IPO in the US – The JOBS Act 

Hello, my name is Krista Pound and I work for KPMG in London in our US Accounting & Reporting Group.

If you are a company thinking of listing in the US and have revenues of less than 1 billion dollars, you likely qualify as a new category of public equity issuer called an Emerging Growth company or EGC.  EGCs are exempt from some SEC reporting requirements of the US securities regulator, or the SEC, for up to 5 years.  Let me explain a bit about the Act that made this possible.

In April 2012, US president Obama passed the Jumpstart our Business Startups (JOBS) Act intended to encourage public company capital raising in the United States.  The JOBS Act created the EGC category and allows for the following reporting exemptions for up to 5 years:

1. 1.      There is no auditor attestation of internal controls over financial reporting or Sarbanes-Oxley  404(b) (but  there is no delay for management’s attestation)
2. 2.      They are allowed a confidential submission of the initial IPO registration document – but upon effectiveness, previously confidential filings are made public.  It should be noted that most foreign companies are already allowed confidential filing status in most circumstances regardless of whether they are an EGC or not.
3. 3.      The initial registration statement includes only 2 years of annual audited financial statements,
4. 4.      There are limited periods of selected financial data (which otherwise is for 5 years)
5. 5.      Management’s discussion and analysis (or MD&A) is limited to the periods covered by the financial statements
6. 6.      The smaller reporting company rules can be followed for Executive compensation disclosures
7. 7.      An EGC can use private company effective dates for new accounting standards
   a.       All or nothing option, irrevocable once switch to public company rules is made
8. 8.      An internal audit function is not required if home country practice is not to have one
9. 9.      Auditors of EGCs are exempt from audit firm rotation and supplements to the auditor’s report if issued and if the SEC deems appropriate

There are more specific aspects of the Act which are not discussed here as they are more narrow in their application and legalistic in nature. 

As noted above, to be an EGC, a company must earn less than 1 billion dollars in annual revenues and qualify as a non-accelerated filer or an accelerated filer. 

The filing status relates to market capitalization and determines the date for which filings are due but only companies with less than $700 million can qualify as an EGC.

A company retains its EGC status until the earliest of:

• the last day of its fiscal year when total annual gross revenues exceed $1 billion or more
• the last day of its fiscal year following the 5th anniversary of the date of its first sale of common equity securities under an effective registration statement
• the date on which the issuer has issued more than $1 billion in nonconvertible debt during the previous three-year period or
• the date on which the issuer is deemed to be a large accelerated filer.
  

Starting with the fiscal year ended after EGC status is lost, all exemptions expire and the company must comply with all standards and rules applicable to non-EGC filers.  Except for the auditor attestation of ICOFR under SOX 404(b) which will be required starting with the 2^nd 10K/20F issued after EGC conditions are no longer met.

Now, technically, these exemptions sound great to a smaller company looking to list in the US, but practically we have yet to see whether the investor or underwriting community will accept these limited disclosures.  I have already seen examples of EGC companies filing more than the minimum as set out here with regard to financial statements and selected financial data, but we are aware of issuers taking advantage of compensation disclosure at smaller reporting company level and following private company GAAP and are expected to take forego auditor attestation on SOX 404(b) if appropriate for their business.

So, I urge companies looking into a US IPO to establish expectations at a very early stage with each of its advisors so that they have sufficient time to prepare what is requested.

If you would like more information, the actual rule can be found on the SEC website as well as frequently asked questions which are being updated regularly.   Thank you.