Wednesday, March 21, 2012

Access to Capital for “Emerging Growth Companies”

By Greg Pfahl, Audit Partner, Hein & Associates

As an auditor of both public and private companies for almost 15 years, I sometimes look back to realize that I have been practicing through some unprecedented times in the financial markets. The Sarbanes-Oxley Act of 2002 was considered by many to be the death of the “small IPO,” an initial public offering of less than $50 million. The primary reason for this belief was the increased cost of becoming and remaining a public company due to some of the requirements within the Act.
On March 8, 2012, the House of Representatives overwhelmingly passed the Jump start Our Business Start ups, or the “JOBS” Act. The JOBS Act contains several bills, one of which will attempt to decrease the burden on smaller companies accessing capital through an IPO. If ultimately enacted into law, following are some of the key provisions of the Act:
· A new status of issuer will be created called an“emerging growth company,” defined as an issuer with total annual gross revenue of less than $1 billion for its most recently completed fiscal year. A company will remain an emerging growth company for up to five years unless it hits the $1 billion in revenue mark, or meets the definition of a large accelerated filer (basically greater than $700million of non-affiliated market capitalization).
· Emerging growth companies would not need to comply with Section 404(b) of the Sarbanes-Oxley Act, which is the requirement to submit the independent auditor attestation of the company’s internal control over financial reporting. Note that, in general, companies with less than $75 million in non-affiliated market capitalization have not been subject to 404(b) because it was being phased-in with multiple delays until finally the Dodd-Frank Act provided a permanent exemption for these companies.
· Reduce the number of years of audited financial statements to be included in the initial registration statement from three years to two years. Again, this is already the requirement of smaller reporting companies.
· Will allow emerging growth companies to adopt new accounting standards based on the effective date requirements for private companies as opposed to the public company effective date requirements. The Financial Accounting Standards Board (FASB)often provides for a longer transition period to newly issued standards for private companies than it does for public companies.
The Alternative Energy industries are generally incredibly capital intensive and, for early stage companies in these industries, access to capital is a critical issue. Public equity is only one option to access capital, but it has historically been a very common option for providing venture capitalists or other investors with liquidity for prior investments, and to get the companies to the other side of the “valley of death.”
On the surface, these provisions appear to be great news to provide more access to the public markets. On their own, however, I do not believe they will make a significant difference. As mentioned earlier, smaller reporting companies, those with less than $75 million in non-affiliated market capitalization, are already exempt from the auditor’s opinion on their internal controls and they are also able to utilize scaled reporting requirements. So the current rules already accommodate the small IPO yet they are still virtually non-existent in today’s markets. In fact, statistics show that the small IPO was already declining in use through the 1990s and into the 2000s.

About the Author
Greg Pfahl, CPA, is an audit partner in the Denver office of Hein & Associates LLP, a full-service public accounting and advisory firm with additional offices in Houston, Dallas and Orange County. He also serves as a local leader for the alternative energy practice area. Pfahl can be reached at or 303.298.9600.

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