Legal Definitions - emerging growth company (EGC)

An Emerging Growth Company (EGC) is a special classification for certain newer, smaller public companies, or those preparing to go public, that allows them to follow a simpler set of rules when disclosing information to investors and the public. This category was created by the Jumpstart Our Business Startups (JOBS) Act of 2012 with the goal of making it easier for smaller companies to raise capital in public markets.

To qualify as an EGC, a company must have annual gross revenues of less than $1.235 billion (this threshold is adjusted periodically for inflation) during its most recent fiscal year and must not have previously sold common stock under a registration statement. Once a company achieves EGC status, it generally retains it for up to five fiscal years after its initial public offering (IPO).

However, a company will lose its EGC status sooner if:

• Its gross revenues exceed the specified threshold (currently $1.235 billion).
• It has issued more than $1 billion in non-convertible debt over a three-year period.
• It becomes classified as a "large accelerated filer," which is another SEC designation for larger, more established public companies.

The primary benefit of EGC status is a reduction in regulatory burdens. This includes:

• Simplified Financial Reporting: EGCs are only required to provide two years of audited financial statements in their IPO registration statements, compared to three years for other companies.
• Reduced Disclosure Requirements: They can provide less extensive disclosures on various topics, such as executive compensation.
• Exemption from Certain Audits: EGCs are not required to obtain an auditor attestation report on their internal controls over financial reporting.
• Relaxed "Gun-Jumping" Rules: These rules govern communications with investors before an IPO, and EGCs have more flexibility in this area.

Examples of an Emerging Growth Company (EGC) in Action:

• Scenario 1: A Tech Startup Preparing for IPO
  InnovateTech Solutions, a software development company, has been growing rapidly and generated $450 million in gross revenue last year. It has decided to go public to raise capital for further expansion. As it prepares its initial public offering (IPO) documents, InnovateTech qualifies as an EGC because its revenues are well below the $1.235 billion threshold and it has not yet sold stock publicly. This allows them to include only two years of audited financial statements in their registration filing, saving time and resources compared to a larger, more established company.

• Scenario 2: A Newly Public Biotechnology Firm
  BioHealth Discoveries Inc., a biotechnology company focused on new drug development, went public two years ago. At the time of its IPO, its annual revenues were $150 million. In its second year as a public company, its revenues grew to $280 million. Since it is still within its first five fiscal years as a public company and its revenues remain below the EGC threshold, BioHealth Discoveries continues to benefit from the relaxed reporting requirements. For instance, it doesn't need to provide as detailed disclosures on executive compensation as a non-EGC would.

• Scenario 3: A Manufacturing Company Losing EGC Status Due to Growth
  GreenBuild Materials Corp., a sustainable construction materials manufacturer, went public four years ago with annual revenues of $600 million, qualifying it as an EGC. However, due to a surge in demand for its eco-friendly products, its revenues for the most recent fiscal year jumped to $1.5 billion. Because GreenBuild Materials' gross revenues now exceed the $1.235 billion threshold, it will lose its EGC status at the end of that fiscal year. Moving forward, it will be required to comply with all the more extensive disclosure and reporting requirements applicable to larger, non-EGC public companies, including providing three years of audited financial statements and obtaining an auditor attestation on internal controls.