The Jumpstart Our Business Startups Act ("JOBS Act"), as signed into law by President Obama on April 5, 2012, is clearly U.S. The legislation was adopted with considerable momentum, and with broad bipartisan support, in part because of the argument that growth companies, post-initial public offering ("IPO"), generate more new jobs, when compared to growth companies that are sold in an M&A transaction. This proposition turned out to be highly attractive to legislators.
Many of the recommendations contained in the report prepared by the IPO Task Force for the Department of Treasury, Rebuilding the IPO On-Ramp: Putting Emerging Companies and the Jobs Market on the Road to Growth (October 20, 2011) ("Report"), were adopted in the JOBS Act. That Report notes during the 1990s, there were an average of 547 IPOs in the United States each year, compared to 192 each year during the following decade. In addressing the balance for regulatory burdens on IPO issuers, the Report does not focus on "small" companies but on "growth" companies, with the new category of emerging growth company ("EGC") with revenues of up to $1 billion. The Report, however, does not mention foreign private issuers ("FPIs"). There is only mention of competition from foreign markets and the observation that the United States is no longer the "international destination of choice" for IPOs.
The JOBS Act, however, will have a significant impact on foreign issuers accessing U.S. markets, either through initial public offerings registered with the U.S. Securities and Exchange Commission ("SEC") or through traditional Rule 144A/Regulation S global equity offerings. As described below, foreign private issuers already enjoy significant concessions for SEC-registered IPOs, and the SEC has made clear that FPIs qualifying as EGCs can enjoy concessions both under the JOBS Act and the current accommodations for FPIs.
There also may be, depending on SEC rulemaking, a liberalization in communications for the traditional Rule 144A/Regulation S global equity market. The key is the rulemaking, scheduled for announcement on August 22, on removing the prohibition on general solicitation in connection with Rule 144A offerings. Other parts of the JOBS Act (exempt offerings, crowdfunding, and registration thresholds) seem much more directed to the domestic U.S. market and are less likely to have much impact on foreign companies and foreign markets.
This Commentary focuses on what we see as being important for non-U.S. issuers.
Why the JOBS Act Is Important
The last 18 months have demonstrated a trend for non-U.S. companies, especially technology companies, turning to U.S.-registered public offerings. In that period, 98 FPIs have filed registration statements, including 40 based in Europe. The JOBS Act, depending on implementation, seems likely to accelerate that trend.
FPIs should benefit under the JOBS Act, as do domestic issuers. The benefits can be broadly divided into (i) liberalized communications for IPOs and (ii) reduced disclosure. The relief for disclosure obligations has a double impact. The JOBS Act relief applies both to the prospectus for the IPO and, thereafter, as a reporting company post IPO, while "on the on-ramp" for up to five years.
The SEC has made clear that such relief and accommodations will be in addition to existing concessions afforded FPIs. So it may be even easier for an FPI EGC to go the route of an SEC-registered IPO than it is for a domestic EGC.
The following chart compares (i) relief under the JOBS Act, (ii) relief under the traditional FPI disclosure requirements (Form 20-F concessions), and (iii) how the concessions under each of the JOBS Act and Form 20-F can be combined, so that an FPI has more flexibility than either a U.S. domestic EGC under the JOBS Act or an FPI under the traditional Form 20-F concessions.
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Confidential SEC Filings for IPOs. EGCs may file an IPO registration statement with the SEC for review on a confidential basis, although public filing is required at least 21 days prior to commencement of the road show.
Observations. The SEC discontinued confidential reviews of FPI registration statements (except for IPOs by FPIs listed or concurrently listing securities on a non-U.S. exchange, being privatized by a foreign government, or where public filing would conflict with applicable foreign law) in December 2011 ("2011 Policy"). The JOBS Act restores this accommodation, which is available only for IPO registration statements, for FPIs that are also EGCs.
Some FPIs, however, still qualify for full confidential treatment under the 2011 Policy. FPIs that qualify for confidential reviews under the 2011 Policy are currently not subject to the 21-day required period between the first public filing of the registration statement and commencement of the road show. The SEC has stated that any such FPIs that are also EGCs must choose between the confidential review process under the JOBS Act or the 2011 Policy (in which case the other benefits of EGC status will be lost).
Liberalized Pre-Road Show Communications. The JOBS Act relaxes the "gun jumping" rules to permit EGCs and their representatives (including underwriters) to communicate with institutional "accredited investors" ("IAIs") and "qualified institutional buyers" ("QIBs") in advance of potential IPOs, as well as follow-on and secondary public offerings.
Observations. By permitting these "test the waters" communications prior to an IPO, the JOBS Act incorporates a common feature of IPOs in other jurisdictions (also known as "pilot fishing" or "pre-sounding") into the U.S. IPO context.
Syndicate Research Reports Permitted. The JOBS Act permits research to be published around the IPO offering period.
Observations. The distribution of pre-IPO research in the U.S., even in unregistered Rule 144A/Reg S offerings by FPIs, has historically been constrained by both Securities Act Section 5 concerns as well as disclosure liability concerns. The JOBS Act addresses the former in the context of registered offerings but does not change the latter. Research reports remain subject to the general anti-fraud provisions of Section 10 of the Exchange Act and Rule 10b-5 thereunder, as well as Section 17 of the Securities Act. The JOBS Act's elimination of the ban on general solicitation and advertising in Regulation D and Rule 144A offerings also raises the potential for research reports being used in connection with those offerings.
If embraced by the market, the greater use of research reports in connection with U.S. offerings could move U.S. IPO practice closer to the prevailing model in many other jurisdictions, where pre-IPO research is common, and facilitate a global approach in multijurisdictional offerings by FPIs. To date, concerns about U.S. disclosure liability has resulted only in limited relaxation of past practice. Generally underwriters of U.S. IPOs so far have only reduced the black-out period for managers and co-managers to 25 days, the same as historically applied to other syndicate members.
Disclosure: IPO and Post-IPO "On the On-Ramp"
Relaxed Financial Disclosure Requirements. An EGC's IPO registration statement is not required to include more than two years of audited financial statements and selected financial data, and there is no mandatory selected financial data or MD&A discussion for periods prior to those presented in the EGC's financial statements.
Observations. FPIs that are EGCs may now find the U.S. requirements less onerous than those of other jurisdictions. Not only would it be possible for an FPI to present only two years of financial statements, but an FPI could make that presentation using IFRS.
Relief from Auditor Internal Control Attestation. EGCs are exempt from auditor attestation of internal control assessments under Sarbanes-Oxley Section 404(b). However, management will still need to report on its assessment of the effectiveness of the internal controls under Section 404(a), and the CEO and CFO will still need to certify as to that assessment under Sarbanes-Oxley.
Observations. Relief from what has long been viewed as Sarbanes-Oxley's most onerous provision in terms of compliance costs may make the U.S. public markets more attractive to FPIs. Even so, as compliance with Sarbanes-Oxley has become more routine, these requirements are no longer viewed by all companies as unduly burdensome.
Relaxed Executive Compensation Requirements. EGCs are exempt from certain compensation disclosure requirements, as well as Dodd-Frank Act "say-on-pay" voting.
Observations. FPIs continue to be able to report executive compensation based on home jurisdiction standards and to be exempt from U.S. proxy rules and thus are already enjoying relief, as an FPI, from these requirements.
Traditional 144A/Regulation S Global Equity
Private Placements. The JOBS Act requires the SEC to revise Regulation D to remove the prohibition against general solicitation and advertising in offers and sales of securities conducted under Rule 506, provided that the ultimate purchasers of securities qualify as "accredited investors" under the SEC's current definition. The legislation also requires the SEC to make comparable changes to Rule 144A to permit solicitation of non-QIBs, provided that only investors reasonably believed to be QIBs purchase the offered securities. This will be a hot topic depending on SEC rulemaking. The SEC is scheduled to provide information about its rules on August 22.
Observations. The JOBS Act provisions apply only to offerings conducted under Rule 506 and Rule 144A. Offerings conducted under Securities Act Section 4(2) (now 4(a)(2)) (frequently used by foreign issuers in rights offerings) and under the Section 4(1-1/2) doctrine (frequently used in block trades where Rule 144A is not available) will still be subject to the prohibition on general solicitation and advertising.
Although securities offered under Rule 506 are "covered securities" for purposes of the exemption from U.S. state "blue sky" laws contained in the Securities Act, securities issued in Rule 144A transactions are not covered securities and are subject to state blue sky law regulation that may preclude general solicitation or advertising in connection with a Rule 144A offering. Further state or SEC action will be required to address the inability of Rule 144A offerings to take advantage of the JOBS Act's liberalizations due to U.S. state blue sky law concerns.
Small Exempt Offerings. Regulation A currently establishes an alternative public offering regime without full SEC registration for offerings of less than $5 million. The JOBS Act requires the SEC to adopt rules to exempt offerings of up to $50 million in any 12-month period and to address the required content of the offering document and subsequent periodic reports, all of which will need to be filed with the SEC. The securities may be sold publicly, and they will not be "restricted securities" for purposes of further resale. The SEC has not set a deadline as to the required rulemaking.
Observations. Rather than being just for small offerings, FPIs may be able to use the expanded exemption for the U.S. piece of a larger global offering. This would offer investors unrestricted securities, although the issuer would be subject to some SEC disclosure and reporting obligations and stricter anti-fraud standards than would be the case for a Rule 144A offering. The "public" nature of this U.S. offering in terms of the publicity permitted could be restricted by the prohibition on directed selling efforts under Regulation S unless the SEC takes action to modify it.
Crowdfunding. The JOBS Act amends the Securities Act to permit crowdfunding, by which a company can raise limited amounts of capital from investors without registering the offering under the Securities Act. No more than $1 million can be raised by an issuer in reliance on the exemption in any 12-month period, and the amount sold to any individual investor is limited based on the investor's annual income and net worth. Securities issued in a crowdfunding transaction are restricted securities.
Observations. The crowdfunding exemption is not available for foreign issuers. Thus, an FPI wishing to take advantage of the crowdfunding exemption would need to reincorporate in the U.S.
Registration Threshold. The JOBS Act revises the threshold for registration under the Exchange Act to increase the limit on shareholders of record from 500 to 2,000 or, in the alternative, 500 persons who are not IAIs. Employees of the issuer who received shares pursuant to an employee compensation plan and investors who received shares under the crowdfunding exemption of the JOBS Act are excluded from this calculation.
Observations. Currently, Exchange Act registration thresholds are typically not an issue for FPIs, and this change should have little impact on most FPIs. FPIs that have not conducted a U.S. public offering or obtained a U.S. listing can avoid Exchange Act registration requirements through satisfying the requirements of Rule 12g3-2(b), which relies on the availability of home country disclosure. This change could help some FPIs that do not want to make the required 12g3-2(b) disclosures or that lose their FPI status. FPIs that seek to terminate their SEC reporting obligations (and any U.S. listing) may rely on alternative trading volume tests under revisions made in 2007 to the SEC's deregistration rules for FPIs.