The SEC has been busy over the past several weeks rapidly issuing interpretations and procedures to implement the JOBS Act. Because the JOBS Act is such a fundamental change to securities law, especially for middle market companies, we wanted to spend this blog catching you up to speed on how the JOBS Act looks since we issued our Special Summary White Paper. While longer than our normal blogs, we think this information is useful and best kept in one place.
Confidential Submission Process
The SEC has implemented a secure e-mail system that allows a registrant that qualifies as an Emerging Growth Company (as defined in the JOBS Act) to confidentially file draft registration statements with the SEC. Commencing this past Monday, May 14th, the secure e-mail system will replace the procedures announced on April 5, 2012. Instructions on how to use the secure e-mail system are fairly easy to follow.
The change to allowing confidential submissions is a fairly radical, and welcome, change to companies filing their initial public offering. Whether the confidential submission process becomes widely used is still up for debate. While there are large advantages for keeping initial submissions private (keeping information secret from competitors until you decide to go forward with the IPO, shortening the “in registration” period to better time the markets, and avoiding embarrassing registration statement withdrawals), there are also some potential disadvantages. For example, often companies filing initial registration statements are simultaneously reviewing other strategic options such as selling the company. Filing the registration statement publicly effectively alerts the markets that your company is “in play.” In addition, the initial filing of a registration statement usually prompts potential plaintiffs with claims to file their lawsuits, which gives management time to amend the registration statement to disclose the risks of the lawsuit. By not filing a publicly available registration statement until 21 days before the road show, plaintiffs may not have an opportunity to file the lawsuit before marketing commences.
Emerging Growth Companies
Title I of the JOBS Act relating to Emerging Growth Companies has been in effect since the JOBS Act was enacted. Consequently, the SEC has issued a set of 41 FAQs, which they periodically update. Here are some of the more important questions and answers:
- An Emerging Growth Company needs to identify itself as such on the cover page of its prospectus.
- Other than accounting standards (which must either be fully adopted or delayed), Emerging Growth Companies may elect the new scaled disclosure on an á la carte basis. This gives a company going public extra flexibility in its disclosures.
- The SEC confirmed that an Emerging Growth Company’s selected financial data needs to cover only two years.
- If an Emerging Growth Company elects to take advantage of the extended transition period for complying with new or revised accounting standards, the company should make this election at the time the initial submission is made. Once an Emerging Growth Company elects to “opt out” of the transition period, the decision is irrevocable. Companies should refer to Staff Accounting Bulletin Topic 11M for guidance on providing disclosure on adoption dates of the delayed accounting standards. The extended transition period applies only to standards that also apply to nonpublic companies.
- Even if a company exceeded $1 billion in revenue in a previous year, it may still qualify as an Emerging Growth Company if revenue was less than $1 billion in the most recently completed fiscal year.
- Comment letters and issuer responses (even those submitted confidentially) will be released publicly 20 business days following the effective time of the registration statement.
- Emerging Growth Companies must comply with XBRL. No relief will be provided.
- If a company restates financial statements after submitting a draft registration statement (even confidentially), the company must include the restatement disclosures in its financial statements.
The SEC has reminded issuers that until the SEC adopts rules to implement the new crowdfunding exemption under the JOBS Act, offers or sales of securities attempting to rely on the crowdfunding exemption would be unlawful.
Under the crowdfunding provisions of the JOBS Act, an issuer must use a “funding portal” to take advantage of the new crowdfunding exemption from registration. A funding portal is merely an intermediary between the investor and the issuer. The Division of Trading and Markets has issued a set of FAQs related to the crowdfunding intermediary provisions. Generally, these FAQs remind potential intermediaries that they will need to register with the SEC and FINRA, but such registration cannot occur until the SEC has issued rules on the registration process.
The SEC issued a set of FAQs in April specifically addressing the deregistration process. Some of the most pertinent questions and answers related to the process of deregistration, including how to terminate Sections 12(g) and 15(d) registration obligations. This process known as “going dark”, while not as prone to litigation risk as a “going private” transaction, is a fairly complicated process. One of the stumbling blocks we have found is that while a company may be eager to suspend its reporting obligations, if it has an outstanding registration statement on Form S-3 or Form S-8 and it has filed its Form 10-K already, then the company will likely be compelled to continue filing its periodic reports through its next Form 10-K because of its Section 15(d) obligations. For further information, you can listen to our recent podcast at the thecorporatecounsel.net.
For more information about how the JOBS Act may apply to your business, contact David C. Scileppi.
Find out more about Gunster’s Emerging Growth Companies Task Force.