Emerging growth companies face looming deadline

A new class of companies, representing a large portion of U.S. businesses created in the last five years, may now be face a year-end deadline to enact changes in their financial and accounting processes. For these organizations, 2018 may bring new challenges, while their peers in the corporate community at large will be looking for guidance on similar issues.

The deadline in question is related to the legacy of the Great Recession and the economic policy initiatives passed in response. In 2012, then-president Barack Obama signed the Jumpstart Our Business Startups Act (JOBS Act), which included several provisions intended to spur investment and growth among small businesses and middle-market companies. 

The JOBS Act and EGCs

Among the contents of the bill were new procedures adopted by the Securities and Exchange Commission that provided some special privileges to qualifying “Emerging Growth Companies.” According to the SEC, an EGC could be broadly defined as one that reported less than $1 billion in revenue during its most recent fiscal year. While this classification includes a majority of U.S. businesses, the provisions of the JOBS Act are primarily related to only those that want to seek outside investment, specifically through an IPO or a crowdfunding vehicle.

By filing for EGC status, a company could realize various potential benefits related to investment opportunities and financial disclosure requirements, which include:

  • Lower minimum capital thresholds for IPOs, allowing EGCs to go public sooner than usual.
  • Higher limits and new exemptions that may prolong the period during which a company may raise capital privately.
  • Lifting restrictions on “general solicitation,” making it easier for EGCs to market themselves to accredited investors.

The main caveat to these provisions for EGCs is the associated time limit. Many of these new rules, particularly those related to SEC financial disclosure requirements, expire five fiscal years after a company has filed for EGC status. That means some of the first businesses to take advantage of these parts of the JOBS Act in 2012 need to get their books in order by December 31, 2017.

Reporting challenges and opportunities

As discussed in a report from the Financial Executives Research Foundation, this could present a headache for registered EGCs, but also an opportunity for financial transformation for executives who are prepared. In the process of moving from an EGC to a traditional SEC filer, the firm will need to meet more rigorous audit standards that involve disclosing about 33 percent more data than what was required during the initial five-year window.

The SEC deadlines for EGCs can be viewed as both a risk and a trigger for productive change.

“The key to making the transition as smooth and successful as practicable … is planning, securing the proper resources, and approaching disclosure not just as a compliance exercise, but, more importantly, as an opportunity to tell the company’s story clearly and convincingly,” the FERF reported, based on advice from industry experts.

For an idea on what that process may look like, the FERF included advice useful to both EGC filers as well as most businesses in general. The upshot is that entrenched, inefficient financial processes can be improved upon when the best technology and talent are correctly positioned.

  • Early planning is perhaps the most obvious piece of wisdom, but that doesn’t mean simply organizing documents in advance of the deadline. In the FERF report, corporate attorney Megan Arthur Schilling explained that it’s also crucial for executives to look ahead and strategize around specific scenarios, such as how to approach evolving compensation disclosures and investor relations.
  • Financial technology available today has never been better, so EGCs and similar companies should take full advantage of the latest in cloud-based document management, reporting and collaboration tools.
  • Communication around financial reports, both internal and external, could always be better. That’s especially true now that reports and disclosures have only gotten more dense and arguably less coherent in the last decade. Taking this opportunity to improve the practical utility of reporting functions results in better investor relations, cost savings and a sense of symbiosis throughout the organization.

Consero’s comprehensive financial solution has already helped numerous companies understand how to address these and other reporting pain points, setting them up for success no matter what sort of deadline is approaching. Learn more from Consero about why a turnaround in financial reporting is not only possible, but often profitable, too.

Consero FaaS: Disrupting the Outdated Traditional F&A Model

  • Cash to GAAP conversion
  • Clean-up work
  • Interim oversight & support
  • Accounting software Implementation

Build it Yourself Solution

  • CFO / Interim CFO
  • Consultants / VARs

Consero FaaS Solution

  • CFO / Interim CFO
  • or Consero Interim CFO
  • Consero Setup/Transformation
Ongoing F&A
  • Monthly financials
  • Daily accounting support
  • Management reporting
  • Integrate add-on acquisitions

Build it Yourself Solution

  • CFO
  • Controllers & Accounting Team
  • Enterprise Accounting Applications

Consero FaaS Solution

  • CFO
  • or Consero Fractional CFO
  • Consero FaaS Enterprise F&A Software and Services

New PE Platform Investment F&A Challenges

Founder Owned Company Accounting:
  • Existing accounting done on a cash/hybrid basis
  • Run on SMB accounting software and other disparate applications
  • Inability to produce auditable financials
  • Lack of know-how to develop projections & KPIs
  • No consistency/structure to customer contracts
  • Underqualified staff
  • Non-scalable manual processes
Carve-Out Accounting:
  • Required to move off parent company accounting applications in a timely fashion
  • Have to build an entire F&A team
  • No documented operational policies and procedures
To Optimized Finance & Accounting:
  • Monthly financials available in 5-10 business days
  • Audit and diligence ready support details
  • Integrated enterprise grade accounting software
  • Budget and forecast reporting
  • Business KPIs
  • Efficient & scalable processes for rolling in add-ons