Wednesday, May 30, 2012

SEC Staff Begins to Issue JOBS Act Comment Letters on EGC Status

The SEC staff has begun to issue comment letters to issuers who may claim emerging growth company (EGC) status.  The EGC is a new type of entity created by the Jumpstart Our Business Startups (JOBS) Act, which became law April 5, 2012. JOBS Act Title I contains scaled disclosure obligations for EGCs.

In comments to Ares Commercial Real Estate Corporation and Fiesta Restaurant Group, the staff noted that each firm appeared to qualify for EGC status. As a result, the staff requested that these companies note their EGC status on their prospectus or information statement cover pages and provide the following disclosures:

·        How and when the company may lose EGC status;

·        A brief description of available JOBS Act exemptions (including the exemption from the internal controls auditor attestation requirement under Sarbanes-Oxley Act Section 404(b) and the exemption from certain executive compensation requirements under Exchange Act Section 14A(a) and (b)); and

·        With respect to the JOBS Act Section 107(b) election: (1) a statement that the firm’s election to opt out of the extended transition period to comply with new or revised accounting standards is irrevocable, or (2) upon electing to use the extended transition period to comply with new or revised accounting standards, include a risk factor stating this election permits the company to delay adoption of certain accounting standards with different effective dates for public and private companies until the standards apply to private companies; The risk factor also must state that due to the election, the firm’s financial statements may not be comparable to those of firms that comply with public company effective dates; Similar disclosure must be made in the company’s MD&A critical accounting policies section.

The SEC staff, in comments to Proofpoint, Inc., observed that the company’s JOBS Act disclosures may inadequately describe when the firm must provide an annual assessment and auditor attestation on internal controls over financial reporting. Specifically, the company must clarify whether it is an EGC and disclose that EGC status excuses the company from the requirements of Sarbanes-Oxley Act Section 404(b) for up to five years. Proofpoint must further disclose the circumstances that may end its EGC status and thus require compliance with Sarbanes-Oxley Act Section 404(b). The staff also asked the firm to consider whether disclosure to investors of the modified disclosure and reporting requirements for EGCs is necessary or appropriate. In particular, the company should consider the effect of EGC status on its investors and the firm’s access to capital.

At the time of publication, the companys' replies to these staff comments were not publicly available on EDGAR. Additionally, the SEC staff has issued numerous documents providing guidance to EGCs under the JOBS Act.