The JOBS Act continues to be a hot topic. Yesterday, the Practicing Law Institute presented its continuing legal education seminar on the JOBS Act. Some discussion highlights from the seminar include:
- Under Section 105(c) of the JOBS Act, an issuer that qualifies as an emerging growth company can engage in oral or written communications, prior to or after filing the registration statement with the SEC, with qualified institutional buyers and institutional accredited investors to determine whether they might have an interest in a contemplated securities offering, also known as “testing the waters.” The panel discussed the SEC’s recent requests, in connection with reviews of issuers’ registration statements, that the issuers provided on a supplemental basis any written materials used by issuers in connection with such testing the waters. It appears that the SEC is requesting these materials to determine if the materials are consistent with the issuer’s registration statement. The fact that the SEC is requesting copies of such materials, combined with the general reluctance on the part of issuers and investment bankers to engage in testing the waters process due to liability concerns, probably means that most issuers and investment bankers will not be using written materials to test the waters, at least in the near term.
- The SEC is asking emerging growth companies to indicate on the cover of their registration statements that they are an emerging growth company and to include in the registration statement disclosure regarding how and when emerging growth company status may be lost, the various exemptions available to the issuer as an emerging growth company, such as exemptions from Section 404(b) of the Sarbanes-Oxley Act, and the issuer’s election under Section 107(b) of the JOBS Act. Unless an issuer that is an emerging growth company opts out, under Section 107(b) of the JOBS Act, the issuer will be subject to any new or revised financial accounting standards on the effective dates applicable to private companies, rather than the effective dates applicable to public companies. Historically, the effective dates for private companies have been later than the effective dates for public companies. If the emerging growth company elects to opt out of the extended transition period, the SEC requests the issuer to state that such election is irrevocable. If the emerging growth company chooses to be subject to the later effective dates for new or revised financial accounting standards, the SEC is requesting issuers to include a risk factor (as well as disclosure in the critical accounting policies section of the MD&A) explaining that the issuer’s financial statements may not be comparable to companies that comply with the public company effective dates. There are at least a few SEC comments letters publicly available requesting this information.
- Under the JOBS Act, once SEC rules are in place, general solicitation or advertising will be permitted in connection with Rule 506 offerings so long as the issuer sells securities only to accredited investors. Interestingly, the definition of the term “accredited investor” provides that an accredited investor is not only someone that is actually an accredited investor, but also someone the issuer “reasonably believes” is an accredited investor. The general consensus was that the SEC will likely not seek to change the definition of “accredited investor,” but will seek to provide for fairly stringent steps issuers will have to take in order to satisfy the JOBS Act requirement that an issuer take “reasonable steps to verify” accredited investor status in connection with Rule 506 offerings that use general solicitation or advertising.