Dale J. Jensen, Weaver LLP
Oil and gas companies face considerable capital expenditures. Companies in the upstream or downstream sector face considerable fluctuations in revenue, too, based on price cycles and international events beyond their control.
A smaller oil and gas company wishing to expand and perhaps become a publicly-traded corporation to capitalize on the current commodity prices requires considerable investor support to grow amid those conditions. The JOBS (Jumpstart Our Business Startups) Act of 2012 makes it easier for such companies to attain that needed support.
The JOBS Act was signed into law by President Obama on April 5, 2012. Among other items, the Act:
- Allows private companies to enlist more investors without having to register securities activity with the Securities and Exchange Commission (SEC).
- Lessens the regulatory burdens associated with undergoing an initial public offering (IPO).
- Eases reporting requirements newly-established public corporations would otherwise face.
EGC designation required for JOBS Act provisions
To capitalize on JOBS Act provisions, an oil and gas company must meet the definition of an Emerging Growth Company (EGC). An EGC is virtually any business with less than $1 billion in annual revenues undergoing an IPO. A qualifying company retains its EGC status until the fifth anniversary of its initial public offering (IPO), or until one of these events occurs:
- The company ends a fiscal year ends with annual revenues of $1 billion or more.
- The company issues more than $1 billion outstanding in non-convertible debt in the previous three years.
- The company ends a fiscal year with the market value of outstanding common equity owned by non-affiliates equaling or exceeding $700 million.
Broader private investor activity allowed
The JOBS Act does not require a company with more than $10 million in assets to register investor activity with the SEC until it has 2,000 investors, or 500 investors who meet the SEC definition of “nonaccredited” investors. A current public reporting company may also file a Form 15 and opt-out public filings if its shareholder listing is less than 1,200 investors.
Easing of pre-IPO communication rules
The SEC allows EGCs to confidentially file registration statements for review and feedback, rather than face customary public disclosure requirements. The JOBS Act also allows a company to communicate with institutional accredited investors and qualified institutional buyers during the IPO process.
Those confidential filing and investor communication opportunities enable a company to “test the waters” and reevaluate plans during the IPO registration statement filing process.
Reduced public company reporting requirements
Rather than having to file audited financial statements for three years, an EGC seeking to become a public corporation only needs to file such statements covering two years. An EGC also faces easier reporting requirements regarding executive compensation disclosure and certain other decisions.
When an EGC that becomes a public corporation, it has five years to fully comply with the Sarbanes-Oxley Act of 2002, rather than the two-year phase-in period facing most newly-formed public corporations. EGC companies are also exempt from compliance with any new or revised accounting standards until those measures are required for private companies.
Potential impact for oil and gas companies
It remains to be seen what impact the JOBS Act will have on national economic growth. The Act by itself cannot drive business success or growth for an oil and gas company, either. Becoming a public corporation is still an expensive and time-consuming process, a process that should not be entered into without considerable thought.
But, for oil and gas companies looking to raise capital in today’s market and see the public markets as an avenue to meet those needs, the JOBS Act offers numerous benefits to make attaining greater investor support and becoming a public company easier.
About the author
Dale J. Jensen, CPA, CFE, is a partner in assurances services in Dallas, and the oil and gas leader for the Dallas/Fort Worth offices for Weaver, the largest independent accounting firm in the Southwest. Dale can be reached at 972.448.9283 or at email@example.com.