The JOBS Act, two years later: an updated look at the IPO landscape

Latham & Watkins | The JOBS Act, Two Years Later: An Updated Look at the IPO Landscape Page 1
April 5, 2014
The JOBS Act, Two Years Later:
An Updated Look at the IPO Landscape
Page 2 Latham & Watkins | The JOBS Act, Two Years Later: An Updated Look at the IPO Landscape
CONTENTS
LESSONS LEARNED IN YEAR TWO.....................................................3
YEAR-OVER-YEAR COMPARISON.......................................................4
EGC IPOS BY THE NUMBERS..............................................................4
USE OF EGC ACCOMMODATIONS.......................................................4
Testing the Waters ..............................................................................5
Confidential SEC Review....................................................................7
The 21-Day Requirement....................................................................9
Disclosure About EGC Status...........................................................10
Scaled Financial Disclosure .............................................................10
Executive Compensation Disclosure ................................................12
Internal Controls Audit ......................................................................12
Extended Phase-In for New GAAP...................................................13
Underwriting Agreements..................................................................14
RESEARCH ISSUES.............................................................................14
CONCLUSION.......................................................................................18
ENDNOTES............................................................................................18
Two years ago, the Jumpstart Our Business Startups (JOBS) Act became law. Title I
of the JOBS Act significantly changed the IPO playbook, creating a new category
of issuer called an emerging growth company (EGC) and rewriting the rules for
EGC IPOs. In the second year after the JOBS Act became law, 85% of issuers that
priced a US IPO identified themselves as EGCs, up from 75% in the first year.
Building on our first-anniversary JOBS Act report on initial trends observed and
lessons learned, we have again conducted a detailed analysis of EGC IPOs, this
time taking a close look at 236 EGCs that priced a US IPO in year two.1
The information and analysis we present is based on our review of SEC filings, SEC
commentary on the JOBS Act and our experience as either issuer’s or underwriters’
counsel in more EGC IPOs than any other law firm. Here is what we have learned
from two years of survey data.
Latham & Watkins | The JOBS Act, Two Years Later: An Updated Look at the IPO Landscape Page 3
LESSONS LEARNED IN YEAR TWO
We continue to see similar trends. More EGCs used the JOBS Act’s
provisions for confidential submission and scaled financial disclosure in year
two than in year one, and the use of other JOBS Act provisions generally
remained consistent.
EGCs span many industries, with pharmaceutical companies representing
the largest group of EGC IPO issuers. The top five industries were
pharmaceuticals, technology, real estate, energy and healthcare.
Confidential submission has become nearly universal. Approximately 90%
of EGCs that priced an IPO in year two confidentially submitted at least one
draft registration statement prior to publicly filing.
Many EGCs are taking advantage of scaled financial disclosure. Two-thirds
of EGCs that priced an IPO in year two provided two years of audited
financial statements rather than three years.
The extended phase-in of the internal controls audit remains popular. Nearly
all EGCs that priced an IPO in year two indicated an intention to use this
accommodation or reserved the right to do so in the future.
Testing the waters has grown in popularity. Testing the waters has gained
momentum across all industries and is considered as a possibility in almost
every deal. The decision whether to test the waters depends on the specific
facts of each deal, although issuers in certain industries, such as life
sciences, tend to test the waters in nearly every deal.
Research practices remain largely unchanged. Pre-deal research in
connection with EGC IPOs has not emerged, and most market participants
voluntarily restrict the publication of research for a contractually agreed
period (typically 25 days) following the IPO. EGC research reports have
emerged during the former quiet periods surrounding lock-up waivers, as
well as secondary and follow-on offerings.
Foreign private issuer interest has increased. Foreign private issuers (FPIs)
represented almost 15% of priced US IPOs by EGCs in year two.
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EGC IPOS BY THE NUMBERS
An EGC is a company with annual revenue of less than $1.0 billion for its most recently completed
fiscal year, subject to disqualification events.3 In the past two years, companies with less than $250
million in annual revenue accounted for approximately 85% of priced EGC IPOs. During year two,
FPIs represented almost 15% of priced EGC IPOs, compared to 10% during year one.
Eleven master limited partnerships (MLPs) and 13 real estate investment trusts (REITs) priced IPOs
as EGCs during year two. As of March 31, 2014, 107 EGCs are publicly in registration with the
SEC.4 Most of these issuers are in the technology, pharmaceutical or real estate industry.
USE OF EGC ACCOMMODATIONS
Title I gives EGCs a menu of options and allows them to choose all, some or none of the on-ramp
accommodations. EGCs continue to use these accommodations to varying degrees.
• Testing the Waters – Before or after filing a registration statement, EGCs may meet with
qualified institutional buyers (QIBs) and other institutional accredited investors to gauge their
interest in a contemplated offering.
• Confidential SEC Review – EGCs may initiate the SEC registration process confidentially.
• Scaled Financial Disclosure – EGCs may go public using two years, rather than three years, of
audited financial statements and as few as two years, rather than five years, of selected financial
data.
YEAR-OVER-YEAR COMPARISON
The trends we identified in our report one year ago have either increased or held steady. The chart
below compares the data we reported one year ago to the data we gathered during the past year.2
Trend Year Two Year One
Percentage of total US IPOs completed by
EGCs
85% 75%
Percentage of EGCs that are also foreign
private issuers
15% 10%
EGCs that submitted at least one registration
statement confidentially
90% 65%
EGCs that provided only two years of audited
financial statements
65% 50%
EGCs that indicated an intention to use the
extended phase-in for Section 404(b) of
Sarbanes-Oxley or reserved the right to do
so in the future
98% 97%
EGCs providing scaled executive
compensation disclosure
85% 75%
EGCs opting out of the extended phase-in for
new accounting standards
77% 80%
Latham & Watkins | The JOBS Act, Two Years Later: An Updated Look at the IPO Landscape Page 5
• Internal Controls Audit – EGCs are exempt from the internal controls audit required by Section
404(b) of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley).
• Executive Compensation Disclosure – EGCs may use streamlined executive compensation
disclosure and are exempt from the shareholder advisory votes on executive compensation
required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-
Frank).
• Extended Phase-In for New GAAP – EGCs may use private-company phase-in periods for new
accounting standards.
• PCAOB Rules – EGCs are exempt from any Public Company Accounting Oversight Board rules
that, if adopted, would mandate auditor rotation or auditor discussion and analysis.
Testing the Waters
EGCs and their underwriters or other authorized persons may engage in oral or written
communications with QIBs and other institutional accredited investors before or after the initial filing
of a registration statement in connection with assessing investor interest in a proposed offering.5
This testing-the-waters provision significantly modified the communications restrictions under
Section 5 of the Securities Act and authorized a new way to approach the market.
Testing the waters is occurring more frequently and is especially popular in certain industries such
as life sciences and technology, where issuers tend to have shorter operating histories and often
need to communicate highly scientific or technical information to potential investors.
In other industries, the option of testing the waters is usually at least explored by the deal team
and, in our experience, is becoming a more commonly used part of the IPO playbook. The
ultimate decision whether to test the waters and the timing of these meetings depends on specific
circumstances. In our experience, the majority of testing-the-waters meetings take place after
confidential submission and before public filing, but we have also seen deals where testing-thewaters
meetings occur during the 21-day period prior to the launch of the road show. Testing the
waters can provide helpful information to EGCs and their underwriters as they determine the size
and timing of a proposed IPO.
PRACTICE POINT
Determining Which EGC Accommodations to Use
At the very beginning of the IPO process, the issuer, the underwriters and counsel should
consider which EGC accommodations to use. This discussion should take account of industry
trends, market forces, the unique facts and circumstances of the issuer and the offering as
well as materiality considerations generally. For example, some EGCs may elect to include
additional executive compensation or historical financial information on a voluntary basis
where the information is readily available and circumstances warrant its inclusion.
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EGCs must proceed carefully if they decide to test the waters with potential investors. The deal
team should consider how much detail to include in testing-the-waters materials, based on when
testing the waters occurs and bearing in mind that the antifraud provisions of the federal securities
laws apply to the content of these communications.6 As with traditional road-show materials, testingthe-
waters materials should also be reviewed for consistency with the information contained in the
registration statement. Market participants typically do not leave written testing-the-waters materials
behind.
Typical underwriter guidelines for testing-the-waters meetings specify (1) the procedures for setting
up and carrying out the meetings, (2) the parameters for the materials that can be used, (3) the
specific investors that may be approached to participate and (4) the ground rules for the meetings.
Testing-the-waters guidelines may also prohibit research analysts employed by participating firms
from attending testing-the-waters meetings and/or outline specific procedures for sales force and
investment banking personnel.
The SEC Staff has taken an interest in testing-the-waters communications and often issues a
comment seeking copies of written materials used to test the waters:
Please supplementally provide us with copies of all written communications, as defined
in Rule 405 under the Securities Act, that you, or anyone authorized to do so on your
behalf, present to potential investors in reliance on Section 5(d) of the Securities Act,
whether or not they retain copies of the communications.
Approximately 20% of EGCs that received this comment responded affirmatively by supplementally
providing written materials to the SEC Staff.7
PRACTICE POINT
Responding to the SEC Staff’s Request for Testing-the-Waters Materials
The SEC Staff has indicated a desire to review testing-the-waters materials for consistency
with the registration statement. The Staff has indicated that the materials will not be posted
to EDGAR or otherwise made public by the SEC if correctly submitted. We recommend the
following:
• Provide the materials supplementally in hard copy. Do not submit them to your SEC
examiner via email or through EDGAR.
• Include the following confidential treatment request legend on each page of the materials:
“CONFIDENTIAL TREATMENT REQUESTED BY [ISSUER NAME] UNDER SEC RULE 83”
and comply with the other requirements of Rule 83 with respect to the submission.
• In the cover letter enclosing testing-the-waters materials, cite Securities Act Rule 418(b) and
ask the SEC Staff to return the enclosed materials.
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Confidential SEC Review
EGCs (including those that are FPIs) may confidentially initiate the SEC registration process by
submitting a draft registration statement for nonpublic review by the SEC Staff.8 The Staff’s review
of a confidential submission should not take any longer than its review of a publicly filed registration
statement (expect your first set of comments within 30 days of submission).
Confidential submissions must be substantially complete when submitted to the SEC for review.
However, a confidentially submitted draft registration statement need not include the consent of
auditors or other experts and does not need to be signed because a confidential submission does
not constitute a filing under the Securities Act.9 An issuer does not need to name any underwriters in
its first confidential submission, but the SEC Staff will typically not continue substantive review of a
draft registration statement if underwriters are not named by the second submission.
Approximately 90% of EGCs that priced an IPO in year two began the IPO process with a
confidential submission. This represents a significant increase (approximately 25%) in the
percentage of EGCs that submitted confidentially as compared to year one.
PRACTICE POINT
Combining Testing the Waters and Confidential Submission
In industries where valuation is uncertain and the timing of the IPO depends on regulatory
or other approval (e.g., biotech companies awaiting FDA approval of a new drug candidate),
the ability to submit confidentially and test the waters with prospective investors can provide
additional flexibility. In these industries, EGCs and their underwriters may gain useful feedback
from prospective investors while maintaining confidentiality as they await both clearance from
industry regulators and market conditions that are favorable to the offering.
PUBLICLY FILED EGC IPOS BY INDUSTRY
0 10 20 30 40 50 60 70
Hospitality
Manufacturing
Services
Retail
Healthcare
Financial Services
Energy
Real Estate
Technology
Pharmaceutical
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PRACTICE POINT
Confidential Submission vs. Filing
The distinction between “confidential submission” and “filing” is important.
• Gun Jumping: Rule 163A provides a safe harbor from Section 5(c) of the Securities Act
for certain communications made by or on behalf of an issuer more than 30 days before
a registration statement is filed. The date of the public filing, not that of a confidential
submission, determines the availability of the Rule 163A safe harbor.10
• SEC and FINRA Filing Fees: Because a confidential submission is not a filing, EGCs do not
need to pay SEC filing fees when they confidentially submit. SEC filing fees are paid with
the first public filing. However, confidential submissions do trigger FINRA filing requirements
and payment of FINRA’s applicable filing fee (unless no FINRA member broker-dealer is yet
involved in the offering).11
• Sarbanes-Oxley: Sarbanes-Oxley applies to an issuer that has filed a registration statement
with the SEC, even if the registration statement is not yet effective. An EGC that has
confidentially submitted a draft registration statement will not be subject to Sarbanes-Oxley
(including Section 402’s prohibition on loans to directors and officers) until the registration
statement is publicly filed.
An EGC may publicly announce that it has confidentially submitted a registration statement for
SEC review, and that announcement will not constitute gun jumping if Securities Act Rule 135 is
followed.12 In the past two years, approximately 10% of confidential submissions have involved this
type of announcement. There may be strategic reasons for this type of announcement, in particular
if an EGC is engaged in a dual-track M&A process.
EGC IPOS BY ISSUER REVENUE
3% 3%
$100 to $250 million
Less than $100 million
$250 to $500 million
$500 to $750 million
$750 million up to $1 billion
69%
17%
9%
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PRACTICE POINT
Numbering Confidential Submissions and Public Filings
The confidential submission process has practical implications for how registration statements
should be numbered and how those registration statements will appear on EDGAR.
• All confidential submissions must be made via EDGAR using the draft registration statement
form type DRS or DRS/A.
• The initial confidential submission should be titled “Confidential Submission,” and
subsequent confidential submissions should be titled “Amendment No. 1 to Confidential
Submission,” “Amendment No. 2 to Confidential Submission,” etc.
• Confidential submissions typically include a header such as the following: “As confidentially
submitted to the Securities and Exchange Commission on [date] pursuant to the Jumpstart
Our Business Startups Act.”
• The first publicly filed version of the registration statement is made as an initial Form S-1 or
F-1 filing and does not denote that the filing is an amendment.
• Subsequent public amendments to the registration statement then follow the traditional
numbering format (e.g., “Amendment No. 1 to Registration Statement on Form S-1,” etc.)
and use the corresponding EDGAR form type (e.g., S-1/A).
The 21-Day Requirement
An EGC may not commence its IPO road show marketing process until at least 21 days after
publicly filing its initial confidential submission and all confidentially submitted amendments.13
Approximately 90% of EGCs that priced their IPO in year two began the registration process with a
confidential submission. On average, these companies made two confidential submissions before
their first public filing, launched their roadshow 43 days after filing publicly (124 days after the first
confidential submission) and priced 10 days after launch. This timing has been generally consistent
over the last two years.
1 2 3 4
confidential
First
submission
First
filing
public
Road s how Pricing
81 days 43 days 10 days
124 days
134 days total
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Disclosure About EGC Status
The SEC Staff expects an EGC’s registration statement to disclose its EGC status and address
related topics, such as exemptions available to EGCs, risks related to the use of those exemptions
and how and when the issuer may lose EGC status. The Staff will typically comment on each
of these points and ask the issuer to state its irrevocable election with regard to the extended
transition period for complying with new or revised accounting standards. If the issuer elects to use
the extended transition period, the Staff will expect the issuer to explain the associated risks, such
as decreased comparability with other issuers’ financial statements.
Many EGCs also choose to include additional disclosure beyond what is required, even when not
requested by the SEC Staff. For example, many EGCs briefly describe in the summary box or risk
factors the requirements for qualifying as an EGC. Even though risk factors should not describe
“risks that could apply to any issuer or any offering,” EGCs often include additional EGC-related
risk factors, such as a warning that the reduced requirements for EGCs could make the issuer’s
securities less attractive to investors or that its costs as a public company will increase further after
the issuer loses EGC status. We have summarized on the following page our recommendations for
typical EGC disclosure in an IPO registration statement.
Once they are public, most EGCs include some basic disclosure regarding their EGC status in their
annual report on Form 10-K or 20-F. This disclosure is usually limited to risk factor disclosure similar
to that which is contained in the IPO registration statement.
Scaled Financial Disclosure
At the time of its IPO, an EGC can provide two, rather than three, years of audited financial
statements and as few as two, rather than five, years of selected financial data.14 After its IPO,
an EGC must phase into full compliance by adding one additional year of financial statements in
each future year until it presents the traditional three years of audited financial statements plus two
additional years of unaudited selected financial data.15 An EGC’s MD&A may address only the years
for which it provides audited financial statements and any subsequent interim period.16
PRACTICE POINT
Financial Statements for Recently Acquired Businesses
An EGC that is required to include audited financial statements of a recently acquired business
or significant equity investee under Regulation S-X Rule 3-05 or 3-09 may present two, rather
than three, years of financial statements for these entities if the EGC is presenting only two
years of its own audited financial statements in the registration statement.17
PRACTICE POINT
The Timing Tradeoff
In considering when to make its first public filing, an EGC must weigh market uncertainty
against the possible harm associated with failing to complete an IPO that has been publicly
announced. An EGC that switches to a public process well in advance of a planned road show
can more readily take advantage of favorable market changes. However, an EGC will not want
to switch prematurely to a public process and unnecessarily give up the benefits of nonpublic
SEC Staff review of the draft registration statement.
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PRACTICE POINT
EGC-Related Disclosure for an IPO
Below is a checklist of EGC-related disclosure to include in an IPO registration statement.
• On the prospectus cover, disclose EGC status.
• In the summary box, disclose:
• a brief summary of the exemptions available to an EGC, in particular the exemption from
Section 404(b) of Sarbanes-Oxley and the executive compensation voting requirements
of Dodd-Frank, including golden parachutes (codified in Section 14A(a) and (b) of the
Exchange Act), and the ability to provide scaled executive compensation and financial
statement disclosure;
• the requirements for qualifying as an EGC and how and when the issuer may lose EGC
status; and
• if the EGC has elected to opt out of the extended transition period for complying with
new or revised accounting standards, the EGC must also indicate that this election is
irrevocable.
• In the risk factors section:
• If the EGC has chosen to take advantage of the extended transition period for complying
with new or revised accounting standards:
◦◦ the EGC must include a risk factor explaining that this allows it to delay the adoption of
new or revised accounting standards that have different effective dates for public and
private companies until those standards apply to private companies; and
◦◦ the risk factor must indicate that the EGC’s financial statements may not be comparable
to companies that comply with all public company accounting standards.
• EGCs often also include risk factors stating that:
◦◦ the reduced requirements applicable to EGCs could make the issuer’s securities less
attractive to investors;
◦◦ the issuer’s exemption from Section 404(b) of Sarbanes-Oxley’s auditor attestation
requirements may result in unsuccessful internal controls; and
◦◦ the issuer may have increased costs from operating as a public company and these
costs will increase once the issuer loses EGC status.
• In the management’s discussion and analysis (MD&A) section, if the EGC elects to follow
the extended transition period for complying with new or revised accounting standards, the
EGC must include a statement in its critical accounting policies disclosure explaining that its
financial statements may not be comparable to companies that comply with public company
effective dates.
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Nearly two-thirds of EGCs that priced an IPO in year two provided two years of audited financial
statements rather than three.18 Of those EGCs that provided three years of audited financial
statements, approximately 65% partially used the accommodation for scaled financial disclosure by
providing fewer than five years of selected financial data. This is a significant increase from year
one, during which only one-third of EGCs used scaled financial disclosure in this manner.
In year two, 86% of EGCs provided fewer than five years of selected financial data, yet only 26% of
EGCs had an operating history of fewer than five years when their IPOs priced.
Executive Compensation Disclosure
EGCs may use streamlined executive compensation disclosure.19 Eighty-five percent of EGCs that
priced an IPO in year two took advantage of this accommodation, generally by dispensing with
compensation discussion and analysis (excluding FPIs, which are not required to provide detailed
CD&A).
Internal Controls Audit
As in year one, nearly all EGCs that priced an IPO in year two indicated an intention to use the
JOBS Act’s extended phase-in for compliance with Section 404(b) of Sarbanes-Oxley or reserved
the right to do so in the future. Consistent with year one, approximately 25% of EGCs that priced
an IPO in year two disclosed a significant deficiency or material weakness in internal control over
financial reporting. None of these issuers indicated an intention to comply with Section 404(b) of
Sarbanes-Oxley sooner than required.
In March 2014, 57 EGCs that went public in 2012 filed their second annual report on Form 10-K
or 20-F.20 None of these registrants chose to comply voluntarily with the internal controls audit
provision of Section 404(b) of Sarbanes-Oxley. However, approximately 30% of these companies
complied with the internal controls audit provision of Section 404(b) because they ceased to qualify
as EGCs, in most cases because they became large accelerated filers.
PRACTICE POINT
Providing Two Years of Audited Financial Statements
The decision whether to provide two years or three years of audited financial statements
should be informed by a number of factors, including industry trends, market conditions and
other issuer- and offering-specific considerations. In our experience, for example, MLP issuers
that are EGCs find this accommodation particularly attractive because historical predecessor
financial statements for MLP issuers are often hard to produce, and creating fewer years can
save significant time and cost and get the issuer to market more quickly.
This accommodation may also benefit issuers that have recently changed audit firms, allowing
the new auditors to avoid re-auditing the third year of historical financial statements, resulting
in cost savings for the issuer and a faster time to market. In this situation, we have also seen
issuers present a third year of unaudited financial statements.
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Extended Phase-In for New GAAP
Seventy-seven percent of EGCs that priced an IPO in year two (excluding FPIs that use IFRS)
irrevocably opted out of the accommodation for the extended phase-in for new accounting standards
and elected from day one to follow the public company phase-in periods for new or revised
accounting standards. This is consistent with the trend in year one.
PRACTICE POINT
Opting Out of the Extended Phase-In
An EGC wishing to opt out of the extended phase-in for new or revised accounting standards
must disclose this election in the first registration statement that is submitted to the SEC,
regardless of whether it is a confidential submission or public filing.21
If an EGC decides not to opt out of the extended phase-in, the SEC Staff will require (i) a risk
factor that indicates that the EGC’s financial statements may not be comparable to those of
other companies that follow public company accounting standards and (ii) a similar statement
in the critical accounting policies disclosure in the MD&A.
• Sample Opt-Out Disclosure: “Section 107 of the JOBS Act provides that an emerging
growth company can use the extended transition period provided in Section 7(a)(2)(B) of
the Securities Act for complying with new or revised accounting standards. This permits an
emerging growth company to delay the adoption of certain accounting standards until those
standards would otherwise apply to private companies. We have irrevocably elected not
to avail ourselves of this extended transition period and, as a result, we will adopt new or
revised accounting standards on the relevant dates on which adoption of such standards is
required for other companies.”
• Sample Disclosure for Extended Phase-In: “We have elected to use the extended
transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new
or revised accounting standards that have different effective dates for public and private
companies until the earlier of the date we (i) are no longer an emerging growth company or
(ii) affirmatively and irrevocably opt out of the extended transition period provided in Section
7(a)(2)(B).”
EGC LISTINGS
NYSE
NASDAQ
59%
41%
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Underwriting Agreements
The JOBS Act brought changes to the typical representations, warranties and covenants found in
underwriting agreements.
EGCs may be asked to provide standard representations and covenants to their underwriters
related to:
• EGC status;
• whether to engage in testing the waters and, if so, who may engage in those activities; and
• the contents of testing-the-waters materials.
JOBS Act-related provisions in underwriting agreements have generally remained unchanged
over the past year, with a few exceptions. Almost all EGC underwriting agreements filed in year
two included a representation by the issuer that it is an EGC. Fewer underwriting agreements
included a representation by the issuer that it had not engaged in any testing-the-waters activities
or distributed any written testing-the-waters materials as compared to year one. A majority of EGC
underwriting agreements included a representation by the issuer confirming that the underwriters
were authorized to conduct testing-the-waters activities on the issuer’s behalf and confirming that
no one other than the lead underwriters was authorized to engage in such activities.
Nearly half of EGC underwriting agreements contained a representation that there were no material
misstatements or omissions in any testing-the-waters materials. In a majority of EGC underwriting
agreements, the indemnity and contribution provisions covered any written testing-the-waters
communications. Only a few EGC underwriting agreements included a representation by the issuer
stating that it would timely file the registration statement 21 days before any road show or one
affirming that no one would engage in any testing-the-waters activities. Similar to year one, we
found a handful of instances in which EGCs agreed to reimburse their underwriters for expenses
related to testing-the-waters activities.
Nearly all EGC underwriting agreements filed in year two included a covenant requiring the EGC to
notify the underwriters of any change in its EGC status, while a majority also included a covenant
requiring the EGC to inform the underwriters of any change that would cause previously distributed
testing-the-waters materials to contain a material misstatement or omission.
RESEARCH ISSUES
The JOBS Act modified the rules of the road relating to analyst research reports and analyst
interactions with non-research personnel in a number of significant ways.
First, Section 105(a) of the JOBS Act amended Securities Act Section 2(a)(3) to provide an
exception from the definition of offer for purposes of Sections 2(a)(10) and 5(c) of the Securities
Act for research reports issued by a broker-dealer regarding an EGC that is the subject of a
proposed public equity offering. For purposes of this exception, a “research report” is defined
expansively to include any “written, electronic, or oral communication that includes information,
opinions, or recommendations with respect to securities of an issuer or an analysis of a security
or an issuer, whether or not it provides information reasonably sufficient upon which to base an
investment decision.” Accordingly, on its face, the definition of research report for purposes of this
provision would encompass nearly any written or oral communication relating to an EGC issuer or
its securities made by a broker-dealer. The SEC Staff, however, has indicated that it will view this
definition somewhat more narrowly and in a manner consistent with how it views research reports
that are issued pursuant to Rule 139 under the Securities Act.22 Importantly, this means that the
Staff believes the Section 2(a)(3) exception is generally available only for research reports issued
Latham & Watkins | The JOBS Act, Two Years Later: An Updated Look at the IPO Landscape Page 15
by persons within a broker-dealer who function as research analysts and not by other broker-dealer
personnel (e.g., sales and trading personnel).
Second, the JOBS Act prohibited the SEC and FINRA from adopting or maintaining any rule or
regulation in connection with an IPO of an EGC that:
• restricts based on “functional role” which employees of a broker-dealer may arrange for
communications between research analysts and prospective investors;
• prohibits research analysts from participating in communications with company management in
the presence of non-research personnel (e.g., investment banking and sales force personnel); or
• prohibits the publication or distribution of a research report or making of a public appearance
within any prescribed period of time either (a) following the pricing date of the EGC’s IPO, or (b)
prior to the expiration date of a company or shareholder lock-up agreement.
As a result, the JOBS Act effectively superseded for EGC IPOs existing FINRA rules that imposed
research quiet periods during the 40 days (or, for participating firms other than managers and
co-managers, the 25 days) immediately following an IPO, as well as during the 15 days preceding
the expiration of a company or shareholder lock-up agreement with the underwriters.23 The JOBS
Act also effectively eliminated for EGC IPOs a FINRA interpretation24 that prevented research
analysts from participating in communications with internal sales personnel in the presence of
company management, as well as other FINRA guidance that was generally viewed as restricting
the ability of research analysts to participate in communications (other than for offering-related due
diligence purposes) with company management in the presence of investment banking personnel.
The JOBS Act, however, did not provide a safe harbor for research reports from liability under
Exchange Act Rule 10b-5 or other federal and state antifraud provisions of the US securities laws.
Moreover, the JOBS Act did not provide a safe harbor under Section 12(a)(2) of the Securities
Act with respect to oral research reports. Consequently, an oral research report could still result in
Section 12(a)(2) liability if it is deemed to constitute an offer of a security and meets the criteria for
liability under that provision.
SEC and FINRA Response
On August 22, 2012, the staff of the SEC’s Division of Trading and Markets issued a series of FAQs
regarding the research-related provisions of the JOBS Act (the Research FAQs).25 In response to
the Research FAQs, FINRA submitted a rule change proposal that was approved by the SEC on
October 11, 2012.26 In addition to the changes mandated by the JOBS Act, FINRA also implemented
a suggestion from the Research FAQs to eliminate the research quiet periods following an EGC
secondary or follow-on offering and during the 15 days after (not only before) the expiration,
termination or waiver of an EGC lock-up agreement.27
Importantly, the Research FAQs confirm that the provisions of the JOBS Act that permit certain
communications between research analysts and investment bankers and other non-research
personnel and that allow research analysts to be present during communications between EGC
management and investment banking personnel relating to a proposed IPO (including during
pre-mandate pitch meetings) do not change the restrictions applicable to firms that are party to
the Global Research Analyst Settlement.28 The Research FAQs also caution that while research
analysts from non-settling firms can be present during EGC IPO pitch meetings pursuant to the
provisions of the JOBS Act, those analysts are still prohibited under FINRA rules from engaging in
efforts to solicit investment banking business. Because of this caution and the difficulties of drawing
lines between permissible and prohibited conduct, many firms are continuing to employ pre-JOBS
Act policies and procedures that prevent research analysts from attending investment banking pitch
meetings.
Page 16 Latham & Watkins | The JOBS Act, Two Years Later: An Updated Look at the IPO Landscape
Although investment banking personnel of non-settling firms may now assist in the arranging of
communications between research analysts and current or prospective investors in connection with
a proposed EGC IPO, FINRA rules continue to prohibit investment banking personnel from directing
research analysts to engage in such communications or in sales and marketing efforts regarding an
investment banking transaction. Research analysts also continue to be prohibited from participating
in road shows or engaging in communications with current or prospective investors regarding
an investment banking transaction in the presence of investment banking personnel or company
management.29
Pre-Deal Research
In addition to requesting copies of testing-the-waters materials, the SEC Staff often issues a comment
relating to pre-deal research:
Please supplementally provide us with any research reports about you that are published
or distributed in reliance upon Section 2(a)(3) of the Securities Act as modified by Section
105(a) of the JOBS Act by any broker or dealer that is participating or will participate in
your offering.
To date, we are not aware of any pre-deal research reports published by participating broker-dealers
in reliance on the new exception for EGC research reports added by Section 105(a) of the JOBS Act.
This appears to be the result of both regulatory and practical limitations relating to the preparation
and issuance of pre-deal research reports including:
• the continuing Global Research Analyst Settlement limitations applicable to settling firms (and
other firms that have otherwise agreed to comply with the settlement’s substantive provisions) on
communications between investment banking personnel and research analysts;
• FINRA rules that prohibit investment banking personnel from directing research analysts to engage
in investor communications or sales and marketing activities relating to an investment banking
transaction;
• the time necessary to produce a well-reasoned report that reflects the analyst’s own personal views
and satisfies FINRA and other content requirements (including that it be fair and balanced, provide
a sound basis for evaluating the facts relative to the security covered, and not omit any material fact
or qualification necessary in order to make the statements made in the report not misleading);
PRACTICE POINT
Responding to SEC Comments Seeking Pre-Deal Research Materials
If there has been no pre-deal research coverage of an EGC, you may wish to use some
variation of the following responses to SEC comments seeking pre-deal research materials:
• As of the date of this letter, the Company is not aware of any research reports about the
Company that have been published or distributed in reliance upon Section 2(a)(3) of the
Securities Act (as modified by Section 105(a) of the JOBS Act) by any broker or dealer that
is currently participating or is expected to participate in the offering.
• As of the date of this letter, the underwriters participating in the Company’s initial public
offering have confirmed to the Company that they have not published or distributed any
research reports about the Company in reliance upon Section 2(a)(3) of the Securities Act
as modified by Section 105(a) of the JOBS Act.
Latham & Watkins | The JOBS Act, Two Years Later: An Updated Look at the IPO Landscape Page 17
• FINRA restrictions with respect to previewing a research report with the subject company; and
• general liability, selective disclosure and issuer entanglement concerns, particularly if the analyst
has been engaged in vetting discussions or has been provided with company models or estimates
that are not yet reflected in a publicly filed registration statement or are otherwise known to the
general public.
Note, too, that the publication by participating broker-dealers of a research report regarding an EGC
may be prohibited during the restricted period applicable to securities distributions under Rule 101
of the SEC’s Regulation M. For IPOs, the Rule 101 restricted period will generally commence five
business days prior to the pricing date and end upon the completion of the distribution (as determined
in accordance with Regulation M). Thus far, the SEC has not indicated how or if it will modify
Regulation M in response to the JOBS Act.
We are aware of a small number of pre-deal research reports by non-participating firms.30
Post-Offering Research
Although the JOBS Act and subsequent FINRA rulemaking have eliminated post-IPO research quiet
periods for EGCs under Rule 2711(f), and thus would allow participating broker-dealers to publish
research reports on an EGC immediately after the IPO pricing date, it has become common for
the lead underwriters in EGC IPOs to impose by contract a research quiet period on members of
the underwriting syndicate. This voluntary research quiet period typically lasts (in the case of EGC
IPOs that will be listed on an SEC-registered national securities exchange) until the 25th calendar
day following the IPO effective date. This approach reflects the view of many industry participants
that investors should be looking to the information provided in the prospectus during the prospectus
delivery (or availability) period set forth in Securities Act Rule 174(d) and allows the covering analysts
time to prepare their research reports and provide analysis that takes into account the information
included in the final prospectus as well as post-offering developments.
As noted above, FINRA rulemaking adopted in response to the JOBS Act has also eliminated for
EGCs the 10-day research quiet periods applicable to secondary offerings and the research quiet
periods applicable during the 15 days both before and after the expiration, termination or waiver of
a lock-up agreement entered into between the underwriters and the company or its shareholders.31
Participating underwriters appear to be taking advantage of this liberalization of the rules and are
publishing research reports during these previously blacked-out periods in the ordinary course.
PRACTICE POINT
Scope of Syndicate Research Restrictions
In cases where the EGC issuer is a subsidiary or spin-off of a parent company for which the
Rule 139 safe harbor is available, consideration should be given as to whether the applicable
syndicate research restrictions would allow a participating underwriter to continue to publish on
the parent company. For example, a research report on the parent company may be viewed as
a backdoor report on the subsidiary EGC if segment or other identifying information is provided
with respect to the EGC. In addition, if the analyst covering the parent is involved in vetting the
EGC offering and is in possession of material nonpublic information regarding the EGC or the
transaction that would need to be disclosed in the parent company report in order to comply
with FINRA content requirements or Exchange Act Rule 10b-5 or other disclosure principles,
it may not be possible for the analyst to continue to publish on the parent company. Outside
counsel and/or internal legal and compliance personnel should be consulted in such situations.
Page 18 Latham & Watkins | The JOBS Act, Two Years Later: An Updated Look at the IPO Landscape
CONCLUSION
Over the past two years, the standard IPO playbook has changed to include confidential submission,
scaled financial disclosure, extended relief from Section 404(b) of Sarbanes-Oxley and streamlined
executive compensation disclosure. Market practices surrounding testing the waters have also
emerged, and most deal teams at least consider whether to test the waters. Research practices
generally remain consistent with the status quo that existed prior to the JOBS Act’s passage. The
extended phase-in for new accounting standards has not gained much favor with EGCs. In sum,
the trends we identified in our report one year ago have continued or increased as EGCs and other
market participants have adopted a new IPO playbook.
ENDNOTES
1 Since March 31, 2013, approximately 550 issuers identifying themselves as EGCs have publicly filed a registration statement with
the SEC. Out of this group, we reviewed the SEC filings of 236 issuers that successfully completed an IPO listed on a major US
securities exchange. We excluded from our data set certain REIT offerings made on a best efforts basis and all offerings by closedend
investment companies made on Form N-2.
Unless otherwise noted, the data in this report are as of March 31, 2014 and are derived from the SEC filings of 236 EGC issuers as
described above. We refer to this information as the year two data. When we refer to year one, we are referencing the data contained
in our report of April 5, 2013, entitled “The JOBS Act After One Year: A Review of the New IPO Playbook.”
Since March 31, 2013, 280 issuers (both EGCs and non-EGCs) successfully completed an IPO listed on a major US securities
exchange.
2 The percentages listed in the year two column refer to the percentage of EGC IPOs that priced during the period, excluding certain
offerings as described in note 1 above. The percentages listed in the year one column refer to the percentage of 184 EGC issuers that
publicly filed a registration statement during the period. We selected these 184 issuers for review in connection with our report of April
5, 2013 based on (i) their successful completion of an IPO listed on a major US securities exchange or (ii) our belief that they were
likely to complete such an IPO, excluding certain offerings as described in note 1 above.
3 See JOBS Act Sections 101(a) and (b) (adding new Section 2(a)(19) of the Securities Act of 1933 and Section 3(a)(80) of the
Securities Exchange Act of 1934). After the initial determination of EGC status, a company will remain an EGC until the earliest of:
• the last day of any fiscal year in which the company earns $1.0 billion or more in revenue;
• the date when the company qualifies as a “large accelerated filer,” with at least $700 million in public equity float;
• the last day of the fiscal year ending after the fifth anniversary of the IPO pricing date; or
• the date of issuance, in any three-year period, of more than $1.0 billion in non-convertible debt securities.
EGC status will ordinarily terminate on the last day of a fiscal year. However, the issuance in any three-year period of more than $1.0
billion in non-convertible debt securities would cause an issuer to lose its EGC status immediately. For purposes of this calculation,
all debt securities (whether outstanding or not) count towards the $1.0 billion limit. Debt securities issued in an A/B exchange offer do
not count towards the $1.0 billion limit, since they are, in effect, “the completion of the capital-raising transaction.” See SEC Division
of Corporation Finance, “JOBS Act FAQs: Generally Applicable Questions on Title I of the JOBS Act” (Sept. 28, 2012), available at
http://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htm (SEC Title I FAQs), Question 18. EGC status is generally
unavailable to any public company that priced its IPO on or before December 8, 2011. See SEC Title I FAQs, Question 2.
4 This number includes those EGC IPOs that we believe are likely to successfully complete an IPO listed on a major US securities
exchange, excluding certain offerings as described in note 1 above.
5 See JOBS Act Section 105(c) (adding new Securities Act Section 5(d)).
6 The application of Exchange Act Rule 15c2-8(e) to testing-the-waters activities was clarified in Question 1 of JOBS Act-related
frequently asked questions published by the SEC Division of Trading and Markets. See SEC Division of Trading and Markets,
“Jumpstart Our Business Startups Act Frequently Asked Questions About Research Analysts and Underwriters” (Aug. 22, 2012),
available at http://www.sec.gov/divisions/marketreg/tmjobsact-researchanalystsfaq.htm (the Research FAQs), Question 1. As
PRACTICE POINT
EGC Lock-Up Agreements
In our experience, lock-up agreements are generally signed in connection with the first public
filing. Lock-up agreements for EGCs no longer need to include provisions designed to extend
the end date of the lock-up agreement in the event that the company issued an earnings
release or another significant event involving the company occurred during a specified period
prior to the scheduled lock-up expiration date.32 These provisions are no longer necessary in
light of the adoption of Rule 2711(f)(5).33
Latham & Watkins | The JOBS Act, Two Years Later: An Updated Look at the IPO Landscape Page 19
discussed in the answer to Question 1, it should be possible for testing-the-waters activities to take place in a manner consistent
with the requirements of Rule 15c2-8(e) (which generally has been interpreted to require the availability of a red herring prospectus
prior to soliciting orders for the registered securities). In particular, the answer to Question 1 states that an underwriter should
generally be able to seek non-binding indications of interest from prospective investors (including as to the number of shares they
may seek to purchase at various price ranges) so long as the underwriters are not soliciting actual orders and the investors are not
otherwise asked to commit to purchase any particular securities.
7 Based on our review of publicly available SEC Staff comment letters from year two, the Staff issued this comment to 142 EGCs, of
which 29 responded in the affirmative.
8 See JOBS Act Section 106(a) (adding new Securities Act Section 6(e)(1)).
9 See SEC Division of Corporation Finance, “JOBS Act FAQs: Confidential Submission Process for Emerging Growth Companies
(Apr. 10, 2012), available at http://www.sec.gov/divisions/corpfin/guidance/cfjumpstartfaq.htm, Question 7. In addition, a confidential
submission does not constitute a filing for purposes of Sarbanes-Oxley.
10 See Latham & Watkins Client Alert “The JOBS Act After Two Weeks: The 50 Most Frequently Asked Questions,” available at http://
www.lw.com/thoughtLeadership/jobs-act-faqs, Question 35; cf. SEC Title I FAQs, Question 3 (“The date of the initial confidential
draft submission is not the ‘initial filing date’. . . since it is not the filing of a registration statement.”).
11 See FINRA Rule 5110(b)(4).
12 See Securities Act Rule 135 (providing a safe harbor for a limited public announcement of a proposed registered offering). The
SEC Staff has informally confirmed that Rule 135 is available for an EGC wishing to announce its confidential submission of a draft
registration statement in connection with a proposed IPO.
13 See JOBS Act Section 106(a).
14 See JOBS Act Section 102(b)(1) (adding new Securities Act Section 7(a)(2)).
15 See JOBS Act Section 102(b)(2) (modifying Exchange Act Section 13(a)).
16 See JOBS Act Section 102(c) (modifying Regulation S-K, Item 303(a)).
17 SEC Title I FAQs, Question 16.
18 Excluding EGCs with fewer than three years of operating history, approximately 55% of these EGCs provided two years of audited
financial statements.
19 See JOBS Act Section 102(c) (modifying Regulation S-K, Item 402).
20 Prior to the enactment of the JOBS Act, all newly public companies had until their second annual report to comply with Section
404(b) of Sarbanes-Oxley.
21 See SEC Title I FAQs, Question 13. For an EGC that does not opt out of the extended phase-in, the SEC Staff has confirmed that
the EGC may later choose to comply with new or revised accounting standards on the effective dates that apply to non-EGCs,
provided that the EGC must then affirmatively and irrevocably opt out of the extended transition period. See SEC Title I FAQs,
Question 37.
22 Securities Act Rule 139 provides a safe harbor for the issuance of research reports by broker-dealers participating in an offering of
securities by certain seasoned issuers that is similar to amended Section 2(a)(3). Unlike Section 2(a)(3), however, Rule 139 is not
available for the initiation of research regarding an issuer or its securities and covers only written (not oral) communications. Note
also that this definition of research report is different from the manner in which a research report is defined for purposes of SEC
Regulation AC as well as for purposes of FINRA’s NASD Rule 2711 (Rule 2711).
23 See Rule 2711(f)(1)(A), (f)(2) and (f)(4).
24 See FINRA Notice 05-34 (May 2005).
25 See note 6 above.
26 See SEC Release No. 34-68037 (Oct. 11, 2012).
27 The changes expressly mandated by the JOBS Act were effective retroactively to April 5, 2012. The other changes adopted to
further the policies of the JOBS Act, but not expressly mandated by the provisions of the JOBS Act, were effective as of October 11,
2012. See FINRA Notice 12-49 (Nov. 2012).
28 The Global Research Analyst Settlement (the Settlement) was entered into in 2003 between a number of major investment banks
and the SEC and other regulators. Although the terms of the Settlement were amended in 2004 and 2010 to modify and remove
certain requirements (largely due to the adoption by FINRA of similar requirements applicable on an industry-wide basis), the
remaining provisions of the Settlement are still in effect. The terms of the Settlement may be modified only by court order or by an
SEC or FINRA rule or interpretation that is expressly stated to supersede a particular provision of the Settlement. The SEC and
FINRA have indicated that they are not inclined to modify the terms of the Settlement in response to the JOBS Act.
29 In addition, analyst communications continue to be subject to certification and other requirements under SEC Regulation AC and to
the content, approval, supervision, compensation and other requirements of Rule 2711 and FINRA Rule 2210 (regarding member
communications with the public).
30 Nearly all of these research reports were simply initiating coverage of the issuer and did not include a price target or a rating.
31 See Rule 2711(f)(1)(B), (f)(4) and new (f)(5).
32 These extension provisions were included to allow research analysts to continue to publish research around the time of the
earnings release or other significant event without running afoul of the research quiet periods set forth in Rule 2711(f)(4).
33 Although a waiver of an EGC lock-up will no longer trigger the imposition of research quiet periods under Rule 2711, the waiver
itself may still require the issuance of a press release pursuant to FINRA Rule 5131, depending on the nature of the waiver and the
persons for whom the restrictions are being waived.
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