Effective September 20, 2022, the Securities and Exchange Commission (SEC) increased the annual gross revenue threshold to qualify for emerging growth company (EGC) status from $1.07 billion to $1.235 billion.
EGC Rule Refresher
An issuer that is an EGC as of the first day of a fiscal year continues to be deemed an EGC until the earliest of:
- The last day of the fiscal year of the issuer during which it had total annual gross revenues of $1.235 billion (new limit) or more;
- The last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the issuer pursuant to an effective registration statement under the Securities Act of 1933, as amended (Securities Act);
- The date on which such issuer has, during the previous three-year period, issued more than $1 billion in non-convertible debt; or
- The date on which such issuer is deemed to be a large accelerated filer (i.e., (i) aggregate worldwide public float of $700 million or more, (ii) subject to SEC reporting requirements for at least 12 calendar months, (iii) filed at least one annual report and (iv) not eligible to be a smaller reporting company under the revenue test of the "smaller reporting company" (i.e., aggregate worldwide public float of $700 million or more and annual revenues of greater than $100 million)).
EGCs are permitted:
- To include less extensive narrative disclosure than required of other SEC reporting companies, particularly in the description of executive compensation;
- To provide audited financial statements for two fiscal years, in contrast to other SEC reporting companies, which must provide audited financial statements for three fiscal years;
- Not to provide an auditor attestation of internal control over financial reporting under Sarbanes-Oxley Act Section 404(b);
- To defer complying with certain changes in accounting standards; and
- To use test-the-waters communications with qualified institutional buyers and institutional accredited investors.
EGC Revenue Adjustment Background
As required by the EGC statutory definition, the SEC is required every five years to index to inflation the annual gross revenue amount used to determine EGC status to reflect the change in the Consumer Price Index for All Urban Consumers (CPI-U) published by the Bureau of Labor Statistics. Such inflation adjustment is designed to maintain the scope of registrants that may qualify as an EGC, preserving the economic effects associated with the option to claim EGC status. The inflation factor of 1.23543 for 2022, which was calculated by dividing the CPI-U for December 2021 (278.802) by the CPI-U for December 2011 (225.672), the calendar year before the EGC definition was established by the JOBS Act, was multiplied by the initial EGC gross revenue threshold of $1.0 billion and rounded to the nearest million to arrive at $1.235 billion.
Based on the SEC's analysis, approximately 1,704 (23.7 percent) of the 7,199 calendar year 2021 issuers that filed annual reports were EGCs. The SEC estimates that the inflation adjustment of the EGC revenue threshold will increase the overall number of EGCs by 51, to approximately 1,755 filers, of which approximately 1,436 are expected to be domestic-form filers, while approximately 319 are expected to be foreign private issuers.
Crowdfunding Threshold Adjustments
On September 20, 2022, inflation adjustments related to Regulation Crowdfunding also became effective.
Rules promulgated under the Securities Act set forth the maximum amount an issuer may sell in reliance on the crowdfunding exemption in a 12-month period, as well as limits on the dollar amount that may be sold to any investor by an issuer in reliance on the crowdfunding exemption. Where the purchaser is not an accredited investor, the aggregate amount of securities sold to such an investor across all issuers in reliance on section 4(a)(6) of the Securities Act during the 12-month period preceding the date of such transaction, including the securities sold to such investor in such transaction, shall not exceed:
- The greater of $2,500, or 5 percent of the greater of the investor's annual income or net worth, if either the investor's annual income or net worth is less than $124,000; or
- Ten percent of the greater of the investor's annual income or net worth, not to exceed an amount sold of $124,000, if both the investor's annual income and net worth are equal to or more than $124,000.
For offerings that, together with all other amounts sold under section 4(a)(6) of the Securities Act within the preceding 12-month period, have, in the aggregate, the following target offering amounts:
- $124,000 or less, the amount of total income, taxable income and total tax, or the equivalent line items shall be certified by the principal executive officer of the issuer to be true and complete in all material respects;
- Between $124,000 and $618,000, financial statements of the issuer shall be reviewed by an independent public accountant (if audited financial statements are available, they must be provided instead); and
- More than $618,000, financial statements of the issuer shall be audited by an independent public accountant; provided, however, that for issuers that have not previously sold securities in reliance on section 4(a)(6) of the Securities Act, offerings that have a target offering amount between $618,000 and $1,235,000, financial statements of the issuer shall be reviewed by an independent public accountant (if audited financial statements are available, they must be provided instead)..
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