Comment by stephenSinniah | Hacker News Reader

Comment by stephenSinniah | Hacker News Reader

From the risk factors summary:

Implications of Being an Emerging Growth Company

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We may take advantage of certain exemptions from various public company reporting requirements, including not being required to have our internal controls over financial reporting audited by our independent registered public accounting firm under Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and any golden parachute payments. We may take advantage of these exemptions for up to five years or until we are no longer an emerging growth company, whichever is earlier. In addition, the JOBS Act provides that an “emerging growth company” can delay adopting new or revised accounting standards until those standards apply to private companies. We have elected to take advantage of certain of the reduced disclosure obligations in the registration statement of which this prospectus is a part and may elect to take advantage of other reduced reporting requirements in future filings. As a result, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity interests.

Wow, I didn't know about this. Shouldn't financial reporting always be transparent?

CPA here.

The short answer is theoretically, yes, but in practice, it's not always practical to have transparent financial reporting.

For context, financial reporting is a tradeoff between cost and effectiveness. Whenever you're reading audited financial statements, you're reading an accounting professional's opinion which would be reasonable given a certain level of constraints. In theory, auditors could audit every facet of an organization and obtain 99.99% assurance, but the financial cost of doing so typically doesn't make sense for the company nor shareholders.

Of the reduced disclosures, the most significant is not having their internal controls audited. For a big company, this is a red flag because the financial accounts are only reasonable if you also have reasonable assurance that there are controls in place to prevent fraud and that they're working effectively.

But for smaller companies where most of the ownership is usually owned by founder-workers, employees, or early investors who are monitoring it on the ground level, there aren't many benefits from increased reporting over internal controls because if they are committing fraud, they'd mostly be defrauding themselves! That, combined with the fact that most early stage companies are already resource-constrained, makes regulators a bit more lenient because they assume investors/employees know what they're getting themselves into.

Now, when a company decides to go public, they need some time to adopt best practices and comply with broader regulations. That takes time, so regulators give them a few years to get the personnel and processes in place without penalizing them. But to cover their bases, they're required to make disclosures like above, so that early investors buying into the IPO know that they won't have similar levels of assurance about the financials for a few years.

Very interesting, thank you for the insight.

From your snippet:

> We may take advantage of these exemptions for up to five years or until we are no longer an emerging growth company, whichever is earlier.

The definition of "emerging growth company", from https://www.sec.gov/smallbusiness/goingpublic/EGC

> A company qualifies as an emerging growth company if it has total annual gross revenues of less than $1.07 billion during its most recently completed fiscal year and, as of December 8, 2011, had not sold common equity securities under a registration statement. A company continues to be an emerging growth company for the first five fiscal years after it completes an IPO, unless one of the following occurs:

> - its total annual gross revenues are $1.07 billion or more

> - it has issued more than $1 billion in non-convertible debt in the past three years or

> - it becomes a “large accelerated filer,” as defined in Exchange Act Rule 12b-2

2020's gross revenue was 318m growing at 50-60m yoy from prior years. So, unless that growth is somehow compounding, the 5 years post-IPO is the most likely outcome.

The biggest implications are relaxed requirements around explaining executive compensation, and that financial control auditing (SOX-compliance) is not required.

It's not necessarily a bad thing for investors, but a trade-off. It means the company can focus more on growth and less elsewhere.

Huh, that's a bit surprising. Can anyone point to examples of what kinds of disclosure obligations are reduced? e.g. liquidation multipliers?

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