On September 9, 2022, the Securities and Exchange Commission (the “SEC”) passed inflation adjustments mandated by the Jumpstart Our Business Startups Act (“JOBS Act”). As a result, an “Emerging Growth Company” (“EGC”) loses its EGC status on the last day of the fiscal year in which it achieves $1.235 billion or more in total annual gross income, instead of the previous $1.07 billion threshold. The JOBS Act requires the SEC to make inflation adjustments to certain rules promulgated under the JOBS Act at least every five years, and the most recent inflation adjustments were in 2017. The final rules came into effect on September 20, 2022.
Issuers that are EGCs are permitted to take advantage of certain tiered disclosure requirements, such as: B. providing audited financial statements for two financial years instead of three, postponing compliance with certain changes in accounting standards, and failing to provide an auditor’s certification of internal control over financial reporting in, among other things, their annual reports. If an issuer qualifies as an EGC on the first day of its fiscal year, it will retain that status until the earliest (i) last day of the issuer’s fiscal year in which it has annual gross income of at least US$1.235 billion (previously US$1.07 billion USD or more); (ii) the last day of its fiscal year following the fifth anniversary of the first sale of its common stock pursuant to a valid registration statement; (iii) the date that the issuer issued more than US$1 billion of non-convertible debt securities during the preceding three year period; or (iv) the date on which the issuer is considered a Large Accelerated Filer. An issuer is considered a large accelerated filer if it has an initial public offering of at least $700 million (as of the last business day of the issuer’s most recently completed second fiscal quarter) and has been subject to SEC reporting requirements for at least 12 months and has at least one annual report submitted.
Takeaways regarding the elevated EGC revenue threshold
- No reclaiming status: The definition of EGC does not include a provision allowing companies to regain lost EGC status. As a result, companies that exceeded the previous gross revenue threshold of $1.07 billion in 2021 (resulting in the loss of EGC status in 2022) may not regain EGC status, even if their gross revenue in 2022 is below the revised threshold of $1.235 billion.
- maintain status: The higher revenue threshold may be welcome news for EGCs approaching $1.07 billion in annual gross revenue, as they may still be able to benefit from relaxed EGC requirements.
- SEC Filing Update: EGCs should ensure they update their registration statements and other SEC filings that reference the definition of an EGC and include the updated gross sales threshold.
- Slightly more companies remain EGCs: The SEC estimates that the inflation adjustment will increase the number of EGCs by about 50 companies for a total of about 1,755 EGCs, accounting for 24.4% of all applicants.