Firm Thought Leadership
On August 17, 2017, the Securities and Exchange Commission issued new guidance clarifying that issuers (including issuers that are not emerging growth companies, or EGCs) may omit from their confidentially submitted draft registration statements certain interim financial information that they reasonably believe will not be required to be presented separately at the time of the contemplated offering. The guidance is included in new Compliance and Disclosure Interpretations (C&DIs) that can be found here (See C&DIs 101.04 and 101.05).
This new guidance closely follows the SEC’s June 2017 expansion of its policy regarding the confidential submission process, including the ability for issuers that are not EGCs to take advantage of the submission of confidential draft registration statements. Our discussion of those rules can be found here.
The new guidance further expands the prior policy that permitted EGCs—generally, issuers with less than $1.07 billion in gross revenue during their most recently completed fiscal year—to omit certain annual financial statements if the EGC “reasonably believes” that the financial information for that annual period will not be required to be included in the registration statement at the time of the contemplated offering. Under the prior guidance, this only exempted annual periods and did not permit omission of interim financial statements even if those interim financials would eventually be superseded at the time of the contemplated offering, either by subsequent interim financial statements or by annual financial statements for a later period.
Under the new guidance, the SEC has made clear that both EGCs and any other issuer submitting a confidential registration statement may omit from their confidential draft registration statements interim financial information that they reasonably believe will not be required to be presented separately at the time of the contemplated offering. However, the examples included in the new C&DIs make clear that the timing of the public filing of the registration statement will have an impact on the ability of issuers to omit certain interim financials./
The SEC provided an illustration, which we have recreated below with certain modifications to aid in its understanding:
- First, assume a calendar year-end EGC submits a confidential registration statement on November 15, 2017 and reasonably believes it will commence its offering in April 2018. The issuer files the registration statement publicly in April 2018.
- Under the prior guidance, the EGC would have been required to include annual historical financial statements covering 2016 (2015 financial information would not be required because, as noted above, the issuer reasonably believes that those annual financial statements would not be required at the time of the offering), as well as interim financial statements covering the nine-month periods ended September 30, 2017 and 2016 in the confidential draft submissions of its registration statement. In addition, at the time of the public filing for the anticipated offering, the EGC would be required to update its registration statement to remove the interim financial statements and include annual financial statements for 2017.
- Under the new guidance, the EGC may now omit its interim financial information related to 2016 and 2017 from the confidential draft submissions, since such financial statements will be superseded by the annual financial information included in the publicly filed registration statement.
- Now assume that the same issuer chose to file publicly in January 2018 (rather than April 2018).
- Under the new guidance, the issuer must include interim financial information for 2016 and 2017 in that January filing because that interim information relates to historical periods that will be included at the time of the public offering.
The SEC also noted that, in the case of a non-EGC under a similar timeline as the first scenario above, the issuer would similarly be permitted to omit its interim financial information related to 2016 and 2017 from its draft registration statements because such information would not be required at the time of its first public filing in April 2018. The illustrations make clear that the ability of any issuer to omit interim financial information (and of non-EGC issuers to omit annual financial information) applies only to draft registration statements and not to publicly filed registration statements.
The new guidance continues the SEC’s stated goal of easing the burden for companies to access the public markets. This new guidance will no doubt be welcomed by issuers looking to keep costs down by avoiding the preparation of financial statements that would not be required to be included in the registration statement at the time of the contemplated offering.