Accounting and Auditing Implications of the JOBS Act

Accounting and Auditing Implications of the
JOBS Act
September 21, 2012
Greg Pfahl, CPA

Outline

• Overview of the JOBS Act
• Public Emerging Growth Companies
• Private Offerings
• Remaining Private
• Crowdfunding

© 2011 Hein & Associates, LLP. All rights reserved.

Overview of the Act

• Signed April 5, 2012
• Jumpstart our Business Startups (JOBS) Act
• “To increase American job creation and economic
growth by improving access to the public capital
markets for emerging growth companies.”


Overview of the Act

• Intended to:
– Ease the IPO process and create an “IPO on-ramp”
– Improve access to capital through private and small public
offerings without SEC registration
– Allow private companies with a relatively large number of
shareholders to delay becoming a public company


Overview of the Act

• Title I – Emerging Growth Companies
• Title II – Access to Capital
• Title III – Crowdfunding
• Title IV – Small Company Capital Formation
• Title V – Private Company Flexibility
• Title VI – Capital Expansion


Other Material

• Limited SEC guidance
• SEC Frequently Asked Questions and other
information located on their website
– www.sec.gov/spotlight/jobs-act.shtml


Emerging Growth Companies

• First registered sale of common stock after
December 8, 2011
• Annual gross revenue less than $1 billion during
most recently completed fiscal year



• Duration of EGC status
– Emerging Growth Company continues to be an EGC until
the earlier of:
• The last day of the fiscal year of the issuer during which it had
annual gross revenues of $1 billion or more (indexed for inflation
every five years)
• The last day of the fiscal year following the 5th anniversary of the 1st
registered sale of common stock
• The date on which the issuer has issued more than $1 billion in non-
convertible debt over the previous three year period
• The date on which such issuer is deemed to be a large accelerated
filer as defined in Regulation12b-2



• Regulation 12b-2
– Large accelerated filer:
• Issuer had an aggregate worldwide market value of the voting and
non-voting common equity held by its non-affiliates of $700 million or
more, as of the last business day of the issuer’s most recently
completed second fiscal quarter
• Issuer has been subject to the requirement of section 13(a) or 15(d)
for a period of at least 12 calendar months
• Issuer has filed at least one annual report pursuant to section 13(a)
or 15(d)
• Issuer is not eligible to use the requirements for smaller reporting
companies in Part 229 for its annual and quarterly reports



• EGC Status not available in case of succession
– SEC Q&A 24
– An issuer completes a transaction that results in the issuer
becoming the successor to its predecessor’s Exchange Act
registration and reporting obligations pursuant to Exchange Act
Rules 12g-3 and 15d-5, which occurs automatically. If the
predecessor was not eligible to be an emerging growth company
because its first sale of common equity securities pursuant to an
effective registration statement occurred on or before December
8, 2011, can its successor nevertheless qualify as an emerging
growth company?
– SEC Answer – No



• Once an issuer loses EGC status, there is no reentry



• Implications
– Internal control over financial reporting
– Exemption from future PCAOB standards
– Periods presented in registration
– Adoption of new accounting pronouncements
– Other disclosures
– Confidential submissions


• Implications
– Exemption from SOX 404b
– 404b requires an external auditor attestation on the
issuer’s internal control over financial reporting
– Management’s assessment of internal control over
financial reporting is still required
– The Dodd-Frank Wall Street Reform and Consumer
Protection Act permanently exempted companies that are
not accelerated or large accelerated filers from 404b
– Item 308 of Regulation S-K contains requirements for
auditor attestation


• Implications
– Exemption from 404b (continued)
– Regulation 12b-2 Definition of Accelerated Filer
• Issuer had an aggregate worldwide market value of the voting and
non-voting common equity held by its non-affiliates of $75 million or
more, but less than $700 million, as of the last business day of the
issuer’s most recently completed second fiscal quarter
• Issuer has been subject to the requirement of section 13(a) or 15(d)
for a period of at least 12 calendar months
• Issuer has filed at least one annual report pursuant to section 13(a)
or 15(d)
• Issuer is not eligible to use the requirements for smaller reporting
companies in Part 229 for its annual and quarterly reports


• Implications
– Exemption from 404b (continued)
– How does this change prior rules?
• Instructions to Item 308 (Regulation S-K)
• A registrant need not comply with paragraphs (a) and (b) of this Item
until it either had been required to file an annual report pursuant to
section 13(a) or 15(d) of the Exchange Act for the prior fiscal year or had
filed an annual report with the Commission for the prior fiscal year. A
registrant that does not comply shall include a statement in the first
annual report that it files in substantially the following form: “This annual
report does not include a report of management’s assessment regarding
internal control over financial reporting or an attestation report of the
company’s registered public accounting firm due to a transition period
established by rules of the Securities and Exchange Commission for
newly public companies.”



• Implications
– Future PCAOB standards
• Mandatory audit firm rotation
• Auditor discussion and analysis
• Other future standards



• Implications
– Periods presented in initial registration statements
• Audited Financial Statements
– Rule 3-02 currently requires audited statements of income and cash flows for the
three most recently completed fiscal years
– Changed to no more than two years
• Selected Financial Data
– Need not present selected financial data for any period prior to the earliest audited
period presented in connection with its initial public offering
• Management Discussion and Analysis
– Need only provide the same periods as financial statements presented elsewhere
in the registration statement


• Implications
– Periods Presented in Initial Registration Statements (continued)
– SEC Q&A 30:
– How many years of audited financial statements are required to be included in an emerging
growth company’s Form 10-K or Form 20-F?
– Answer: For an emerging growth company that is not a smaller reporting company, three
years of audited financial statements are required to be included in its Form 10-K or Form
20-F. The provision in Securities Act Section 7(a)(2)(A) permitting emerging growth
companies to file only two years of audited financial statements is limited to the
registration statement for the emerging growth company’s initial public offering of
common equity securities. We note that, as a practical matter, an emerging growth
company will not be required to include, in its first annual report on Form 10-K or on
Form 20-F, audited financial statements for any period prior to the earliest audited
period presented in connection with its initial public offering of common equity
securities. For example, if an emerging growth company with a December 31 fiscal year-
end has a registration statement for its initial public offering of common equity securities
declared effective during the 3rd quarter of 2012, the registration statement would include
audited financial statements for 2011 and 2010. The registrant’s first annual report, which will
be for the fiscal year ending December 31, 2012 and will be filed in 2013, will include audited
financial statements covering 2012, 2011 and 2010.



• Implications
– Adoption of new accounting pronouncements
• Option to transition as private company
• Must formally make election with SEC at the time the EGC is first
required to file a registration statement, periodic report or other
report with the SEC
• Opt-out is irrevocable


• Implications
– Adoption of new accounting pronouncements (continued)
• SEC Q&A 13
• If an emerging growth company chooses not to take advantage of the extended
transition period provided in Securities Act Section 7(a)(2)(B) for complying with new or
revised accounting standards, when is the emerging growth company required to make
that decision, and how should that be communicated to the Commission?
• Answer: Section 107(b)(1) of the JOBS Act provides that an emerging growth company
“must make such choice at the time the company is first required to file a registration
statement, periodic report, or other report with the Commission” and to notify the
Commission of such choice. Although emerging growth companies that are submitting
their draft registration statements on a confidential basis will not be required to file a
registration statement until at least 21 days before the road show, they should notify the
review staff of their choice in their initial confidential submission, as that choice will
inform the staff’s review of the financial statements in the draft registration statement.
Emerging growth companies that currently are in registration or are subject to Exchange
Act reporting should make and disclose their choice in their next amendment to the
registration statement or in their next periodic report, respectively.
• Note that Section 107(b)(2) provides that any decision to opt out of the extended
transition period provided in Securities Act Section 7(a)(2)(B) for complying with new or
revised accounting standards is irrevocable.


• Implications
– Adoption of new accounting pronouncements (continued)
• SEC Q&A 37
• If an emerging growth company chooses to take advantage of the
extended transition period provided in Section 7(a)(2)(B) of the
Securities Act for complying with new or revised financial accounting
standards, can it later decide to “opt in” (i.e., comply with the financial
accounting standard effective dates applicable to non-emerging growth
companies)?
• Answer: Yes. If an emerging growth company initially decides to take
advantage of the extended transition period provided in Section
7(a)(2)(B), we will not object if the company later decides to opt in, so
long as it complies with the requirements in Sections 107(b)(2) and (3) of
the JOBS Act. This decision should be prominently disclosed in the first
periodic report or registration statement following the company’s
decision and is irrevocable.



• Implications
– Other disclosures
• Executive compensation disclosures
– Not required to provide a Compensation Discussion and Analysis
– Provide information on three named executive officers, as opposed to five
– Executive compensation data reduced from three years to two years
– The following tables are eliminated for EGC’s
» Grants of Plan-Based Awards
» Option Exercises and Stock Vested
» Pension Benefits
» Nonqualified Deferred Compensation
– Permitted to eliminate narrative disclosure of compensation policies and practices
related to risk management



• Implications
– Other disclosures (continued)
• Say on Pay and Golden Parachutes
– EGC’s are exempt from vote requirements
• Following disclosure requirements removed:
– Relationship between executive compensation and financial performance
– Executive compensation ratio comparing median of annual total compensation of
all employees to the total compensation of the chief executive officer



• Implications
– Confidential submissions
• Initial registration statements may be submitted confidentially
• Includes comment letters and responses
• Must be filed publicly no later than 21 days prior to roadshow
• EGC should disclose that it is an EGC on cover page of prospectus


Private Offerings

• Regulation A Offerings
– Increased threshold to $50 million
– Previously $5 million


Private Offerings

• Other Changes
– Annual audited financial statements
– Electronic offering circular
– Periodic disclosure requirements
– Potential exemption from Blue Sky Laws
• These changes under Title IV of the JOBS Act are
not immediately effective and no deadline was set for
the SEC


Private Offerings

• General Solicitation and Advertising
– Revision of Rule 506 of Regulation D to allow general
solicitation and advertising
• Securities are only purchased by accredited investors
• Reasonable steps by issuer are taken to verify that investors are
accredited

• 90 Days to revise rules


Private Company Flexibility and Growth

• Section 12(g) of the 1934 Act
– A company with $10 million in assets must register any
class of security that is held by 500 or more shareholders
of record as of the end of its fiscal year
• Shareholders of Record Increased from 500 to 2,000
– Less than 500 non-accredited investors
• Definition of “Held of Record” excludes certain
employee shares


Crowdfunding

• Prominent posting on SEC website:
• “…The Act requires the Commission to adopt rules to
implement a new exemption that will allow
crowdfunding. Until then, we are reminding issuers
that any offers or sales of securities purporting to rely
on the crowdfunding exemption would be unlawful
under the federal securities laws.”


Crowdfunding

• What is “Crowdfunding?”
– “Capital Raising Online While Deterring Fraud and
Unethical Non-Disclosure Act of 2012”


Crowdfunding

• Exempt from registration
• Limitations:
– Issuer
• Up to $1 million in any 12 month period
– Investor
• Greater of $2,000 or 5% of annual income if annual income or net
worth is less than $100,000; or
• 10% of annual income or net worth up to maximum $100,000 if
either annual income or net worth is equal to or more than $100,000


Crowdfunding

• Transactions conducted through broker or online funding
portal
• Issuer must file with the SEC
– Financial Statement Thresholds
• $100,000 or less
– Income tax returns filed for the most recently completed fiscal year
– Financial statements certified by the principal executive officer
• $100,000 to $500,000
– Financial statements reviewed by an independent public accountant
• Greater than $500,000
– Audited financial statements

– Annual financial statements as determined by rule of the SEC


Crowdfunding

• Securities are restricted

• 270 days for SEC rulemaking


7 Stages of the Business Lifecycle

Seed

Exit Start-Up

Decline Growth

Expansion Established


Accounting and Auditing Implications of the
JOBS Act

• Conclusions and questions

Hein & Associates LLP
Greg Pfahl, Partner
303-298-9600
gpfahl@heincpa.com


Accounting and Auditing Implications of the JOBS Act

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