Yesterday President Obama signed into law the Jumpstart Our Business
Startups Act, commonly referred to as the “JOBS
Act.” Among other changes to the federal securities laws, the Act exempts
certain new public companies, called “emerging growth companies” (EGCs), from
various requirements otherwise applicable to public companies under the
Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (Dodd-Frank) and various regulations of the Securities
and Exchange Commission (SEC). This article focuses on the exemption from
various compensation-related disclosure requirements that the Act provides to
Emerging Growth Companies
Under the Act, an EGC is any issuer of publicly-traded securities that had
total annual gross revenues of less than $1 billion (adjusted for inflation
every five years) for its most recently completed fiscal year. Any issuer that
went public on or before Dec. 8, 2011, however, is not eligible for EGC status.
An issuer will retain its status as an EGC until the earliest to occur of any
of the following:
- The last day of the EGC’s fiscal year for which its total annual gross
revenues are $1 billion or more (adjusted for inflation every five years);
- The last day of the EGC’s fiscal year containing the fifth anniversary
of the date on which it went public;
- The date on which the EGC has issued, during the immediately preceding
three-year period, more than $1 billion in non-convertible debt; or
- The date on which the EGC becomes a “large accelerated filer,” generally
meaning the last day of the EGC’s first fiscal year in which the EGC (i) has
been a public company for at least 12 months; (ii) has filed at least one
annual report; and (iii) had a market capitalization of $700 million or more
as of the end of its most recently-completed second fiscal quarter.
Exemption of EGCs from Compensation-Related Disclosure Requirements
The Act exempts EGCs from the following compensation-related disclosure
requirements that are otherwise applicable to public companies:
- Say-on-Pay: EGCs do not have to hold any say-on-pay,
say-on-frequency or say-on-golden-parachute shareholder votes. Once the EGC
ceases to qualify as an EGC, it must hold its first say-on-pay and
say-on-frequency votes by no later than the first anniversary of the date on
which it ceases to so qualify (or, if the EGC qualified for less than two
years after it went public, by no later than the third anniversary of the
date it went public).
- Pay versus Performance: An EGC does not have to disclose
information in its annual proxy statement that shows the relationship
between executive compensation actually paid and the financial performance
of the EGC.
- Pay Ratio: EGCs do not have to disclose in certain public filings
the ratio of the median annual total compensation for all of the EGC’s
employees, other than its chief executive officer (CEO), to the annual total
compensation of the EGC’s CEO.
- Scaled Disclosure for Smaller Reporting Companies: EGCs are to be
treated as “smaller reporting companies” (i.e., companies with a public
float of less than $75 million) for purposes of the executive compensation
disclosure requirements under Item 402 of Regulation S-K. This generally
means that, in their annual proxy statements or annual reports, EGCs (i)
will be exempt from having to file a compensation discussion and analysis
(CD&A); (ii) will need to disclose compensation information only for the CEO
and two other named executive officers (instead of for the CEO, the chief
financial officer and three other officers); (iii) will need to disclose
compensation information only for the current fiscal year (instead of the
current year and the prior two years); and (iv) may omit the “Grants of
Plan-Based Awards” table and certain other tables.
These “pay-versus-performance” and “pay-ratio” requirements described above
were added by Dodd-Frank and have not yet been implemented by the SEC, although
the SEC is currently expected to propose rules implementing these requirements
by June 30, 2012.
The Act also requires the SEC to undertake a comprehensive review of the
registration requirements under Regulation S-K (including the executive
compensation disclosure requirements in Item 402) and to report back to Congress
within 180 days regarding how the registration process can be further
streamlined and simplified for EGCs.
The compensation-disclosure exemptions for EGCs discussed above took effect
immediately upon the Act becoming law and are not dependent on any SEC
For more information, please contact the authors or any other members of
McGuireWoods’ Employee Benefits team.