On September 9, 2022, the Securities and Exchange Commission
(the "SEC") adopted a number of inflation-related
adjustments under the Jumpstart Our Business Startups Act (the
"JOBS Act"), including an adjustment to the revenue cap
in the definition of "emerging growth company"
("EGC"), as well as adjustments to certain thresholds and
limitations in the crowdfunding exemption under Regulation
Crowdfunding.
EGCs are currently defined to mean, among other things, an issuer
that had total annual gross revenues of less than $1,070,000,000.
Under the JOBS Act, the SEC is required, every five years, to index
to inflation that annual gross revenue limitation to reflect the
change in the Consumer Price Index for All Urban Consumers
published by the Bureau of Labor Statistics. As adjusted, the new
inflation-adjusted EGC revenue cap will be $1,235,000,000, up from
$1,070,000,000.
The JOBS Act became law in April 2012 with a goal of improving
access to capital markets and easing compliance burdens for newer
and smaller public companies. The JOBS Act made registration and
reporting requirements easier for companies classified by the SEC
as "emerging growth companies" or "EGCs."
Our client advisory summarizes the changes adopted and highlights
how these changes could impact growing startups. The new
inflation-adjusted amounts will become effective upon publication
in the Federal Register.
Here is the fact sheet and the final rule.
Summary of the Changes
Title I of the JOBS Act added Securities Act Section 2(a)(19)
and Exchange Act Section 3(a)(80) to define the term "emerging
growth company". Pursuant to the statutory definition, the SEC
is required every five years to index to inflation the annual gross
revenue amount used to determine EGC status to reflect the change
in inflation. The amendments increase that amount from
$1,070,000,000 to $1,235,000,000.
Title III of the JOBS Act added Securities Act Section 4(a)(6),
which provides an exemption from the registration requirements of
Securities Act Section 5 for certain crowdfunding transactions.
Sections 4(a)(6) and 4A of the Securities Act set forth dollar
amounts used in connection with the crowdfunding exemption, and,
similar to the EGC definition, Section 4A(h)(1) states that such
dollar amounts shall be adjusted by the SEC not less frequently
than once every five years to reflect the change in
inflation.
Why Is This Important?
The inflation adjustment of the total annual gross revenue
threshold for EGCs is designed to maintain the scope of registrants
that may qualify as an EGC, preserving the economic effects
associated with the option to claim EGC status.
According to the SEC, the inflation adjustment amendment could
marginally expand the number of issuers that may claim EGC status,
thus extending the economic effects, including impacts on
efficiency, competition, and capital formation, of the option to
claim this status to issuers that fall between the current
$1,070,000,000 gross revenue threshold and the $1,235,000,000 gross
revenue threshold that will define EGC eligibility under the
amendments. Using the number of filers and the distribution of
filer revenues in calendar year 2021, the SEC estimates that the
inflation adjustment of the EGC revenue threshold will increase the
overall number of EGCs by 51, from approximately 1,704 (23.7% of
the total number of filers (7,199)) to approximately 1,755 (24.4%
of the total number of filers (7,199)); among them, the number of
domestic issuers that qualify as EGCs would increase by 45, from
approximately 1,391 (22.3% of the total number of domestic-form
filers (6,232)) to approximately 1,436 (23.0% of the total number
of domestic-form filers (6,232).
The amendments to Regulation Crowdfunding adjust the thresholds in
Rules 100(a)(2) and 201(t) in accordance with inflation as required
by Section 4A(h) of the Securities Act and are not expected to
increase disclosure or compliance costs incurred by an issuer. The
adjustment will cause some issuers to become subject to less
extensive financial statement requirements and may lower disclosure
or compliance costs for these issuers. The adjustment will also
increase the amounts of securities that may be sold to a given
investor, which may expand some issuers' ability to raise
capital and some investors' ability to gain exposure to
Regulation Crowdfunding investment opportunities.
Conclusion
This adjustment by the SEC expands the number of companies that can take advantage of the eased registration and reporting requirements for EGCs. An EGC can take advantage of JOBS Act accommodations for up to five years. These accommodations include less extensive narrative disclosure than required of other reporting companies (particularly in the description of executive compensation), the requirement to provide audited financial statements for two (instead of three) years and the ability to use test-the-waters communications with qualified institutional buyers and institutional accredited investors.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.