Under the JOBS Act, an emerging growth company (EGC) has up to the last day of the fiscal year following the fifth anniversary of its IPO to come into full compliance with various disclosure regulations and accounting and auditing standards that are otherwise applicable to all US public companies. An EGC may elect to forgo any of the exemptions available to it and instead comply with the requirements that apply to a company that is not an EGC (except that an EGC is not permitted to choose to comply with some but not all of the non-EGC accounting standards).
Although the overwhelming majority of all IPO candidates are likely to qualify as EGCs—approximately 90% of all IPO companies between 2007 and 2011 would have qualified—the extent to which EGC standards are being adopted varies widely. We reviewed the publicly available filings of all EGCs that made their initial submission or filing after enactment of JOBS Act, and found the following rates of adoption with respect to four key items of EGC relief:
- omission of CD&A: ~90%
- confidential submission of draft Form S-1: ~80%
- two years of audited financial statements (instead of three years): ~33%
- deferred application of new or revised accounting standards: ~20%
It’s too soon to track the adoption rate for the exemption from SOX 404(b) audit reports because the requirement is not applicable until a newly public company’s second Form 10-K, although it seems likely that this relief will be widely adopted. Also, the exemption from new PCAOB auditing standards cannot be assessed yet, as there are no new auditing standards to which the EGC exemption applies. Based on EGC behavior to date with respect to audited financial statements and new accounting standards, however, one can imagine that many EGCs will be inclined to adopt future auditing standards at the time they are applied to other public companies so that their financial statements will be more comparable to those of their peers.