New guidance outlines key rules for the new confidential review option for initial public offerings by emerging growth companies in the United States.
The Jumpstart Our Business Startups Act (also known as the JOBS Act) became a U.S. federal law on April 5, 2012 and immediately authorized a confidential submission option for registered securities offerings in the United States by emerging growth companies (EGCs). The U.S. Securities and Exchange Commission (SEC)'s Division of Corporation Finance staff promptly announced its procedure for accepting confidential draft registration statements using this option. The staff has also given written and oral guidance on a number of relevant frequently asked questions. This alert explains the background and expected benefits of the confidential submission option, reviews the SEC staff guidance on how it works, and discusses other considerations companies can use to better determine whether and how to use it.
Previously, a company seeking to make an initial public offering (IPO) of its securities was generally required to file publicly an initial registration statement with the SEC through its electronic filing system. Once so filed, a registration statement is posted on the SEC's public website, and generally may not be removed. Under the U.S. Securities Act of 1933 (Securities Act) and its implementing rules, a registration statement must disclose comprehensive and often sensitive information about the company. The SEC may issue several rounds of comments on the registration statement, often requiring an amendment each time, which when filed may also be viewed immediately online. As such, traditionally most companies considering a U.S. IPO had to determine whether they were prepared for the public registration spotlight several months (or possibly even years) before the marketing and closing of their offering could occur.
Now, under the JOBS Act, a company may confidentially submit a registration statement that will never become public until it proceeds with its road show, and therefore eliminate or reduce premature negative publicity, if (1) the company is an EGC and (2) the "initial public offering date" (IPO Date) has not yet occurred, i.e., the company has not yet sold common equity securities under an effective registration statement pursuant to the Securities Act. To be an EGC, a company must have total annual gross revenues of less than $1 billion (subject to inflation indexing) as of the end of its last fiscal year. It must also not have issued more than $1 billion (subject to inflation indexing) in non-convertible debt during a three-year period, or be a "large accelerated filer" (i.e., had a public float of at least $700 million at the end of its most recent second fiscal quarter, filed at least one annual report and had been a public reporting company at least a year). There are other requirements for EGC status, but they are satisfied if the IPO Date has not
occurred. Along with confidential IPO registration review, EGCs are eligible for scaled public disclosure and freer IPO investor and analyst exposure under the JOBS Act's "IPO On-Ramp" provisions.1
If an EGC uses the confidential submission option, the JOBS Act requires the initial confidential submission and all amendments to be publicly filed at least 21 days before the company conducts a "road show" as defined in Securities Act Rule 433(h)(4). As defined, a "road show" is "an offer…that contains a presentation regarding an offering by one or more members of the issuer's management...and includes discussion of one or more of the issuer, such management, and the securities being offered."
SEC Staff Guidance
The SEC staff's guidance clarifies important issues relating to EGC eligibility and testing, the IPO Date, the "road show," alternative submissions, form and content of confidential submissions, pending filings, confidentiality, registration fee and offer timing, and foreign private issuer (FPI) submissions.
EGC eligibility. On an EGC's requirement to have "total annual gross revenues" of less than $1 billion during the last fiscal year, this amount is total revenues on the annual income statement, calculated under U.S. GAAP (unless it is an FPI, as discussed separately below). If a predecessor's income is included in the financial statements, that income is counted. The EGC requirement to issue $1 billion or less of debt in the last three years is analyzed using a rolling three-year period ending on the date that the company tests EGC status. "Debt" here means all non-convertible debt securities issued in public or private offerings, even if not outstanding, and appears to count refinancings, but not non-security loans.
EGC testing. EGC status must be tested at the time of each confidential submission, including each draft amendment, and at the time of public filing. For example, if a company qualifies as an EGC when it makes a confidential submission, but at the end of that year has $1 billion or more of total annual gross revenues, if it is still in confidential review, it would need to publicly file the registration statement and the prior confidential submissions to continue the review process. The registration statement form and content, and the company generally, would also need to comply with the rules applicable to non-EGCs. However, if the company publicly files the registration statement (with the prior confidential submissions) while it is still an EGC, its registration statement may use EGC scaled disclosure even if it loses EGC status, though it may not use other EGC privileges such as the EGC safe harbor for test-the-waters communications.
IPO Date. An IPO Date is triggered by any public sale of common equity pursuant to an effective registration statement. Therefore, if a company granted common stock to employees pursuant to an effective registration statement, or a stockholder sold common stock pursuant to an effective resale registration statement, either action would trigger an IPO Date. However, unregistered sales, and registered sales of anything besides common equity, such as debt or preferred stock, would not.
Filing before road show. The requirement to file publicly a registration statement at least 21 days before the road show means either 21 days before any communications that may constitute a "road show" as defined, or if there is no road show, before the anticipated date that the SEC will declare the registration statement effective. A traditional road show should be easily identified, as where the issuer and underwriters have discussions with investors. Test-the-waters communications with only qualified institutional buyers or institutional accredited investors would not be treated as a road show. Any other communications, such as with retail investors (accredited or not), may need to be treated as a road show. Also, the public filing does not end the SEC's review, especially if material new facts come to light.
Alternative submissions. The SEC guidance appears to support use of the EGC confidential submission process for shareholder and shelf offerings and other non-traditional IPO equity registrations. It also appears to be available for non-common equity offerings. One open question in this context is whether a road show for an offering requires a public filing for just that offering or all offerings; if only for the related offering, an EGC could confidentially submit unlimited non-common equity offerings before its IPO Date.2
Form and content of confidential submission. A confidentially submitted registration statement's form and content should be substantially the same as one that is publicly filed, except that it does not need the company's signatures or an auditor consent. The registration statement must include a signed audit report and all other exhibits that would be required if publicly filed. We presume that for any exhibit that has portions that the company seeks to keep confidential if the submission is ultimately filed publicly, a confidential treatment request must be submitted with it that satisfies the conditions for such requests in the context of a public filing, including a redacted version of the exhibit. Likewise, offering price and other offering-related information may be omitted to the same extent as in a public filing. The initial submission should indicate how the EGC is using its irrevocable option to comply with new or revised accounting standards that apply to both public and private companies only when they take effect as to private companies. If the submission is materially deficient, the staff will defer review. When the registration statement is publicly filed, it must include all required signatures, signed audit reports, consents, exhibits, and filing fees. It must also include as exhibits all of the confidential submissions and amendments, and all of their exhibits, presumably including any redacted exhibits subject to a confidential treatment request.
Registrations in progress. If an EGC is already in public registration but otherwise qualifies, it may switch to confidential submissions and EGC scaled disclosure (unless moving to scaled disclosure would be materially misleading). It should coordinate the transition with its reviewing staff. However, the registration statement (with all confidential submissions, amendments and their exhibits) must be filed publicly again at least 21 days before the road show (or before effectiveness, if there is no road show).
Confidentiality, fee and offers. A confidential treatment request is not required to preserve the confidentiality of a submission prior to its public filing. The registration fee will not be due until the company publicly files its registration statement because confidential submission is not considered a "filing." Likewise, prior to the public filing, public communications about an offering in the United States are still generally prohibited, other than pre-filing public notices conforming to strict form and content limits.
FPI submissions. For purposes of the EGC total annual gross revenues test, an FPI that reports under IFRS may use IFRS-based total revenues. FPIs that use a non-U.S. currency in their financial statements should use the exchange rate as of the end of the last fiscal year. In addition, a relatively narrow set of FPIs may also qualify to use an alternative confidential submission process.3 The alternative FPI process does not currently require the registration statement to be publicly filed at least 21 days before the road show. If an FPI EGC qualifies and opts to use that process, it must disclose this choice in the initial submission. FPIs using that process may not take advantage of any EGC privilege. Once an FPI makes a confidential submission, it must comply with its chosen process and may not switch to the other process.