On August 17, 2017, the Securities and Exchange Commission, or SEC, took a further step in its ongoing efforts to make initial public offerings, or IPOs, a more attractive option for companies. Until recently, IPO filers were required to include stand-alone interim financial information in confidential draft registration statements, even if that information was expected to be included in annual audited financial statements at the time of the IPO. In July 2017, the SEC announced an expansion of its procedures for draft registration statements that suggested a relaxation of this requirement, which we described in our Alert from July 17, 2017, entitled “SEC Staff Expands Nonpublic Review Process for Registration Statements and Announces Related Accommodations.” New SEC guidance and policy positions now clearly eliminate this requirement and the associated time delays and expenses.
In recent years, the SEC has taken several steps to ease the burdens on companies contemplating IPOs. Most notably, the JOBS Act in 2012 allowed issuers that qualified as “emerging growth companies,” or EGCs, to make their initial filings with the SEC confidential up to the point of the marketing phase of the IPO, and also scaled IPO filing requirements, including requiring only two full years of financial information in the registration statement, as opposed to three years for companies that are not EGCs. This was followed by the FAST Act in 2015, which allowed EGCs to omit historical financial information from their initial confidential filings for periods that they reasonably believed would not be required to be included in the registration statement at the time of the contemplated offering.
In June 2017, the SEC both extended the ability to make confidential filings to all IPO companies (and not only EGCs), and stated that, for non-EGCs, the SEC would process draft registration statements that are substantially complete except for financial information the company reasonably believes would not be required at the time the registration statement is publicly filed.
The New Guidance
Prior to publication of the new guidance, companies had to strictly follow the requirements of Regulation S-X under the Securities Act, which require presentation of interim financial information if a specified number of days has lapsed since the period covered by the most recent audited financial statements. This requirement applied even in the case of initial submissions, including when interim financials would not separately be required in the prospectus because it would be included in annual audited financial statements.
Under the new guidance, however, the SEC has stated that their staff policy is that an EGC may omit otherwise required interim financial information if it reasonably believes such interim information would not separately be required at the time of the contemplated offering. This means that, for example, if an EGC contemplating an IPO made its initial confidential filing in November of 2017 for an offering it reasonably believed would take place in April 2018, it could omit interim financial information for 2016 and 2017 in its initial filing because,, at the time of the contemplated offering, the prospectus would include full-year financial statements for 2017 and not any interim financial information for 2017. Prior to the guidance, the company would have had to include the 2016 and 2017 interim financial information in its initial filings. However, if the offering would take place in January 2018, then 2016 and 2017 interim financials would be required at the time of offering and in turn would be required in the initial confidential filings.
For non-EGCs, the SEC announced that, while non-EGCs are not entitled to the benefits of the FAST Act, it would provide a similar accommodation for interim financial information if the issuer reasonably believes such information would not be required to be presented separately at the time it files its registration statement publicly.
The following table illustrates the current requirements for both EGCs and non-EGCs after the new guidance.
By eliminating the need for interim financials not required to otherwise be separately stated at the time of offering in initial confidential filings, the SEC has reduced the burdens for companies planning IPOs by relieving them of the time and expense of preparing financial information for interim periods that ultimately would not be used in the final offering materials. Some companies may nonetheless opt to provide interim information, but the new relief may enable some potential IPO companies to file confidentially sooner to prepare for future market windows.