Over the past two years, Dechert has witnessed a noticeable increase in interest from non-U.S. companies in pursuing a listing of equity securities on a U.S. securities exchange. This has been due in part to the continued appetite for new issues in the U.S. equity markets and the Jumpstart Our Business Startups Act, or the “JOBS Act”, which after its enactment in 2012 has made it easier for “emerging growth companies” (defined by the JOBS Act as a company with less than $1.0 billion in revenues in its last fiscal year), to offer equity securities in those markets. This article will highlight some of the benefits to a non-U.S. company of becoming a public company in the United States and why it should be viewed as a potential exit option for certain non-U.S. portfolio companies held by private equity sponsors.
A “foreign private issuer”, as defined by applicable SEC rules, has for many years enjoyed advantages over domestic U.S. public companies, including less voluminous SEC disclosure obligations and numerous exemptions from the listing rules of the primary U.S. securities exchanges (NASDAQ/NYSE). Some of these regulatory concessions include:
- Significantly lessened Exchange Act reporting obligations, including quarterly reporting not being required unless dictated by home country rules and less extensive current reporting;
- General exemptions from the applicable rules of the SEC and NASDAQ/NYSE governing the solicitation of proxies;
- Ability to continue to follow certain corporate governance practices in accordance with home country rules in lieu of the otherwise applicable NASDAQ/NYSE listing rules;
- Relaxed rules relating to intentional disclosures of material non-public information under Regulation FD; and
- Exemptions from the insider reporting obligations (forms 3, 4 and 5) and the short-swing profit rules of Section 16 of the Exchange Act.
Similarly, the JOBS Act has eased many of the regulatory burdens imposed on smaller companies seeking to access the U.S. equity markets, assuming they qualify as “emerging growth companies.” Because emerging growth companies are not limited to U.S. domestic companies, many foreign private issuers also qualify as emerging growth companies and thus can take advantage of further relief from the regulatory burdens of being a U.S. public company. Among these benefits, an emerging growth company:
- Can submit its draft registration statement to the staff of the SEC for review on a confidential basis prior to any public filing (provided that the draft registration statement and any applicable amendments are publicly filed at least 21 days prior to the start of the company’s roadshow);
- Can engage in oral or written communications with qualified institutional buyers and institutional accredited investors to gauge interest in the equity offering prior to the traditional roadshow (so called “testing the waters” communications);
- Is permitted to present only two years of audited financial statements in its registration statement and to exclude certain other financial information for periods prior to those presented in the registration statement; and
- Are not required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the “Sarbanes-Oxley Act.”
As a result, a non-U.S. company that qualifies as both a foreign private issuer and an emerging growth company is uniquely positioned to take advantage of the benefits associated with being a U.S. publicly traded company while mitigating, to an extent not available to other companies, the associated burdens. The potential benefits of being a U.S. publicly traded company include:
- Greater valuation potential versus a listing on a local or regional exchange in its home country;
- Increased visibility and worldwide market credibility;
- Ready access to the largest and most liquid capital markets in the world;
- Comparability with its peer companies in the United States;
- Enhanced ability to attract and retain key officers and employees by offering them equity-based compensation in a U.S. publicly traded company;
- U.S. investors tend to be more amenable to highly levered companies, which is common for a private equity portfolio company;
- Research coverage by U.S. based analysts; and
- Expansion of potential exit options in the United States.
Public equity offerings in the United States are an established exit option for domestic portfolio companies controlled by private equity sponsors. As one might expect, the number of initial public offerings (IPOs) by such companies has risen in 2013 in line with the increase in the number of IPOs generally, including the recently completed IPOs of Hilton Worldwide and Aramark Holdings. Whether the applicable private equity sponsor can achieve any liquidity in connection with an IPO (i.e., can sell any of its shares in the portfolio company) is largely dependent on the specific circumstances of the portfolio company. In most cases, for a private equity sponsor to achieve full liquidity, one or more registered secondary offerings will also need to be conducted following an IPO.
Pursuing a U.S. public equity offering and subsequent listing on NASDAQ/NYSE as a potential exit option is not without its drawbacks. For example, structuring considerations, including whether the shares being offered will be American Depositary Shares (rather than a direct listing of the company’s shares), must be carefully considered, which can be a time consuming process. The costs involved, including underwriting commissions, accounting and legal fees and other expenses, can be substantial, both with respect to the offering process itself and the company’s ongoing compliance obligations. In addition, while mitigated by the JOBS Act, U.S. public companies are still subject to various requirements under the Sarbanes-Oxley Act and related rules, including those that require the establishment and maintenance of effective disclosure and financial controls. Finally, U.S. publicly traded companies are subject to potential liability under the U.S. federal securities laws and the risk of related class action lawsuits that often arise in connection with alleged violations of such laws or in connection with fluctuations in a company’s stock price on NASDAQ/NYSE; provided that the enforceability of any judgment resulting from such a lawsuit would be subject to the relevant company’s home country rules.
Having a well thought-out exit strategy for a portfolio company investment, particularly in a non-U.S. company, is important to the overall success of that investment. As the U.S. economy continues to emerge from the Great Recession and activity on the U.S. equity markets continues to be robust, a private equity sponsor should consider whether a U.S. listing for one or more of its non-U.S. portfolio companies offers an attractive exit option given the dual benefits of potentially qualifying as a foreign private issuer and an emerging growth company under the JOBS Act.