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House Passes Bill to Ease Requirements for EGCs
Practical Law Legal Update 1-581-6505 (Approx. 5 pages)
House Passes Bill to Ease Requirements for EGCs
by Practical Law Corporate & Securities
| Published on 18 Sep 2014 • USA (National/Federal) |
The US House of Representatives passed H.R. 5405, the Promoting Job Creation and Reducing Small Business Burdens Act, which would, among other things, ease certain JOBS Act and other requirements for emerging growth companies.
On September 16, 2014, the US House of Representatives passed H.R. 5405, the Promoting Job Creation and Reducing Small Business Burdens Act. This bill would, among other things:
- Create a liquidity pilot program for securities of certain emerging growth companies (EGCs).
- Ease certain filing, disclosure and other requirements for EGCs under the Securities Act and the JOBS Act.
- Create an exemption from eXtensible Business Reporting Language (XBRL) requirements for EGCs and other smaller companies.
- Require the SEC to issue regulations that permit issuers to submit a summary page on Form 10-K.
The bill now moves to the US Senate for consideration.
Liquidity Pilot Program
Title V of the bill, the Small Cap Liquidity Reform Act, would amend Section 11A(c)(6) of the Exchange Act to create a liquidity pilot program under which securities of a covered EGC would be quoted using either:
- A minimum increment of $0.05.
- If a company so elects no more than 60 days after enactment of the bill:
- a minimum increment of $0.10; or
- the increment at which the securities would be quoted without regard to the minimum increments established by Title V.
A "covered EGC" would have the same meaning as in Section 3(a) of the Exchange Act except that the threshold for annual gross revenues of the company during its most recent fiscal year would be $750 million instead of $1 billion.
Beginning 90 days after enactment of the bill, a covered EGC whose securities are quoted at a minimum increment of $0.05 or $0.10 could change to either the other increment or to the increment at which the securities would be quoted without regard to the minimum increments established by Title V. A covered EGC would be quoted at the increment at which the securities would be quoted without regard to the minimum increments established by Title V if:
- It ceases to be an EGC.
- The trading price of its securities is below $1 at the close of the last trading day before the date that is 90 days after enactment of the bill.
- The trading price of its securities is below $1 at its initial public offering (IPO).
- The average trading price of its securities falls below $1 for any 90-day period beginning on or after the enactment of the bill.
- The SEC determines that the covered EGC has violated any provision of the securities laws prohibiting fraudulent, manipulative or deceptive acts or practices.
Section 11A(c)(6) would be repealed effective five years after enactment of the bill.
Amendments to Securities Act
Title VI of the bill, the Improving Access to Capital for Emerging Growth Companies Act, would amend Section 6(e)(1) of the Securities Act to:
- Decrease from 21 days to 15 days the amount of time before its road show that an EGC must publicly file its initial confidential registration statement and all amendments to the registration statement.
- Provide that an issuer that was an EGC at the time it filed or confidentially submitted its initial registration statement, but that ceases to be an EGC thereafter, will continue to be treated as an EGC for purposes of Section 6(e)(1) through the earlier of:
- the date on which the issuer consummates its IPO under the registration statement; or
- one year after the company ceases to be an EGC.
Amendments to JOBS Act
Title VI of the bill would also add to Section 102 of the JOBS Act a new subsection (d) that would require the SEC to revise its general instructions on Form S-1 to indicate that a registration statement filed, or submitted for confidential review, by an issuer prior to an IPO may omit financial information for historical periods otherwise required by Regulation S-X as of the time of filing or confidential submission if both:
- The omitted information relates to a historical period that the issuer reasonably believes will not be required to be included in the Form S-1 at the time of the contemplated offering.
- Prior to distributing a preliminary prospectus to investors, the issuer amends the registration statement to include all financial information required by Regulation S-X at the date of the amendment.
Issuers would be able to take advantage of this new provision 30 days after the bill's enactment.
EGC Exemption from XBRL Requirements
Title VII of the bill, the Small Company Disclosure Simplification Act, would, among other things, require the SEC to revise its regulations to exempt EGCs and other smaller companies from the requirements to use XBRL for financial statements and other periodic reporting. "Other smaller companies" would include issuers with total annual gross revenues of less than $250 million. The exemption for other small companies would remain in effect until either:
- Five years after the enactment of the bill.
- Two years after an SEC determination that the benefits of the XBRL requirements to issuers outweigh the costs (but no earlier than three years after enactment of the bill).
Despite the exemption, EGCs and other smaller companies would still have the option of electing to use XBRL for their financial statements and other periodic reporting.
Summary Page on Form 10-K
Title X of the bill, the Disclosure Modernization and Simplification Act, would, among other things, require the SEC to issue regulations permitting issuers to submit a summary page on Form 10-K, provided each item on the summary page includes a cross-reference to the material contained in Form 10-K to which the item relates.