A bill, H.R. 3978, that includes various disparate measures passed in the House of Representatives by a vote of 271 to 145.  Among the measures included in H.R. 3978 are the Fostering Innovation Act of 2017, about which we have previously written, which amends Sarbanes-Oxley Section 404(b) attestation requirements extending the exemption available to EGCs for a longer period—until the earlier of ten years after the EGC went public, the end of the fiscal year in which the EGC’s average gross revenues exceed $50 million, or when the EGC qualifies with the SEC as a large accelerated filer.  In addition, H.R. 3978 includes the National Securities Exchange Regulatory Parity Act, which modernizes Section 18 of the Securities Act.

Our recently updated Quick Guide to REIT IPOs provides an overview of the path to an initial public offering for a REIT. The guide also addresses regulatory, tax and accounting considerations relevant to sponsors considering forming a REIT.

To download a copy of the guide, click here.

Bill Hinman, Director of the Securities and Exchange Commission’s Division of Corporation Finance delivered the keynote address at the Practising Law Institute’s annual Securities Regulation in Europe program.  During his speech, Mr. Hinman touched on various topics, including the types of measures that may be undertaken in order to make the capital markets and the public company alternative more attractive.  He discussed the accommodations available to foreign private issuers (FPIs), as well as the Division’s policy changes extending the confidential submission process to companies other than emerging growth companies (EGCs).  Mr. Hinman noted that since adoption of the new policy in the summer of 2017, the Commission has received draft submissions for more than 20 IPOs of companies that exceed $1 billion in revenue or otherwise do not qualify to submit as EGCs, and from over 35 companies engaged in follow-on offerings.  Mr. Hinman also reiterated the willingness of the Division staff to review and consider requests made under Regulation S-X Rule 3-13 for accommodations relating to financial statement presentation.

Addressing future areas of focus, Mr. Hinman noted that the Staff is discussing ways in which internal processes, such as filing reviews and the consideration of no-action letter requests, as well as possible updates to the Financial Reporting Manual and the Compliance and Disclosure Interpretations in order to make these more user-friendly.  Turning to disclosure, Mr. Hinman noted that the Staff is considering whether additional guidance would be helpful regarding cybersecurity disclosure.  Mr. Hinman also provided some insight on future rulemaking.  He noted that the Staff is:

  • preparing recommendations for a proposal to implement the resource extraction issuer disclosure provision of the Dodd-Frank Act;
  • considering rulemaking to raise the threshold companies for smaller reporting company eligibility;
  • recommending final rules to update and simplify disclosure requirements that are outdated, or are overlapping or duplicative with other Commission rules or U.S. GAAP;
  • preparing recommendations for proposals to amend the rules for financial information required for acquired entities (Regulation S-X Rule 3-05), as well as Regulation S-X Rule 3-10 for disclosures by guarantors and issuers of guaranteed securities; and
  • developing recommendations for updating Industry Guide 3 to modernize the disclosure requirements for financial institutions.

The full text of Mr. Hinman’s remarks are available here:  https://www.sec.gov/news/speech/speech-hinman-020118.

On December 1, 2017, the SEC’s Division of Corporation Finance updated its Financial Reporting Manual for the following changes:

  • Revising guidance related to the pro forma impact of adopting new accounting standards (Sections 3250.1(m)-(n)), including clarifying that if a registrant:
    • acquires a significant business, and such business adopts a new accounting standard as of a different date and/or under a different transition method than the registrant, than the registrant must conform the date and method of adoption of the acquired business to its own date and method in its pro forma financial information; however, the guidance suggests that the SEC Staff will consider requests for relief from this requirement; and
    • retrospectively adopts a new accounting standard on January 1, 2018, makes a significant acquisition in September 2018, and later files a Form 8-K that includes pro forma financial information for the year ended December 31, 2017 and the six months ending June 30, 2018, than the registrant does not need to apply the new accounting policy to the pro forma information for periods prior to adoption until it has reflected the new standard in the historical financial statements for those periods; however, if the registrant believes the effect of the new standard on 2017 historical information will be material, it should make appropriate disclosure to that effect in the notes to the pro forma financial information.
  • Revising guidance to address the adoption of new or revised financial accounting standards after an EGC loses its EGC status (Section 10230.1), clarifying that:
    • EGCs that take advantage of an extended transition period provision are encouraged to review their plans to adopt accounting standards upon losing EGC status and to discuss with the SEC Staff any issues they foresee in being able to timely comply; and
    • generally, if an EGC loses its status after it would have had to adopt a standard absent the extended transition, the issuer should adopt the standard in its next filing after losing status, but depending on the facts and circumstances the SEC Staff may not object to other alternatives.
  • Clarifying the effective dates for ASU No. 2014-09 “Revenue from Contracts with Customers” and ASU No. 2016-02 “New Leasing Standard” for certain public business entities (Sections 11100 and 11200).

The updates to the Financial Reporting Manual are available here.

Below, a continuation of our bibliography of thought-provoking articles on issues related to right-sizing regulation, staying private versus going public, and related topics:

JOBS Act and Information Uncertainty

A recent paper titled “The JOBS Act and Information Uncertainty in IPO Firms,” published by Mary E. Barth, Wayne R. Landsman, and Daniel J. Taylor, has garnered quite a bit of attention.  The paper examines the extent to which omission of certain information by emerging growth companies (EGCs) can be tied to IPO underpricing.  According to the paper, EGCs that present compensation information for fewer than five top executives and present fewer than three years of audited financial statements are associated with higher levels of underpricing.  It is difficult to conclude whether there really is a correlation since, in our experience, many of the EGCs that choose to rely on the accommodations and omit this information are concentrated in particular sectors and those are usually associated with underpricing.  Similarly, in our experience, many companies in those sectors have concentrated ownership and existing investors participating in the IPOs.  The paper also concludes that EGCs have higher levels of institutional ownership than non-EGCs. This may not be all that surprising given trends in private capital raising over the last eight to ten years.  The authors suggest that this information should be considered in connection with additional regulatory reforms that might reduce disclosure burdens.  Without more detail comparing the sectors of the companies that are or are not EGCs, and of the EGCs that choose to omit disclosures, and the pricing issues specific to IPOs of companies in such sectors, as well as of companies by age or maturity, it would seem difficult to draw any conclusions.

The U.S. Department of the Treasury issued its second report (of four reports), titled “A Financial System that Creates Economic Opportunities, Capital Markets.”  The Report was issued in response to Presidential Order 137772 setting forth the Core Principles that should guide regulation of the U.S. financial system. The Report addresses various elements of the capital markets, from the equity and debt markets, to the U.S. Treasury securities market, and to derivatives and securitization.  The recommendations relating to the U.S. IPO market and reducing the regulatory burdens for companies seeking to undertake an IPO as well as for smaller public companies may be very familiar to readers of this blog, since many of the measures are included in the Financial CHOICE Act or otherwise addressed in proposed legislation or in rule proposals from the SEC.

See our alert, which may be accessed here.

On October 2, 2017, Congressmen Ted Budd (R-NC) and Gregory Meeks (D-NY) introduced a bipartisan bill, H.R. 3903, in the U.S. House of Representatives.  The bill proposes amendments to the Securities Act of 1933, as amended, to increase initial public offering (“IPO”) and follow-on activity. The proposed legislation extends three JOBS Act provisions currently available to emerging growth companies to all issuers: (1) submission of a draft registration statement for confidential nonpublic review by the SEC prior to the public filing of the IPO registration statement; (2) within the one-year period following an IPO, confidential submission of a draft registration statement for an offering; and (3) the ability to test-the-waters with institutional investors.  The SEC’s Division of Corporation Finance’s policy changes earlier in the year already have addressed confidential submissions for IPOs as well as follow-on offerings undertaken within twelve months of an IPO; however, the bill would ostensibly extend the confidentiality provisions contained in Securities Act Section 6(e)(2) for these draft registration statements.  Currently, those confidentiality provisions are available only for EGCs and confidential submissions made under the new SEC policy must be the subject of a Rule 83 confidential treatment request.  Also, the bill would address the ability to test the waters, which was not addressed by the Division of Corporation Finance.

The text of the bill is available here.

Recently, the Financial Executives Research Foundation (FERF) published a white paper titled, “Growing Past Emerging Growth: Five Years After the JOBS Act,” which highlights areas of focus for emerging growth companies (EGCs) that took advantage of the 2012 JOBS Act and now are losing their EGC status. In particular, the white paper notes the importance of developing a transition plan. Companies ceasing to be EGCs will be required to prepare full compensation disclosures. The more significant hurdle for most companies is addressing Sarbanes-Oxley Section 404 auditor attestation requirements. The white paper provides helpful suggestions on marshalling the requisite resources to prepare for compliance.

The Staff of the Division of Corporation Finance recently posted additional guidance regarding the financial information that an EGC may omit from its draft registration statements, as well as guidance for non-EGC issuers.  See below the Staff’s guidance:

Question 1

Question: What financial information may an Emerging Growth Company omit from its draft and publicly filed registration statements?

Answer: Under Section 71003 of the FAST Act, an Emerging Growth Company may omit from its filed registration statements annual and interim financial information that “relates to a historical period that the issuer reasonably believes will not be required to be included…at the time of the contemplated offering.”  Interim financial information that will be included in a longer historical period relates to that period.  Accordingly, interim financial information that will be included in a historical period that the issuer reasonably believes will be required to be included at the time of the contemplated offering may not be omitted from its filed registration statements.   However, under staff policy, an Emerging Growth Company may omit from its draft registration statements interim financial information that it reasonably believes it will not be required to present separately at the time of the contemplated offering.

For example, consider a calendar year-end Emerging Growth Company that submits a draft registration statement in November 2017 and reasonably believes it will commence its offering in April 2018 when annual financial information for 2017 will be required.  This issuer may omit from its draft registration statements its 2015 annual financial information and interim financial information related to 2016 and 2017.  Assuming that this issuer were to first publicly file in April 2018 when its annual information for 2017 is required, it would not need to separately prepare or present interim information for 2016 and 2017.  If this issuer were to file publicly in January 2018, it may omit its 2015 annual financial information, but it must include its 2016 and 2017 interim financial information in that January filing because that interim information relates to historical periods that will be included at the time of the public offering.  See also Question 101.05 for guidance related to registration statements submitted or filed by non-EGCs. [Aug. 17, 2017]

Question 101.04

Question: What financial information may an Emerging Growth Company omit from its draft and publicly filed registration statements?

Answer: Under Section 71003 of the FAST Act, an Emerging Growth Company may omit from its filed registration statements annual and interim financial information that “relates to a historical period that the issuer reasonably believes will not be required to be included…at the time of the contemplated offering.”  Interim financial information that will be included in a longer historical period relates to that period.  Accordingly, interim financial information that will be included in a historical period that the issuer reasonably believes will be required to be included at the time of the contemplated offering may not be omitted from its filed registration statements.   However, under staff policy, an Emerging Growth Company may omit from its draft registration statements interim financial information that it reasonably believes it will not be required to present separately at the time of the contemplated offering.

For example, consider a calendar year-end Emerging Growth Company that submits a draft registration statement in November 2017 and reasonably believes it will commence its offering in April 2018 when annual financial information for 2017 will be required.  This issuer may omit from its draft registration statements its 2015 annual financial information and interim financial information related to 2016 and 2017.  Assuming that this issuer were to first publicly file in April 2018 when its annual information for 2017 is required, it would not need to separately prepare or present interim information for 2016 and 2017.  If this issuer were to file publicly in January 2018, it may omit its 2015 annual financial information, but it must include its 2016 and 2017 interim financial information in that January filing because that interim information relates to historical periods that will be included at the time of the public offering.  [Aug. 17, 2017]

Question 101.05

Question: What financial information may an issuer that is not an Emerging Growth Company omit from its draft and publicly filed registration statements?

Answer: The relief provided by Section 71003 of the FAST Act is not available to issuers other than Emerging Growth Companies. However, under staff policy, an issuer that is not an Emerging Growth Company may omit from its draft registration statements interim and annual financial information that it reasonably believes it will not be required to present separately at the time it files its registration statement publicly. The issuer may not omit any required financial information from its filed registration statements.

For example, consider a calendar year-end issuer that is not an Emerging Growth Company that submits a draft registration statement in November 2017 and reasonably believes it will first publicly file in April 2018 when annual financial information for 2017 will be required. This issuer may omit from its draft registration statements its 2014 annual financial information and interim financial information related to 2016 and 2017 because this information would not be required at the time of its first public filing in April 2018. [Aug. 17, 2017]