Like most pieces of legislation, the devil in the recently passed JOBS Act is in the details. And like most pieces of legislation, the details are often worked out in the regulations, not the legislation. A story in today’s Wall Street Journal highlights the problem (“Meet the JOBS Act’s Jobs-Free Companies“). The issue: what is an “emerging growth company.”
Much of the focus in the entrepreneurship community and thus the press has been on the crowdsourcing part of the Act. But possibly more significant is the part that looseness regulatory reporting requirements for “emerging growth company.” The Act (Section 101) simply defines an “emerging growth company” as one with total annual gross revenues of less than $1 billion (subject also to certain limits on market capitalization and total debt obligations). There is no “growth” or “emerging” metric in the law.
Herein lies the importance of the definition (as the WSJ story explains):
Just eight weeks after its passage, however, more than a dozen of the companies seeking to use its looser rules for going public aren’t the type of high-tech growth companies lawmakers had in mind.
“Special-purpose acquisition companies” and “blank check” companies, basically empty shells with almost no employees that are used in mergers or as a backdoor route to U.S. stock listings, have been quick to identify themselves in [SEC] regulatory filings as “emerging growth companies.”
In addition, the article notes that royalty trusts for music and movie royalties are also seeking to qualify. However, they also point out that SEC staff has stated that asset-backed securities companies do not qualify.
Given the definition in the law, it will be interesting to see what the SEC does with these regulatory filings. It is not clear that they have the authority to deny any company with less than $1 billion in revenues the exemptions from the disclosure requirements.
In an earlier posting, I made the point that the JOBS Act needs to be seen as a regulatory experiment. Proponents of the Act said that any problems could always be fixed later. Now we just might see if that statement is true — beginning with a fix for what actually constitutes an “emerging growth company.”