In its recently released survey, 2013 BDO IPO Outlook, BDO included specific questions on the effect of the JOBS Act on the IPO market. The report can be accessed here: http://www.bdo.com/download/2432. According to the survey, 42% of bankers surveyed responded that they saw no evidence that the JOBS Act had affected the IPO market positively; however, 28% of respondents noted that it was too early to make an assessment. A significant number of those surveyed (48%) noted that institutional investors were reluctant to meet with companies in test-the-waters discussions until companies had filed publicly.
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.
Join us for a JOBS Act Update. The seminar will be held at The Michelangelo in New York on Friday, September 21st, from 8:15am-10:00am. Want to attend? Click here.
We invite you to join us for the first of our fall CLE series (note: new location). Our session will focus on developments related to the JOBS Act and the IPO market. We will discuss the SEC Staff’s guidance on various interpretative questions relating to Title I of the JOBS Act. We also will discuss the SEC Staff’s Frequently Asked Questions on research issues, and the proposal relaxing the ban on general solicitation in connection with certain private offerings. Our speakers will cover the following topics:
- SEC views on emerging growth company (EGC) status;
- Research guidance, research safe harbors, and liability issues;
- Using Title I benefits in connection with mergers and exchange offers;
- The general solicitation proposal and investor verification;
- The IPO process and investor communications; and
- Practical considerations for various offering formats, including PIPE transactions, 4(a)(1-1/2) transactions and 4(a)(2) exempt offerings.
Partner, Morrison & Foerster LLP
Partner, Morrison & Foerster LLP
Assistant General Counsel, Bank of America Merrill Lynch
NY and CA CLE credit is pending.
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.
Have you noticed that most of the terms relating to contacting potential investors to gauge their interest in possible securities offerings take their inspiration from terms related to the sea? We wonder why. Probably not an homage to Jacques Cousteau or Wes Anderson. In Europe and Asia, for some time, bankers have had greater flexibility to discuss potential offerings with investors in order to gauge their interest. This process often is referred to as pilot fishing. Wikipedia tells us that pilot fish are carnivorous fish that congregate around sharks and lead sharks to food, but rarely get eaten by sharks due to the erratic behavior of pilot fish when caught. This doesn’t exactly make it obvious why bankers refer to the process as “pilot fishing.” Perhaps a better explanation comes from the etymological origins of the name—which is the belief by early mariners that pilot fish would direct, or pilot, their ships to land. For quite a long time, given the prohibitions on communications prior to a securities offering, it was difficult for bankers in the United States to engage in these types of conversations with potential investors, without fear of having these activities considered impermissible gun-jumping. Of course, the JOBS Act significantly updates the regulatory framework governing offering related communications for emerging growth companies. Making it all the more important to understand the types of pre-offering communications that have been part of the bookbuilding process in Europe. Conducting preliminary investor inquiries, or “pre-soundings” (the reference to “soundings” is intuitively obvious), in Europe and Asia has yielded important information about valuation and has helped during volatile market conditions. Usually, following pilot fishing, book runners then identify anchor investors (again, what’s with the nautical references). Even under our updated JOBS Act framework, it would be impermissible to obtain orders from key investors in advance of having a preliminary prospectus with a price range. However, we often do see financial sponsor types (QIBs) step up and participate in a private placement completed contemporaneously with the proposed IPO. It is interesting that just as the process for interacting with investors in the United States is becoming more fluid, the pre-sounding process in Europe and Asia (at least in relation to follow-ons) is becoming somewhat more constrained. Maybe the practices will coalesce at sea.