On May 30th, the SEC updated its procedures for foreign private issuers wishing to make non-public submission to the SEC of draft registration statements for review by the SEC. Prior to the enactment of the JOBS Act, domestic issuers filing initial registration statements with the SEC were required to file publicly through the EDGAR system. Under certain limited circumstances, however, foreign private issuers had the option of submitting to the SEC registration statements and amendments on a non-public basis for SEC review in connection with their first-time registration of securities with the SEC.
Pursuant to Section 106(a) of the JOBS Act, any emerging growth company (EGC), in connection with its initial public offering, may submit to the SEC a draft registration statement for confidential, non-public review. Section 106(a) of the JOBS Act also requires that the EGC file publicly the initial confidential submission and all amendments at least 21 days prior to the date the company starts its road show. In addition, SEC policy requires EGCs to submit on EDGAR all company responses to SEC comment letters on confidential draft registration statements at the time the EGC first files its registration statement publicly on EDGAR. The SEC will then publicly release its comment letters and company responses no earlier than 20 business days following the effective date of the registration statement, which is the same time frame the SEC uses for non-confidential filings.
Pursuant to the updated procedures, the process for non-public submission of initial registration statements by foreign private issuers that are not EGCs now tracks the process applicable to EGCs. When a foreign private issuer utilizing the SEC’s non-public submission policy first publicly files its registration statement, it is also required to file publicly all previously submitted draft registration statements and to resubmit all previously submitted responses to SEC comment letters. Thereafter, the SEC will publicly release its comment letters and company responses in accordance with its policy described above. A foreign private issuer that both qualifies as an EGC and meets the SEC’s requirements for non-public submission of registration statements by foreign private issuers can elect to submit its initial draft registration statement confidentially to the SEC as an EGC or non-publicly as a foreign private issuer. The new filing and submission requirements set forth in the SEC’s May 30th update apply to foreign private issuers seeking non-public review (as opposed to confidential review as an EGC) only where the initial draft registration statement was submitted after May 30, 2012.
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.
The SEC published new instructions for the submission of draft registration statements by emerging growth companies (as permitted under the JOBS Act) and by foreign private issuers (under the SEC’s policy) for confidential, non-public review by the SEC. Such registration statements, exhibits and correspondence must be submitted to the SEC via a secure e-mail system. Users will be required to create an e-mail account. All draft submissions must be in text searchable PDF format and should include a transmittal letter identifying the issuer and the type of submission. Emerging growth companies should confirm their status as an EGC in their transmittal letters. The registration statement, correspondence and exhibits should each be in a separate file, using simple names to identify them, such as DRAFTS.pdf for the registration statements, LETTER.pdf for the transmittal letter and EXHIBIT10.1.pdf for each exhibit (numbered to correspond to the exhibit number). All SEC comment letters and other correspondence also will be sent via the secure email system. These procedures are effective May 14, 2012 and replace the SEC‘s prior announcement of April 5, 2012.
On April 23, 2012, the SEC posed a release reminding issuers that capital raising via crowdfunding is not yet a reality:
On April 5, 2012, the Jumpstart Our Business Startups (JOBS) Act was signed into law. The Act requires the Commission to adopt rules to implement a new exemption that will allow crowdfunding. Until then, we are reminding issuers that any offers or sales of securities purporting to rely on the crowdfunding exemption would be unlawful under the federal securities laws.
There is a lot of excitement in the securities and business worlds about the potential for crowdfunding to allow smaller companies to raise capital. But, I think much of that excitement is premature.
First, under Section 301(c) of the JOBS Act, the SEC has 270 days (yes, about 9 months) to issue rules implementing the crowdfunding provisions of the JOBS Act and the SEC may be unable to meet that deadline. Wave after wave of regulatory reform hitting the SEC has resulted in the SEC falling behind on its rule making activities under the Dodd-Frank Act. In addition, the JOBS Act requires the SEC to consult with any state securities commission and national securities association that that wants to provide input, which has the potential to consume a lot of time.
Second, the JOBS Act provides the SEC with a great deal of discretion on how to implement the crowdfunding provisions. While the JOBS Act received broad bipartisan and Presidential support, it is no secret that the SEC is not a fan of the crowdfunding. As such, it is difficult to predict the ultimate outcome of the SEC’s rulemaking activities with respect to crowdfunding or how those rules will be perceived by companies and the securities industry.