Emerging growth company: Overview, definition, and example
What is an emerging growth company?
An emerging growth company (EGC) is a designation for a company that is in the early stages of its development and has not yet reached a certain level of revenue or market maturity. In the context of U.S. securities law, an EGC is typically defined as a company that has total annual gross revenues of less than $1.07 billion (as of 2022) and has not yet conducted a public offering of securities. EGCs are eligible for certain regulatory advantages, such as reduced disclosure and financial reporting requirements, to encourage investment and help them grow without the regulatory burden faced by larger, more established companies.
For example, a tech startup that has just begun to offer its products and is preparing for an initial public offering (IPO) may be classified as an emerging growth company if its annual revenue is under the threshold and it has not yet gone public.
Why is the concept of an emerging growth company important?
The concept of an emerging growth company is important because it provides a pathway for young companies to access capital markets and attract investors while easing the regulatory burden that could otherwise hinder their growth. The reduced reporting and disclosure requirements are designed to help EGCs focus on expanding their business, without being overwhelmed by compliance costs or complex regulations that are more suited to larger, established firms. This designation aims to encourage innovation and job creation by making it easier for young companies to scale and compete in the marketplace.
Understanding an emerging growth company through an example
Let’s say a biotechnology company has developed a promising new drug but has not yet achieved significant revenue. The company plans to go public through an IPO but qualifies as an emerging growth company because its total gross revenues are under the $1.07 billion threshold. As an EGC, the company benefits from relaxed disclosure requirements, such as the ability to file scaled-down financial statements and fewer executive compensation disclosures. This allows the company to focus its resources on research and development rather than regulatory compliance.
In another example, a software startup that has been operating for a few years and has generated initial revenues from sales may seek to raise capital by issuing shares in an IPO. If its revenues are below the threshold for emerging growth companies, it can take advantage of the EGC designation to reduce the regulatory burden during the IPO process and maintain its focus on growing its user base and expanding its offerings.
An example of an emerging growth company clause
Here’s how an emerging growth company clause might appear in an offering document or securities filing:
“The Company qualifies as an Emerging Growth Company under the Jumpstart Our Business Startups (JOBS) Act and, as such, is eligible for reduced disclosure and financial reporting requirements, including, but not limited to, a scaled-down audit report and exemption from certain executive compensation disclosures. The Company intends to rely on these benefits as it proceeds with its initial public offering.”
Conclusion
An emerging growth company (EGC) is a designation that allows younger, smaller companies to grow and access capital markets with less regulatory pressure. This status helps these companies overcome barriers to expansion by reducing the cost and complexity of compliance, allowing them to focus on innovation and scaling their business. For investors, understanding the EGC status is important, as it signals a company’s potential for growth while navigating the early stages of its market journey.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.