On April 5, 2012, the President signed the Jumpstart Our Business Startups Act (the "JOBS Act" or the "Act") which made significant changes to the public offering process to encourage "emerging growth companies" (companies with less than $1 billion in revenue) ("EGCs") to go public, which we describe in our memorandum dated April 3, 2012, including1:

  • Initiating the IPO registration process through confidential review by the Securities and Exchange Commission (the "SEC");
  • Permitting scaled-back financial statement and executive compensation disclosure;
  • Exempting EGCs from the auditor attestation report for internal controls required by the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") and from certain rules that the Public Company Accounting Oversight Board (the "PCAOB") may adopt in the future; and
  • Easing the restrictions on pre-launch marketing communications with institutional investors and reducing restrictions with respect to the publication of analyst reports.

Given the scope of the JOBS Act, many questions remain from the language of the Act and the Staff of the SEC's Division of Corporation Finance has released a series of "Frequently Asked Questions" ("FAQs") providing guidance in certain of the areas covered in the Act.2 In addition, industry players, including counsel and investment banks, are beginning to apply the new rules and deal with implementation questions.3 We expect the practice in this area to continue to develop and the SEC's Divisions of Corporation Finance and Trading and Markets, and potentially the Financial Industry Regulatory Authority ("FINRA"), to issue additional guidance.

Set forth below is a summary of select practice guidelines based on the FAQs released to date and our understanding and experience with the current state of market practice with respect to the JOBS Act. These guidelines focus on the part of the JOBS Act that eases restrictions to encourage EGCs to go public.

Determining Emerging Growth Company Status

The Act creates a new class of issuers referred to as "emerging growth companies." An EGC is a company that had total annual gross revenues of less than $1 billion for its most recently completed fiscal year. An EGC will retain its status until the earlier of: (i) the last day of the fiscal year during which the company had total annual gross revenues of $1 billion or more, (ii) the last day of the fiscal year following the fifth anniversary of the date of the company's initial public offering, (iii) the date on which the EGC has issued more than $1 billion in non-convertible debt during the previous 3-year period, or (iv) the date on which the company qualifies as a "large accelerated filer" (a company that has been reporting for at least a year, has a non-affiliated public float of at least $700 million and has filed at least one annual report).

  • A company cannot go in and out of EGC status. Once an EGC has completed its IPO and it loses its EGC status (e.g., by having $1 billion or more in revenues or issuing more than $1 billion of non-convertible debt securities during the previous 3-year period) it cannot regain EGC status.
  • An issuer loses EGC status on the date on which it has during the previous 3-year period issued more than $1 billion in non-convertible debt provided that none of the other disqualifying conditions have been triggered.
  • The 3-year period is a "rolling" 3-year period.
  • Non-convertible debt includes any non-convertible security that constitutes indebtedness (not including bank debt) whether or not issued in a registered offering. Non-convertible issued debt is counted toward the $1 billion debt limit whether or not it is then outstanding.
  • Debt securities issued in a Rule 144A offering that are later registered pursuant to an Exxon Capital exchange offer, however, do not count towards the $1 billion limit.
  • If the financial statements of a predecessor are the financial statements included in the registration statement, the total annual gross revenues of the predecessor should be used to test the definition of EGC.
  • If the financial statements of a foreign private issuer are presented in a currency other than U.S. dollars, total annual gross revenues is calculated using the exchange rate on the last day of the most recently completed fiscal year.
  • An asset-backed securities issuer does not qualify as an EGC.
  • A registered investment company registered under the Investment Company Act cannot qualify as an EGC, but a business development company can qualify as an EGC.

Confidential Filing Process

The Act provides that an issuer that qualifies as an EGC can submit its registration statement for its initial public offering confidentially for SEC review. However, the issuer must publicly file all draft registration statements no later than 21 days prior to the commencement of its IPO road show.

Filing Date

The date of the initial confidential draft submission of the registration statement is not the "initial filing date" of a registration statement for securities law purposes. The registration statement is not considered "filed" for securities law purposes according to the SEC.

  • The Staff has confirmed that Rule 134 is not available until the company publicly files its registration statement.
  • We expect that for purposes of Rule 163A, the registration statement will also not be considered filed until the company publicly files its registration statement.

Process Points

  • A company must qualify as an EGC at the time it submits its draft registration statement or any amendment to have the benefit of confidentiality.
  • An EGC currently in registration can switch to a confidential process for future amendments but will be required to file all confidential submissions at least 21 days before the road show.
  • If during the review process, a fiscal year is completed and the company's revenues exceed $1 billion, a company would no longer qualify as an EGC. The company would need to complete the review process publicly.
  • If an issuer has conducted an offering of common equity pursuant to an employee benefit plan registered on a Form S-8 or a secondary offering on behalf of a selling stockholder, it cannot file a registration statement confidentially, even if it has not conducted its traditional IPO.
  • A confidentially submitted draft registration statement must be substantially complete at the time of initial submission and the Staff will defer review if it is materially deficient.
  • Filing fees are due when the registration statement is first filed publicly on EDGAR.
  • A confidentially filed registration statement does not need to be signed by officers or directors and does not need to include the consent of auditors or other experts.
  • Signed audit reports of registered public accounting firms must be included.
  • EGCs do not need to treat "test-the-waters" communications that comply with new Section 5(d) as a road show that would trigger the requirement to publicly file the registration statement at least 21 days before the start of the road show.
  • If an EGC does not conduct a traditional road show or engage in activities that would come within the definition of "road show" (Rule 433(h)(4)), the registration statement and confidential submissions must be publicly filed no later than 21 days before the anticipated date of effectiveness of the registration statement.
  • If an EGC files an Exxon Capital registration statement on Form S-4 or Form F-4, the EGC would have to publicly file the registration statement and confidential submissions at least 21 days before the anticipated date of effectiveness of the Form S-4 or Form F-4.
  • EGCs must resubmit as correspondence on EDGAR response letters to Staff comment letters on confidential draft registration statements. The Staff will publicly release its comment letters and issuer responses publicly in its typical course. When an EGC seeks to keep confidential certain information in its response letters, the EGC must identify this information in the confidential submission and follow Rule 83 procedures at the time it resubmits its response letters on EDGAR or follow Rule 83 procedures at the time it submits response letters to the Staff.

Non-IPO Registration Statements

  • An EGC that has registered securities under the Securities Act of 1933, as amended, (the "Securities Act") that are not common equity securities can file a registration statement for securities confidentially.
  • For example, an EGC that has filed a Form S-4 or Form F-4 registration statement for debt securities for an Exxon Capital exchange offer can submit a registration statement for an IPO confidentially.
  • In addition, an EGC that has not completed a sale of common equity securities pursuant to a registration statement under the Securities Act can confidentially file a Form S-4 or Form F-4 registration statement to register debt securities in an Exxon Capital exchange offer.
  • An issuer registering securities on a Form 10 under the Securities Exchange Act of 1934, as amended, (the "Exchange Act") cannot submit the Form 10 confidentially, for example in the case of a spin-off.

Disclosure Benefits

The Act provides that EGCs are permitted to present only two years of audited financial statements in their IPO registration statements, rather than three years. In addition, for any other registration statement, periodic report or other report they file with the SEC, they are only required to present selected financial data as of the earliest audited period presented in their IPO registration statement. The Act exempts EGCs from providing a comprehensive overview of certain material elements of compensation disclosure. An EGC is not required to comply with any new or revised financial accounting standard unless and until the standard is generally applicable to companies that are not "issuers" under the Sarbanes-Oxley Act.

General

  • The test of EGC status for scaled disclosure is when the company actually "publicly files" its registration statement.
  • If a company publicly files its registration statement at a time when it qualifies as an EGC, it will have the disclosure benefits through effectiveness of the registration statement, even if it loses its EGC status during registration.
  • If a company loses its EGC status at the time it "publicly files" its registration statement, it would no longer have the disclosure benefits of EGC status.
  • Companies currently in registration that qualify as an EGC can amend their registration statements to provide scaled disclosure.
  • EGCs that went public after December 8, 2011 can file their periodic reports using scaled disclosure.
  • EGCs can pick and choose among scaled disclosure, except that they cannot cherry-pick the accounting standards they will follow.

Financial Statements

  • If an EGC presents two years of audited financials in its IPO registration statement, it can also present selected financial data for only two years.
  • After its IPO, an EGC does not have to present audited financial statements in a registration statement for any period prior to the earliest period presented in its IPO. Therefore, follow-on offerings also benefit from the scaled financial statement disclosure requirements.
  • If an EGC is required to present financial statements of other entities (such as acquired businesses) based on the significance of those entities (see Rule 3-05 of Regulation S-X), it can provide only two years of financial statements for those entities if it provides only two years of its own financial statements.
  • An EGC can present its ratio of earnings to fixed charges for the same number of years that it provides selected financial data disclosures.
  • An EGC is not exempt from XBRL requirements.

Accounting Issues

  • An EGC's decision to opt out of the extended transition period for complying with new or revised financial accounting standards is irrevocable. If an EGC initially decides to take advantage of the transition period, it can later decide to opt in and that decision is irrevocable.
  • The terms "new or revised" financial accounting standards refers to any updates issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
  • EGCs should notify the Staff of their decision of whether to take advantage of the extended transition period to comply with new or revised accounting standards at the time of the initial confidential submission.
  • EGCs currently in registration or having completed their IPO, should disclose their choice in the next amendment to the registration statement or in the next periodic report.
  • With respect to recently issued accounting standards for companies that take advantage of the extended transition period, an EGC should disclose the date on which adoption is required for non-EGCs and the date on which the EGC will adopt the new accounting standard assuming it remains an EGC as of that date.

Testing the Waters

The Act gives EGCs and persons authorized to act on their behalf more freedom to communicate (orally or in writing) with potential investors that are qualified institutional buyers or institutional accredited investors to gauge interest in a contemplated securities offering, including an IPO, either before or after the filing of a registration statement. Any such pre-filing and post-filing communications would not be subject to the SEC's current "gun-jumping" restrictions.

  • EGC status is determined at the time a company engages in test-the-waters communications.
  • The SEC will not view protected test-the-waters communications as a violation of Section 5 if the company later loses its EGC status.
  • Pre-launch meetings with investors that are Qualified Institutional Buyers and Institutional Accredited Investors may take place more frequently than in the past.
  • We expect initial practice will be to limit communications so that they are conducted "live" and in real time and that any information used is not left behind.
  • Any information used should be consistent with the registration statement because Securities Act Section 12(a)(2) and Exchange Act Section 10(b) may apply. There may be future SEC guidance on this point. We do not expect to see projections distributed. Companies should be mindful that the Staff may ask to see the information used in pre-launch meetings.
  • Rule 15c2-8 of the Exchange Act still applies (broker-deal prospectus delivery requirements). Orders cannot be solicited without a valid price range in a prospectus.
  • Test-the-water communications are available for all offerings by EGCs (e.g., debt offerings, secondary offerings, follow-on offerings) – not just IPOs.
  • Companies should be mindful of Regulation FD issues.

Research Reports and Meetings with Research Analysts

Any research (including during the pre-filing, post-filing and post-effective periods) about an EGC that facilitates its public equity offering will not be considered an "offer" under Section 5 of the Securities Act, even if the broker-dealer publishing the research is participating in the offering. The JOBS Act also prohibits the SEC or FINRA from adopting or maintaining any rule that restricts broker-dealers from publishing research about an EGC during the post-IPO blackout period and before expiration of an IPO lock-up agreement.

The JOBS Act eases current restrictions on the communications between analysts, investors, companies and investment bankers.

  • The JOBS Act safe harbor only applies to public offerings of equity securities.
  • EGC status is determined at the time research reports are released.
  • Research reports still remain subject to Rule 10b-5 and state anti-fraud laws.
  • Restrictions under the Global Research Analyst Settlement are still applicable and prohibit research personnel from participating in certain pre-launch marketing activities.
  • It is uncertain whether the restrictions under the global settlement will be revisited by the SEC or FINRA.
  • Research analysts must continue to comply with Regulation AC, which requires research analysts to certify that the views expressed in their reports accurately reflect their personal views.

Foreign Private Issuers

  • Foreign private issuers can be EGCs as long as they have not completed their IPO prior to December 8, 2011.
  • Foreign private issuers that qualify as EGCs have the benefit of scaled disclosure even though the JOBS Act does not refer to Form 20-F.
  • Foreign Private issuers that are entitled to submit their registration statement confidentially pursuant to the existing policy applicable to foreign private issuers must be careful not to trigger the EGC procedures for confidentiality, which would potentially require a public filing earlier than the rules applicable to foreign private issuers and also require public filings of all submissions.
  • A foreign private issuer that takes advantage of any benefit available to EGCs will be treated as an EGC and will be required to publicly file its confidential submission at least 21 days before the road show.
  • A foreign private issuer cannot register its securities on a Form 20-F Exchange Act registration statement confidentially (e.g., in a spin-off transaction).
  • A foreign private issuer can take advantage of the extended transition period for complying with new or revised financial accounting standards in its U.S. GAAP reconciliation. This does not allow an EGC to apply financial accounting standards as if it were a nonpublic entity.

Registered Debt-Only EGCs ("Debt EGCs")4

  • Issuers that have registered debt securities under the Securities Act (for example pursuant to an Exxon Capital exchange offer for Rule 144A debt securities) can be EGCs.
  • Debt EGCs can submit registration statements confidentially prior to the date of their initial public equity offering.
  • Debt EGCs have the benefit of the transition period for new accounting rules.
  • Debt EGCs have the benefit of scaled back executive compensation disclosure and the CEO pay ratio disclosure of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
  • Debt EGCs are exempt from the requirement to comply with the new PCAOB requirements.

Footnotes

1 See Fried Frank memorandum, "The Enactment of the Jumpstart Our Business Startups Act: Simplifying the IPO Process While Transitioning to Full Public Company Status", dated April 3, 2012.

2 See JOBS Act FAQs, SEC Division of Corporation Finance: "Confidential Submission Process for Emerging Growth Companies," April 10, 2012; "Changes to the Requirements for Exchange Act Registration and Deregistration," April 11, 2012; "Generally Applicable Questions on Title I of the JOBS Act," April 16, 2012 and May 3, 2012; and SEC Division of Trading and Markets: "Frequently Asked Questions About Crowdfunding Intermediaries," May 7, 2012.

3 See Letter re: the JOBS Act from the Securities Industry and Financial Markets Association ("SIFMA") to the SEC, April 27, 2012; and Letter re: the JOBS Act from SIFMA to FINRA, April 27, 2012.

4 We note that Debt EGCs are generally exempt from Section 404(b) of the Sarbanes-Oxley Act's requirement to provide an auditor attestation report on internal control over financial reporting.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.