JOBS Act Establishes IPO On-Ramp

Today, the House of Representatives passed the JOBS Act by a 380-41 vote. Last week, the Senate passed an identical version of the Act by 73-26. We expect President Obama to sign the JOBS Act into law in the coming days.

Title I of the JOBS Act grew out of the recommendations of the IPO Task Force, a national group of industry experts formed under the guidance of the US Department of the Treasury. Joel Trotter, a partner in our Washington, D.C. office, served as one of two securities lawyers on the IPO Task Force.1

The JOBS Act makes significant changes to the US securities laws that will make the IPO process more attractive to most US and non-US companies considering an IPO. Title I of the JOBS Act creates a new category of issuer, called an emerging growth company (EGC), that will benefit from a transition period, or on-ramp, from private to public company. During this period — which can last for up to five years — EGCs will be exempt from certain costly requirements of being a public company.

This Client Alert focuses on the IPO-related provisions of the JOBS Act and summarizes the key changes that will apply to EGCs. We also briefly describe the JOBS Act's elimination of prohibitions on general solicitation or general advertising in certain private offerings, as well as its changes to the 500-shareholder trigger of Section 12(g) of the Securities Exchange Act of 1934.

The Headlines

The Streamlined IPO Process

Title I of the JOBS Act will significantly streamline the IPO process for most companies seeking to go public. EGCs will benefit from the following changes to the IPO process:

they will be able to make pre-filing offers to institutional investors; they will be permitted to initiate the registration process confidentially with the Securities and Exchange Commission; they will need only two, rather than three, years of audited financial statements to go public; and research analysts will be allowed to publish reports on EGCs immediately after they become public companies. The IPO On-Ramp

Once public, an EGC will have a limited transition period of one to five years, depending upon the size of the company, during which the regulatory requirements will be scaled in order to ease the cost of compliance. During this on-ramp period, an EGC will be:

exempt from Section 404(b) of the Sarbanes-Oxley Act of 2002, which requires auditor attestation of internal control over financial reporting; exempt from the detailed narrative disclosure requirements of compensation discussion and analysis; exempt from the executive compensation voting requirements of the Dodd-Frank Wall Street Reform Act of 2010, including the requirement for say-on-pay, say-on-frequency and say-on-golden-parachute shareholder votes; exempt from the Dodd-Frank executive compensation disclosure provisions requiring the pay-for-performance graph and CEO pay ratio disclosure; subject to the longer phase-in periods that apply to private companies for any new or revised financial accounting standards; and exempt from any rules that the Public Company Accounting Oversight Board may adopt relating to mandatory audit firm rotation and any requirement to include an auditor discussion and analysis narrative in the audit report. These changes will take effect immediately. The IPO-related provisions of the JOBS Act are self-executing and do not require any SEC rulemaking, although we expect the SEC to issue interpretive guidance and technical conforming changes to existing rules. Until that happens, uncertainty will remain about a variety of implementation issues. For example, we expect the SEC to adopt specific procedures for making confidential submissions to initiate the IPO process. We will keep you updated on key developments.

The Details

What Is an Emerging Growth Company

To qualify as an EGC, a company must have annual revenue for its most recently completed fiscal year of less than $1.0 billion.2

After the initial determination of EGC status, a company will remain an EGC until the earliest of:

the last day of any fiscal year in which the company earns $1.0 billion in revenue; the date when the company qualifies as a "large accelerated filer," with at least $700 million in public float; the issuance, in any three-year period, of more than $1.0 billion in non-convertible debt securities;3 or the last day of the fiscal year ending after the fifth anniversary of the IPO pricing date.4 EGC status will ordinarily terminate on the last day of a fiscal year. However, the issuance in any three-year period of more than $1.0 billion in non-convertible debt securities would cause an issuer to lose its...