On August 22, 2012, the staff of the Securities and Exchange Commission (SEC) released answers to frequently asked questions (FAQs) about certain research provisions of Title I of the Jumpstart Our Business Startups Act (JOBS Act), including provisions regarding analyst communications, testing the waters and post-offering communications. Some of the notable FAQs are described below.
1. Testing the Waters and Rule 15c-8(e)
Question 1 of the FAQs addresses whether the ability of an emerging growth company to "test the waters" under Section 105(c) of the JOBS Act conflicts with Rule 15c2-8(e) under the Securities Exchange Act of 1934 ("Exchange Act"). Section 105(c) of the JOBS Act amends Section 5 of the Securities Act of 1933 ("Securities Act") to permit an emerging growth company or its personnel to engage in communications with potential investors that are qualified institutional buyers or institutions that are accredited investors either prior to or following the date of filing of a registration statement. The JOBS Act did not, however, amend Rule 15c2-8, which states that it is a deceptive act or practice for a broker or dealer to participate in the distribution of securities with respect to which a registration statement has been filed under the Securities Act unless, among other things, the broker or dealer takes reasonable steps to make available a copy of the preliminary prospectus relating to the securities to each of that broker's or dealer's associated persons who are expected, prior to the effective date of the registration statement, to solicit customers' orders for the securities. Because a prospectus would likely not be available at the time that an underwriter "tests the waters" pursuant to the JOBS Act, it was unclear whether these activities might be interpreted as "solicitations" under Rule 15c2-8(e).
The FAQs state that "testing the waters," as contemplated by the JOBs Act, can take place in a manner that is consistent with Rule 15c2-8. The staff explained that an underwriter may seek non-binding indications of interest from its customers in relation to a potential offering to assist the underwriter in determining the appropriate price, volume and market demand. The staff noted that requesting this non-binding indication of interest would likely not constitute "soliciting" a customer order for the purposes of Rule 15c2-8(e). Furthermore, the staff also noted that Rule 15c2-8 is only applicable where a registration statement has been filed with the SEC under the Securities Act. The staff explained that a confidential submission of a draft registration statement will not be considered the filing of a registration statement that invokes Rule 15c2-8.
2. No Effect on the Global Settlement
The response to Question 2 of the FAQs clarifies that the JOBS Act does not amend or modify the settlement that was entered into in 2003 and 2004 among the SEC, self-regulatory organizations (SROs) and 12 large broker-dealers regarding conflicts of interest between the firms' research and investment banking functions. Accordingly, those firms remain subject to the settlement. The staff noted that the settlement can be modified by the SEC, if the SEC adopts a rule "with the stated intent to supersede" a provision of the settlement.
3. Arranging Communications Between Analysts and Potential Investors
Question 3 of the FAQs addresses the uncertainty of whether an associated person of a broker-dealer, including investment banking personnel, may arrange communications between analysts and investors in light of the rules of the SEC and SROs. The staff explained that neither the SEC nor any of the SROs has a rule that directly prohibits this activity. Nevertheless, the staff commented that it believes that arranging communications between analysts and investors, without more, would not violate NASD Rule 2711(c)(6) or NYSE Rule 472(b)(6)(ii). The staff explained that appropriate activity would include an investment banker forwarding a list of clients to the analyst that the analyst could contact at his or her own discretion and with appropriate controls. The staff noted that investment bankers can also arrange, but not participate in, calls between analysts and clients.
The FAQs are available on the SEC's website: