On September 28, 2012, the Staff of the Division of Corporation Finance of the Securities and Exchange Commission (the “SEC”) issued Frequently Asked Questions (“FAQs”) to provide guidance on the application of the Jumpstart Our Business Startups Act (the “JOBS Act”) to exchange offers and mergers and with respect to other aspects of the JOBS Act. Signed into law on April 5, 2012, the JOBS Act 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 and provide private companies with additional avenues to raise capital without registration with the SEC.1
These FAQs, which are the latest in a series issued by the SEC Staff providing guidance on certain aspects of the JOBS Act,2 address:
- the applicability of testing the waters in exchange offers and mergers;
- the confidential submission process in connection with exchange offers and mergers;
- financial statement and other financial information disclosure requirements pertaining to target companies; determining EGC status following mergers and acquisitions; and
- other guidance of general application.
The FAQs provided the following guidance:
- Testing the waters permitted in exchange offers and mergers
The JOBS Act allows EGCs or persons authorized to act on their behalf to engage in oral or written communications with potential investors that are qualified institutional buyers under Rule 144A or institutional accredited investors under Regulation D before or after the date of filing a related registration statement for the purpose of gauging interest in a contemplated securities offering. The SEC Staff has clarified that EGCs may also engage in these types of test-the-waters communications in connection with exchange offers and mergers. Notwithstanding this ability to test the waters, the SEC Staff has stated that EGCs still remain subject to the rules under, and must make any filings required by, the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with respect to any written communications made in connection with or relating to exchange offers and mergers, such as filing pre-commencement tender offer communications and proxy soliciting materials in connection with business combinations as required by Rule 13e-4(c) (requirement to file written materials in issuer tender offers), Rule 14a-12(b) (requirement to file soliciting materials provided to security holders before the furnishing of a proxy statement) and Rule 14d-2(b) (filing of pre-commencement written communications relating to tender offers). This clarification provides EGCs with the opportunity to gauge interest, at least orally, with certain investors in contemplated exchange offers and mergers. Any company considering engaging in testing the waters discussions must remain mindful of the obligations to file written communications required under the Exchange Act and other considerations, such as only providing information which is consistent with materials already filed or expected to be filed with the SEC, only engaging in live communications, not leaving any information used in such discussions behind and being mindful of Regulation FD issues, among others. Moreover, the utility of this guidance may be limited in practice both because many institutional investors will not want to be put in the position of holding material non-public information that will restrict their ability to trade and because most confidentiality agreements entered into in connection with potential M&A transactions limit the ability to disclose information about a potential transaction to third parties, absent consent of all participants in the negotiation.
- Confidential submission process in connection with exchange offers and mergers
The JOBS Act provides that an EGC may submit a registration statement for an initial pubic offering for SEC review on a confidential basis so long as it files all draft registration statements with the SEC no later than 21 days prior to the commencement of its IPO road show. The SEC Staff has clarified that draft registration statements for an exchange offer or merger can also be submitted confidentially for SEC review if the exchange offer or merger would constitute the EGC’s initial public offering of common equity securities.
Furthermore, the SEC Staff has provided guidance on the filing obligations under the Securities Act of 1933, as amended (the “Securities Act”), and the Exchange Act of EGCs that submit draft registration statements for exchange offers or mergers on a confidential basis:
- for exchange offers that do not commence before the effectiveness of the registration statement, including going-private and roll-up transactions that do not qualify for early commencement under Exchange Act Rule 13e-4(e)(2) or Rule 14d-4(b), the EGC must publicly file all draft registration statements (including prior confidential submissions) at least 21 days before the earlier of the commencement of the road show, if any, and the anticipated date of effectiveness of the registration statement;
- for exchange offers that commence before the effectiveness of the registration statement pursuant to Securities Act Rule 162 or for the early commencement of exchange offers subject only to Regulation 14E, an EGC must publicly file all draft registration statements at least 21 days before the earlier of the commencement of the road show, if any, and the anticipated date of effectiveness of the registration statement, but, in the case of an exchange offer that commences before the effectiveness of the registration statement pursuant to Rule 162, no later than the commencement date of the exchange offer in light of the filing requirements under Rules 13e-4(e)(2) and Rule 14d-4(b);
for pre-commencement tender offer communications, the EGC must file:
- certain materials required under Securities Act Rule 425 in connection with business combination transactions (unless it is relying on test-the-waters communications);
- written materials required under Exchange Act Rule 13e-4(c) in connection with issuer tender offers; and
- pre-commencement written communications required under Exchange Act Rule 14d-2(b) relating to tender offers;
- for exchange offers, an EGC must file a tender offer statement on Schedule TO on the date of commencement of the exchange offer under Exchange Act Rule 13e-4(b) (filing requirements for issuer tender offers) or Rule 14d-3(a) (filing requirements for non-issuer tender offers); and
- for mergers where the target is subject to Regulation 14A or 14C and the registration statement of the EGC acquiror includes a prospectus that also serves as the target’s proxy or information statement, the EGC must publicly file all draft registration statements at least 21 days before the earlier of the commencement of the road show, if any, and the anticipated date of effectiveness of the registration statement, and make the required filings under Securities Act Rule 425 (unless it is relying on test-the-waters communications) and Exchange Act Rule 14a-12(b).
As a practical matter, some of these filing deadlines may require that the acquiring EGC either delay seeking effectiveness of a registration statement, commencing a road show and/or commencing an exchange offer if it wishes the SEC Staff to review the registration statement on a confidential basis.
- Financial statement and other financial information disclosure requirements pertaining to target companies
In earlier guidance, the SEC Staff indicated that if EGCs are 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), they can provide only two years of financial statements for those entities if they provide only two years of their own financial statements. Consistent with this guidance, the SEC Staff has clarified that registration statements for exchange offers or mergers may also contain only two years of financial statements for the target so long as the EGC provides only two years of its own financial statements in the registration statement and is not a shell company.
Similarly, the SEC Staff has also clarified that in the circumstance where an EGC acquires a business subsequent to its initial public offering of common equity securities, but prior to filing three years of financial statements in its first Form 10-K, and is required to file three years of financial statements of the acquired business pursuant to Regulation S-X in a Form 8-K, the EGC is permitted to file only two years of financial statements of the acquired business in the Form 8-K, so long as the EGC provided only two years of its own financial statements in its IPO registration statement and is not a shell company.
- Determination of EGC status following mergers and acquisitions
A company’s EGC status following a merger or acquisition could change as a result of the combination of two or more businesses. The JOBS Act provides that an EGC, which is a company that had total annual gross revenues of less than $1 billion for its most recently completed fiscal year, will lose its EGC status upon the earlier of: (1) the last day of the fiscal year during which the company had total annual gross revenues of $1 billion or more, (2) the last day of the fiscal year following the fifth anniversary of the date of the company’s initial public offering of common equity securities, (3) the date on which the EGC has issued more than $1 billion in non-convertible debt during the previous three-year period, or (4) 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 public float of at least $700 million and has filed at least one annual report).
To determine on a post-transaction basis whether a company has triggered any of the disqualifications from EGC status, the SEC Staff has provided the following illustrative guidance on forward acquisitions and reverse mergers. In Example 1, Company A acquires Company B for cash or stock in a forward acquisition where Company A is both the legal and accounting acquiror. In Example 2, Company C undertakes a reverse merger with Company D, an operating company, where Company D is presented as the predecessor in the post-transaction financial statements. In both examples, all of the companies have calendar fiscal years, the transactions closed on September 30, 2012 and, on succession, neither predecessor disqualifies Company A or Company C from being an EGC by having had conducted its first sale of common equity securities on or before December 8, 2011. Under these facts, Company A’s and Company C’s EGC status should be determined on a post-transaction basis as follows:
Click here to view table.
- Other guidance of general application
The SEC Staff also provided the following guidance on matters relating to the confidential submission process, financial statement and other financial information disclosure requirements and determining EGC status that are not specific to exchange offers and mergers.
- Draft registration statements do not need to be signed or include expert consents upon public filing.
Notwithstanding the requirement under the JOBS Act that EGCs must publicly file all draft registration statements no later than 21 days before the commencement of the road show, the publicly filed confidential submissions are not required to be signed by the EGC or any of its officers or directors or include consents of auditors or other experts as would otherwise be required for registration statements that are publicly filed under the Securities Act.
Three years of financial statements must be filed for registrations under Section 12(g) and for initial public offerings of debt securities.
- Registrations of equity securities under Section 12(g). An EGC that has not consummated an initial public offering of its common equity securities and which is required to register a class of equity securities under Section 12(g) of the Exchange Act (as a result of having more than $10 million in assets and 2,000 or more holders of record as of the end of its most recent fiscal year) must include three years of financial statements in the applicable Form 10 or Form 20-F. The SEC Staff further clarified that since Section 7(a)(2)(A) under the Securities Act, which permits an EGC to provide two years of financial statements, applies only to a registration statement for an initial public offering of common equity securities, an EGC is required to provide three years of financial statements in its registration statement on Form 10 or Form 20-F.
- Initial public offerings of debt securities. Consistent with the SEC Staff’s guidance above on the scope of Section 7(a)(2)(A) under the Securities Act, a registration statement filed for an offering of debt securities that constitutes an EGC’s initial public offering must include three years of financial statements. However, the SEC Staff indicated that to the extent an EGC conducted a registered offering of debt securities subsequent to its initial public offering of common equity securities, the EGC would have the benefit of not being required to include audited financial statements for any period prior to the earliest audited period provided in the EGC’s equity IPO registration statement.
- Disclosure of selected financial data and ratio of earnings to fixed charges for companies that have lost EGC status.
A company that loses its EGC status will not be required to present selected financial data or a ratio of earnings to fixed charges in subsequently filed registration statements and periodic reports for periods prior to the earliest audited period presented in its initial registration statement filed pursuant to the Securities Act or Exchange Act.
- Determination of EGC status after year-end but before new annual financial statements are filed.
If a company wishes to file a registration statement for an initial public offering of common equity securities after its fiscal year end (e.g., January 2013) but before financial statements for the previous fiscal year (e.g., the year ended December 31, 2012) have been publicly filed, the company would have to apply the revenue test using its revenues from the previous fiscal year (e.g., the year ended December 31, 2012), not the last fiscal year for which financial statements have been filed.
Determination of EGC status of subsidiary issuers and previous reporting companies.
- Subsidiary issuers. When a parent company intends to spin-off a wholly-owned subsidiary, register an initial public offering of the wholly-owned subsidiary’s common stock or transfer a business into a newly-formed subsidiary for the purpose of conducting an initial public offering of that subsidiary’s common stock, and the subsidiary had less than $1 billion in revenue in its most recently completed fiscal year and is not otherwise disqualified from being an EGC, the subsidiary may qualify as an EGC notwithstanding that its parent does not because the parent’s first sale of common equity securities occurred on or before December 8, 2011. The SEC Staff has stated that, in general, the focus of the analysis on whether a subsidiary issuer qualifies as an EGC is on the subsidiary, not its parent.
- Previous reporting companies. A company that conducted an initial public offering of its common equity securities on or before December 8, 2011 and was once an Exchange Act reporting company but is currently not required to file periodic reports may qualify for EGC status. This position is not available to any company that has had the registration of a class of its securities revoked pursuant to Section 12(j) of the Exchange Act for failing to comply with any provision of the Exchange Act or any rules or regulations thereunder.
The SEC Staff highlighted that if it appears, based on the particular facts and circumstances, that the company or its parent is engaging in a transaction for the purpose of converting a non-EGC into an EGC, or for the purpose of obtaining the benefits of EGC status indirectly when it is not entitled to do so directly, or that the company ceased to be a reporting company for the purpose of conducting a registered offering as an EGC, the SEC may question the EGC status of the particular company. Moreover, the SEC Staff cautioned that companies with questions relating to taking advantage of the benefits of EGC status (i) through a spin-off or an initial public offering of a wholly-owned subsidiary, or by transferring a business into a newly-formed subsidiary for the purpose of conducting an initial public offering, or (ii) after a company has ceased to be an Exchange Act reporting company, should contact the Division’s Office of the Chief Counsel.