On September 9, 2022, the Securities and Exchange Commission (the “SEC”) adopted inflation adjustments mandated by the Jumpstart Our Business Startups Act (“JOBS Act”). As a result, an “emerging growth company” (“EGC”) will lose its EGC status on the last day of the fiscal year in which it has $1.235 billion or more in total annual gross revenue, rather than the prior threshold of $1.07 billion. Under the JOBS Act, the SEC is required to make inflation adjustments to certain rules promulgated under the JOBS Act at least once every five years, and the last inflation adjustments occurred in 2017. The final rules became effective on September 20, 2022.
Issuers that are EGCs are permitted to take advantage of certain scaled disclosure requirements, such as reporting audited financial statements for two fiscal years rather than three, deferring compliance with certain changes in accounting standards and not providing an auditor attestation of internal control over financial reporting in their annual reports, among other items. If an issuer qualifies as an EGC on the first day of its fiscal year, it maintains that status until the earliest of (i) the last day of the fiscal year of the issuer during which it has total annual gross revenues of $1.235 billion or more (previously $1.07 billion or more); (ii) the last day of its fiscal year following the fifth anniversary of the first sale of its common equity securities pursuant to an effective registration statement; (iii) the date on which the issuer has, during the previous three-year period, issued more than $1 billion in non-convertible debt; or (iv) the date on which the issuer is deemed to be a “large accelerated filer.” An issuer is deemed to be a “large accelerated filer” if it has a public float of $700 million or more (as of the last business day of the issuer’s most recently completed second fiscal quarter), has been subject to SEC reporting requirements for at least 12 months and has filed at least one annual report.
Takeaways Regarding Increased EGC Revenue Threshold
- No Reclaiming Status: The definition of EGC has no provision allowing companies to regain EGC status once lost. Therefore, companies that exceeded the previous gross revenue threshold of $1.07 billion in 2021 (resulting in the loss of EGC status in 2022) may not regain EGC status even if their 2022 gross revenue is less than the amended $1.235 billion threshold.
- Maintaining Status: The higher revenue threshold may be welcome news for EGCs that are nearing gross annual revenues of $1.07 billion, as they may be able to continue to take advantage of the relaxed requirements for EGCs.
- Updating SEC Filings: EGCs should ensure that they update their registration statements and other SEC filings that reference the definition of an EGC and include the updated gross revenue threshold.
- Slightly More Companies Stay EGCs: The SEC estimates the inflation adjustment will increase the number of EGCs by approximately 50 companies, for a total of approximately 1,755 EGCs, which accounts for 24.4% of all filers.