On June 29, 2017, the Securities and Exchange Commission ("SEC") extended to all issuers some of the benefits that Congress granted to emerging growth companies ("EGCs") 1 in 2012 under the Jumpstart Our Business Startups Act (the "JOBS Act").2
By way of background, the JOBS Act effectively created a two-tiered system for US IPOs, easing the path for EGCs to become public companies while maintaining restrictions for non-EGCs. A portion of the relief involved relaxing disclosure requirements that required investments of time and resources that were arguably not commensurate with the related benefits to investors in smaller companies. However, other areas of relief—notably those related to the IPO process itself—had no clear rationale based on the size of the issuer. The SEC’s June 29, 2017 announcement goes some way towards addressing this disparity with respect to the offering process. However, as outlined below, additional work for the SEC remains in order to finish the job of levelling the playing field between EGCs and non-EGCs with respect to the IPO process.
SEC Relief for IPOs of non-EGCs
The SEC is allowing two new groups of companies to submit their initial registration statements confidentially in draft form and maintain that confidentiality until 15 days before a roadshow or, if there is no roadshow, 15 days prior to the effective date of the registration statement. The first group is non-EGCs. This effectively permits all issuers to submit IPO registration statements confidentially. The second group is companies filing a registration statement under the Securities Exchange Act of 1934 (the "Exchange Act"). This would include, for example, foreign private issuers traded overseas and seeking to list on the New York Stock Exchange or Nasdaq in a non-capital-raising transaction by means of a direct listing or a Level II ADR program.
The SEC clarified in FAQs that the confidentiality provisions of Section 6(e)(2) of the Securities Act of 1933 (the "Securities Act") are specifically limited to draft registration statements of EGCs.3 Accordingly, the SEC has reminded non-EGCs using this method of submission that they should consider the use of SEC Rule 83 when submitting registration statements and related correspondence confidentially. This rule requires the SEC to notify the filer if it receives a Freedom of Information Act ("FOIA") request with respect to the registration statement and provides the filer with an opportunity to seek confidential treatment for relevant portions of the filing and related correspondence.
A non-EGC seeking to submit confidentially should include a legend at the top of each page of the electronically submitted draft registration statement indicating that it has requested confidentiality. In addition, in its responses to SEC comments, an issuer should identify any information in the registration statement for which it intends to seek confidential treatment upon public filing to ensure that the SEC does not include such information in its comment letters. The SEC reiterated in FAQs that, consistent with its practice in all filing reviews, the staff will publicly release its comment letters and issuer responses to staff comment letters on EDGAR no earlier than 20 business days following the effective date of a registration statement.4
The SEC also clarified in FAQs that a filing fee is still due only when the registration statement is first publicly filed on EDGAR.5 The voluntary submission of a draft registration statement is not considered a “filing” so no fee is due at that time. Furthermore, a submission of a draft registration statement is not required to be signed by the registrant or by any of its officers or directors, nor is it required to include the consent of auditors and other experts, as it is not filed with the SEC.6 In addition, an issuer submitting a draft registration statement for non-public review may not make a public announcement about its offering in reliance on the Rule 134 safe harbor but may use the Rule 135 safe harbor instead.7
Non-Required Financial Statements
The SEC will accept and review a registration statement that omits financial statements and related information that the issuer reasonably believes will not be required at the time the registration statement is publicly filed. This is similar—but not identical—to the relief provided under the December 2015 Fixing America's Surface Transportation Act (the "Fast Act") which allowed EGCs to omit financial information that relates to a historical period that the issuer reasonably believes will not be required to be included at the time of the contemplated offering. The reason for the slight difference is unclear, but is potentially meaningful for non-EGCs that decide to make an early public filing of their registration statement in order to be able to test the waters with investors (see discussion below).
SEC Relief for All Companies in 12 Months Following IPOs
The SEC is allowing all companies to submit a registration statement confidentially during the 12 months following effectiveness of an IPO registration statement or the initial Exchange Act registration statement. Such confidentiality can be maintained until 48 hours before the requested effective time of the registration statement at which time the registration statement must be filed publicly on EDGAR. However, the ability of such companies to submit a registration statement confidentiality applies only to the first filing while any second filing—for example to make amendments to respond to SEC comments—must be public.
The ability to submit a registration statement confidentiality for the 12 months following effectiveness of an initial registration statement is a welcome development for issuers, but the limitation to only the first submission of a registration statement may result in issuers seeking to avoid filing an amendment to a registration statement selected for review and, instead, they may try to respond to SEC comments via correspondence filings only. Moreover, the SEC relief results in disparate treatment for a company whose registration statement is selected for review and one that is not—something that is not within an issuer’s control. For this reason, it is hoped that the SEC will extend its relief to all filings until, for example, 48 hours before the effective date.
It is also hoped that the SEC will extend the ability to file confidentially beyond 12 months. The 12-month period is roughly coterminous with the date on which an issuer would presumptively become eligible to file a Form S-3 or F-3.8 An issuer that has more than US$700 million in unaffiliated public float at that time would likely be a well-known seasoned issuer ("WKSI"), and such Form S-3 or F-3 would be automatically effective, thereby removing the potential market impact of filing a registration statement and having to wait to learn whether the SEC intends to review it or not. However, for Form S-3 or F-3 issuers that are not WKSIs, the ability to file confidentially initially while learning whether the SEC intends to review the filing, as well as during any review process, could meaningfully reduce any adverse market impact. This challenge is even more pronounced for issuers that are eligible to use a Form S-3 or F-3, but are subject to the "baby shelf" rules (i.e., Form S-3 or F-3 eligibility rules applicable to issuers with an unaffiliated public float of less than US$75 million undertaking a primary capital raise), and may therefore have to use a Form S-1 or F-1 to achieve their desired offering size. A broader extension of the ability to submit confidentially would likely be appreciated by issuers as it would aid capital formation without adversely impacting investors.