& Securities

In a recent blog, we described steps taken by the SEC’s Division of Corporation Finance in late June to incentivize IPOs by expanding the universe of issuers eligible to submit draft registration statements for nonpublic review by the Division’s staff.  On August 17, 2017, the Division refined and enhanced the scope of relief available to issuers opting for this flexible confidential review process,1 as explained below.  The latest guidance is part of a broader initiative, spearheaded by SEC Chair Jay Clayton, to facilitate capital formation in the public securities markets.

Since July 10, 2017, all companies have been able to use a special confidential filing and review procedure for going public – whether pursuant to a registered offering under the Securities Act of 1933, or registering securities listed on a national securities exchange under Section 12(b) of the Securities Exchange Act of 1934 (e.g., through the filing of a Form 10 for U.S. issuers, or a Form 20-F for foreign issuers).  Previously available only to “emerging growth companies” or EGCs (as defined in Title I of the JOBS Act), and certain foreign private issuers, this accommodation enables non-reporting companies to work through the iterative staff IPO review and comment process while evaluating M&A prospects on a dual track, without incurring the risk of unwanted pre-launch publicity or even a failed IPO in the event an open market window suddenly slams shut during the Division’s pre-effective review and comment process.  In return, the issuer must confirm in a cover letter accompanying the confidential draft submission that it will publicly file the registration statement (and all other nonpublic draft submissions) at least 15 days prior to any road show or, in the absence of a road show, at least 15 days before the requested effective date of the registration statement.  EGCs and non-EGCs alike also are able to invoke this flexible nonpublic review process for a follow-on offering, so long as the new registration statement is submitted in draft form on a confidential basis prior to the end of the twelfth month after the effective date of the IPO registration statement, and the issuer confirms (in a cover letter to the nonpublic draft submission) that it will file the follow-on registration statement publicly on EDGAR at least 48 hours before any requested effective date and time.

The staff’s most recent guidance reflects two key changes to these interpretations.  First, an issuer (whether EGC or non-EGC) that has publicly filed its registration statement may switch on a pre-effective basis to the nonpublic staff review and comment process, subject to satisfying specified conditions. Second, both EGCs and non-EGCs may now omit certain interim financial information from confidentially submitted draft registration statements, provided that the particular issuer “reasonably believes” the omitted information will not be required in the registration statement (which includes the statutory prospectus) either “at the time of the offering” (in the case of EGCs)2 or at the time the registration statement is publicly filed (in the case of non-EGCs).

Prior to the Division’s publication last month of the updated guidance, even EGCs were not permitted to exclude certain interim financial information – whether from a confidential submission or a publicly filed preliminary prospectus — in circumstances where the interim period(s) in question fell within an annual period whose inclusion would be required in the registration statement at the time of the offering.  In August, the Division essentially reversed its earlier interpretive position to allow EGCs to exclude from a confidential draft submission any interim financial information (and presumably the corresponding discussion in the MD&A) that a particular EGC reasonably believes would not be required in the registration statement (including the preliminary prospectus) at the time of the offering.  In addition, the Division’s August guidance extended that relief to allow non-EGCs to exclude from a confidential submission historical interim information that they reasonably believe would not be required in the first public filing of the registration statement containing the preliminary prospectus (as opposed to the version on file, in the case of an EGC, when the offering is launched).

In sum, any EGC or non-EGC that prefers the public preliminary prospectus filing route will not be able to omit interim financial information from pre-effective versions of the registration statement filed publicly via EDGAR, with one nuance for EGCs dictated by the interaction of Section 71003 of the FAST Act3 and the “age-of-financial-statements” requirements of Regulation S-X.  If an EGC would like to commence the offering process publicly without including separately presented interim (or annual) financial information in the preliminary prospectus, it will be able to do so if it reasonably believes at that time that Regulation S-X does not require the inclusion of such information.4

The Division simultaneously announced5 its willingness to entertain an issuer’s timely request for relief under Rule 3-13 of Regulation S-X, without distinguishing between EGCs and non-EGCs.  This statement suggests that the Division’s accounting staff might permit the exclusion of financial information (whether annual or interim) on a case-by-case basis after considering an individual issuer’s unique facts and circumstances.

New Division Compliance and Disclosure Interpretations (C&DIs) clarify the scope of the updated guidance and explain its application to EGCs and non-EGCs. With respect to EGCs, identical language in new Securities Act Forms C&DI 101.04 and revised Question 1 of the staff’s Fixing America’s Surface Transportation Act (FAST Act) C&DIs, illustrates the appropriate omission of interim financial information by a hypothetical EGC:

“For example, consider a calendar year-end Emerging Growth Company that submits a draft registration statement in November 2017 and reasonably believes it will commence its offering in April 2018 when annual financial information for 2017 will be required. This issuer may omit from its draft registration statements its 2015 annual financial information and interim financial information related to 2016 and 2017.  Assuming that this issuer were to first publicly file in April 2018 when its annual information for 2017 is required, it would not need to separately prepare or present interim information for 2016 and 2017.  If this issuer were to file publicly in January 2018, it may omit its 2015 annual financial information, but it must include its 2016 and 2017 interim financial information in that January filing because that interim information relates to historical periods that will be included at the time of the public offering.”

New Securities Act Forms C&DI 101.05 provides a similar example involving a hypothetical non-EGC:

“For example, consider a calendar year-end issuer that is not an Emerging Growth Company that submits a draft registration statement in November 2017 and reasonably believes it will first publicly file in April 2018 when annual financial information for 2017 will be required. This issuer may omit from its draft registration statements its 2014 annual financial information and interim financial information related to 2016 and 2017 because this information would not be required at the time of its first public filing in April 2018.”

Only time will tell whether the latest round of IPO incentives emanating from the SEC will tip the balance, for “unicorns” and other start-up companies considering their alternatives as their businesses mature and expand, in favor of entering the public securities markets despite the additional regulatory burdens associated with becoming, and remaining, a public company.  It is worth noting, in this regard, that the JOBS Act contains provisions designed to facilitate capital formation in both the private and public securities markets.  An August 2017 report to Congress by the SEC’s Division of Economic Risk and Analysis (DERA) indicates that amounts raised through exempt offerings of corporate debt and equity from 2012, the year the JOBS Act was enacted, through 2016, exceeded amounts raised through registered debt and equity offerings over the same period by approximately 26%.6  However, DERA’s economists were unable to pinpoint the specific causes of the observed changes in market participant behaviors during this period, suggesting that there may have been a multiplicity of macroeconomic, regulatory and other factors at work in influencing companies’ decisions whether to go public.  For all these reasons, this is a space we will continue to monitor.