How the US JOBS Act can benefit a Philippine company
By Johnny F. Ang
First Published in Business World (8/28/2012)
United States President Barack Obama signed on April 5, 2012 the Jumpstart Our Business Startups (JOBS) Act, effective immediately, to provide start-up private companies easier access to the public capital markets in the US.
A number of the relief provisions under the JOBS Act are intended to reduce the cost and complexity of going public, thereby encouraging eligible companies to pursue Initial Public Offerings (IPOs).
To facilitate easier access to public capital markets, the JOBS Act provides for “IPO on-ramp relief,” which gives Emerging Growth Companies (EGCs) up to a maximum of five years following the effective date of their IPO, before they are required to comply with certain Securities and Exchange Commission (SEC) reporting and regulatory requirements.
The IPO on-ramp reliefs are also available to companies outside of the US that are planning to raise capital from stock markets like the National Association of Securities Dealers Automated Quotation (NASDAQ) or the New York Stock Exchange (NYSE). This means that a Philippine domestic company planning to raise capital from the US through an IPO can avail itself of these reliefs, provided it qualifies as an EGC.
An EGC is defined as a company with annual revenues of less than US$1 billion in its most recently-completed fiscal year. An issuer would be eligible to maintain its EGC status for five years following its common equity IPO, or earlier, if it meets any of the following criteria:
(1) Issued more than US$1 billion in non-convertible debt over a rolling three-year period; (2) Becomes a large accelerated filer (i.e., market capitalization greater than US$700 million) or;
(3) Had annual revenues exceeding US$1 billion.
EGC status cannot be reclaimed once an issuer loses its EGC status following its IPO.
The following are the key reliefs available to EGCs under the JOBS Act:
• Compliance by EGCs with the requirement of Section 404(b) of the Sarbanes Oxley Act of 2002 is deferred until loss of EGC status. Section 404(b) mandates an independent auditor to audit and report on the effectiveness of a company’s internal control over financial reporting. However, IPO companies must still comply with Section 404(a) of the Sarbanes Oxley Act of 2002, which requires management to assess and report on its own internal control over financial reporting, beginning with its second annual report.
• In IPO registration statements, EGCs may go public using two years, rather than three years (third year was required for non-US GAAP and domestic filers), of audited financial statements. In addition, an EGC need not present selected financial data in any registration statement or provide management discussion and analysis (MD&A) pertaining to periods other than what is presented in the audited financial statements.
• EGCs can submit to the US SEC IPO registration statements and amendments on a confidential basis rather than filing them publicly. An EGC is required to publicly file all prior confidential submissions in its initial “filed” registration statement as separate Exhibit 99s no later than 21 days before a roadshow, enabling an EGC to maintain its IPO plans in secrecy and delay disclosure of sensitive information to competitors and employees until much later in the IPO process.
• An EGC is allowed to provide the reduced executive compensation disclosures previously available only to companies with a public float of less than US$75 million. This reduced disclosure includes, among others:
(a) Three (rather than five) named executive officers;
(b) Two (rather than three) years of compensation data; and
(c) No narrative requirement regarding compensation policies and practices related to risk management.
• EGCs are exempt from any future mandatory audit firm rotation requirement and any rules that the Public Company Accounting Oversight Board (PCAOB) might adopt requiring auditors to supplement their audit reports with additional information about the audit or financial statements of the company. Future changes to PCAOB auditing standards would not apply to audits of EGCs, unless the US SEC later decides that they should, after considering the protection of investors and whether the action will promote efficiency, competition and capital formation.
The JOBS Act also modified triggers for public registration and reporting by increasing the number of record holders that prompt a company’s obligation to register and report as a public company.
In addition, the JOBS Act encourages capital formation through other provisions that require US SEC rulemaking. These include:
(1) A new category of exempt offerings of up to US$50 million raised over a 12-month period; and
(2) Allowing private companies to raise small amounts of capital from a large group of investors through a process called “crowdfunding” without adding to the record holder count that triggers Exchange Act registration.
Crowdfunding is a process whereby private companies raise small amounts of equity capital from a large pool of investors (e.g., through the internet). The US SEC is required to adopt rules to implement the crowdfunding exemption within 270 days from enactment (i.e., by 31 December 2012). Until then, the US SEC staff has reminded companies that use of the crowdfunding exemption is unlawful.
The key changes brought about by the JOBS Act seek to ease the regulatory burden for companies with less than US$1 billion in revenue that want to tap US capital markets via an IPO. While it is primarily intended to benefit US companies, it also presents opportunities for eligible Philippine companies that wish to make their first forays into the US capital markets or that are considering transitioning into a multinational organization.
Johnny F. Ang is a Partner of SGV & Co.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.