Recently the staff of the U.S. Securities and Exchange Commission announced steps to live up to the promise of increasing the attractiveness of the U.S. public capital markets (for a discussion of this and other goals, see our recent blog here). These were highlighted in SEC Chairman Jay Clayton’s speech on July 12, 2017.
- Beginning July 10, 2017, the SEC’s Division of Corporation Finance started accepting IPO draft registration statements from companies of all sizes for non-public (confidential) review. Previously, confidential review was available only to “emerging growth companies” and certain “foreign private issuers.” The SEC staff will also accept draft registration statements for non-public review for many companies throughout their first year in the SEC reporting system.
- For both IPO and already-public companies, SEC Chair Clayton assures that the SEC staff is placing a high priority on responding to requests for modifications to their financial reporting requirements in situations where the disclosure is burdensome to generate but is not material to investors. See Rule 3-13 of Regulation S-X.
New Confidential Review Procedures for Draft Registration Statements
Previously, confidential registration statements only could be filed by (1) an issuer with total annual gross revenues of less than $1 billion during its most recently completed fiscal year, known as “emerging growth companies” (EGCs) under the JOBS Act, or (2) certain foreign private issuers (FPIs) as defined under SEC guidance.
The confidential review accommodation has been popular among EGC’s filing IPO registration statements as nearly 88% of such EGCs have taken advantage of the confidential review process (See Ernst & Young, Update on emerging growth companies and the JOBS Act (Nov. 2016)).
While the new procedures will not have any effect on the existing process for EGCs (see our alert here for more information) or FPIs, the SEC staff now offers all other companies the opportunity to maintain a confidential initial registration process when contemplating certain public securities offerings, including initial public offerings (IPOs).
The new draft registration statement processing procedures, detailed in the Division’s statement available here, are summarized below. To assist with interpreting the expanded procedures, the Division has provided responses to 18 new FAQs available here.
IPOs and Initial Registrations (1933 Act and 1934 Act)
Companies may confidentially submit draft initial registration statements under the Securities Act of 1933 or Section 12(b) of the Securities Exchange Act of 1934 and their related revisions for review. When doing so, companies must confirm in a cover letter to the submission that they will publicly file their registration statements and nonpublic draft submissions at least 15 days prior to any road show, or, in the absence of a road show, at least 15 days prior to the requested effective date of the registration statement, or at least 15 days prior to the anticipated effective date of the registration statement for its listing on a national securities exchange, as applicable.
Follow-on Offerings Within One Year of 1933 Act or 1934 Act Registrations
Companies may also confidentially submit draft registration statements for SEC review for follow-on offerings under the 1933 Act or Section 12(b) of the 1934 Act made within one year of their initial registrations. However, the non-public review is limited to the initial submission (and therefore not available to subsequent amendments). Furthermore, all responses to SEC staff comments are to be submitted publicly. When filing the initial nonpublic submission for the follow-on offering, companies must confirm in a cover letter that they will publicly file their registration statements and nonpublic draft submission such that they are publicly available on the EDGAR system at least 48 hours prior to any requested effective time and date.
Companies With an IPO Registration Statement Already in SEC Review
For companies that already have a publicly filed IPO registration statement in SEC review (before these new procedures were put in effect), the SEC staff has indicated informally that, on a case by case basis, it may permit such companies to take advantage of the expanded non-public review procedures by filing amendments confidentially.
Implications for Foreign Private Issuers (FPIs)
FPIs have the option to take advantage of these procedures or those available to emerging growth companies (if the issuer qualifies as an EGC) or follow the May 30, 2012 guidance permitting nonpublic review of registration statements for FPIs available here.
Public Communications About the Offering
If a company submits a draft registration statement for nonpublic review, it may not make a public communication about its offering in reliance on the Securities Act Rule 134 safe harbor until it files a registration statement that satisfies Rule 134. It may rely upon Securities Act Rule 135; however, such public statements could affect whether the SEC can withhold the draft registration statement under Rule 83 in response to a Freedom of Information Act request. See SEC FAQs 17 and 18.
Financial Statements, Timing, Confidential Treatment and Technicalities
The Division’s statement and FAQs indicate that the staff will not delay processing a draft registration statement submitted by a company that is not an EGC that does not include financial statements if the company reasonably believes omitted financial information will not be required when the registration statement is filed publicly. In addition, the staff will consider an issuer’s specific facts and circumstances when considering any request by an issuer to omit or replace particular financial information under Rule 3-13 of Regulation S-X.
The staff will also consider reasonable requests to expedite its review, will work quickly to address such requests, and encourages issuers to discuss the timing of their transactions with their reviewers.
If an issuer does not yet have EDGAR codes, it should indicate on its Form ID application form that it intends to use the codes to submit a draft registration statement pursuant to JOBS Act Section 106 to protect the nonpublic status of the drafts until there are publicly filed.
Companies that are not EGCs but seeking to take advantage of the confidential review process are advised in the Division’s FAQs to use EDGAR submission type DRS. Detailed instructions on how to prepare and submit draft registration statements are in Volume II of the EDGAR Filer Manual. The current instructions apply to all draft registration statements not just EGCs until the SEC updates the Filer Manual. In addition, the Division also advises non-EGCs to consider requesting confidential treatment under Rule 83 for its draft registration statement and associated correspondence when seeking nonpublic review. Such request can be submitted electronically using submission DRSLTR and, if it is so submitted, there is no need to submit paper materials; however, a legend should be included at the top of each page of the electronically submitted draft.
Also, the Division’s FAQs remind companies that draft registration statements are not required to be signed, nor are consents of auditors or other experts required, when drafts are submitted for confidential review or when they become public. Of course, the first (non-draft) publicly filed registration statement must be complete with all these items.
Evaluating the Confidential Review Process
The submission of a draft registration statement for confidential review offers many advantages as well as some disadvantages. Companies should consider the following:
- Confidential review of draft registration statements enhances a company’s flexibility in responding to staff comments outside of public view.
- Although a company is able to submit a confidential draft, unless the company withdraws its offering well in advance of any road show or the requested effective date of a registration statement, the nonpublic draft will ultimately be available for public review.
- Costs related to the filings of an initial draft registration statement may be reduced as a result of not needing to file each draft publicly.
- The confidential review process does not allow companies that are not EGCs to “test the waters” to assess qualified institutional buyer (QIB) and institutional accredited investor interest during the period of confidential review. See SEC FAQ 15.