As mentioned in a May 30, 2012 post, the SEC staff has begun to issue comment letters to companies that have or 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.
Pacific Coast Oil Trust’s response is one of the first issuer replies to JOBS Act staff comment letters to be published on EDGAR. The staff comments required Pacific Coast Oil Trust to amend its Form S-1, which became effective May 2, 2012. A letter indicating the staff has completed its review has not yet been published on EDGAR.
In its comments, the staff observed that Pacific Coast Oil trust noted its EGC status on its prospectus cover page. In what appear to be form comments sent to many issuers, the staff asked Pacific Coast Oil Trust to revise its prospectus to disclose:
· How and when the trust 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 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 trust 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 trust’s MD&A critical accounting policies section.
In its reply, Pacific Coast Oil Trust said it would revise the prospectus cover page to show its EGC status and to refer readers to the summary section discussion of the implications of EGC status. The prospectus summary will mention that, as an EGC, the trust may take advantage of scaled reporting requirements for up to five years, including: (1) the need for only two years of audited financials and two years of related MD&A, (2) an exemption from the auditor attestation requirement, (3) reduced executive compensation disclosures, and (4) no need to hold nonbinding advisory votes on executive compensation or golden parachutes. The summary also will state how the trust may lose EGC status and recite that the trust has not yet availed itself of the JOBS Act provisions, but may invoke some or all of these advantages in future filings.
Pacific Coast Oil Trust included a risk factor detailing some of the applicable JOBS Act provisions. First, the trust explained, among other things, that although it must report changes to internal controls over financial reporting quarterly, and the trustee must annually assess these controls, the trust’s registered public accountant is not required to attest to the effectiveness of the controls while the trust is an EGC. The risk factor also stated that even if the trustee finds the controls effective, the independent accountant may decline to attest to that assessment or may issue a qualified report.
Second, the trust stated that it has elected to delay adoption of new or revised accounting standards until these standards apply to private companies. As a result, said the trust, its financials may not be comparable to those of other public companies. The trust’s risk factor also addressed the potential impact of this election for investors by stating:
Neither PCEC nor the trust can predict if investors will find the trust units less attractive because the trust will rely on these exemptions. If some investors find the trust units less attractive as a result, there may be a less active trading market for the trust units and the trust’s trading price may be more volatile.
The trust’s MD&A included similar disclosure regarding the accounting standards election.