We think the attached chart (available here: http://www.mofo.com/files/Uploads/Images/130411-Issuer-Financial-Statements-In-Registration-Statements.pdf) is a simple way to keep track of the basic financial statements that different filers must include in SEC registration statements. For more specific guidance, go to Regulation S-X and the SEC’s Division of Corporation Finance’s Financial Reporting Manual, which is now updated regularly.
The Staff of the Division of Corporation Finance of the U.S. Securities and Exchange Commission (the “SEC”) recently updated its Frequently Asked Questions on Title I of the Jumpstart Our Business Startups Act (“JOBS Act”) to address a number of issues regarding the applicability of the provisions in Title I to exchange offer, merger and spin-off transactions, as well as considerations for determining whether a company qualifies as an emerging growth company (an “EGC”) and the financial information that an EGC includes in certain filings. The SEC also recently implemented a process whereby an EGC can submit its draft registration statement for confidential review via the EDGAR system. In this regard, the Staff has provided additional guidance as to how EGCs with pending submissions can transition to the new EDGAR filing process. To read our client alert, click here.
In connection with the recent migration of draft registration statement submissions to EDGAR, the SEC Staff sent letters to companies with draft registration statements subject to an ongoing review process, advising those companies how to submit a draft registration statement through EDGAR.
The letter notes that companies with pending draft registration statements already have a Central Index Key, or CIK number, assigned to them. In order to initiate the EDGAR submission process, it is necessary to:
1. Submit a request to the SEC asking that the company’s EDGAR status be converted to an electronic filer;
2. Request the access codes and passwords necessary to submit the registration statement on the EDGAR system; and
3. Make any necessary changes to the company’s contact information and business and mailing addresses in EDGAR prior to making an initial filing, including the secure email address that the Staff will use to send comment letters.
The Staff notes that the first EDGAR draft submission should be made as a new draft registration statement, even if it is an amendment to a previously submitted version. The first EDGAR submission should also include each previously submitted draft registration statement (including exhibits) as a separate Exhibit 99 document. No marked submissions should be provided. Each item of correspondence also must be provided with the initial EDGAR submission as a separate “COVER” document within the submission.
The Staff also reminds companies to properly mark confidential information if they intend to use Rule 83 to request confidential treatment in the correspondence submitted via EDGAR.
On Friday, September 28, 2012, the Dodd-Frank Investor Advisory Committee of the SEC met (see this agenda) and received an SEC Staff briefing on the JOBS Act. In connection with the Staff briefing, the Committee received an update from Jonathan Ingram, Deputy Chief Counsel and Lona Nallengara, Deputy Director (Legal and Regulatory) in the Division of Corporation Finance. Ingram reviewed the proposal relaxing the prohibition against general solicitation for certain offerings under Rule 506. One of the Committee members inquired whether an issuer’s failure to take “reasonable steps” to verify investor status (even if the investors were indeed accredited) would be considered an insignificant violation of Rule 508 or whether it would result in the loss of the offering exemption. Ingram noted that the proposal did not address Rule 508 in this context. The Committee also discussed prior proposals that had raised the deregulation of offers, and whether the SEC would have the authority to modify the definition of “accredited investor” to add a sophistication element to the definition (to supplement the net worth test). The Committee suggested that the Staff consider adopting a new “Form GS” (for general solicitation) in order to track the types of offerings in which general solicitation is used. The Committee also recommended that material used in a general solicitation be furnished to the SEC at the same time as it is being used. Finally, the Committee suggested that there be a safe harbor for verification. Over the longer term, the Committee suggested that the Commission consider amending the “natural person” prong of the “accredited investor” definition. The Committee also received an update from the Staff on crowdfunding.
The Division of Corporation Finance confirmed that beginning on October 1, 2012, an EGC may submit its confidential draft registration statement through the EDGAR system. Once an issuer chooses to rely on EDGAR submissions, it cannot opt to change to paper submissions through the secure email system. The SEC will provide instructions on transitioning from the secure email system submissions to EDGAR for those EGCs that have submissions pending. See http://www.sec.gov/divisions/corpfin/cfannouncements/drsfilingprocedures.htm.
Under Title I of the JOBS Act, an emerging growth company may confidentially submit a draft registration statement for an initial public offering for nonpublic review, provided that the initial confidential submission and all amendments are publicly filed with the SEC no later than 21 days prior to the issuer’s commencement of a road show. The confidential submission process has proven to be a popular aspect of the JOBS Act’s IPO on-ramp provisions, given that emerging growth companies can go through a substantial portion of the SEC review process without (immediate) public disclosure of changes made in response to SEC Staff comments.
Presently, the SEC Staff accepts draft registration statements in a text-searchable PDF file submitted through a secure e-mail system. Last week, the SEC adopted a new EDGAR Filer Manual, which contemplates confidential EDGAR submissions of draft registration statements. Once the programming is completed for these changes, draft registration statements and amendments to draft registration statements will be submitted via EDGAR using submission form types DRS and DRS/A, respectively. We have heard from the SEC Staff that the necessary changes to the EDGAR system should be completed by some time in October. In the meantime, emerging growth companies should continue to use the secure e-mail system for their draft registration statement submissions.
In the most recently issued set of FAQs on the JOBS Act, the SEC Staff also addressed testing-the-waters communications, and, in particular, the requirements of Rule 15c2-8(e). Rule 15c2-8(e) requires that a broker-dealer make available a copy of the preliminary prospectus (prior to the effective date) for a registered offering of securities before soliciting orders from customers. If read broadly, the prohibitions of Rule 15c2-8(e) might constrain the types of activities that are permissible during test-the-waters discussions. The FAQs provide practical guidance noting that while the JOBS Act does not amend Rule 15c2-8(e) (that is, the JOBS Act does not modify the meaning of the term “solicit”), an emerging growth company or a financial intermediary acting on the EGC’s behalf may engage in discussions with institutional investors to gauge their interest in purchasing EGC securities before the EGC has filed its registration statement with the SEC (when 15c2-8 would technically not apply) and after the EGC has filed its registration statement. During this period, the underwriter may discuss price, volume and market demand and solicit non-binding indications of interest from customers. Soliciting such a non-binding indication of interest, in the absence of other factors, would not constitute a “solicitation” for purposes of 15c2-8(e). This is very helpful. Of course, underwriters still will need to monitor carefully the types of communications that take place during test-the-waters discussions to ensure compliance with the securities laws.
The JOBS Act also does not provide much guidance in relation to various phase-ins or transitions once an issuer that was an EGC crosses one of the specified thresholds and loses its EGC status. In its set of FAQs on Title I of the JOBS Act, the Staff outlined certain principles relating to transition out of EGC status, such as the principles applicable to the availability of confidential review, the form/contents of a registration statement, and the ability to engage in test-the-waters communications. Essentially, an issuer must test its status throughout the submission/filing process to ensure that it qualifies as an EGC at the time that it is engaging in the relevant activity, or choosing to rely on benefits available to EGCs. Later in its life, an issuer that is approaching one of the thresholds (such as large accelerated filer status or the $1 billion in revenues threshold) likely will not have any phase-in period or grace period to prepare itself for compliance with the executive compensation disclosures, say-on-pay requirements, and Sarbanes-Oxley Section 404(b) compliance. Presumably, the Staff’s rationale is that an EGC will be able to track its progress in approaching the relevant EGC thresholds and will be able to undertake the preparation necessary to ensure that once it crosses the applicable threshold and no longer qualifies as an EGC, it will be ready to transition to compliance with these requirements the applicability of which was deferred during its EGC phase.
Many practitioners have found that the most challenging questions about EGC status arise in connection with previously public entities that have undergone some organic change on or prior to December 8, 2011, such as a merger or a going-private transaction. There is no real guidance in the JOBS Act to answer some of these difficult questions, however in the SEC Staff’s FAQs on Title I of the JOBS Act, they indicated that if an issuer completes a transaction that results in the issuer becoming the successor to its predecessor’s Exchange Act registration and reporting obligations pursuant to Exchange Act Rules 12g-3 and 15d-5, and the predecessor was not eligible to be an EGC because its first sale of common equity securities pursuant to an effective registration statement occurred on or before December 8, 2011, then the successor cannot now qualify as an EGC. We understand that the SEC Staff intends to publish a new set of FAQs to further address successor issuer/EGC status questions in light of some of the issues that have come up to date. In certain cases, it seems likely that the Staff guidance will provide some assurance that a reporting company that went dark or was taken private (such as through a private equity or management buyout) that would like to now access the public markets may qualify as an EGC. The same rationale would likely apply if a holding company parent or a subsidiary of the previously public entity now seeks to qualify as an EGC. . Further, a spin-off from an existing reporting company relying on the Staff’s position in Staff Legal Bulletin No. 4 also may qualify as an EGC, provided that the spun-off entity itself did not have and sale of common equity securities on or prior to December 8, 2011. Of course, this guidance assumes that these transactions were undertaken for valid business purposes and not with any intent to circumvent the securities law, including EGC status as provided in the JOBS Act.
We hope that the SEC engages actively with the securities exchanges to facilitate the listing of securities of issuers concurrently with the pricing of their Regulation A+ (a/k/a 3(b)(2)) offerings. The JOBS Act seems to contemplate that some issuers will pursue Regulation A+ offerings, not seek exchange listings and choose to remain non-reporting companies. However, the Act also contemplates that an issuer might conduct a Regulation A+ and concurrently list its securities on a national securities exchange. In fact, one of the paths to preemption depends on a concurrent exchange listing. So, how will this accomplished? The current approach would seem impractical. Now, an issuer would have to file a registration statement on Form 10 (in addition to having prepared, filed and had reviewed an offering statement for the Regulation A+ offering). That is duplicative and costly. Exchange listings in connection with Regulation A+ offerings will, in almost all instances, increase the universe of potential investors, provide significantly enhanced after-market liquidity, and encourage after-market research analyst coverage, which would otherwise be sparce or non-existent. Facilitating exchange listings also would serve to support the SEC’s investor protection objectives. A Regulation A+ offering with a contemporaneous exchange listing is a sounder approach than say, a reverse merger.