This Monday, July 10, will mark the beginning of an intriguing new chapter in the capital markets space. Following a surprise announcement by the SEC’s Division of Corporation Finance on June 29, all potential issuers will be able to submit draft registration statements relating to initial public offerings, Exchange Act registrations and most other offerings made in the first year after going public. Under current practice, established in the 2012 JOBS Act, only “emerging growth companies” (EGCs), defined as an issuer with total annual gross revenues of approximately $1 billion (adjusted periodically for inflation) during its most recently completed fiscal year, may make such confidential submissions.
"By expanding a popular JOBS Act benefit to all companies, we hope that the next American success story will look to our public markets when they need access to affordable capital," said Chairman Jay Clayton. He added that “we are striving for efficiency in our processes to encourage more companies to consider going public, which can result in more choices for investors, job creation, and a stronger U.S. economy."
Corp Fin has developed the parameters of the new policy through a press release, an expanded announcement and a series of answers to frequently asked questions over the last few days. The procedures announced by Corp Fin are in some ways more expansive than the JOBS Act provisions for EGCs. For example, the procedures announced last week apply to both Securities Act and Exchange Act registration statements, while the SEC staff advised in 2012 in connection with the JOBS Act changes that “[a]s the confidential submission process is required by Section 6(e) of the Securities Act, it applies only to the Securities Act registration process, so it would not be available for Exchange Act-only registration.”
For IPOs, the issuer must submit a cover letter affirming that it will publicly file its registration statement and nonpublic draft submissions at least 15 days prior to any road show or, in the absence of a road show, at least 15 days prior to the requested effective date of the registration statement. Similar undertakings apply to confidential Exchange Act registration statement submissions, where an issuer must submit a cover letter affirming that it will publicly file its registration statement and nonpublic draft submissions at least 15 days prior to the anticipated effective date of the registration statement for its listing on a national securities exchange.
For follow-on offerings within a year from the effective date of an issuer’s initial Securities Act or Exchange Act Section 12(b) registration statement, the issuer must agree that it will publicly file its registration statement and nonpublic draft submission so that it is publicly available on the EDGAR system at least 48 hours prior to any requested effective time and date.
The division staff will treat these submissions related to follow-on offerings somewhat differently from the treatment afforded to initial Securities Act or Exchange Act registration statement drafts. Confidential treatment will apply only to an issuer’s initial submission. According to the staff, issuers responding to comments on such a draft registration statement should do so with a public filing rather than with a revised draft registration statement. The staff will conduct any further review following the division’s normal procedures, and will act upon requests for effective date acceleration in accordance with Securities Act Rule 461. These issuers, like those engaged in initial public offerings, must file the draft registration statements they submitted confidentially when it publicly files its registration statement.
In its FAQ sheet, the staff answered a question that the initial announcement left open. According to the response, the staff stated that they will publicly release their comment letters and issuer responses on nonpublic draft submissions on EDGAR no earlier than 20 business days following the effective date of a registration statement. The response suggests that the back and forth between the staff and the issuer will only be made public if the issuer’s registration statement ultimately becomes effective. The staff advised, however, that the language of Securities Act Section 6(e)(2) concerning protection from Freedom of Information Act disclosure applies only to certain draft registration statements of EGCs. Issuers seeking to make a confidential submission in reliance on the division’s new policy “should consider requesting confidential treatment under Rule 83 for its draft registration statement and associated correspondence when seeking a nonpublic review.”
Companies should make their confidential treatment request electronically using EDGAR submission type DRSLTR when they submit their electronic draft registration statement. The issuer should also appropriately identify information for which it intends to seek confidential treatment upon public filing to ensure that the staff does not include that information in its comment letters.
The submission of a draft registration statement is not considered to be a “filing,” and no fee is due at this time. The draft submission need not be signed by the registrant or by any of its officers or directors, and consents of auditors and other experts are not required. The staff stated that it will process a draft registration statement that is substantially complete except for financial information that the issuer reasonably believes will not be required at the time the registration statement is publicly filed.
The staff clarified that the expansion applied only to confidential submissions, and did not apply to other JOBS Act measures such as the testing the water provision, which remains available only to EGCs. The staff also advised that asset-backed securities issuers may not take advantage of the new policy. In addition, issuers may not use the confidential submission process to submit a draft post-effective amendment to an already effective registration statement.
The FAQ sheet contains responses to the interplay between the new confidential treatment policy and two Securities Act disclosure safe harbors. The Rule 134 safe harbor for the disclosure of general business information and limited information about the offering would not be available upon submission of a draft statement, as the rule applies only after the issuer formally files a registration statement. Rule 135, which allows the limited "tombstone" notices of upcoming offerings, could be available, but the staff cautioned that a public statement by the issuer about its offering could affect whether the Commission can withhold the draft registration statement in response to a request under the Freedom of Information Act.
It is difficult to assess at this point whether the new policy will successfully prime the IPO pump. The new approach is admittedly attractive to issuers, who can get the initial reaction of the reviewing staff and engage in the back and forth with the staff away from the prying eyes of both the marketplace and their competitors until shortly before closing (as described above, issuers have until 15 days before they conduct a road show or, if there is no road show, 15 days before the effective date of the registration statement, to file the initial nonpublic draft registration statement and all draft amendments). Investors will also not see the staff’s comments on the issuer submissions until well after the registration statement becomes effective.
A key factor to remember, however, is that for all of the folksy-sounding charm of the name, “emerging growth companies” are not necessarily plucky startups. Companies with up to $1.07 billion in annual revenues fit within the definition, and these companies have accounted for the lion’s share of IPOs completed since the JOBS Act became law. It remains to be seen whether the relaxed confidential submission standards can tempt companies with revenues north of the billion dollar border into the public markets.
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