What Is an Emerging Growth Company (EGC)?

An Emerging Growth Company (EGC) is a category of issuer established by the Jumpstart Our Business Startups (JOBS) Act of 2012. This designation encourages smaller, developing businesses to access public capital markets by temporarily reducing certain regulatory requirements. EGC status eases the transition from private to public, streamlining the initial public offering (IPO) process. Companies meeting the EGC definition benefit from scaled disclosure obligations and exemptions from some federal securities laws.

Qualifying as an Emerging Growth Company

To qualify as an Emerging Growth Company, a business must meet specific financial and historical criteria. A company’s total annual gross revenues during its most recently completed fiscal year must be less than $1.235 billion. This revenue threshold, initially set at $1 billion, is subject to inflation adjustments every five years. Gross revenues typically refer to total revenues reported under U.S. Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS).

A company also cannot be an EGC if it sold common equity securities in an SEC-registered IPO on or before December 8, 2011. Certain issuers, such as asset-backed securities issuers and investment companies, are specifically excluded from EGC status. The revenues of a predecessor entity are considered when determining EGC eligibility for a new issuer.

Regulatory Relief and Exemptions for EGCs

Emerging Growth Companies receive several regulatory reliefs and exemptions to reduce public company reporting burdens. A significant accommodation involves scaled disclosure requirements in SEC filings. EGCs can provide only two years of audited financial statements in an IPO of common equity, instead of the three years typically required. They also do not need to include audited financial statements for periods prior to the earliest audited period presented in their IPO for subsequent filings.

EGCs benefit from reduced executive compensation disclosures, presenting less extensive narrative information compared to non-EGCs. They can also delay adopting new or revised accounting standards until these standards become effective for private companies. If an EGC opts out of this extended transition period to adopt new standards earlier, this election is irrevocable.

Reduced Sarbanes-Oxley (SOX) compliance burdens are another relief. EGCs are exempt from the requirement to obtain an auditor attestation report on internal controls over financial reporting under Section 404(b) of SOX. However, EGC management must still perform its own assessment of internal controls under SOX Section 404(a). Additionally, EGCs are exempt from certain shareholder advisory votes, such as “say-on-pay” and “say-on-frequency” on executive compensation, and are not required to provide CEO pay-ratio disclosure. The JOBS Act introduced the “test the waters” provision, allowing EGCs to communicate with qualified institutional buyers and institutional accredited investors to gauge interest in a potential offering before or after filing a registration statement. EGCs can also submit draft registration statements to the SEC on a confidential basis, providing greater control over the IPO timeline and process.

Termination of Emerging Growth Company Status

An Emerging Growth Company’s status is not indefinite; it terminates upon the earliest occurrence of several specific events. A company loses its EGC status on the last day of the fiscal year in which its total annual gross revenues exceed $1.235 billion. This revenue threshold is the same as the initial qualification limit and is adjusted for inflation.

EGC status also ends on the date the company has issued more than $1 billion in non-convertible debt during the preceding three-year period. This is a rolling three-year period, including all non-convertible debt issued. Another trigger for termination is when the company becomes a “large accelerated filer.” This occurs when a company’s worldwide public float, or the market value of its shares held by non-affiliates, reaches $700 million or more, typically assessed at the end of the second fiscal quarter.

Finally, EGC status automatically terminates on the last day of the fiscal year following the fifth anniversary of the company’s first sale of common equity securities under an effective registration statement. This five-year period provides a defined window for companies to benefit from reduced regulatory requirements before transitioning to full public company compliance.