Early Bird Rates – Act by End of this Friday, April 13th: For the special early bird discount rate – both of the Conferences are bundled together with a single price – register by the end of this Friday, April 13th.
JOBS Act: Corp Fin’s New “Confidential Registration Statement Submissions” FAQs
Yesterday, Corp Fin issued 13 FAQs relating to the confidential submission process for draft registration statements by emerging growth companies. This new guidance is in addition to last week’s announcement about the confidential submission process.
– The Staff will not object if an emerging growth company does not treat “test-the-waters” communications conducted in reliance on Section 5(d) as a road show for purposes of Section 6(e). Section 5(d) test-the-waters communications are limited to communications with qualified institutional buyers (“QIBs”) and institutional accredited investors.
– An issuer currently in registration at the time of enactment of the JOBS Act that qualifies as an emerging growth company may switch to the confidential submission process for future amendments.
– A foreign private issuer that qualifies as an emerging growth company may use the confidential submission process to the same extent as a domestic company.
– Draft registration statements submitted confidentiality must be “substantially complete,” including a signed audit report of the registered public accounting firm and exhibits consistent with the existing requirements for non-public submissions by foreign private issuers.
Transcript: “The SEC Staff on M&A”
We have posted the transcript for the recent DealLawyers.com webcast: “”The SEC Staff on M&A.”
When President Obama signed the JOBS Act last week, he issued this statement that includes this excerpt:
The President is directing the Treasury Department, Small Business Administration and Department of Justice to closely monitor the implementation of this legislation to ensure that it is achieving its goals of enhancing access capital while maintaining appropriate investor protections. These agencies, consulting closely with the SEC and key non-governmental stakeholders, will report their findings to the President on a biannual basis, and will include recommendations for additional necessary steps to ensure that the legislation achieves its goals.
No doubt this is a reaction to the many Democrats who railed against the JOBS Act over the past month (and the response of some in Congress to reporter’s questions of whether they would monitor its consequences – the answer which was ‘no’ – at least they are honest about that!). But it’s just so strange – and unfortunately predictable these days – that the leaders in our government don’t even seem to know who should be minding the store. The Treasury, SBA and DOJ monitoring the securities laws? So I guess the SEC should be monitoring food and drugs…
Will the JOBS Act Rulemaking Impact the SEC’s Dodd-Frank Rulemaking Schedule?
Many members have emailed asking whether the slew of JOBS Act rulemaking ahead of Corp Fin will impact the timing of its Dodd-Frank rulemaking projects. Although I haven’t heard anyone from Corp Fin address this yet – and the SEC’s Dodd-Frank Implementation Schedule hasn’t changed – I can’t see how it won’t given the incredibly tight timeframe in which the Staff has to work.
How tight? Keith Bishop notes how the timeframe is so tight for the JOBS Act rulemaking – in his blog entitled “The SEC’s Rule Making Rule Doesn’t Follow The Rules” – that it might be impossible to finish under the President’s recent rulemaking directive…
Dodd-Frank: The SEC Finally Establishes the New “Investor Advisory Committee”
However, the SEC continues to plug away at its Dodd-Frank obligations – yesterday, it announced the formation of the new “Investor Advisory Committee” that was mandated by Section 911 of Dodd-Frank. Among the 21 members of the new committee is Steve Wallman – the tech guru that doubled as a SEC Commissioner in the ’90s who hasn’t been heard from much during the past decade…
On Thursday afternoon, President Obama signed the JOBS Act and it was off to the races for law firms as a new wave of memos bombarded the airwaves that night (we continue to post them in our “JOBS Act” Practice Area). There was a wave of other activity too – many crowdfunding services began (as will be covered in a future blog) and some regulatory activity as discussed below.
In addition, here is just a smattering of JOBS Act coverage in the press over the past week:
Corp Fin Issues Confidential Filing Guidance for Emerging Growth Companies
On Thursday, Corp Fin announced these procedures by which emerging growth companies can furnish a confidential IPO registration statement to the Staff. Section 106 of the JOBS Act provides that an EGC may submit its IPO registration statement to the Corp Fin Staff in draft form for confidential review – conditioned on the furnishing of the confidential submission and all amendments publicly with the SEC no later than 21 days prior to the date the company first conducts a road show for its IPO. Here’s more about this guidance culled from this O’Melveny & Myers memo:
Under this guidance, one copy of the draft registration statement should be sent to the following address:
Draft Registration Statement
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
The Division also announced the following with regard to the submission of draft registration statements for IPOs of emerging growth companies:
– the submission should include a transmittal letter confirming the issuer’s status as an emerging growth company;
– the draft registration statement should be submitted either as a text-searchable PDF file supplied on a CD/DVD or, alternatively, on paper (it may not be stapled or bound if submitted on paper); and
– there is no requirement to provide a registration fee at the time a confidential submission is made.
Following its receipt of a confidential submission, the Division will contact the emerging growth company to confirm receipt of the submission and to advise it of the office assigned to review the submission.
Emerging growth companies with questions regarding the draft registration statement submission and review process should call (202) 551-5867.
– Confidential Submissions by Foreign Private Issuers – In addition to the confidential submission process for emerging growth companies, the Division has long had a confidential submission process for certain foreign private issuers. This process is described in our Client Alert here. In its guidance, the Division announced that, going forward, any foreign private issuer that is permitted to submit a draft registration statement (either as an emerging growth company or under the Division’s foreign private issuer confidential submission policy) must now submit that draft registration statement in the same format and to the same address discussed above. In connection with this requirement, foreign private issuers may no longer use the e-mail address that the Division had provided for confidential submissions.
– Application of Section 5 to Confidential Submissions – The Division took the opportunity in the guidance to make clear that the confidential submission of a draft registration statement is not a public filing. Accordingly, a registration statement submitted through this process is not considered “filed” for purposes of Section 5 of the Securities Act.
JOBS Act and General Solicitation: 14 Law Firm White Paper
Also on Thursday, 14 law firms joined together to issue this white paper to address questions about private offerings during the transition period until the SEC adopts the required revisions to Rule 144A and Rule 506 under Regulation D. Under the JOBS Act, the SEC has 90 days – by July 4th – to eliminate certain existing prohibitions on general solicitation or general advertising. As noted in this Morrison & Foerster memo, the white paper “concludes that, until the SEC adopts final rules as directed by Title II of the JOBS Act, market participants relying on the Rule 506 and Rule 144A safe harbors will generally continue to implement customary procedures for these offerings. The report also concludes that market participants will continue to satisfy conditions of applicable safe harbors such as Securities Act Rules 135c, 152 and 155, as well as comply with applicable SEC and staff guidance regarding the integration of concurrent private and public offerings.”
While we didn’t see a flood of Dodd-Frank Act rulemaking in the first quarter of 2012 (there was one proposed rule relating to identity theft red flags, a final rule providing exemptions for securities-based swaps discussed below, changes to the net worth standard for accredited investors, and rules regarding investment adviser performance fees), the Staff did deliver the second of four reports to Congress on the implementation of consultant recommendations, as required by Section 967(c) of the Dodd-Frank Act. The SEC Staff had engaged Boston Consulting Group to comply with Section 967(b), which directed the SEC to engage an independent consultant to conduct a broad and independent assessment of the SEC’s internal operations, structure, funding, and the agency’s relationship with SROs.
The report notes that over the past year, the Staff has conducted assessments of potential organizational improvement opportunities under an initiative called the SEC Mission Advancement Program (MAP). The report notes operational improvements in three key areas: (1) reorganizing critical internal infrastructure, such as the Division of Enforcement and the Office of Compliance Inspections and Examinations, as well as the restructuring important administrative offices; (2) analyzing a broad array of agency activities in an effort to improve efficiency and the distribution of resources to key activities, implement stronger internal controls, and improve responsiveness; and (3) identifying areas for cost improvement, resulting in projected saving of $8.3 million over the next two years. However, the report notes that, given the limited resources that the SEC has available now, future activity will be focused on only a limited number of projects.
SEC Adopts Key Exemptions for Security-Based Swaps
Last week, the SEC adopted rules which exempt transactions by clearing agencies in security-based swaps from all provisions of the 1933 Act (other than the Section 17(a) anti-fraud provisions), as well as exempt these security-based swaps from 1934 Act registration requirements and from the provisions of the Trust Indenture Act, provided that conditions specified in the rules are met. Title VII of the Dodd-Frank Act does not contain an exemption from the 1933 Act or the 1934 Act registration provisions, or from Trust Indenture Act qualification, for security-based swaps. In the SEC’s view, however, compliance by a clearing agency with the registration and qualification provisions would likely be impracticable and frustrate the purposes of Title VII, which seeks to ensure that, wherever possible and appropriate, security-based swaps are cleared. The final rules are effective April 16, 2012.
JOBS Act to be Signed Today: Time to Generally Solicit?
The Jumpstart Our Business Startups Act will be signed today at a ceremony in the Rose Garden this afternoon. While a number of key portions of the law will go into effect immediately, most notably the breaks for “emerging growth companies,” many parts of the law will require further SEC action to implement the changes. Notably, Title II’s repeal of the ban on general solicitation and general advertising in Rule 506 offerings directs the SEC to change its rules, rather than changing the rules effective upon enactment – likewise for the provisions regarding crowdfunding and Regulation A style offerings. There will no doubt be guidance forthcoming on these topics once the JOBS Act is enacted, so stay tuned.
Nothing says “Jumpstart Our Business Startups” more than crowdfunding, the seemingly new approach to raising capital over the Internet that has been the focus of much of the debate and criticism in connection with the legislative efforts that culminated in last week’s passage of the JOBS Act. In my mind, crowdfunding is not really something new, in that people have been soliciting funds from friends, family and those who share an interest for a long time (think, e.g., the March of Dimes) – this activity is now supercharged thanks to the power of the Internet and social media. As we noted in the July-August 2011 issue of The Corporate Counsel, until the JOBS Act came along, crowdfunding didn’t fit nicely into existing 1933 Act exemptions, and efforts have been underway for a few years to encourage the SEC to adopt a small offering exemption that was specifically tailored to crowdfunding.
The JOBS Act, after some debate resulting in an amendment to the crowdfunding title when the legislation was considered by the Senate, delivers on the promise of a 1933 Act exemption for crowdfunding, but with some strings attached in the name of investor protection. In particular, Title III, “Crowdfunding,” will amend Section 4 of the 1933 Act to add a new paragraph (6), which provides an exemption from registration subject to the conditions that: (1) the aggregate amount sold to all investors by the issuer, including any amount sold in reliance on the crowdfunding exemption during the 12-month period preceding the date of the transaction, is not more than $1,000,000; (2) the aggregate amount sold to any investor by the issuer, including any amount sold in reliance on the crowdfunding exemption during the 12-month period preceding the date of the transaction, does not exceed: (a) the greater of $2,000 or 5 percent of the annual income or net worth of the investor, as applicable, if either the annual income or the net worth of the investor is less than $100,000; or (b) 10 percent of the annual income or net worth of an investor, as applicable, not to exceed a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000; (3) the transaction is conducted through a registered broker-dealer or funding portal that complies with the requirements of the exemption; and (4) the issuer complies with the requirements of the exemption.
The information requirements contemplated by the exemption ― which apply to both issuers and broker-dealers/funding portals ― are relatively steep, in that they contemplate providing information about risks (including asking questions of investors about risk), information about the issuer (including financial statements with varying levels of review/audit depending on the target amount raised), information about the offering (including a target amount where the issuer doesn’t receive the funds until the target amount is reached), and even ongoing SEC reporting after the offering is completed. The legislation contemplates the adoption of a whole new regulatory scheme applicable to the “funding portals” that host crowdfunding offerings, while at the same time giving those funding portals a break from full-blown broker-dealer registration. Intermediaries involved in crowdfunding offerings (or wanting to be involved in crowdfunding offerings) will need to figure out if they want to go with a broker-dealer model, or the presumably the more lightly regulated funding portal model.
But just in case you were getting excited to go out tomorrow and raise $1 million for a hot dog stand, note that the crowdfunding exemption leaves a lot for the SEC to determine through the rulemaking process. The JOBS Act directs the SEC to adopt implementing rules within 270 days of enactment, and who knows whether the SEC will be able to meet that deadline given the wide-ranging nature of this exemption and the seemingly obvious investor protection concerns that it raises.
Crowdfunding Gets an Association
Earlier this week, a collection of over fifty companies and individuals announced the formation of the National Crowdfunding Association. The NCFA is charged with “supporting, educating and protecting the American crowdfunding industry.” It is comprised of companies and individuals, funding portals, consultants and vendors to the industry. The group is going to hold its first National Crowdfunding Conference in July. Judging from my e-mail inbox these days, they are not going to be alone in holding crowdfunding events over the next few months.
Up Next: A Crowdfunding SRO?
A group is also seeking to establish a self-regulatory organization for the crowdfunding industry, to be dubbed the “Crowdfunding Industry Self Regulating Organization.” It is unclear at this time whether this effort will be successful and whether this group would ultimately become subject to SEC oversight. It will be very interesting to watch how this crowdfunding “industry” develops following enactment of the JOBS Act and the development of the SEC’s rules.
ISS recently announced a new “feedback review board,” which is designed to be used by investors, issuers, and other interested parties who wish to communicate with ISS about its research, policies and recommendations. The feedback review board is a web-based form where “market constituents” can submit comments “regarding accuracy of research, accuracy of data, policy application and general fairness of ISS policies, research and recommendations.” This can also be a place to notify ISS about factual inaccuracies in its data or research. ISS says that it may not respond to every submission through this review board. The review board is not supposed to supplant regular channels for communicating with ISS, and it isn’t a forum for seeking answers to policy questions or interpretations or lobbying for favorable vote recommendations. It is unclear whether this will be something that issuers would really be inclined to utilize, particularly given that larger issuers usually get a chance to correct factual inaccuracies in ISS reports prior to issuance. In any event, it certainly seems like it may at least open up another avenue to vent.
More JOBS Act Fun Facts
With the signing of the JOBS Act scheduled for this Thursday, it seems like a good time to highlight some of the more promising aspects of the Act. Title IV of the Act could ultimately turn out to be one of the unsung heroes of the legislation in terms of the impact on capital formation, depending on how it gets implemented by the SEC. This portion of the JOBS Act creates a whole new exemption under Section 3(b) of the Securities Act, under which an issuer will be able to offer and sell up to $50 million in securities within a 12-month period in reliance on the exemption. The issuer can offer equity securities, debt securities, and debt securities convertible or exchangeable for equity interests (including any guarantees of such securities), and the securities sold under this exemption will be offered and sold publicly (without restrictions on the use of general solicitation or general advertising) and will not be deemed “restricted securities.” The issuer may also “test the waters” with respect to the offering prior to filing any offering statement with the SEC, subject to any additional conditions or requirements that may be imposed by the SEC. The securities will be considered “covered securities” for NSMIA purposes and not subject to state securities review if offered and sold on a national securities exchange, or the securities are offered or sold to a “qualified purchaser.”
We affectionately dubbed the legislative initiatives which served as precursors to Title IV “Regulation A+” in the May-June 2011 issue of The Corporate Counsel, noting how the new Section 3(b) exemption being contemplated was an improved version of the much-maligned and rarely used Regulation A. The reason that this new provision is relatively exciting is that it could potentially open the door again to what are effectively smaller initial public offerings up to $50 million, which we rarely see today (rather, IPOs are more often in the $100 million to $200 million range in terms of amounts raised). Much will depend on how the SEC decides to implement the exemption, as it does have strings attached like submitting an offering statement to the SEC and distributing the offering statement to investors, as well as providing periodic disclosures after the offering is completed. This provision, unlike many of the other parts of the JOBS Act, doesn’t specify any deadline for rulemaking, which unfortunately may mean that it gets back-burnered while the SEC attends to more pressing rulemakings with short deadlines.
Board Portal Developments
In this podcast, Andrew Moore of Computershare Governance Services discusses the latest developments in board portals, including:
– What are you seeing companies doing in the area of board communications? What are the major trends?
– How is Computershare’s BoardWorks different than other board portals?
– What is driving directors and companies to look to this type of solution? Are there legal and compliance issues that online services like this can address?
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!
We have posted the April issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Members often ask what are the pressing issues being discussed down at the SEC. And those issues typically are not what people would think they would be. Sometimes they are about morale, sometimes they are about limited resources (by the way, Corp Fin is hiring accountants right now). But often they are about the types of things that folks are concerned about at their own job. The little things.
The buzz right now is that Dunkin’ Donuts has moved out of its internal location within the SEC’s HQ and replaced with an inferior tenant. And I can understand that. They didn’t have a Dunkin’ Donuts either time I worked there and I would have killed for one! Instead, they had a McDonalds and other fast-food joints that couldn’t hold a candle to the master of donuts. So far, no word of a strike or any other meaningful way to try to persuade Dunkin’ Donuts to return.
No, this is not an April Fool’s joke. A tad too early for that. Thanks to Dave for handling the blog next week as I am off for Spring Break 2012…
PCAOB’s Updated Standard-Setting Timeline
On Monday, the PCAOB updated its timeline for expected action on standard-setting projects. Here is Congressional testimony by Chair Jim Doty – and testimony from SEC Chief Accountant James Kroeker – on this topic from Wednesday (as part of a hearing on a draft bill that would amend Sarbanes-Oxley’s Section 103 to eliminate the PCAOB’s authority to mandate audit firm rotation – here’s a related Reuters article)…
As the sleepers of the STOCK Act continue to get visibility in the memos posted in our “Insider Trading” Practice Area (and this blog), hat tip to Bridgeway Software’s Blane Erwin for pointing out this excerpt from the Act (on pages 12 and 13):
Not later than 18 months after the date of enactment, the Secretary of the Senate and the Sergeant of Arms of the Senate and the Clerk of the House of Representatives shall develop systems to enable (A) electronic filing of reports… (B) public access to financial disclosure reports… (ii) allow the public to search, sort and download data contained in the reports.
As noted in this Washington Examiner article, the new software and hardware will be developed at a cool cost of $9 million ($3.2k per Congressman per year per this article). Wonder if the new system will be like the SEC’s Edgar? Take part in the anonymous poll below…
Latest Developments in Use of Supplemental Proxy Materials
In this CompensationStandards.com podcast, Jim Kroll of Towers Watson discusses the latest developments in using supplemental proxy materials for say-on-pay votes (here’s our ongoing list of supplemental materials), including:
– How many companies have filed them so far this year?
– Is the approach that companies are taking any different than last year?
– What are the pros and cons of using supplemental materials?
Poll: What Should the Name of the New Congressional Trading Database Be?
Did you know that the SEC had an internal contest to name its filing database back in the ’80s? Then Corp Fin’er Herb Scholl won that contest with his “EDGAR” entry. Now it’s your turn. Note that the suggestion of “Crotch” below is an acronym for “Congressional Recordkeeping of Trades, Changes & Hooch”:
In this podcast, Dave Lynn and Marty Dunn discuss the JOBS Act including:
– The new category of “emerging growth company” and the IPO “on-ramp” available to these companies
– The repeal of the prohibition on general solicitation and general advertising in Rule 506 private placements
– Crowdfunding
– A new Regulation A-style offering exemption for offerings up to $50 million
– Changes to the Exchange Act registration/reporting thresholds
Supreme Court Rejects Open-Ended Tolling of Section 16(b) Claims
On Monday, the US Supreme Court limited the ability to bring Section 16 short-swing profit claims years after the alleged improper trading in Credit Suisse Securities (USA) v. Simmonds. On the issue of whether equitable tolling even applies to the two-year period for bringing claims under Section 16(b), the Court split 4-4 – Chief Justice Roberts did not participate in the decision. The Court thus left that issue for another day. Nevertheless, the eight voting Justices held unanimously that, assuming the two-year period can be extended, the tolling rules articulated by the Ninth and Second Circuits impermissibly deviated from ordinary equitable tolling principles.
Alan Dye and Peter Romeo will now be able to finish their 4th Edition of the “Romeo & Dye Section 16 Treatise” as this is the first SCOTUS opinion to deal with Section 16 in decades – and is an important decision. Order your hard copy of the Treatise now so you can get your hands on a copy as soon as it’s hot off the presses…
