The Securities and Exchange Commission continues to churn out fresh guidance on compliance with the JOBS Act—which, compared to the SEC's plodding pace for enacting provisions of the Dodd-Frank Act, is coming along with downright mercurial speed.
Within weeks of the JOBS Act's passage at the end of March, the SEC announced that it would start accepting confidential registration statements from companies planning to go public (Section 106 of the law), even though the agency has no official way to accept electronic submissions yet. Then came a bundle of Frequently Asked Questions, then another bundle, and then a call for public comment on various parts of the JOBS Act even though the SEC has yet to propose one single JOBS Act rule.
The law—hailed in business circles as a way to revive small business, panned by investor activists as a scheme to repeal corporate governance and send more fees to investment banks—creates a new class of “Emerging Growth Companies” (EGCs) exempt from several corporate governance provisions for the first five years of their life as a public company. The SEC did oppose the law as Congress debated it in March, but now that the JOBS Act is here, the agency is moving quickly.
First was the guidance on how to file a non-public registration statement for a confidential review by SEC staff. In a cart-before-horse moment, the SEC explained that it had no system in place to accept confidential submissions electronically. Companies must either submit the draft registration statement on a text-searchable PDF file burned to a CD or DVD, or go old school with paper submissions.
On April 10 the agency then published its first list of Frequently Asked Questions, based on the agency's “current understanding” of the JOBS Act. Among the clarifications offered by the Division of Corporation Finance:
EGCs may confidentially submit a registration statement as long as the initial public offering date has not occurred. “Date of the first sale” is not limited to the company's initial offering of common equity securities for cash and can also include an offering of common equity pursuant to an employee benefit plan, as well as a selling shareholder's secondary offering registered on a resale registration statement.
A company that has had Securities Act-registered sales of securities other than common equity securities can qualify to use the confidential submission process as long as it otherwise qualifies as an EGC. (EGCs must have less than $1 billion in annual revenue and less than $700 million in market capitalization and can only be EGCs for the first five years after going public.)
A foreign private issuer that qualifies as an EGC can use the confidential submission process, following the same procedures as a domestic company.
Draft registration statements should be “substantially complete” at the time of submission, including a signed audit report of the registered public accounting firm covering the fiscal years presented in the registration statement and exhibits.
EGCs do not have to treat preliminary communications with qualified institutional buyers and institutional accredited investors as a “road show.” If a qualifying company doesn't conduct a traditional road show at all, its registration statement and confidential submissions should be filed publicly 21 days before the anticipated date of the IPO.
An EGC that was already in registration when the JOBS Act was passed can switch to the confidential submission process for future amendments, rather than withdrawing the registration statement and confidentially re-submitting.
A second bundle of FAQs was released on April 16 to address questions of general applicability under Title I of the JOBS Act and scaled disclosure provisions for EGCs. Some of the finer points:
“The SEC is known to dislike the JOBS Act, but this shows good sportsmanship by jumping in and being very practical and pragmatic about the guidance they have given so far.”
—Andrew Fabens,
Partner,
Gibson, Dunn & Crutcher
If an EGC ceases to qualify while undergoing the confidential review, it will need to file a registration statement and adhere to all rules and regulations applicable to companies lacking that status. Prior confidential draft submissions would be filed as exhibits to the registration statement.
Test-the-waters communications made before filing a registration statement will not be a violation of Section 5 if a company is no longer an EGC at the time of the filing, so long as it was at the time those communications were made.
An EGC is not required to present more than two years of audited financial statements in a registration statement for an IPO of its common equity securities.
An EGC may comply with Title I's disclosure provisions in its registration statements, periodic reports, and proxy statements, even if doing so would be inconsistent with existing rules and regulations.
As of any date on which an issuer has issued more than $1 billion in non-convertible debt over the three years prior to such date, the issuer loses its status as an EGC.
From Guidance to Practice
The quick turnaround on JOBS Act guidance has been appreciated by those advising companies considering an IPO and the banks that will underwrite them.
SUBMITTING DRAFT REGISTRATION STATEMENTS
Below is the SEC's announcement regarding confidential submission of draft registration statements under the JOBS Act:
Pursuant to the Jumpstart Our Business Startups Act, an Emerging Growth Company (as defined in the Act) whose common equity securities have not been previously sold pursuant to an effective registration statement under the Securities Act of 1933 may confidentially submit to the Commission a draft registration statement for confidential non-public review. Until we fully implement a system that provides for electronic transmission and receipt of confidential submissions, we ask that you submit draft registration statements in a text searchable PDF file on a CD/DVD. Alternatively, you may submit them in paper, and if you do, we ask that you not staple or bind them. Please include a transmittal letter in which the company confirms its Emerging Growth Company status.
Please send one copy of your confidential draft registration statement to:
Draft Registration Statement
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Foreign private issuers eligible to submit draft registration statements as Emerging Growth Companies or eligible to follow the Division of Corporation Financepolicy must submit their draft registration statements in the same format and to the same address provided above as the e-mail address previously available for these submissions is no longer active.
If you submit a draft registration statement, we will contact you to confirm receipt and advise you of the office to which we have assigned your submission for review. A registration fee is not required with a confidential draft registration statement. Please note that this submission is not a public filing and that a registration statement submitted through this process is not filed for purposes of Section 5 of the Securities Act of 1933.
Please direct questions about the draft registration statement submission and review process to (202) 551-5867.
Source: SEC.
“There are these provisions that are immediately effective, so everyone needed to be in a position to take advantage of them and the SEC needed to act to give people some guidance on what to do,” says Andrew Fabens, partner at the law firm Gibson, Dunn & Crutcher. “The SEC is known to dislike the JOBS Act, but this shows good sportsmanship by jumping in and being very practical and pragmatic about the guidance they have given so far.”
“Companies have such sophisticated communications machines now, they spend so much time communicating with customers and suppliers, that to throw their quiet period restrictions into that mix can be very cumbersome,” he adds. “To be in registration for as long as you are typically can really hamper a company's ability to maneuver. The Act simplifies that.”
Megan Gates of law firm Mintz Levin points out that companies can bypass the newly granted confidentiality if they choose.
“That is still an option if they decide they want to appear fully out there and don't want to be under the radar,” she says. “They may not want to appear to be taking advantage of provisions that are meant to help support less fully developed companies. They may want to be seen as ready for prime time, as opposed to looking like they need help to get over the finish line.”
EGCs might also want to pursue a public registration if they're contemplating some sort of acquisition; one way to draw potential buyers out of the woodwork is to file a Form S-1 registration statement as usual. “If your S-1 is confidential, you don't have that ability anymore,” Gates says.
Fabens, however, does see potential value in a confidential process when juggling both an IPO and a possible merger. “Now, because of the confidential process, you can actually get further down the road with the SEC and you have a credible threat of an IPO without incurring the ire of potential buyers for having publicized the financial statements,” he says.
Another change under close scrutiny, according to Fabens, involves a prohibition on loans to executive officers.
“When you file your S-1 you basically have to unwind those loans,” he says. “Because of the confidential submission process, you can now defer that decision. Not every company has loans out to executive officers, but for those that do, it was another hurdle to filing an S-1. You were not certain the IPO is going to work and yet you had to ask everybody to repay those loans. Now, they can push that out.”
No comments yet