In a recent speech (see http://www.sec.gov/news/speech/2013/spch041913laa.htm), SEC Commissioner Aguilar addressed the “scale back” of disclosures in connection with the JOBS Act, and the role of institutional investors in the capital markets. Commissioner Aguilar cited a paper noting that institutional investors were better at avoiding the worst-performing investors—presumably based on their analysis of financial information made available by public companies. He noted that the JOBS Act reduces the amount of information required to be made public by emerging growth companies. This raises a number of interesting questions. The accommodations available to EGCs under Title I of the JOBS Act relate principally to scaled back executive compensation disclosures. Would more fulsome executive compensation disclosures be helpful or informative to investment decisions? It is unlikely that more robust compensation disclosures would be essential to an investment analysis. Title I also permits EGCs to present two years of financial information in their filings. Perhaps it could be argued that two rather than three years of data would make a difference to an initial investment analysis; however, there is no data yet that would substantiate whether there is a measurable difference to institutional investor decisions based on the availability of a third year of data. Before concluding that the relatively modest scaled disclosures available to EGCs pose an issue, should we consider whether institutional investors simply have resources to conduct their own analysis, and have access to information (often from investment banks) that is not available to retail investors?
Practical Law Company (PLC) recently published a useful survey (online version accessible here: http://us.practicallaw.com/7-522-8947?q=&qp=&qo=&qe) of the compensation practices adopted by 52 emerging growth companies, or EGCs. Of those surveyed, 41 EGCs disclosed their post offering director compensation policies. Of these, 40 will pay annual retainer fees to directors, generally in cash. The amounts of the annual retainer payments were reported to vary from $10,000 to $120,000. The survey also noted that, of the 41 EGCs that disclosed their policies, 27 are not paying meeting fees, and 14 pay meeting fees generally. The survey provides additional details regarding compensation for committee meetings that may be of interest to EGCs.
The “IPO On-Ramp” in Title I of the JOBS Act is the latest installment in efforts over the past several years aimed at easing the transition to public company status for newly public companies. Prior to these efforts, newly public companies were faced with the often daunting task of having to comply with all of the public company requirements once the IPO was completed. But the advent of the Sarbanes-Oxley Act and the internal control over financial reporting assessment and attestation requirements caused a rethinking of that historical approach, and now newly-public companies, and particularly those that fall within the definition of “emerging growth company,” have a number of breaks available to them as they transition to life as a public company, as outlined below.
Internal Control over Financial Reporting Assessment and Attestation: A newly public company (even if it is not an emerging growth company) is not required to comply with the internal control reporting requirements (management’s assessment and the auditor’s attestation) until its second annual report filed with the SEC after becoming a public company.
- In the first annual report, the company would include the statement: “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.”
- During this transition period, the principal executive officer and principal financial officer may omit the portion of the introductory language in paragraph 4 as well as language in paragraph 4(b) of the required Sarbanes-Oxley Section 302 certification that refers to the certifying officers’ responsibility for designing, establishing and maintaining internal control over financial reporting for the issuer until the issuer becomes subject to the internal control over financial reporting requirements. This language is then required to be provided in the certifications included with the first annual report required to contain management’s internal control report and in all periodic reports filed thereafter. The remainder of the certifications must be filed with all periodic reports during this transition period.
- A newly public company need not comply with the provisions of Exchange Act Rule 13a–15(d) or 15d–15(d), requiring an evaluation of changes to internal control over financial reporting requirements, or comply with the provisions of Exchange Act Rule 13a-15(a) or 15d-15(a) relating to the maintenance of internal control over financial reporting until the first periodic report due after the first annual report that must include management’s report on internal control over financial reporting. No disclosure regarding changes in internal controls need be provided until the company is subject to the internal control evaluation requirements.
After the initial transition period provided for newly public companies, if a company is either a non-accelerated filer or an emerging growth company, then it would not be required to include an attestation report of the company’s registered public accounting firm as long as that status is maintained.
Financial Statement and MD&A Requirements: As the SEC Staff stated in answer to Question 30 of its Generally Applicable Questions on Title I of the JOBS Act dated May 3, 2012, 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. The interim periods presented in Form 10-Q would also correspond to the interim periods required for a company that is not an emerging growth company. An emerging growth company also must provide management’s discussion and analysis disclosure in accordance with the requirements of Item 303 of Regulation S-K. As indicated in answer to Question 28 of the SEC Staff’s Generally Applicable Questions on Title I of the JOBS Act dated May 3, 2012, a newly-public company, even if it is an emerging growth company, is also subject to requirements to provide interactive data files in accordance with the SEC’s XBRL rules, including with each Form 10-Q and Form 10-K.
Executive Compensation Disclosures: An emerging growth company may comply with the executive compensation disclosure provisions available to a “smaller reporting company,” which means that the emerging growth company is not required to present a Compensation Discussion an Analysis section in the Form 10-K/definitive proxy statement, and is permitted to present only two (instead of three) years of executive compensation information for only three (instead of five) named executive officers. In addition to a Summary Compensation Table, an emerging growth company is only required to include an Outstanding Equity Awards Table, a Director Compensation Table and additional narrative supplementing those tables for as long as it qualifies as an emerging growth company. Further, an emerging growth company would not be required to disclose the relationship between executive compensation and company performance, or the ratio of CEO pay to median employee pay, if and when those disclosure requirements under the Dodd-Frank Act are implemented by SEC rules. In addition to these reduced executive compensation disclosure requirements, an emerging growth company not required to hold the shareholder advisory votes on “say-on-pay,” “say-on-frequency” and “say-on-golden parachute” required under the Dodd-Frank Act and the SEC’s implementing rules.
Certifications: Except as noted above with respect to the internal control over financial reporting phase-in for newly public companies, emerging growth companies are required to provide Sarbanes-Oxley Sections 302 and 906 certifications. As noted in Question 15 of the SEC Staff’s Generally Applicable Questions on Title I of the JOBS Act dated April 16, 2012, the Staff views compliance with Sections 102(c) (executive compensation disclosures) and 103 (auditor assessment of internal control over financial reporting) of the JOBS Act as being consistent with full compliance with the requirements of Sections 13(a) or 15(d) of the Exchange Act, and therefore satisfies the “fully complies” language in the Section 906 certification.