Emerging Growth Company
An Emerging Growth Company (EGC) is a company classification created by the Jumpstart Our Business Startups (JOBS) Act of 2012 that allows smaller, recently public companies to comply with reduced SEC disclosure requirements and auditing standards for up to five years following their initial public offering.
The JOBS Act created the EGC category with the stated goal of reducing the regulatory burden on smaller companies accessing public capital markets, thereby encouraging more IPOs and economic growth. Congress observed that the number of US IPOs had declined sharply since the late 1990s and attributed part of this trend to the compliance costs associated with being a public company, particularly the auditor attestation requirements of Sarbanes-Oxley Section 404(b). The EGC provisions were designed to provide a graduated on-ramp to full public company compliance.
A company qualifies as an EGC at the time of its IPO if its most recent annual gross revenues are less than $1.235 billion (the inflation-adjusted threshold as of 2023). The company retains EGC status until the earliest of: (1) the last day of the fiscal year in which its revenues exceed the threshold; (2) the last day of the fiscal year following the fifth anniversary of its IPO; (3) the date it issues more than $1 billion of non-convertible debt over a rolling three-year period; or (4) the date it becomes a large accelerated filer (public float of $700 million or more as of the last business day of the second fiscal quarter). The loss of EGC status typically marks a significant increase in compliance obligations.
The accommodations available to EGCs are substantial. They may submit registration statements on a confidential basis to the SEC for staff review before public filing, allowing the company to test the waters without public exposure to the filing process. They may include only two years of audited financial statements in their IPO registration statement versus three years for non-EGCs. They are exempt from the auditor attestation requirement of SOX 404(b) — potentially the most financially significant accommodation for smaller companies, as 404(b) audits can cost millions of dollars annually for larger firms. EGCs may also follow new accounting standards on the same delayed timeline available to private companies rather than the accelerated adoption schedule for public companies.
EGCs may engage in testing-the-waters communications with qualified institutional buyers and institutional accredited investors before and after filing a registration statement, without those communications constituting a gun-jumping violation. They may also omit executive compensation disclosure that would otherwise be required under say-on-pay rules, including the pay ratio disclosure comparing CEO compensation to median employee compensation.
Since the JOBS Act's passage, EGC status has been used by the vast majority of US IPO companies, as even many sizable companies qualify given the revenue threshold. Critics of the EGC framework have argued that the reduced disclosure — particularly the exemption from 404(b) — leaves investors with less assurance about the reliability of financial statements during the years when newly public companies are statistically at highest risk of material restatements and accounting irregularities.