Trigger Point Showcase: Emerging Growth Companies

emerging growth companies -- automata

In 2012, the Jumpstart Our Business Startups Act (JOBS Act) was passed, which among other things, eased securities regulations for young and growing companies. Small companies have an easier time raising capital through open platforms and have more time to establish a market presence and operational stability before working under the strict requirements of SEC regulations of public companies. Paraphrasing the SEC definition of an emerging growth company (EGC):

An EGC is a company that has:

  • Amassed less than $1.07B in gross revenue in the previous fiscal year.
  • Has not sold common equity securities under a registration statement as of December 2011.
  • Has issued less than $1B in non-convertible debt in the past three years and has not become a “large accelerated filer,” as defined in Exchange Act Rule 12b-2.

Understanding the status of young public companies starts with analyzing SEC filings, which clearly indicates emerging growth companies and provides other valuable insights into both young and established companies. A section of an SEC filing is shown below, and indicates whether the filing entity is an EGC:

Automata - SEC filing - Emerging growth companies

Emerging growth companies are required to submit SEC filings and indicate if they are taking advantage of the rules that govern emerging growth companies.

Benefits of qualifying as an EGC

A critical benefit of qualifying as an EGC is a “phase-in” period provided to young public companies. They are allowed to gradually comply with the regulations that govern more established companies. Young companies can be more agile and quickly react to market and technology changes with respect to both product development and operational strategy.

Access to funding outside of traditional channels for pre-IPO companies was meant to accelerate economic growth. This effort has a trickle down effect that also benefits companies providing services to the emerging growth companies. More access to funding strengthens the larger market ecosystem. The challenge for service providers is to identify which companies should be targeted and the optimal time to do so.

How this affects marketers

The loose regulations around reporting and public transparency for young public companies is great. It has created an interesting environment for investors and marketers who benefit from insights into organizations to compete for business. Data on public companies is certainly plentiful. Between SEC filings, press releases, investor calls, and IPO disclosures, the financial and strategic details that define a public company’s strengths and weaknesses are generally available, but scattered. This provides valuable information to develop a strategy of when and what to offer these companies to improve their performance.

EGCs have greater flexibility on how to disclose pertinent information to the public. They can elect to withhold details in SEC filings. However, research analysts have the ability to communicate directly with a company before significant events. Insights into emerging companies can then be used by third parties as investment or marketing triggers. In general, the easing of regulations around direct contact and information transfer between interested parties and the emerging companies generally increases the amount of publicly available information.

According to the “2017 IPO Report” by researchers at Harvard, 85% of IPOs since the enactment of the JOBS act have been by emerging growth companies. The presence of an “emerging growth company” status is a clear indicator of sustained future growth.

Why growth information is important

Catching companies at the right time is a key to successful sales and marketing. The right time means something different for every company, but there are a few key insights that indicate growth. When companies are growing, they are often changing operational strategies, increasing hiring efforts in specific segments, buying new software and rethinking their design and marketing approaches.

Growth in employee numbers and revenue almost always goes hand in hand with growth in consumption. Companies providing critical operational services should be paying attention to who is growing, what they are consuming, and what they need to continue succeeding. Hiring and spending patterns, leadership changes, and new market penetration are all indicators of growth. The emerging growth company indicator is a critical trigger point that should put an organization on the map to track future activity and capitalize on their increasing need for products and services.