The U.S. Securities and Exchange Commission recently announced1 an expansion of nonpublic review of draft registration statements for initial public offerings, initial registrations of classes of securities under Section 12(b) of the Exchange Act and follow-on offerings made within twelve months of IPOs and initial Exchange Act registrations.
Starting on July 10, 2017, all issuers (except issuers of asset-backed securities) may voluntarily file draft registration statements with the SEC for nonpublic review.
Nonpublic review will be available for IPOs, initial Exchange Act registrations, and in the twelve months following an IPO or initial Exchange Act registration.
Nonpublic review will be granted for the initial submission and any revisions, except in the case of follow-on offerings, where any revisions will have to be made in public filings following established practice.
All materials that receive nonpublic review will eventually need to be filed publicly.
Requests for confidential treatment under Rule 83 are still recommended.
Generally, issuers that would like to sell equity securities to the public must file a registration statement that is open to public scrutiny even while it is in preliminary form and under review by the SEC. That process has been blamed for discouraging companies from raising capital in the public markets because of the lengthy exposure to public scrutiny and the stigma associated with failing to complete an IPO successfully.2 In response to that criticism and desiring to expedite capital-raising for smaller companies, Congress passed the Jumpstarting Our Business Startups Act of 2012 (the JOBS Act), which has been enormously popular, enabling emerging growth companies (EGCs)3 to keep their filings confidential until their plans solidified.
Now, to boost capital raising further, the SEC is giving more companies the ability to use the nonpublic review procedure, including those whose revenue are too high to qualify as EGCs. The change is part of the SEC’s “ongoing efforts to facilitate capital formation.”4
As part of the expansion, SEC staff will grant nonpublic review to registration statements and related revisions in connection with IPOs for all issuers (except issuers of asset-backed securities), not just EGCs. In addition, confidential review is available in connection with the initial registration of a class of securities under Section 12(b) of the Securities Exchange Act of 1934 (the Exchange Act). This provision will benefit issuers who want to have their shares publicly traded on an exchange, but do not want or need to raise capital. In the case of an IPO, the issuer will need to confirm in a cover letter that it will publicly file the registration statement and all nonpublic draft submissions at least 15 days prior to its roadshow or the requested effective date of the registration statement, whichever is earlier. In the case of an initial registration of a class of securities pursuant to Section 12(b) of the Exchange Act, such cover letter needs to state that the issuer will publicly file the registration statement and all nonpublic draft submissions at least 15 days prior to the requested effective date of the registration statement.
Nonpublic review is also available for registration statements submitted prior to the end of the twelfth month following the effective date of either an IPO or an initial registration of a class of securities pursuant to Section 12(b) of the Exchange Act. For such follow-on registration statements, only the initial draft submission will receive nonpublic review, and issuers will need to confirm in a cover letter that they will publicly file the registration statement and nonpublic draft submission at least 48 hours prior to the requested effective time and date of the registration statement. Nonpublic review of follow-on registration statements may help in bridging a confidentiality gap that currently exists between when a company first enters the public market and when that same company might become eligible to file a shelf registration that is automatically effective. Companies that are eligible to file an automatically effective shelf registration can time the effectiveness of the shelf registration to their needs, without the risk that their intention to do a public offering is widely known at the same time that they are waiting to clear comments with the SEC. Within twelve months following an IPO or initial Exchange Act registration, companies that are not eligible to file automatically effective shelf registrations will be able to undergo the initial part of the SEC review process without publication of their intent to undertake a public offering.
The decision whether to use the newly announced nonpublic review process remains a strategic one. For example, companies considering whether to pursue an M&A sale or an IPO (a dual-track process) may choose not to utilize nonpublic review of drafts and to make public their intentions as early as possible.
Nonpublic review will not be available for draft post-effective amendments to effective registration statements.
Foreign private issuers (FPIs) may also take advantage of nonpublic review, even if they do not qualify as EGCs. Accordingly, FPIs may elect to follow the guidance offered by the SEC’s Division of Corporation Finance in May, 2012 guidance, under which certain FPIs have been permitted to submit draft registration statements for nonpublic review.
In its June 29, 2017 announcement, the SEC also stated that it would not withhold review of registration statements solely because a draft does not include financial information that the issuer reasonably believes will not be required at the time of effectiveness.
Issuers wishing to take advantage of the expanded nonpublic review of registration statements must submit their draft registration statements in the same manner as EGCs. Issuers without EDGAR access codes will need to obtain such codes and indicate on the relevant form that they intend to file under Section 106 of the JOBS Act, even if they are not EGCs.
Although the change in SEC policy extends some benefits of EGC status to all filers, many other benefits remain the exclusive privilege of EGCs. In a set of Frequently Asked Questions regarding the change, SEC staff clarified that non-EGCs may not engage in “testing the waters” pre-marketing. Furthermore, the confidentiality provisions of Section 6(e)(2) of the Securities Act of 19335 apply only to EGCs.6 Time will tell whether this expansion of nonpublic review will accomplish SEC Chairman Jay Clayton’s goal to make selling shares in the U.S. public markets more attractive to companies “and at an earlier stage in their development.”7