It seems highly likely that the Jumpstart Our Business Startups Act (some call it the “JOBS Act,” others call it the “Jumpstart Act” for short) will get signed into law this week, and many of the questions I have been getting revolve around the immediate impact of the new law on offerings.
Title I of the JOBS Act, “Reopening American Capital Markets to Emerging Growth Companies,” will be effective immediately upon enactment, so that is where most of the action will be under the JOBS Act until the SEC adopts the implementing rules required under the other titles. For a company that is contemplating an initial public offering filing in the near future and meets the generous definition of “emerging growth company” (e.g., having total annual revenue of less than $1 billion during the most recently completed fiscal year), the most immediate effect will be the availability of a process to submit a confidential draft of the registration statement to the SEC for its review, provided that the initial filing and all amendments are filed on EDGAR no later than 21 days before the date of the roadshow. Based on what has been said at recent conferences, I expect that the Staff will issue guidance very soon after enactment to describe how this confidential review process will work in practice. In terms of content of the registration statement, any company meeting the “emerging growth company” definition that is contemplating an IPO filing (or that is already in registration) will want to consider the availability of reduced financial statement requirements ― only two years of audited financial statements instead of three years, MD&A corresponding to the number of years of audited financial statements presented in the filing, and the “smaller reporting company” scaled disclosures for executive compensation (for more on the executive compensation provisions, see Mark Borges’ blog on CompensationStandards.com). While these breaks sound good, companies may still need to consider if the reduced disclosures might hurt the marketability of the offering, particularly for those companies that are already on file and have provided the more fulsome information. Under Section 107(a) of the JOBS Act, a company may forgo any exemption and instead comply with the requirements applicable to an issuer that is not an emerging growth company.
In terms of the breaks that the JOBS Act provides on permissible “test the waters” communications with QIBs and institutional accredited investors, we may not see issuers and underwriters rushing out right away to engage in those communications, particularly with respect to written communciations. Instead, the reaction might be akin to what we saw with free writing prospectuses back in 2005, where there was (and continues to be) caution about the use of written communications outside of a Section 10(a) prospectus while in IPO mode. Likewise, we may not see an immediate rush to providing research in an around the time of the IPO ― despite the fact that the research will no longer be deemed an offer under the Securities Act ― because I think it will likely take at some lead time for banks to get comfortable (if they can get there at all) with the process of providing research for IPO companies before, during and immediately after the offering, as well as the advisability of that practice from an overall marketing perspective. In any event, all of these bold new communications rules are being actively considered as we speak, and will undoubtedly change the landscape for IPOs in the long term.
It is important to note that the other capital raising provisions of the Act ― the repeal of the ban on general solicitation and general advertising in Rule 506 offerings, the new crowdfunding exemption under Securities Act Section 4 and the new Regulation A-style Section 3(b)(2) exemption ― all require SEC rulemaking to implement the changes contemplated by the Act, so we will not likely see any action on those provisions until later on this year, at the earliest.
Be on the lookout for more coverage in the upcoming issue of The Corporate Counsel.
April Fool’s Day? It is No Joke at the SEC this Year
It is hard to imagine a day when the SEC wasn’t so saddled with Congressionally-mandated rulemaking projects that folks there would actually take the time to play an April Fool’s Day prank poking fun at the SEC’s own rule proposals. Just five short years ago — in those simpler, pre-financial crisis days ― Broc noted how Chairman Cox had issued a fake press release announcing the Commission’s plans to require that publicly-listed companies disclose the pay and perks of the “top 100 people who make more than the CEO.” This was obviously poking fun at the “Katie Couric” rule that surfaced during the 2006 executive compensation rulemaking, which of course never saw the light of day.
I am afraid that in today’s post-Dodd-Frank Act world, we wouldn’t necessarily identify something like that press release as being a joke, but rather we would assume it is just another new rule pursuant to some Congressional mandate along the lines of disclosure regarding the ratio of CEO pay to median employee pay, or conflict minerals for that matter.
I was still at the SEC when this fake press release came out (but I had nothing to do with it), and I will never forget how my friend in the SEC press office called to tell me about the impending release first thing in the morning, because he was very concerned that I might have some sort of medical emergency when I saw the press release hit the wires.
Our April Eminders is Posted!
– Dave Lynn