FAQ

In these Frequently Asked Questions (FAQs), the Division of Trading and Markets is providing guidance on the implementation of the crowdfunding intermediary provisions of the Jumpstart Our Business Startups Act (JOBS Act). These FAQs are not rules, regulations or statements of the SEC. The SEC has neither approved nor disapproved these FAQs.

The Division may update these questions and answers periodically. In each update, the questions added after publication of the last version will be marked with “MODIFIED” or “NEW.” In addition, the SEC is soliciting public comments on regulatory initiatives under the JOBS Act.


Background

These FAQs address questions about the crowdfunding intermediary provisions in Title III of the JOBS Act.

Crowdfunding issuers. Title III of the JOBS Act amends Section 4 of the Securities Act to create a new exemption for offerings of “crowdfunded” securities. Specifically, the JOBS Act amends Section 4 of the Securities Act to exempt issuers from the requirements of Section 5 of that Act when they offer and sell up to $1 million in securities, provided that individual investments do not exceed certain thresholds and the issuer satisfies other conditions in the JOBS Act, some of which will require rulemaking by the SEC.

One of these conditions is that issuers use the services of an intermediary that is either a broker registered with the SEC or a “funding portal” registered with the SEC.

Funding portals. Title III of the JOBS Act adds new Section 3(h) to the Exchange Act which requires the SEC to exempt, conditionally or unconditionally, an intermediary operating a funding portal from the requirement to register with the SEC as a broker. The intermediary, though, would need to register with the SEC as a funding portal and would be subject to the SEC’s examination, enforcement, and rulemaking authority. The funding portal also must become a member of a national securities association that is registered under Section 15A of the Exchange Act.

A funding portal is defined as a crowdfunding intermediary that does not: (i) offer investment advice or recommendations; (ii) solicit purchases, sales, or offers to buy securities offered or displayed on its website or portal; (iii) compensate employees, agents, or others persons for such solicitation or based on the sale of securities displayed or referenced on its website or portal; (iv) hold, manage, possess, or otherwise handle investor funds or securities; or (v) engage in such other activities as the SEC, by rule, determines appropriate.

The JOBS Act directs the SEC to adopt rules to implement Title III within 270 days of enactment of the Act. The President signed the JOBS Act into law on April 5, 2012.

Responses to Frequently Asked Questions

Question 1. operate a crowdfunding intermediary

I would like to operate a crowdfunding intermediary. Am I required to register with the SEC before doing so?

Answer:

Yes. You must register with the SEC either as a broker or as a funding portal.

Please keep in mind that the SEC still has to write rules to implement the crowdfunding provisions of the JOBS Act. Until the SEC has completed this rulemaking, you cannot act as a crowdfunding intermediary, even if you are already a registered broker. The Division of Corporation Finance also has reminded issuers that any offers or sales of securities purporting to rely on the crowdfunding exemption would be unlawful under the federal securities laws until the SEC’s rulemaking is complete.

Question 2. register with the SEC as a funding portal

How do I register with the SEC as a funding portal?

Answer:

The SEC must adopt rules governing funding portals before permitting anyone to register with the SEC as a funding portal. These rules will address the form and process needed to register with the SEC as a funding portal.

Funding portals also must become members of a national securities association that is registered under Section 15A of the Exchange Act. Today, FINRA is the only national securities association in existence that is registered under Section 15A of the Exchange Act.

Question 3.  funding portals

I would like to operate as a funding portal. Do I need to register with the Financial Industry Regulatory Authority (FINRA)?

Answer:

All funding portals must become members of a national securities association that is registered under Section 15A of the Exchange Act, in addition to registering with the SEC. Today, FINRA is the only national securities association in existence that is registered under Section 15A of the Exchange Act.

Question 4.  what a funding portal can do

Are there are any limitations on what a funding portal can do?

Answer:

Among other things, the JOBS Act imposes several restrictions on the activities of a registered funding portal. A funding portal is not permitted to:

  • provide investment advice or make recommendations;
     
  • solicit purchases, sales, or offers to buy the securities offered or displayed on its website or portal;
     
  • compensate employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its website or portal;
     
  • hold, manage, possess, or otherwise handle investor funds or securities; or
     
  • engage in any other activities the SEC determines to prohibit in its crowdfunding rulemaking.

In addition, each funding portal and each crowdfunding broker is prohibited from:

  • compensating promoters, finders, or lead generators for providing the intermediary with the personal identifying information of any potential investor; or
     
  • allowing its directors, officers, or partners (or any person occupying a similar status or performing a similar function) to have a financial interest in any issuer using the services of the intermediary.

Question 5. operate a crowdfunding intermediary

I would like to operate a crowdfunding intermediary. In addition to registering with the SEC and a national securities association, what should I know?

Answer:

There are many considerations in determining whether to operate a crowdfunding intermediary. At a minimum, you should understand the legal obligations that the JOBS Act assigned to crowdfunding intermediaries. For example, crowdfunding brokers and funding portals have significant duties under the JOBS Act to provide information to investors, reduce the risk of fraud and, where required under the Act, ensure that investors and issuers satisfy the requirements outlined in Title III of the JOBS Act. 

The JOBS Act requires these intermediaries to, among other things:

  • provide disclosures that the SEC determines appropriate by rule, including regarding the risks of the transaction and investor education materials
     
  • ensure that each investor: (1) reviews investor education materials; (2) positively affirms that the investor understands that the investor is risking the loss of the entire investment, and that the investor could bear such a loss; and (3) answers questions that demonstrate that the investor understands the level of risk generally applicable to investments in startups, emerging businesses, and small issuers and the risk of illiquidity;
     
  • take steps to protect the privacy of information collected from investors;
     
  • take such measures to reduce the risk of fraud with respect to such transactions, as established by the SEC, by rule, including obtaining a background and securities enforcement regulatory history check on each officer, director, and person holding more than 20 percent of the outstanding equity of every issuer whose securities are offered by such person;
     
  • make available to investors and the SEC, at least 21 days before any sale, any disclosures provided by the issuer;
     
  • ensure that all offering proceeds are only provided to the issuer when the aggregate capital raised from all investors is equal to or greater than a target offering amount, and allow all investors to cancel their commitments to invest; 
     
  • make efforts to ensure that no investor in a 12-month period has purchased crowdfunded securities that, in the aggregate, from all issuers, exceed the investment limits set forth in section Title III of the JOBS Act; and
  • any other requirements that the SEC determines are appropriate.

In addition, under the JOBS Act, an intermediary should be aware of the prohibited activities listed in response to Question 


Jumpstart Our Business Startups Act 
Frequently Asked Questions

Generally Applicable Questions on Title I of the JOBS Act

May 3, 2012 (Questions 18-41)
April 16, 2012 (Questions 1-17)

The Jumpstart Our Business Startups Act (the “JOBS Act”) was enacted on April 5, 2012. In these Frequently Asked Questions, the Division of Corporation Finance is providing guidance on the implementation and application of the JOBS Act, based on our current understanding of the JOBS Act and in light of our existing rules, regulations and procedures. These FAQs are not rules, regulations or statements of the Commission. Further, the Commission has neither approved nor disapproved these FAQs.

These FAQs address questions of general applicability under Title I of the JOBS Act. Title I provides scaled disclosure provisions for emerging growth companies, including, among other things, two years of audited financial statements in the Securities Act registration statement for an initial public offering of common equity securities, the smaller reporting company version of Item 402 of Regulation S-K, and no requirement for Sarbanes-Oxley Act Section 404(b) auditor attestations of internal control over financial reporting. Title I also enables emerging growth companies to use test-the-waters communications with QIBs and institutional accredited investors and liberalizes the use of research reports on emerging growth companies.

For information about the confidential submission of emerging growth company draft registration statements, please refer to the Division announcement regarding confidential submission of draft registration statements under the JOBS Act.

(1) Question:

How can an issuer determine whether or not it meets the revenue test for “emerging growth company”?

Answer:

An “emerging growth company” is defined in the Securities Act and the Exchange Act as an issuer with “total annual gross revenues” of less than $1 billion during its most recently completed fiscal year. The phrase “total annual gross revenues” means total revenues as presented on the income statement presentation under U.S. GAAP (or IFRS as issued by the IASB, if used as the basis of reporting by a foreign private issuer).  If the financial statements of a foreign private issuer are presented in a currency other than U.S. dollars, total annual gross revenues for purposes of this test should be calculated in U.S. dollars using the exchange rate as of the last day of the most recently completed fiscal year. In addition, if the financial statements for the most recent year included in the registration statement are those of the predecessor of the issuer, the predecessor’s revenues should be used when determining if the issuer meets the definition of an emerging growth company.

(2) Question:

How can an issuer determine whether it qualifies as an “emerging growth company” as of the effective date for the definition of that term?

Answer:

Section 101(d) of the JOBS Act provides an “effective date” for the definition of emerging growth company: an “issuer shall not be an emerging growth company for purposes of [the Securities Act and the Exchange Act]…if the first sale of common equity securities of such issuer pursuant to an effective registration statement under the Securities Act of 1933 occurred on or before December 8, 2011.” The phrase “first sale of common equity securities” in the JOBS Act is not limited to a company’s initial primary offering of common equity securities for cash. It could also include offering common equity pursuant to an employee benefit plan on a Form S-8 as well as a selling shareholder’s secondary offering on a resale registration statement.

Even if the issuer had a registration statement declared effective on or before December 8, 2011, so long as the first sale of common equity securities occurs after December 8, 2011, an issuer may qualify as an emerging growth company, assuming the other requirements of the definition are satisfied.

(3) Question:

When would a company determine whether it is an emerging growth company for purposes of the various provisions in Title I?

Answer:

Current Commission rules do not address when emerging growth company status should be determined or provide for any transition into or out of emerging growth company status. Absent rule changes, we will apply the following general principles, based on current rules and on the language of Title I:

A company must qualify as an emerging growth company at the time of submission in order to submit a confidential draft registration statement, or any amendment thereto, under Securities Act Section 6(e). If a company ceases to qualify as an emerging growth company while undergoing the confidential review of its draft registration statement – for example, since the initial submission date, a fiscal year has been completed with revenues over $1 billion – it would need to file a registration statement to continue the review process and comply with current rules and regulations applicable to companies that are not emerging growth companies. At that time, the prior confidential draft submissions would be filed as exhibits to the registration statement (see Question 10, Confidential Submission Process for Emerging Growth Companies).

Securities Act Rule 401(a) provides that “the form and contents of a registration statement and prospectus shall conform to the applicable rules and forms as in effect on the initial filing date of such registration statement and prospectus.” The date of the initial confidential draft submission is not the “initial filing date” for these purposes since it is not the filing of a registration statement. Under Rule 401(a), a company’s status at the time of the initial filing date of its registration statement will determine the requirements for the contents of that registration statement. If a company files its registration statement at a time when it qualifies as an emerging growth company, in accordance with Rule 401(a), the disclosure provisions for emerging growth companies would continue to apply through effectiveness of the registration statement even if the company loses its emerging growth company status during registration. Conversely, if a company submits a draft registration statement for confidential review at a time when it qualifies as an emerging growth company, but files its initial registration statement at a time when it does not qualify as an emerging growth company, then the initial registration statement would need to comply with the requirements applicable to registration statements filed by companies that are not emerging growth companies.

For purposes of Securities Act Section 5(d) test-the-waters communications, a company would need to determine whether it qualifies as an emerging growth company at the time it engages in communications in reliance on Section 5(d). For example, if a company made test-the-waters communications in reliance on Section 5(d) before filing a registration statement at a time when it qualifies as an emerging growth company, but is no longer an emerging growth company at the time it files a registration statement, we would not view the earlier communications as a violation of Section 5. Further test-the-waters communications in reliance on Section 5(d), however, would not be permitted if the company no longer qualifies as an emerging growth company. The same approach would apply to the research reports described in amended Securities Act Section 2(a)(3).

(4) Question:

How should an emerging growth company identify itself as an emerging growth company in a draft registration statement submitted to the staff on a confidential basis under Securities Act Section 6(e) and in the subsequent electronic filing of the registration statement on EDGAR?

Answer:

The issuer should disclose that it is an emerging growth company on the cover page of its prospectus.

(5) Question:

May an issuer that qualifies as an emerging growth company amend its registration statement to provide the scaled disclosure available to emerging growth companies if the registration statement was initially filed prior to April 5, 2012?

Answer:

Yes.  The emerging growth company may provide the scaled disclosure available to emerging growth companies in a pre-effective amendment to a pending registration statement or in a post-effective amendment.

(6) Question:

An emerging growth company completed its initial public offering after December 8, 2011 and prior to April 5, 2012. May this company file its next periodic report using the scaled disclosure provisions in Title I?

Answer:

Yes.

(7) Question:

Is an emerging growth company required to follow all of the scaled disclosure provisions for emerging growth companies set out in Title I, or may it comply with some of the scaled disclosure provisions and some of the regular disclosure requirements?

Answer:

Other than the accounting standards referenced in Section 7(a)(2)(B) of the Securities Act and Section 107(b) of the JOBS Act (addressed in Question 13 below), an emerging growth company may decide to follow only some of the scaled disclosure provisions for emerging growth companies.

(8) Question:

May a foreign private issuer that qualifies as an emerging growth company comply with the scaled disclosure provisions available to emerging growth companies to the extent relevant, even though the JOBS Act refers only to Regulation S-K and does not refer to the corresponding items in Form 20-F?

Answer:

Yes, the staff will not object if a foreign private issuer that qualifies as an emerging growth company complies with the scaled disclosure provisions available to emerging growth companies to the extent relevant to the form requirements for foreign private issuers.

(9) Question:

A foreign private issuer qualifies as an emerging growth company and is also entitled to submit its draft registration statement on a non-public basis pursuant to the Division’s policy on Non-Public Submissions from Foreign Private Issuers. In this situation, will the foreign private issuer be required to publicly file its confidential submissions at least 21 days before the road show?

Answer:

If the foreign private issuer chooses to take advantage of any benefit available to emerging growth companies, then it will be treated as an emerging growth company and will be required to publicly file its confidential submissions at least 21 days before the road show. If the foreign private issuer chooses not to take advantage of any emerging growth company benefit, then it may follow the Division’s policy on Non-Public Submissions from Foreign Private Issuers.

(10) Question:

May a Canadian issuer filing under the Multi-Jurisdictional Disclosure System (“MJDS”) qualify as an emerging growth company if it satisfies the requirements of the definition of emerging growth company?

Answer:

Yes. While the disclosure requirements for this Canadian issuer would continue to be established under its home country standards in accordance with the MJDS, other provisions of Title I, such as the test-the-waters provision in Section 5(d) of the Securities Act and the deferral of compliance with Section 404(b) of the Sarbanes-Oxley Act, would be available to an MJDS filer that qualifies as an emerging growth company.

(11) Question:

How many years of financial data need to be included under Item 301 of Regulation S-K in the initial public offering registration statement of an emerging growth company?

Answer:

Securities Act Section 7(a)(2)(A) provides that an emerging growth company need not present more than two years of audited financial statements in a registration statement for an initial public offering of its common equity securities. This section also provides that, “in any other registration statement to be filed with the Commission, an emerging growth company need not present selected financial data in accordance with section 229.301 of title 17… for any period prior to the earliest audited period presented in connection with its initial public offering.” Although Section 7(a)(2)(A) refers to “any other” registration statement, we will not object if an emerging growth company presenting two years of audited financial statements in its initial public offering registration statement in accordance with Section 7(a)(2)(A) limits the number of years of selected financial data under Item 301 of Regulation S-K to two years as well.

(12) Question:

How many years of audited financial statements are required to be included in an emerging growth company’s registration statement other than the registration statement for its initial public offering of common equity securities?

Answer:

The provision in Securities Act Section 7(a)(2)(A) permitting the filing of only two years of audited financial statements is limited to the registration statement for the emerging growth company’s initial public offering of common equity securities. Although the provision is limited to the initial public offering registration statement, we will not object if, in other registration statements, an emerging growth company does not present audited financial statements for any period prior to the earliest audited period presented in connection with its initial public offering of common equity securities.

(13) Question:

If an emerging growth company chooses not to take advantage of the extended transition period provided in Securities Act Section 7(a)(2)(B) for complying with new or revised accounting standards, when is the emerging growth company required to make that decision, and how should that be communicated to the Commission?

Answer:

Section 107(b)(1) of the JOBS Act provides that an emerging growth company “must make such choice at the time the company is first required to file a registration statement, periodic report, or other report with the Commission” and to notify the Commission of such choice. Although emerging growth companies that are submitting their draft registration statements on a confidential basis will not be required to file a registration statement until at least 21 days before the road show, they should notify the review staff of their choice in their initial confidential submission, as that choice will inform the staff’s review of the financial statements in the draft registration statement. Emerging growth companies that currently are in registration or are subject to Exchange Act reporting should make and disclose their choice in their next amendment to the registration statement or in their next periodic report, respectively.

Note that Section 107(b)(2) provides that any decision to opt out of the extended transition period provided in Securities Act Section 7(a)(2)(B) for complying with new or revised accounting standards is irrevocable.

(14) Question:

If an emerging growth company chooses to take advantage of the extended transition period provided in Securities Act Section 7(a)(2)(B) for complying with new or revised accounting standards, what type of disclosure should be included in its registration statement or periodic report prior to the adoption of such standards?

Answer:

SAB Topic 11M provides disclosure guidance with respect to recently issued accounting standards that will be adopted by the registrant in a future period. SAB Topic 11M specifies that one of the disclosures that should generally be considered by a registrant is the effective date of such standards. For each recently issued accounting standard that will apply to its financial statements, an emerging growth company that chooses to take advantage of the extended transition periods should disclose the date on which adoption is required for non-emerging growth companies and the date on which the emerging growth company will adopt the recently issued accounting standard, assuming it remains an emerging growth company as of such date.

(15) Question:

Until the Commission amends the form requirements, Regulation S-X and Regulation S-K to be consistent with the disclosure provisions for emerging growth companies as set forth in Title I of the JOBS Act, how should emerging growth companies handle any conflict between the disclosure provisions in Title I and existing rules and regulations?

Answer:

An emerging growth company may comply with Title I’s disclosure provisions in its registration statements, periodic reports and proxy statements, even if doing so would be inconsistent with existing rules and regulations. The disclosure provisions in Title I supersede, in relevant part, existing rules and regulations.

For example, we note that Section 102(c) of the JOBS Act, which was not enacted as part of the Exchange Act, provides that an emerging growth company may comply with Item 402 of Regulation S-K by providing only the information required of a smaller reporting company, even if it does not qualify as a smaller reporting company. In addition, Section 103 of the JOBS Act, which also was not enacted as part of the Exchange Act, provides that an emerging growth company is not required to comply with the requirements of Sarbanes-Oxley Section 404(b).

An emerging growth company’s CEO and CFO are required to certify in their Sarbanes-Oxley Act Section 906 certifications that the company’s periodic report fully complies with the requirements of Sections 13(a) or 15(d) of the Exchange Act. We view compliance with Sections 102(c) and 103 of the JOBS Act as being consistent with full compliance with the requirements of Sections 13(a) or 15(d) of the Exchange Act.

(16) Question:

In addition to presenting its own financial statements, an issuer may be required to present up to three years of financial statements of other entities in its registration statement, based on the significance of those entities (e.g., financial statements of acquired businesses and equity method investees under Rules 3-05 and 3-09 of Regulation S-X, respectively). How many years of financial statements must be presented for these entities if an emerging growth company presents only two years of financial statements pursuant to Section 7(a)(2)(A) of the Securities Act?

Answer:

If the significance test results in a requirement to present three years of financial statements for these other entities, we would not object if the emerging growth company presents only two years of financial statements for these other entities in its registration statement. This approach is similar to how smaller reporting companies report the financial statements of businesses acquired or to be acquired pursuant to Rule 8-04(c) of Regulation S-X.

(17) Question:

Securities Act Section 2(a)(19)(C) provides that an issuer may lose its emerging growth company status on the “date on which such issuer has during the previous 3-year period, issued more than $1,000,000,000 in non-convertible debt,” provided that none of the other disqualifying conditions in Section 2(a)(19) have been triggered. How is the 3-year period measured, and what constitutes “non-convertible debt”?

Answer:

The 3-year period covers any rolling 3-year period. It is not limited to completed calendar or fiscal years. As of any date on which an issuer has issued more than $1 billion in non-convertible debt over the three years prior to such date, the issuer will lose its status as an emerging growth company, provided that none of the other disqualifying conditions have been triggered.

“Non-convertible debt” means any non-convertible security that constitutes indebtedness, whether issued in a registered offering or not.

(18) Question:

Do debt securities issued in an A/B debt exchange offer count towards the $1 billion debt limit for purposes of determining whether a company has lost its emerging growth company status pursuant to Securities Act Section 2(a)(19)(C)?

Answer:

In general, all non-convertible debt securities issued over the prior three-year period, whether outstanding or not, are required to be counted against the $1 billion debt limit. We will not object, however, if a company does not count debt securities issued in an A/B exchange offer, as these debt securities are identical to (other than the fact that they are not restricted securities) and replace those issued in the non-public offering and we view the A/B exchange offer as, in effect, the completion of the capital-raising transaction.

(19) Question:

May an asset-backed securities (“ABS”) issuer qualify as an emerging growth company?

Answer:

No. We do not believe, given the existing regulatory regime for ABS issuers and the context of the JOBS Act and its definition of “emerging growth company,” that ABS issuers qualify as emerging growth companies. An ABS issuer under Regulation AB is an issuer, usually a trust, that acquires and holds a discrete pool of financial assets, such as credit card receivables, car leases or loans, that by their terms liquidate over a specified time period. ABS issuers are subject to an entirely separate disclosure and reporting regime under Regulation AB that is designed to address their particular structure and operations. Many of the specific exemptions from the disclosure and other requirements contained in Title I for emerging growth companies are exemptions from requirements to which ABS issuers already are not subject. For example, an ABS issuer’s prospectus does not include financial statements of the issuer, and there is no MD&A or executive compensation disclosure. An ABS issuer also is not required to comply with Section 404(b) of the Sarbanes-Oxley Act or to conduct a say-on-pay vote.

(20) Question:

May an investment company registered under the Investment Company Act qualify as an emerging growth company?

Answer:

No. We do not believe, given the existing regulatory regime for registered investment companies and the context of the JOBS Act and its definition of “emerging growth company,” that registered investment companies qualify as emerging growth companies. Registered investment companies are externally managed pooled investment vehicles that are subject to an entirely separate disclosure and reporting regime that is designed to address their particular structure and operations. Many of the specific exemptions from the disclosure and other requirements contained in Title I for emerging growth companies are exemptions to requirements to which registered investment companies already are not subject. For example, registered investment companies are not required to provide executive compensation disclosure or MD&A, or to comply with Section 404(b) of the Sarbanes-Oxley Act or to conduct a say-on-pay vote. Further, registered investment companies typically include only a “seed capital” balance sheet in their initial registration statement and, going forward, are required to include only a balance sheet and statement of operations for the last fiscal year and a statement of changes in net assets for two fiscal years – hence, the limited audited financial statements provision of the JOBS Act is not implicated. Moreover, compliance with the registration and disclosure regime for registered investment companies also fulfills their obligations under the Investment Company Act from which Title I provides no exemption.

(21) Question:

May business development companies (“BDCs”), a category of closed-end investment companies that are not required to register under the Investment Company Act but are regulated pursuant to Sections 55 through 65 of that Act, qualify as emerging growth companies?

Answer:

Yes. We believe, given the existing regulatory regime for BDCs and the context of the JOBS Act and its definition of “emerging growth company,” that BDCs may qualify as emerging growth companies. BDCs invest in startup and emerging growth companies for which they make available significant managerial experience, and are subject to many of the disclosure and other requirements from which Title I provides exemptions, including executive compensation disclosure, say-on-pay votes, MD&A and Section 404(b) of the Sarbanes-Oxley Act.

(22) Question:

A company had more than $1 billion in total annual gross revenues two years ago. For its most recently completed fiscal year, the company’s total annual gross revenues were less than $1 billion. This company is now contemplating an initial public offering of its common equity securities. Does this company meet the total annual gross revenues test for emerging growth company?

Answer:

Yes. The definition of emerging growth company focuses on the total annual gross revenues for the most recently completed fiscal year.

(23) Question:

How would a financial institution determine its total annual gross revenues for purposes of determining whether it meets the definition of emerging growth company?

Answer:

The definition of emerging growth company does not include different standards for calculating revenues for different types of issuers. We note, however, that for purposes of calculating revenues to determine smaller reporting company status under Exchange Act Rule 12b-2, the staff has developed a specific approach for financial institutions. See Section 5110.2(c) of the Division’s Financial Reporting Manual. We believe it would be appropriate for a financial institution to use the same approach in determining its “total annual gross revenues” for purposes of determining emerging growth company status.

Specifically, under the approach used for smaller reporting company determinations, a financial institution must include all gross revenues from traditional banking activities. Banking activity revenues include interest on loans and investments, dividends on investments, fees from loan origination, fees from trust and investment services, commissions, brokerage fees, mortgage servicing revenues, and any other fees or income from banking or related services. Revenues do not include gains and losses on dispositions of investment portfolio securities (although it may include gains on trading account activity if that is a regular part of the institution’s activities).

(24) Question:

An issuer completes a transaction that results in the issuer becoming the successor to its predecessor’s Exchange Act registration and reporting obligations pursuant to Exchange Act Rules 12g-3 and 15d-5, which occurs automatically. If the predecessor was not eligible to be an emerging growth company because its first sale of common equity securities pursuant to an effective registration statement occurred on or before December 8, 2011, can its successor nevertheless qualify as an emerging growth company?

Answer:

No. If the predecessor is not eligible to be an emerging growth company because its first sale of common equity securities occurred on or before December 8, 2011, then its successor is similarly not eligible to be an emerging growth company.

(25) Question:

Will the staff publicly release its comment letters and issuer responses to staff comment letters on confidential draft submissions after the registration statement is effective?

Answer:

Yes. The staff will publicly release its comment letters and issuer responses to staff comment letters on EDGAR no earlier than 20 business days following the effective date of a registration statement (the same time frame for the public release of staff comment letters and issuer responses with respect to filings that are not submitted confidentially). To assist in this process, the staff will ask emerging growth companies to resubmit, on EDGAR, their response letters to staff comment letters on confidential draft registration statements, using the submission type “CORRESP,” when they first file their registration statements on EDGAR.

(26) Question:

Should an emerging growth company identify information for which it intends to seek confidential treatment when it submits its responses to staff comments on confidential draft registration statements?

Answer:

Yes. Although an emerging growth company need not seek confidential treatment for its response letters for information it does not want to be made public during the course of the confidential review, in its response letters, the company should appropriately identify the information for which it intends to seek confidential treatment upon public filing to ensure that the staff does not include that information in its comment letters. When the company resubmits its responses to staff comments on the confidential draft registration statement on EDGAR, it should follow the Rule 83 procedures. Alternatively, the company could follow the Rule 83 procedures at the time it submits its response letters to the staff.

(27) Question:

For certain offerings, Item 503(d) of Regulation S-K requires an issuer that is not a smaller reporting company to present its ratio of earnings to fixed charges for each of the last five fiscal years and the latest interim period for which financial statements are presented in the registration statement. If Item 503(d) is applicable, is an emerging growth company that is not a smaller reporting company required to present its ratio of earnings to fixed charges for each of the last five fiscal years?

Answer:

Although Title I does not include any provision addressing the existing requirement to disclose the ratio of earnings to fixed charges, we recognize that requiring the ratio to be disclosed for periods prior to those included in the financial statements or selected financial data could impose burdens inconsistent with the provisions of Title I. Consequently, we will not object if an emerging growth company presents in a registration statement its ratio of earnings to fixed charges for the same number of years for which it provides selected financial data disclosures in accordance with Title I of the JOBS Act.

(28) Question:

Is an emerging growth company required to comply with XBRL requirements?

Answer:

Yes. Title I does not exempt emerging growth companies from these requirements.

(29) Question:

May a company that has issued only debt securities pursuant to an effective registration statement on or before December 8, 2011 qualify as an emerging growth company if its annual total gross revenues for its most recently completed fiscal year were less than $1 billion and none of the disqualifying conditions have been triggered?

Answer:

Yes. The effective date for the definition of emerging growth company focuses only on whether the first sale of common equity securities pursuant to an effective registration statement occurred on or before December 8, 2011.

(30) Question:

How many years of audited financial statements are required to be included in an emerging growth company’s Form 10-K or Form 20-F?

Answer:

For an emerging growth company that is not a smaller reporting company, three years of audited financial statements are required to be included in its Form 10-K or Form 20-F. The provision in Securities Act Section 7(a)(2)(A) permitting emerging growth companies to file only two years of audited financial statements is limited to the registration statement for the emerging growth company’s initial public offering of common equity securities. We note that, as a practical matter, an emerging growth company will not be required to include, in its first annual report on Form 10-K or on Form 20-F, audited financial statements for any period prior to the earliest audited period presented in connection with its initial public offering of common equity securities. For example, if an emerging growth company with a December 31 fiscal year-end has a registration statement for its initial public offering of common equity securities declared effective during the 3rdquarter of 2012, the registration statement would include audited financial statements for 2011 and 2010. The registrant’s first annual report, which will be for the fiscal year ending December 31, 2012 and will be filed in 2013, will include audited financial statements covering 2012, 2011 and 2010.

(31) Question:

May an emerging growth company use the confidential submission process to submit a draft registration statement for an A/B debt exchange offer on Form S-4 or on Form F-4?

Answer:

Yes, so long as its initial public offering date has not yet occurred. An emerging growth company must publicly file the Form S-4 or Form F-4 for its A/B debt exchange offer at least 21 days before its anticipated date of effectiveness.

(32) Question:

May an issuer that conducted its first sale of common equity securities pursuant to an effective registration statement as an emerging growth company regain its status as an emerging growth company after losing that status pursuant to the disqualification provisions in Sections 2(a)(19)(A), (B), (C) or (D) of the Securities Act?

Answer:

No. The definition of emerging growth company in Section 2(a)(19) of the Securities Act has no provision allowing an issuer to regain emerging growth company status in this situation.

(33) Question:

Section 7(a)(2)(B) of the Securities Act provides that an emerging growth company can take advantage of an extended transition period for complying with any “new or revised” financial accounting standard. What is considered to be a “new or revised” financial accounting standard?

Answer:

The term “new or revised” financial accounting standard refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012, the date of the enactment of the JOBS Act.

(34) Question:

If it qualifies as an emerging growth company, may a foreign private issuer that reconciles its home country GAAP financial statements to U.S. GAAP take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised financial accounting standards in its U.S. GAAP reconciliation?

Answer:

Yes. The foreign private issuer can take advantage of the extended transition period provided in Section 7(a)(2)(B) for complying with new or revised financial accounting standards in its U.S. GAAP reconciliation.

(35) Question:

Certain financial accounting standards (e.g., segment disclosures under ASC 280-10-15-3 and earnings per share computation, presentation and disclosures under ASC 260-10-5-1) exclude from their scope nonpublic entities, and the definition of nonpublic entities in U.S. GAAP typically includes companies that are not “issuers,” as defined in Section 2(a) of the Sarbanes-Oxley Act. Are emerging growth companies that have chosen to take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised financial accounting standards required to comply with these standards?

Answer:

Yes. Section 7(a)(2)(B) only provides an accommodation with respect to the effective dates of new or revised financial accounting standards, and only applies if such standards apply to companies that are not issuers.

(36) Question:

Some non-U.S. jurisdictions have a separate set of financial accounting standards for nonpublic entities. If a foreign private issuer qualifies as an emerging growth company and has chosen to take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised financial accounting standards in its U.S. GAAP reconciliation, may the foreign private issuer apply the set of standards for nonpublic entities?

Answer:

No. Section 7(a)(2)(B) only provides an accommodation with respect to the effective dates of new or revised financial accounting standards, and only applies if such standards apply to companies that are not issuers. It does not allow an emerging growth company to apply financial accounting standards as if it were a nonpublic entity. Accordingly, emerging growth companies may not report under a separate set of standards for nonpublic entities. Similarly, emerging growth companies that are foreign private issuers may not report under IFRS for Small and Medium-sized Entities.

(37) Question:

If an emerging growth company chooses to take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised financial accounting standards, can it later decide to “opt in” (i.e., comply with the financial accounting standard effective dates applicable to non-emerging growth companies)?

Answer:

Yes. If an emerging growth company initially decides to take advantage of the extended transition period provided in Section 7(a)(2)(B), we will not object if the company later decides to opt in, so long as it complies with the requirements in Sections 107(b)(2) and (3) of the JOBS Act. This decision should be prominently disclosed in the first periodic report or registration statement following the company’s decision and is irrevocable.

(38) Question:

An emerging growth company submits a draft registration statement on a confidential basis under Section 6(e) of the Securities Act. After the initial submission, the company discovers a material error in one or more of its financial statements. The company restates and confidentially submits a draft amendment to the registration statement to correct the error and disclose the restatement. When may the company remove the restatement disclosures?

Answer:

The emerging growth company would be required to include the restatement disclosures in its financial statements until its financial statements are updated for the next annual period. ASC 250-10-50 requires that “when prior period adjustments are recorded, the resulting effects…on the net income of prior periods shall be disclosed in the annual report for the year in which the adjustments are made and in interim reports issued during that year subsequent to the date of recording the adjustments.” ASC 250-10-50 further states that “[f]inancial statements of subsequent periods shall not repeat the [restatement] disclosures.”

(39) Question:

Paragraphs 6 and 21 of IFRS 1, First-time Adoption of International Financial Reporting Standards, require a first-time adopter of IFRS to present an opening IFRS statement of financial position at the date of transition to IFRS. This requirement results in the presentation of three statements of financial position. Likewise, a foreign private issuer that is not a first-time adopter of IFRS is required by paragraph 10(f) of IAS 1, Presentation of Financial Statements, to provide three statements of financial position when it applies an accounting policy retrospectively, makes a retrospective restatement or reclassifies items in its financial statements. If a foreign private issuer is an emerging growth company and is either a first-time adopter of IFRS or required by paragraph 10(f) of IAS 1 to provide three statements of financial position, may it include only two statements of financial position in a registration statement for its initial public offering of common equity securities?

Answer:

No. Notwithstanding Section 7(a)(2)(A) of the Securities Act, in order for this foreign private issuer to assert that its financial statements are prepared in compliance with IFRS as issued by the IASB, it must include three statements of financial position in the situations described above.

(40) Question:

Pursuant to Securities Act Section 2(a)(19)(B), an issuer will lose its emerging growth company status on 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 pursuant to an effective registration statement,” provided that none of the other disqualifying conditions have previously been triggered. How is this date determined?

Answer:

This date is determined by looking to the fiscal year during which the fifth anniversary occurs. The last day of this fiscal year will be the first day that the issuer is a non-emerging growth company, provided that none of the other disqualifying conditions have been triggered. For example, if an issuer with a December 31 fiscal year-end first sold common equity securities pursuant to an effective registration statement on May 2, 2012, it would cease to be an emerging growth company no later than December 31, 2017.

(41) Question:

Is an emerging growth company that is not also a smaller reporting company permitted to comply with the smaller reporting company version of Item 303 of Regulation S-K?

Answer:

No. While Section 102(c) of the JOBS Act permits an emerging growth company to comply with the smaller reporting company version of Item 402 of Regulation S-K, Section 102(c) does not permit an emerging growth company to comply with the smaller reporting company provisions of Item 303 of Regulation S-K. Instead, Section 102(c) permits an emerging growth company, in its MD&A, to discuss only those audited periods presented in its audited financial statements. Therefore, if in the registration statement for its initial public offering of common equity securities, an emerging growth company’s audited financial statements cover only two years, as permitted by Section 7(a) of the Securities Act, then the company can limit its MD&A discussion to those two years.