The Securities and Exchange Commission (SEC) announced that beginning on July 10, 2017, subject to certain restrictions, the confidential draft registration statement submission process previously reserved for emerging growth companies (EGCs) has been expanded to all companies, including those that would not qualify as EGCs (e.g., as a result of having annual gross revenues greater than $1.07 billion). The SEC announcement, corresponding FAQs, and the SEC’s explanation of procedures are available online. The expanded nonpublic review process, which is also often referred to as the SEC’s confidential submission process, will be available for:
- Initial Public Offerings (IPOs);
- Initial registrations of a class of securities under Section 12(b) of the Securities Exchange Act of 1934, as amended (Exchange Act); and
- Offerings made in the first year after a company enters the SEC’s public reporting system.
The SEC’s announcement did not expand the testing-the-waters accommodations afforded to EGCs when the SEC originally rolled out its confidential submission process under the Jumpstart Our Business Act of 2012 (JOBS Act). These testing-the-waters accommodations allow EGCs, or any person authorized to act on behalf of an EGC, to engage in oral or written communications with potential investors that are Qualified Institutional Buyers (QIBs) or institutions that are accredited investors to determine whether such investors might have an interest in a contemplated securities offering. Thus, as the SEC did not expand such accommodations to non-EGCs, they remain subject to traditional gun jumping rules (and the corresponding potential liability arising from violations of Section 5(c) of the Securities Act of 1933, as amended (Securities Act)), such as Rules 164 and 433 of the Securities Act. In other words, Well Known Seasoned Issuers (WKSIs) and EGCs are the only registrants that the SEC has provided latitude in terms of engaging in pre-filing communications- with WKSIs having their safe harbor from Section 5(c) liability pursuant to Rule 163 of the Securities Act, and EGCs having the testing-the-waters accommodations found in the JOBS Act discussed above.
Another alternative for companies interested in testing-the-waters more broadly with entities smaller than QIBs or institutional accredited investors is the JOBS-Act amended version of Regulation A, often referred to as Regulation A+, which is an exemption from registration under the Securities Act that allows testing-the-waters communications to any member of the public, subject to customary anti-fraud laws. However, a “mini-IPO” conducted using the exemption from registration found under Regulation A+ only allows companies to raise up to $50 million in a 12 month period, so this method will likely not appeal to companies that are larger than EGCs in any case.
In addition, the SEC’s new policy does not change the existing confidential submission process for EGCs, nor does it affect the confidential submission processes otherwise available for foreign private issuers beyond allowing such foreign private issuers to decide to use the new policy’s guidelines or the guidance set forth in the SEC’s May 30, 2012 statement on the topic. The SEC has also made it clear that Canadian companies using the Multi-Jurisdictional Disclosure System may take advantage of the SEC’s new policy relating to the confidential submission process. Additionally, the SEC’s announcement addressed certain technical points regarding companies, including foreign issuers, that do not have EDGAR codes prior to making a confidential filing.
Initial Public Offerings
In order to take advantage of this confidential draft registration statement, an issuer must confirm in a cover letter that it will publicly file its registration statement, (usually on Form S-1) and all nonpublic draft submissions, at least 15 days prior to any roadshow or, in the absence of a roadshow, at least 15 days prior to the requested effective date of the registration statement. By requiring this 15-day period, the SEC is able to ensure that the public still has ample opportunity to evaluate a previously confidential filing. Accordingly, unlike its confidentially filed drafts, the company’s first publicly filed registration statement must be complete, including signatures, signed audit reports, consents, exhibits, and accompanied by any required filing fees.
The SEC’s expansion of its confidential submission process for IPOs to all companies provides a key strategic benefit for companies interested in conducting an IPO, but unsure of certain aspects of the process, perhaps as a result of an unique business model or accounting issue. It also allows companies to receive feedback from the SEC without necessarily incurring the extensive costs and time commitments that are associated with completing an IPO. This may also allow companies that have already determined to do an IPO to begin the IPO process earlier, only revealing its filing publicly when market conditions dictate that it is the right time to launch the company’s IPO.
Furthermore, a company can get feedback from the SEC without revealing any information to the public, or perhaps more importantly, to competitors. As indicated above, the confidential submission process can facilitate an earlier dialogue with the SEC regarding the company’s accounting methods and other disclosures such as issues relating to an unique business model. Then, if the company does not find the SEC’s response favorable, or if market conditions significantly deteriorate, a company can simply withdraw its draft registration statement and terminate its IPO process without having any member of the public or a competitor know that it made a filing with the intention of conducting an IPO. The company also does not incur a registration fee upon such withdrawal, potentially saving the company thousands of dollars.
Initial registrations of a class of securities under Section 12(b) of the Exchange Act
The SEC’s policy change also applies to the initial registration of securities under Section 12(b) of the Exchange Act, provided that the company confirms in a cover letter to the nonpublic draft submission that it will publicly file its registration statement and nonpublic draft submissions at least 15 days prior to the anticipated effective date of the registration statement for its listing on a national securities exchange.
This expansion should be especially attractive to public companies thinking about conducting a spin-off transaction, given their need to register the spun-off company’s securities under the Exchange Act pursuant to the requirements set forth in the SEC’s Staff Legal Bulletin No. 4, published September 16, 1997. By allowing a company to file this registration statement confidentially prior to completing the spin-off, companies can get feedback from the SEC about the proposed transaction without alerting the public markets or competitors that such a spin-off is being contemplated.
Offerings made in the first year after a company enters the SEC’s public reporting system
Companies may also submit follow-on registration statements confidentially prior to the end of the twelfth month following the effective date of their initial Securities Act registration statement (or Exchange Act Section 12(b) registration statement, as discussed above), confirming such confidential submission through a publicly available cover letter that must be on the SEC’s EDGAR system at least 48 hours prior to any requested effective time and date. It should also be noted that the SEC will not review amendments to such follow-on registration statements confidentially.
Like a company that has already determined to pursue an IPO, but keeps its initial S-1 filing confidential until market conditions are right, this expansion of the SEC’s review process allows companies potentially to protect follow-on offerings in the 12 months following their IPO from adverse market fluctuations by giving the company more control as to when the applicable registration statement becomes public knowledge.
The SEC’s new policy is intended to make it easier for companies to access the public markets, especially when considering an IPO. By permitting all companies to take advantage of the confidential review process, the new SEC rules should provide companies with more options to get substantial feedback from the SEC before having their IPO filing go live in public, while simultaneously allowing companies greater control over the timing of disclosure of their potential IPO, spin-offs or follow-on offerings, sheltering such offerings from lengthy exposure to negative market fluctuations during the SEC review process.
For additional information, please contact Marc Adesso or any member of Waller’s Capital Markets and Securities practice at 800.487.6380.
The opinions expressed in this bulletin are intended for general guidance only. They are not intended as recommendations for specific situations. As always, readers should consult a qualified attorney for specific legal guidance.