JOBS Act Exemptions to Expire Soon for Emerging Growth Companies

March 12, 2018

Businesses that went public under the designation of emerging growth companies shortly after the JOBS Act of 2012 was enacted could soon lose their exemptions from the law. The five-year exemptions included in the JOBS Act, which curtails regulations for young companies that raise investor funds and encourages initial public offerings, are set to expire soon. Once the exemptions expire, hundreds of young companies will be subject to various accounting, disclosure and corporate governance requirements foreign to them.

One exemption set to go away relates to Section 404(b) of the Sarbanes-Oxley Act. Section 404(b) requires an external auditor to review and report on management’s assessment of internal controls over financial reporting. Complying with the provision can be expensive, but supporters of Section 404(b) believe the requirement has improved financial reporting efforts and reduced accounting fraud incidents. Not all companies, however, will be bound by Section 404(b) requirements once they lose their emerging growth company designation. Nonaccelerated filers, which are public companies with public float less than $75 million, will remain exempt.

Another exemption involves the Dodd-Frank Act’s pay ratio disclosure requirements under Release No. 33-9877, Pay Ratio Disclosure. Issued by the Securities and Exchange Commission (“SEC”), Release No. 33-9877 requires businesses to disclose a ratio matching the chief executive’s pay to the median employee’s pay. In addition, emerging growth companies are expected to lose exemptions from shareholder “say-on-pay” advisory votes regarding executive compensation and certain scaled disclosure requirements.

With many companies losing emerging growth company status soon, Congress is taking action to extend the protections. Late last year, the House Financial Services Committee advanced the Fostering Innovation Act, which would provide another five-year exemption from Section 404(b) for companies with less than $50 million in yearly sales.