Search within this section
Select a section below and enter your search term, or to search all click PwC SEC volume
Favorited Content
SEC 2170 - Registration and reporting by emerging growth companies
Publication date: 30 Jun 2023
us PwC SEC Volume 2170
.1 General
.11 What is an emerging growth company?
The term emerging growth company (EGC) is defined in Exchange Act Rule 12b-2 and Securities Act Rule 405.
An EGC is an issuer that had total annual gross revenues of less than $1.235 billion during its most recently completed fiscal year unless it has exited EGC status.
[Editor’s note: The SEC staff has indicated that the "most recently completed fiscal year" for purposes of determining EGC status would be the most recent annual period completed, regardless of whether financial statements for the period are presented in the initial registration statement filed or submitted for the company's initial public offering of common equity securities. See JOBS Act Title l FAQ Question 51.]
[Editor’s note: An issuer cannot be an EGC if it first sold common equity pursuant to an effective Securities Act registration statement on or before December 8, 2011. See JOBS Act Title I FAQ Question 2.]
.111 What causes an EGC to lose its EGC status?
An issuer that is an EGC as of the first day of its fiscal year will lose its EGC status on the earliest of:
- the last day of the fiscal year during which it had total annual gross revenues of $1.235 billion or more;
- the last day of the fiscal year following the fifth anniversary of the first sale of the issuer's common equity securities in an offering registered under the Securities Act;
- the date on which the issuer has issued more than $1 billion in non-convertible debt securities during the previous three-year period; or
- the date on which the issuer becomes a large accelerated filer (see Exchange Act Rule 12b-2 and SEC 3125).
If an issuer loses its EGC status after it has conducted its first sale of common equity securities pursuant to an effective registration statement as an EGC, it cannot regain EGC status. See SEC FRM 10110.7.
.12 What are some of the accommodations available to EGCs?
Title I of the Jumpstart Our Business Startups (JOBS) Act created a number of special accommodations under the US securities laws intended to make it easier for EGCs to complete an equity-IPO (Initial Public Offering) and to operate in the SEC reporting system. These special accommodations are sometimes referred to as the "IPO on-ramp" for EGCs (although they may also be available to companies that are not traditional "IPO companies," such as certain debt-only issuers). See JOBS Act Title I FAQ Question 29.
The special accommodations allow EGCs to:
- submit certain registration statements for initial SEC staff review on a confidential basis;
- prepare an equity IPO registration statement (and certain other registration statements) with only two years of audited financial statements (see SEC FRM 10220.1a);
- adopt any new or revised accounting standards using the same timeframe as private companies (if the standard applies to private companies) (see SEC FRM 10230.1);
- comply with the SEC's detailed executive compensation disclosure requirements on the same basis as a smaller reporting company (see S-K 402(l)); and
- omit financial information (including audited financial statements) if that financial information relates to periods that are not reasonably expected to be required at the time of the offering (see SEC 2170.3).
EGCs are also temporarily exempted from:
- the internal control audit requirements of Section 404(b) of the Sarbanes-Oxley Act (see SEC FRM 10240);
- any future PCAOB rules that might be adopted relating to mandatory audit firm rotation or supplemental auditor discussion and analysis reporting; and
- certain executive compensation-related disclosures (e.g., "say-on-pay," "say-on-golden parachute," "pay vs. performance," and "CEO pay ratio") (see S-K 402(t), (u), and (v)).
In addition to the special accommodations for EGCs discussed above, the JOBS Act also includes other changes to the US securities laws and regulations. The additional accommodations are not necessarily limited to EGCs. These topics are not addressed in SEC 2170.
.13 Where can I find additional information relating to the JOBS Act?
The text of the JOBS Act can be found at https://www.gpo.gov/fdsys/pkg/BILLS-112hr3606enr/pdf/BILLS-112hr3606enr.pdf.
Additionally, the SEC staff has published a number of FAQs related to Title I of the JOBS Act at http://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htm.
The SEC staff FAQ document related to the confidential submission process for EGCs can be found on the SEC's website at https://www.sec.gov/divisions/corpfin/guidance/cfjumpstartfaq.htm.
.2 Guidance for applying the definition of an emerging growth company
.21 How does the revenue exit criterion work?
An EGC will lose EGC status on the last day of the fiscal year during which it had total annual gross revenues of $1.235 billion or more. For example, a calendar year-end company whose total annual gross revenues equals or exceeds $1.235 billion for the year ending December 31, 2023 exits EGC status on December 31, 2023 and would prepare its 2023 annual report (to be filed in 2024) as a non-EGC.
The SEC staff has indicated that the term "total annual gross revenue" should be interpreted to mean total revenue presented on the statement of comprehensive income for a company that applies US GAAP or IFRS as issued by the IASB. If a company uses home-country GAAP (other than IFRS as issued by the IASB), we understand it should use the total revenue determined under US GAAP for purposes of assessing total annual gross revenue. If a foreign private issuer presents its financial statements in a currency other than the US dollar, it should calculate total annual gross revenue based on the US dollar exchange rate as of the last day of the most recently completed fiscal year.
See JOBS Act Title I FAQ Question 1.
See SEC 2170.901-.903.
.22 How does the fifth anniversary exit criterion work?
An EGC will lose EGC status on the last day of the fiscal year following the fifth anniversary of the first sale of the issuer's common equity securities in an offering registered under the Securities Act. The SEC staff has indicated that this criterion refers to the end of the fiscal year that includes the fifth anniversary of the first sale of the EGC's common equity securities in an offering registered under the Securities Act. See JOBS Act Title I FAQ Question 40.
For example, assume Company X, a calendar year-end EGC, first sold its common equity securities in an offering registered under the Securities Act on April 4, 2023. Company X would lose EGC status no later than December 31, 2028 (the end of the fiscal year that includes the fifth anniversary of the equity IPO date). Company X might, however, lose EGC status earlier than December 31, 2028 based on the other exit criteria.
[Editor's note: We understand that a company can qualify as an EGC even if it enters the SEC reporting system by means other than an equity IPO (e.g., a debt-only registrant). An EGC that enters the SEC reporting system in this way might never trigger the "fifth anniversary" exit criterion (if its common equity is never sold in a Securities Act offering) and, therefore, could remain an EGC indefinitely.]
[Editor's note: A company that becomes an SEC reporting company by means of a spin-off typically uses an Exchange Act registration statement rather than a Securities Act registration statement; however, that company may also offer/sell its equity securities to employees in a transaction registered under the Securities Act (typically on Form S-8). See SEC FRM 10110.3. An EGC that becomes public via only the Exchange Act, and that also files a Form S-8, should consider consulting with its legal counsel to determine whether the Form S-8 would constitute sale of the issuer's common equity securities in an offering registered under the Securities Act (thereby starting the "five-year clock"). The determination of whether a company qualifies as an EGC and the interpretation and application of many of the key principles of the JOBS Act are legal determinations. Registrants should consider consulting with their legal counsel on these matters.]
.23 How does the rolling three year debt exit criterion work?
An EGC will lose EGC status as of any date on which it has issued more than $1 billion in non-convertible debt during the previous three years prior to that date. The SEC staff has indicated that the test should be performed on a continuous, rolling three-year basis. This means the three-year period covers any rolling three-year period. It is not limited to completed calendar or fiscal years. See JOBS Act Title I FAQ Question 17.
For example, assume a calendar year-end EGC issued $400 million of non-convertible debt securities on May 31, 2023, which caused the amount of non-convertible debt securities issued during the immediately preceding rolling three-year period (June 1, 2020 to May 31, 2023) to exceed $1 billion. In this fact pattern, the issuer exits EGC status on May 31, 2023.
The SEC staff has indicated that once the $1 billion threshold has been breached, from that point on, the registrant must comply with non-EGC reporting requirements. For example, assume a registrant qualifies as an EGC as of December 31, 2022 but issues non-convertible debt in January 2023 resulting in the registrant exceeding the $1 billion non-convertible debt issuance exit criterion. The registrant plans to file its Form 10-K for the year ended December 31, 2022 in early March 2023. In this fact pattern, the registrant will not be an EGC for the purposes of its Form 10-K for the year ended December 31, 2022 (to be filed in March 2023). Accordingly, the registrant will not be able to take advantage of EGC accommodations in that Form 10-K (e.g., exemption relating to the auditor attestation requirements relating to internal control over financial reporting set forth in S-K 308(b) or the extended transition period exemption for new or revised accounting standards). See Topic III.C in the Highlights of the June 2021 meeting of the CAQ SEC Regulations Committee.
[Editor's note: The three-year rolling non-convertible debt computation for purposes of determining whether a company loses its EGC status is not the same as the three-year rolling non-convertible securities computation for purposes of determining whether a company is a well-known seasoned issuer (WKSI) (see Securities Act Rule 405). The two tests are trying to evaluate different characteristics. The EGC test is a means to evaluate the size of a company; the WKSI test is a means to evaluate the extent of a company's public following. For instance, the WKSI test does not include debt securities issued in the private market (even if those securities ultimately were/will be exchanged for substantially equivalent debt registered under the Securities Act).]
EGCs should consider consulting with their legal counsel when evaluating which debt issuances should be included in or excluded from the computation.
.24 When should EGC status be assessed in conjunction with an initial public offering?
The SEC staff has indicated that a company must qualify as an EGC at the time of initial submission to in order to be permitted to submit a confidential draft registration statement under Securities Act section 6(e). See JOBS Act Title I FAQ Question 3.
If a company ceases to qualify as an EGC after it submits a draft registration statement or publicly files a registration statement (e.g., after the initial submission date, a fiscal year has been completed with revenues over $1.235 billion), the company will continue to be treated as an EGC for the purposes of the scaled disclosure provisions in its initial registration statement until the earlier of (i) the date on which the issuer consummates its initial public offering or (ii) the end of the one-year period beginning on the date the company ceases to qualify as an EGC. See SEC FRM 10110.5.
For example, assume a calendar year-end company submits a draft registration statement on July 14, 2023 and qualifies as an EGC at the time that the draft registration statement is submitted for confidential review. The company does not first publicly file its registration statement until 2024. Assume the company’s revenues exceed $1.235 billion for the calendar year ended December 31, 2023. In this fact pattern, if the company does not consummate its initial public offering by December 31, 2024, the company cannot avail itself of the EGC scaled disclosure provisions for relevant SEC filings submitted after December 31, 2024.
The immediately preceding guidance relates to an issuer that lost its EGC status before publicly filing its registration statement. Securities Act Rule 401(a) provides that the “form and content of a registration statement and prospectus shall conform to the applicable rules and forms as in effect on the initial filing date of such registration statement and prospectus.” Accordingly, the ability to use the scaled disclosure provisions applicable to EGCs in a registration statement depends on whether the company qualifies as an EGC at the initial public filing date of the registration statement. If a company qualifies as an EGC on the initial date that the registration statement is publicly filed, the scaled disclosure provisions related to EGCs would continue to apply through effectiveness of the registration statement even if the issuer loses its EGC status during the registration process. See SEC FRM 10110.6.
[Editor’s note: Under Division of Corporation Finance policy, a company that does not qualify as an EGC may be eligible to submit certain registration statements for non-public SEC staff review and for other accommodations. See SEC 2110.12.]
.3 Financial statements requirements
.31 How many periods should be included in the annual financial statements included in draft and filed registration statements submitted by an EGC?
The JOBS Act amended the Securities Act to explicitly permit an EGC to provide only two years of audited issuer financial statements in connection with an equity-IPO registration statement. The SEC has codified this change in S-X 3-02.
Although the JOBS Act did not explicitly provide that same accommodation for other registration statements, the SEC staff has indicated that it will not object if, in registration statements filed after the IPO, an EGC does not present audited financial statements for any period prior to the earliest audited period presented in connection with its equity-IPO. See SEC FRM 10220.1c.
[Editor's note: We understand this interpretation applies to registration statements prepared after the equity-IPO, and not to those that come before an equity-IPO (such as a pre-equity IPO debt registration statement). See JOBS Act Title l FAQ Question 49.]
See SEC 2110.2 for a discussion of annual financial statements requirements.
.32 What are the financial statement requirements for interim periods in draft and filed registration statements submitted by an EGC?
See SEC 2110.23 for a discussion of interim financial statement requirements.
.33 Can an EGC present only two years of financial statements for a significant equity method investment even if the EGC voluntary provides a third year of its own financial statements?
The SEC staff indicated that an EGC that voluntarily provides a third year of its own financial statements would not be required to provide three years of financial statements for an equity method investee under S-X 3-09. See SEC FRM 10220.5b.
.34 Can an EGC that is preparing a registration statement on Form S-4 or proxy statement in connection with a merger transaction present two years of annual financial statements for the target even if the requirements of the forms being filed would otherwise require three years of financial statements for the target?
Under certain circumstances, yes. See SEC FRM 10220.6 and .7 and the editor’s note in SEC 7050.2. See also JOBS Act Title l FAQ Question 45.
.35 Can an EGC omit financial statements of other entities required by S-X 3-05, 3-09 and 3-14 from its draft registration statement?
An EGC may omit financial statements of an acquired or to be acquired business (e.g., S-X 3-05), an acquired or to be acquired real estate operation (e.g., S-X 3-14) or an equity method investee (e.g., S-X 3-09) from its draft registration statement if the issuer reasonably believes those financial statements will not be required at the time of the offering. See FAST Act Compliance and Disclosure Interpretations Question 2.
.36 How many years should be included in annual financial statements prepared by an EGC that is not a smaller reporting company in its annual report on Form 10-K subsequent to its IPO?
The SEC staff has indicated that an EGC that is not a smaller reporting company must provide three years of audited financial statements in its annual report on Form 10-K. See JOBS Act Title l FAQ Question 30 and SEC FRM 10220.1e.
An EGC that is a smaller reporting company may provide only two years of audited financial statements (consistent with the requirements for smaller reporting companies).
.37 Transition to new or revised accounting standards
.371 What does the phrase “new or revised financial accounting standard” mean?
The SEC staff has indicated that the phrase "new or revised financial accounting standard" is intended to mean any update to the Financial Accounting Standards Board Accounting Standards Codification (the FASB ASC) made after April 5, 2012 (see JOBS Act Title I FAQ Question 33). The transition accommodation provided to EGCs does not apply to any updates to the FASB ASC made on or before April 5, 2012. FASB ASC updates made on or before April 5, 2012 must be adopted according to the requirements for public companies.
[Editor’s note: The transition provisions related to the adoption of new accounting standards can be a complex matter. See US In depth 2019-20 and SEC FRM 10230.1f.]
.372 Does the transition accommodation apply to IFRS as issued by the IASB or any home-country (i.e., non-US GAAP) accounting framework?
No. The accounting transition accommodation does not apply to any financial accounting framework other than the FASB ASC. Accordingly, an EGC may not take advantage of the transition accommodation in connection with primary financial statements prepared using an accounting framework other than the FASB ASC (e.g., the accounting transition accommodation does not apply to financial statements prepared in accordance with IFRS as issued by the IASB). A foreign private issuer that is an EGC may, however, take advantage of the accounting transition accommodation with respect to its US GAAP reconciliation (if applicable). See JOBS Act Title I FAQ Question 34.
.373 Can an EGC change its election relating to the use of the extended transition period?
The SEC staff has indicated that an EGC that initially decides take advantage of the extended transition period for complying with new or revised financial accounting standards can later elect to follow non-EGC accounting transition. However, that later election to follow non-EGC accounting transition would be irrevocable. See JOBS Act Title I FAQ Question 37.
The decision to follow non-EGC accounting transition should be indicated by checking the appropriate box on the cover page in the first periodic report or registration statement including a confidential submission following the EGC's decision.
If an EGC decides to take advantage of the extended transition period for complying with new or revised financial accounting standards, it should evaluate the disclosure requirements of SAB 74 (Topic 11-M) and should consider disclosing the effective date for non-EGCs in addition to the effective date that will apply to the EGC (assuming it remains an EGC). See JOBS Act Title I FAQ Question 14.
If an EGC decides to apply new or revised accounting standards on the same basis as a non-EGC, it must:
- make that decision when it is first required to file a registration statement (e.g., Form S-1), periodic report (e.g., Form 10-Q), or specified other report with the SEC and check the appropriate box on the cover page;
- comply with all standards to the same extent as a non-EGC; and
- continue to comply with those standards to the same extent as a non-EGC for as long as the company remains an EGC.
See JOBS Act Title I FAQ Question 13 and SEC FRM 10230.1.
.4 Audit requirements relating to internal control over financial reporting
.41 How does the temporary EGC exemption for the audit requirements relating to internal control over financial reporting work?
SEC reporting companies are generally required to provide management's assessment of the company's internal control over financial reporting beginning with their second annual report. Non-EGCs that are accelerated filers or large accelerated filers (see Exchange Act Rule 12b-2 and SEC 3125) are also required to provide an auditor's opinion on the effectiveness of the company's internal control over financial reporting.
EGCs are exempted from the requirement to obtain an audit of internal control over financial reporting for as long as they remain an EGC. See S-K 308(b). It is important to note that this exemption only applies to the internal control audit requirements. EGCs are not exempt from the requirements to provide management’s assessment of the company’s internal control over financial reporting beginning with the company's second annual report.
[Editor’s note: See PCAOB AS 3105.59 for auditor reporting guidance when management is required to report on the company's internal control over financial reporting but such report is not required to be audited, and the auditor has not been engaged to perform an audit of management's assessment of the effectiveness of internal control over financial reporting.]
Example
Facts: Company X, a calendar year-end EGC, first sold its common equity securities in an initial public offering registered under the Securities Act in July 2018. Company X remained an EGC at all times prior to December 31, 2023. Company X will be considered an accelerated filer as of December 31, 2023.
Analysis: December 31, 2023 is the last day of the fiscal year that includes the fifth anniversary of Company X’s equity IPO. Accordingly, Company X will lose its EGC status on December 31, 2023. In addition to complying with the management assessment requirements relating to internal control over financial reporting (which were previously applicable to Company X), in its annual report on Form 10-K for the year ended December 31, 2023 Company X will also need to obtain an audit of the company's internal control over financial reporting as of December 31, 2023. Since Company X is not an EGC at December 31, 2023, the 2023 Form 10-K must be prepared without the benefit of the temporary EGC exemption from the audit requirements relating to internal control over financial reporting.
.5 Confidential submission process
Under the JOBS Act, an EGC is able to submit a draft registration statement confidentially in advance of an IPO. The JOBS Act requires an EGC to file the initial confidential submission of its registration statements and all amendments with the SEC before the anticipated effective date of the registration statement or road show. See JOBS Act Title I FAQ Question 44.
SEC comment letters and issuer responses related to draft registration statements will also be made public according to the SEC staff’s existing policies. See JOBS Act Title I FAQ Question 25.
An EGC should follow the SEC procedures for seeking confidential treatment if there are sections of response letters that the EGC wishes to keep confidential after the letters/responses are publicly released. See JOBS Act Title I FAQ Question 26.
See SEC 2110.12 for additional information.
See SEC 2170.907 and .908 for additional guidance.
.9 Frequently asked questions
.901 How should “total annual gross revenue” be interpreted by banks and similar financial institutions when assessing EGC status?
The JOBS Act did not specifically address how the total annual gross revenue criterion should be applied by a bank or similar financial institution. The SEC staff has indicated that a bank or similar financial institution must include all gross revenues from traditional banking activities. Banking activity revenues may include interest on loans and investments, dividends on investments, fees from loan origination, fees from trust and investment services, commissions, brokerage fees, mortgage servicing revenues, and any other fees or income from banking or related services. See SEC FRM 10110.2 and SEC FRM 5110.3(c) for a smaller reporting company.
.902 How should “total annual gross revenue”, “rolling three-year basis” and “date of the first sale” be interpreted subsequent to a reverse merger when assessing EGC status?
Subsequent to a reverse merger, the SEC staff has indicated that:
- The revenue of the accounting acquirer should be used for the purposes of the annual gross revenue test. This would include the revenue of the legal acquirer from the date of the reverse merger.
- The accounting acquirer’s debt issuances should be used for the purpose of the rolling three-year test. This would include the legal acquirer’s debt issuances from the date of the reverse merger.
- The date of the first sale of the legal acquirer's common equity securities in an offering registered under the Securities Act should be used for purposes of the five-year anniversary test.
See JOBS Act Title l FAQ Question 47 and SEC FRM 10120.2.
.903 How should “total annual gross revenue” be interpreted when assessing EGC status if the financial statements for the most recent fiscal year are those of a predecessor of the issuer?
If the financial statements for the most recently completed fiscal year are those of the predecessor of the issuer, the predecessor’s revenues should be used when determining if the issuer meets the definition of an EGC. See SEC FRM 10110.2.
.904 Are non-convertible debt securities issued in a private transaction included in the three-year rolling amount?
The SEC staff has publicly indicated that non-convertible debt securities issued in a private transaction would generally be included in the calculation. They have also indicated that, since the JOBS Act used the word "issued," only "securities" should be included in the calculation. If bank debt does not constitute a security, we understand it would not be included in the calculation. EGCs should consider consulting with their legal counsel to evaluate which transactions should be included or excluded from the computation. See SEC FRM 10110.4 c.
.905 Would debt securities issued in a registered exchange offer typically be included in the three-year rolling amount?
Debt securities issued in a registered exchange offer would generally not be included in the assessment of the EGC rolling three-year debt exit criterion since they are identical to and replace those issued in the non-public offering. See JOBS Act Title I FAQ Question 18.
.906 Are the reporting and disclosure accommodations available to an EGC the same as scaled disclosure accommodations available to a smaller reporting company?
Not in all instances. In several instances, EGCs are permitted to provide a level of disclosure that is similar to the scaled disclosure requirements applicable to a smaller reporting company. However, it is important to note that the EGC disclosure accommodations are not identical to the scaled disclosure requirements applicable to a smaller reporting company. If the EGC is also a smaller reporting company, it may take advantage of both sets of accommodations. See SEC 2160 for further discussion of smaller reporting companies.
.907 Can an EGC use the confidential submission process to submit a draft registration statement for an exchange offer or merger?
The SEC staff has indicated that an EGC may use the confidential submission process to submit a draft registration statement for an exchange offer or merger that constitutes its initial public offering of common equity securities (JOBS Act Title l FAQ Question 43).
A Special Purpose Acquisition Company (SPAC) that plans to file a registration statement on Form S-4 within twelve months of the effective date of its initial public offering should discuss the possibility of submitting a draft registration statement on Form S-4 for non-public review with legal counsel.
.908 Does a draft registration statement need to be complete at the time it is submitted?
The JOBS Act did not specify the exact content requirements for a draft registration statement. However, the SEC staff has indicated an expectation that any draft registration statement would be substantially complete (including exhibits) at the time of initial submission. The SEC staff has indicated that it will defer review of any draft registration statement that is materially deficient. See JOBS Act Confidential Submission Process FAQ Question 7.
The SEC staff has also indicated that, since a draft registration statement is not a "filing," it does not need to be signed and does not need to include an auditor's (or other expert's) consent. However, a draft registration statement submitted by an EGC must include the signed audit report of the independent registered public accounting firm(s) covering the fiscal years presented in the registration statement.
Additionally, the SEC staff has indicated that a draft registration statement should include any other required financial statements (e.g., financial statements for a recently acquired or to-be-acquired business under S-X 3-05 or for an equity method investee under S-X 3-09). As described above, companies could omit financial information of these entities if they reasonably believe such omitted periods will not be required at the time of the offering under the circumstances described in FAST Act Compliance and Disclosure Interpretations Question 2. The initial confidential submission and all amendments must be publicly filed with the SEC no later than 15 days before the date on which the issuer conducts a road show (as defined in Securities Act Rule 433(h)(4)). Upon public filing, the previous confidential submissions are not required to be signed or to include consents. See JOBS Act Title I FAQ Question 52.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
Link copied
