Understanding Emerging Growth Company Status: Advantages and Disadvantages
As a small business looking to go public, you may have heard of the term “Emerging Growth Company” or EGC. Under the Jumpstart Our Business Startups (JOBS) Act of 2012, companies that meet certain criteria are eligible for EGC status. In this blog post, we’ll explore the requirements to be an EGC, the advantages and disadvantages of this status, and what small businesses should consider before making a decision.
Requirements to be an EGC
To be considered an EGC, a company must meet the following requirements:
- Annual gross revenues of less than $1.07 billion in its most recently completed fiscal year.
- Went public within the previous five years.
- Not have issued more than $1 billion in non-convertible debt in the previous three years.
Advantages of EGC Status
There are several benefits to being classified as an EGC. These benefits include:
- Reduced Disclosure Requirements: EGCs are not required to comply with certain disclosure requirements that are normally required of larger public companies. For example, they are not required to provide executive compensation disclosures or certain financial disclosures. This reduced disclosure burden can be particularly beneficial for small businesses that may not have the resources to comply with all of the regulatory requirements that apply to larger public companies.
- Exemption from Certain SEC Regulations: EGCs are exempt from certain regulations that apply to larger public companies. For example, they are not required to hold shareholder advisory votes on executive compensation packages. This regulatory relief can provide EGCs with additional flexibility during the IPO process.
- Confidential Submission of IPO Registration Statements: EGCs are allowed to submit their initial IPO registration statements on a confidential basis to the SEC. This provides them with additional flexibility and confidentiality during the IPO process.
Disadvantages of EGC Status
There are also some disadvantages to being classified as an EGC. These disadvantages include:
- Limited Duration of EGC Status: EGC status is only available for a limited period of time, generally up to five years after the company’s IPO or until it reaches certain revenue and public float thresholds. After this time period expires, the company must comply with all of the regulatory requirements that apply to larger public companies.
- Increased Regulatory Scrutiny after EGC Status Expires: Once a company’s EGC status expires, it must comply with all of the regulatory requirements that apply to larger public companies. This can result in increased regulatory scrutiny and compliance costs.
- Reduced Investor Confidence: Some investors may view EGCs as riskier investments due to their limited operating history and reduced disclosure requirements. This reduced investor confidence can make it more difficult for EGCs to raise capital and grow their business.
Being classified as an EGC provides certain benefits and regulatory relief measures to small businesses that have recently gone public or are in the process of going public. However, EGC status is only available for a limited period of time and may result in reduced investor confidence and increased regulatory scrutiny after EGC status expires. Companies considering EGC status should carefully weigh the benefits and drawbacks before making a decision. A qualified securities attorney can provide guidance on the pros and cons of EGC status and help small businesses navigate the complex regulations that apply to public companies.