On August 17, the SEC’s Division of Corporation Finance issued new guidance indicating that emerging growth companies (EGCs) and non-EGCs may omit from their nonpublic draft registration statements interim financial information they reasonably believe will not be required to be presented separately at (1) the time of the first public filing (for non-EGCs) or (2) the time of commencement of the offering (for EGCs). The staff’s position will relieve issuers in these circumstances of the expense required to prepare separate financial statements and related financial information covering applicable interim periods, including disclosure for the interim periods in management’s discussion and analysis. The new guidance reflects the SEC’s ongoing efforts to facilitate capital-raising by reducing the costs associated with the registration process.
The two new Compliance and Disclosure Interpretations (C&DIs) have been posted on the SEC’s website under the C&DI category “Securities Act Forms” and are identified by their issue date of August 17, 2017. The SEC staff also published a revised FAQ under the Fixing America’s Surface Transportation Act (FAST Act), identified by its revision date of August 17, 2017, which changes the prior guidance and mirrors the first Securities Act C&DI. On the same date, the SEC published an update to its announcement of June 29, 2017 describing the procedures the staff will follow in processing draft registration statements. Each addition to the original announcement has been individually identified with a date of August 17, 2017.
Nonpublic draft registration statements. As described in the SEC Update we issued on July 7, the SEC announced in June that the Division of Corporation Finance will allow all companies to submit for nonpublic review draft registration statements relating to initial public offerings and other specified registrations. Under the new process, nonpublic review procedures will be available to any company that submits a registration statement to the SEC covering the (1) registration of an IPO under the Securities Act, (2) initial registration of a class of securities pursuant to Section 12(b) of the Exchange Act or (3) registration of an offering under the Securities Act during the first twelve months after a company’s IPO or Section 12(b) registration. EGCs (generally, companies having total annual gross revenues of less than $1.07 billion) as well as non-EGCs benefit from the new procedures.
Financial information requirements for publicly-filed registration statements. The new guidance provides relief from the requirements under the SEC’s Regulation S-X governing the inclusion of annual and interim financial statements and related financial information in a publicly-filed registration statement and amendments to the registration statement.
Interim financial statements are unaudited financial statements generally covering the first three months, six months and nine months of the issuer’s fiscal year. Financial statements in a registration statement are evaluated for compliance with the “staleness” rules under Regulation S-X by the number of days between the date of the financial statements included in the filing and the effective date of the registration statement. As a general matter, and subject to certain exceptions and adjustments (including for third‑quarter financial information), a registration statement filed for an IPO is required to include unaudited interim financial statements as of a date and for the most recent interim period ended no more than 134 days before the effective date, and, with respect to the income and cash flow statements, the corresponding period in the prior fiscal year. As indicated in the Division of Corporation Finance’s Financial Reporting Manual, the SEC staff historically has reserved the right not to commence a review of a filing unless the issuer’s financial statements “comply with the rules for age of financial statements and audit at the date of filing.” Each filing would be expected to include, in addition to the interim financial statements, selected financial data for the interim periods, as well as disclosure in management’s discussion and analysis comparing the financial results for the current interim period with those for the prior corresponding period.
Prior guidance for financial information in nonpublic draft registration statements. The SEC announced on June 29, 2017 that the staff will not delay processing a draft registration statement if a company omits financial information that it “reasonably believes” will not be required under Regulation S‑X at the time the registration statement is first publicly filed.
This promised accommodation differed from the relief previously granted solely to EGCs in amendments to the Jumpstart Our Business Startups Act (JOBS Act) made in 2015 by Section 71003 of the FAST Act and discussed in the SEC Update we issued on December 23, 2015. Under the FAST Act relief, an EGC has been permitted to omit from either draft or publicly‑filed registration statements annual financial statements the company reasonably believes will not be required to be included at the time the contemplated offering commences. In 2015 (in the FAST Act FAQ now superseded by the revised guidance discussed below), the staff declined to extend this relief to the presentation of interim financial statements. The staff said in the 2015 guidance that it would not permit an EGC to omit from either draft or publicly-filed registration statements interim financial statements for a period that would be included, at the time the offering commences, within required financial statements for a longer interim period or for the completed fiscal year, even if Regulation S‑X would not require financial statements for the shorter interim period to be presented separately at that time.
New guidance on omission of interim financial information
The August 17 guidance changes the staff’s 2015 position with respect to the omission of interim financial information from nonpublic submissions by EGCs and clarifies the implications of the June 2017 announcement for nonpublic draft submissions by both EGCs and non-EGCs. Under the new guidance, issuers may omit from their nonpublic draft registration statements interim financial information that they reasonably believe will not be required to be presented separately at (1) the time of the first public filing (for non-EGCs) or (2) the time of commencement of the offering (for EGCs). The effect of the guidance may be illustrated by reference to the examples provided by the SEC staff in the two newly published C&DIs, the first of which pertains to EGCs, and the second of which pertains to non-EGCs. These examples have been modified slightly for purposes of this discussion. Nonpublic submission by EGC. The first example contemplates a calendar year-end EGC that makes a nonpublic draft submission in December 2017 and plans to publicly file its registration statement and launch its offering in April 2018. The following relief would be available under the revised guidance:
- Annual financial statements: Consistent with the 2015 guidance, the EGC’s draft registration statement would have to include audited annual financial statements for 2016, but may omit audited annual financial statements for 2015 if the company reasonably believes that those financial statements would not be required at the time of the April 2018 offering. (An EGC is required to include only two years of audited annual financial statements, which at the time of the April 2018 offering would be the company’s audited annual financial statements for 2017 and 2016.)
- –Interim financial statements: If the EGC reasonably believes that that it will launch its offering in April 2018, the draft registration statement would not be required to include unaudited interim financial statements or related financial information for the nine months ended September 30, 2017, because at the time the offering commences the registration statement would include, as its most recent financial statements, only audited annual financial statements for 2017 and no financial statements for any interim period. In a change from the guidance under the superseded 2015 FAQ, the fact that the nine-month financial statements are part of the longer historical period – full year 2017 – no longer would require the separate presentation of those interim financial statements and related financial information in the December draft submission.
Nonpublic submission by non‑EGC. The results under the new guidance are similar for a calendar year-end non-EGC that makes a nonpublic draft submission in December 2017 and plans to first publicly file its registration statement in April 2018.
- Annual financial statements: The non‑EGC’s draft registration statement would have to include audited annual financial statements for both 2016 and 2015. The company may omit audited annual financial statements for 2014 if it reasonably believes that those financial statements would not be required at the time of the first public filing in April 2018. (A non‑EGC is required to include three years of audited annual financial statements, which at the time of the April 2018 filing would consist of the company’s annual financial statements for 2017, 2016 and 2015.)
- Interim financial statements: The new guidance clarifies that if the company reasonably believes that that it will first publicly file its registration statement in April 2018 (regardless of when the offering will commence), the December draft submission would not be required to include unaudited interim financial statements or related financial information for the nine months ended September 30, 2017, because the publicly-filed registration statement in April 2018 would include, as its most recent financial statements, only audited annual financial statements for 2017 and no financial statements for any interim period.
Public filing by EGC or non‑EGC. In the new guidance, the staff did not relax its prior position with respect to the inclusion of interim financial statements in publicly-filed registration statements. In accordance with the prior staff guidance, publicly-filed registration statements may not omit any interim financial information that will be part of financial information for a longer historical period which the issuer will include at (1) the time it first files publicly (for a non-EGC) or (2) the time it commences its public offering (for an EGC). To illustrate this point, if the EGC in the staff’s example were to plan to publicly file its registration statement for the first time in January 2018 and commence its offering in April 2018, the registration statement filed in January 2018 would have to include interim financial statements and related financial information for the nine months ended September 30, 2017. This result would be mandated by the fact that the financial information for the nine months ended September 30, 2017 would be included within the audited annual financial statements for 2017 to be presented in the EGC’s prospectus filed in April 2018.
Switching from public to nonpublic review process
As updated on August 17, the SEC’s June 2017 announcement states that an issuer that has publicly filed a registration statement which is being reviewed by the SEC staff and is not yet effective may switch to the nonpublic review process for future pre-effective amendments to the registration statement. To take advantage of this accommodation, the issuer must (1) be eligible to participate in the nonpublic review process and (2) agree to publicly file its amended registration statement and all draft amendments in accordance with the timing required for public filings under the nonpublic review guidelines.