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 EGCs.
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 rulemaking.
For more information, please contact the authors or any other members of McGuireWoods’ Employee Benefits team.