On June 29, the SEC announced that its Division of Corporation Finance will allow all companies to submit for nonpublic review draft registration statements relating to initial public offerings and other specified registrations. The procedures for nonpublic review of draft registration statements previously were limited primarily to the confidential review process for IPOs provided for emerging growth companies (EGCs) under the Jumpstart Our Business Startups Act (JOBS Act). Under the new process, nonpublic review procedures will be available to any company that submits a registration statement to the SEC covering the (1) registration of an IPO under the Securities Act, (2) initial registration of a class of securities pursuant to Section 12(b) of the Exchange Act or (3) registration of an offering under the Securities Act during the first twelve months after a company’s IPO or Section 12(b) registration. EGCs as well as non-EGCs will benefit from the new procedures.
The SEC also announced that the staff will not delay processing a draft registration statement if a company omits financial information that it reasonably believes will not be required at the time the registration statement is first publicly filed. In addition, the SEC indicated that the staff would be willing to discuss with eligible issuers and their advisors expedited reviews of both draft and filed registration statements.
The new administrative procedures, which are not mandated by statute or regulation, are described in an announcementby the SEC and will become effective on July 10, 2017. Following the announcement, the Division of Corporation Finance issued 18 FAQs to “address preliminary questions about the expanded procedures.” The FAQs are available here and are discussed below.
The JOBS Act eased certain SEC requirements applicable to the IPO process for a company that qualifies as an “EGC” (generally by having total annual gross revenues in its most recent fiscal year of less than $1.07 billion, as recently adjusted). Among the benefits of this status, an EGC is permitted to submit to the SEC its IPO registration statement and related amendments on a confidential basis for review by the SEC staff so long as it publicly files them at least 15 days before the start of its IPO road show. This confidential review process has allowed an EGC to avoid signaling its IPO plans to the market until the EGC is reasonably confident it will proceed with the offering, and has been a popular process for companies accessing the public equity capital markets for the first time.
Although a nonpublic review process will now be available to non-EGCs, the SEC has not extended to such companies other accommodations of the JOBS Act applicable to EGCs, such as reduced compensation disclosure and relief from auditor attestation concerning internal control over financial reporting. The SEC’s announcement indicates that the new review process will not limit the current process by which EGCs submit draft IPO registration statements for confidential review, and that the SEC staff will continue to process those submissions “in the normal course.”
New nonpublic review process
Under the new process, all companies, including foreign private issuers, will be permitted to submit draft IPO registration statements and related revisions to the SEC staff for nonpublic review regardless of their prior-year revenue. The nonpublic review process is also being made available for draft registration statements concerning initial registrations of a class of securities under Section 12(b) of the Exchange Act, which likely will be welcomed by public companies engaging in certain spin-off transactions.
The new policy goes beyond the confidential review process provided to EGCs under the JOBS Act. The SEC has undertaken to review on a nonpublic basis draft registration statements by both EGCs and non-EGCs for offerings for which a company submits a draft of its Securities Act registration statement before the end of the twelfth month following the effective date of the company’s initial registration statement under the Securities Act or of its Section 12(b) registration statement. In connection with such offerings, however, only the initial submission will be entitled to nonpublic review, and the company must respond to staff comments in a public filing rather than in a revised nonpublic draft of the registration statement.
A company submitting a nonpublic draft registration statement under the new process must provide, in a cover letter to the SEC accompanying the initial submission, the following representations:
- For a Securities Act registration in connection with an IPO, the company must confirm that it will publicly file its registration statement and nonpublic draft submissions at least 15 days before any road show or, in the absence of a road show, at least 15 days before the requested effective date of the registration statement.
- For an initial registration of a class of securities under Section 12(b) of the Exchange Act, the company must confirm that it will publicly file its registration statement and nonpublic draft submissions at least 15 days before the anticipated effective date of the registration statement for its listing of the securities on a national securities exchange.
- For a securities offering for which a draft registration statement is submitted within twelve months after the effectiveness of an IPO or Exchange Act Section 12(b) registration, the company must confirm that it will publicly file its registration statement and nonpublic draft submission so that they are publicly available on the EDGAR system at least 48 hours before any requested effective time and date.
The procedures to be followed by companies making nonpublic submissions via EDGAR generally are the same as those already in effect for EGCs. A technical note to the SEC’s announcement indicates that a company that does not yet have EDGAR access codes will need to file a Form ID to obtain them, and should indicate on that form that it intends to use the codes to submit a draft registration statement pursuant to Section 106 of the JOBS Act, even if the company is not an EGC. Following the SEC’s instruction will help preserve the nonpublic status of the company’s drafts until they are filed publicly.
The announcement indicates that foreign private issuers may elect to rely on the new procedures (or, if the foreign private issuer qualifies as an EGC, on those currently available to EGCs) or may instead follow the guidance set forth in the May 30, 2012 statement of the Division of Corporation Finance regarding nonpublic submissions from foreign private issuers.
Relief from certain financial statement requirements for draft registration statements
The SEC’s announcement indicates that while a company “should take all steps to ensure that a draft registration statement is substantially complete when submitted,” the staff will not delay processing a draft registration statement if the company omits financial information that it reasonably believes will not be required at the time the registration statement is first publicly filed.
This accommodation is similar to relief previously granted to EGCs as a result of certain amendments to the JOBS Act made in 2015 by Section 71003 of the Fixing America’s Surface Transportation Act and discussed in the SEC Update we issued on December 23, 2015. Under that relief, EGCs may omit financial information that the company reasonably believes will not be required to be included at the time the contemplated offering commences. The new accommodation enables all issuers to avoid the potentially significant costs associated with preparing financial statements for periods that would not be required by Regulation S-X at the time the issuer first publicly files the registration statement.
The SEC announcement notes that the staff will consider a company’s specific facts and circumstances in connection with any request made under Rule 3-13 of Regulation S-X, which is the rule allowing the staff to waive certain financial information requirements. This suggests the staff may intend to be more accommodating with respect to requests to omit other financial information from the registration statement.
Related FAQs published by the Division of Corporation Finance
The 18 FAQs subsequently issued by the Division of Corporation Finance in connection with the new review process provide clarification with respect to certain procedural matters, required financial information, signatures and consents, the applicability of the policy to certain types of issuers, and the implications for certain communications under Section 5 of the Securities Act and the safe harbors for specified public communications provided in Securities Act Rules 134 and 135. The FAQs also contain important guidance with respect to obtaining confidential treatment for the draft submissions, in which the staff differentiates the protections afforded under this new “nonpublic” process from those under the existing “confidential” process available to EGCs pursuant to Section 6(e)(2) of the Securities Act.
Guidance on procedures under new process.
The FAQsprovide guidance with respect to various administrative aspects of the new process:
- A non-EGC may use EDGAR submission type “DRS” and follow related instructions for submitting a draft registration statement for nonpublic review. The staff directs companies to Volume II of the EDGAR Filer Manual for instructions on how to prepare and submit a draft registration statement, and notes that those instructions should not be deemed to be limited to submissions by EGCs (pending further updates to the Filer Manual). (Question (1))
- The Securities Act registration filing fee is not due until the registration statement is first filed publicly on EDGAR. Because the statutory provision requiring payment of a registration fee under Section 6(b) of the Securities Act applies at the “time of filing a registration statement,” the voluntary submission of a draft registration statement does not require payment of a fee. (Question (10))
- Public release of staff comment letters will follow effectiveness of the registration statement. The staff indicates that, consistent with its past practice in all filing reviews, it will release publicly on EDGAR its comment letters and the company responses no earlier than 20 business days following the effective date of a registration statement. (Question (11)
- A company may not use the draft submission process to submit a draft post-effective amendment to an effective registration statement. (Question (14))
Guidance on required content.
The FAQs clarify certain content requirements relating to financial information, signatures and consents:
- A non-EGC may not omit from its publicly filed registration statement financial information that it reasonably believes will not be required at the time of the contemplated offering. Although, as discussed above, a company may omit financial statements from the draft registration statement that it reasonably believes will not be required at the time the registration statement is first publicly filed, the staff emphasizes that a non-EGC (unlike an EGC) may not omit financial information from a filed registration statement that it believes will not be required at the time of the offering. (Question (7))
- Signatures and consents not required in a draft registration statement. A draft registration statement is not required to be signed by the registrant or by any of its directors and officers and is not required to include a consent of auditors or other experts. The FAQs also confirm that when the registration statement is publicly filed, there is no need to include signatures or consents for the previous nonpublic submissions. (Questions (8) and (9))
Guidance on applicability of new process to certain issuers. The new guidance indicates that while a Canadian issuer filing under the Multi-Jurisdictional System may take advantage of the new accommodations (Question (12)), an asset-backed securities issuer may not. (Question (13))
Guidance on communications under Section 5 of the Securities Act and Securities Act Rules 134 and 135.
- The submission of the draft registration statement does not constitute a filing for purposes of the prohibition in Section 5(c) of the Securities Act. Section 5(c) prohibits making offers of a security in advance of filing a registration statement. The guidance indicates that the nonpublic submission of a draft registration statement does not constitute a filing that would permit the issuer to make a Section 5(c) offer. (Question (16))
- A non-EGC may not use test-the-waters communications with qualified institutional buyers and institutional accredited investors pursuant to Section 5(d) of the Securities Act. An issuer must qualify as an EGC to avail itself of the benefits afforded by Section 5(d). (Question (15))
- After submitting a draft registration statement for nonpublic review, a company may not make a public communication about its offering in reliance on the safe harbor under Securities Act Rule 134 until it first files a registration statement that satisfies the requirements of that rule. (Question (17))
- After submitting a draft registration statement for nonpublic review, a company may make a public communication about its offering in reliance on the safe harbor under Securities Act Rule 135. The staff cautions issuers, however, that a public statement about the offering may affect whether the SEC may withhold the entire draft registration statement in response to a request under the Freedom of Information Act (FOIA), as discussed below. (Question (18))
Guidance on confidential treatment. In a footnote to the initial public announcement of its new policy, the SEC noted that it would “keep submitted nonpublic draft registration statements confidential subject to the provisions of applicable law.” The FAQs emphasize, however, that the confidentiality provisions of Securities Act Section 6(e)(2) are limited to certain draft registration statements of EGCs and do not extend to the new process. Section 6(e) is the statutory provision which provides for a confidential review process for EGCs, and paragraph (e)(2) makes clear that the SEC “shall not be compelled to disclose any information provided to or obtained by the Commission” pursuant to this process. Because paragraph (e)(2) applies only to EGCs, draft materials submitted by a non-EGC under the new process may be subject to release by the SEC upon a request under FOIA by, for example, a competitor or the media. The staff therefore recommends in the FAQs a process by which a non-EGC may request confidential treatment for its submissions, as follows:
- A non-EGC should consider requesting confidential treatment for its draft registration statement and associated correspondence under Rule 83. This rule provides a procedure by which persons submitting information to the SEC may request that such information be withheld if requested under FOIA. Rule 83 applies in the context of SEC examinations, inspections and investigations, and in other cases where no procedures exist for requesting confidential treatment for particular categories of information (such as in connection with the SEC’s filing review comment process). (Question (1)) The staff’s related response to Question (4) indicates that a company seeking confidential treatment for draft registration statements submitted under the new procedures may make its request electronically using EDGAR submission type “DRSLTR” when the company submits its electronic draft registration statement. The staff goes on to state that if a company does so, it is not necessary also to send paper copies of the request and the materials to either the Division of Corporation Finance or the SEC’s FOIA Office. The company, however, should include a legend at the top of each page of the electronically submitted draft registration statement indicating that it has requested confidential treatment for the draft registration statement pursuant to Rule 83. (Question (4))
- A non-EGC also should identify information for which it intends to seek confidential treatment when it submits its responses to staff comments on draft registration statements. The staff indicates that if a company identifies information for which it intends to seek confidential treatment upon public filing, the staff will ensure that it does not include that information in its comment letters. (Question (6))
As indicated in the press release accompanying the SEC announcement, the goal of these policy changes is to make it “easier for more companies to enter and participate in [the] public company disclosure-based system” and “to encourage more companies to consider going public.” While it is unclear whether the more accommodating procedures will be sufficient to achieve those intended results, they are likely to be well-received by companies considering entering the public reporting regime for the first time and reluctant to “show their hand” to the public prematurely. With reduced risk under the new procedures of suffering the negative publicity associated with abandoning an IPO, more companies might consider at least initiating the going-public process.