The JOBS Act buys a young issuer five years without 404(b)

The record

The JOBS Act became Public Law 112-106 on 5 April 2012. Section 103 of the enacted text amends Section 404(b) of the Sarbanes-Oxley Act of 2002 to exempt an issuer that is an emerging growth company from the requirement that an outside auditor attest to the effectiveness of internal control over financial reporting. Section 101 of the same law defines an emerging growth company as an issuer with less than 1 billion dollars in total annual gross revenue in its most recent fiscal year, a threshold indexed for inflation every five years; the SEC's own Emerging Growth Companies page states the current indexed threshold is 1.235 billion dollars.

What the documents establish

The statute itself sets the exemption's outer limit: under Section 101, an issuer keeps emerging growth company status until the earliest of the last day of the fiscal year in which its revenue reaches the threshold, the fiscal year following the fifth anniversary of its first registered common equity sale, issuing more than 1 billion dollars in non-convertible debt within a rolling three-year period, or becoming a large accelerated filer. Five years after IPO is therefore a ceiling, not a guarantee; a fast-growing issuer can lose the exemption earlier on any of the other three tests. The SEC's own page adds that emerging growth companies also retain other Section 404(a) obligations and simply are not required to obtain the auditor's attestation that Section 404(b) otherwise requires, alongside separate scaled-disclosure and test-the-waters accommodations the statute grants.

The operating read

As an editorial matter, a founder preparing for IPO should not read the 404(b) exemption as excusing management from assessing its own internal controls; Section 404(a), which requires management's own assessment, is untouched by the JOBS Act amendment, and the statute's text amends only the attestation clause. The practical effect is narrower than it sounds: it removes one specific auditor sign-off, for a bounded period governed by four independent tests, not a general audit exemption.

What to check before you decide

Before assuming an emerging growth company's financial statements carry the same audit assurance as a larger peer's, check the following against the company's own filings and counsel:

• Which of the four sunset tests is closest to being triggered for this issuer, revenue, the five-year anniversary, debt issuance, or accelerated-filer status?
• Does the filing distinguish management's own Section 404(a) assessment from the absent Section 404(b) auditor attestation?
• Has the company disclosed any material weakness that a 404(b) attestation might otherwise have surfaced sooner?

The exemption buys time on one specific audit procedure, on terms Congress wrote with four separate expiration triggers, not an open-ended pass on internal control.