JOBS Act Update: SEC Issues New Guidance and Approves Amendments to FINRA Research Rules
The staff of the Division of Corporation Finance (Staff) of the Securities and Exchange Commission (SEC) recently issued new frequently asked questions (Title I FAQs) regarding Title I of the Jumpstart Our Business Startups Act (JOBS Act).1 While Title I of the JOBS Act is generally considered to apply only to capital markets transactions, in the Title I FAQs the Staff notes that an emerging growth company (EGC) may rely on certain Title I provisions in connection with exchange offers and mergers subject to compliance with existing rules for tender offers and proxy solicitations. The Title I FAQs also provide guidance on determining EGC status and the financial information required in certain EGC filings.
The Staff also recently announced that, beginning October 15, 2012, EGCs must file confidential, draft registration statements and related amendments and correspondence using the SEC’s EDGAR filing system rather than using the secure email system.2
On October 11, 2012, the SEC granted accelerated approval of proposed amendments to NASD Rule 2711 and Incorporated NYSE Rule 4723 to conform the rules with recent guidance provided by the staff of the SEC’s Division of Trading and Markets in the form of frequently asked questions regarding the JOBS Act’s research provisions (Research FAQs).4 Certain of the amendments are retroactively effective to April 5, 2012, while the other amendments are effective on the date of the SEC’s accelerated approval.
This alert summarizes key aspects of the Staff’s recent guidance and the research rule amendments.
Title I FAQs
“Test the waters” communications available for EGC exchange offers and mergers. An EGC may use “test the waters” communications with qualified institutional buyers and institutional accredited investors pursuant to Section 5(d) of the Securities Act of 1933 (Securities Act) in connection with an exchange offer or merger. However, the Staff noted that the JOBS Act did not amend the exchange offer or merger regulatory requirements under the Securities Exchange Act of 1934 (Exchange Act) that require the filing of written communications made in connection with the transaction. For example, an EGC would still be required to make required filings for pre-commencement tender offer communications and proxy soliciting materials in connection with a business combination transaction.
Confidential registration statements available for certain EGC exchange offers and mergers. An EGC may use the confidential submission process in Securities Act Section 6(e) to submit a draft registration statement for an exchange offer or merger that constitutes its initial public offering of common equity securities (IPO). In such a case, the Staff detailed an EGC’s filing obligations under the Securities Act and Exchange Act as follows:
- An EGC that does not commence its exchange offer before the effectiveness of the registration statement must publicly file the registration statement (including the initial confidential submission and all amendments) at least 21 days before the earlier of any road show or the anticipated effective date of the registration statement.
- An EGC that commences its exchange offer before the effectiveness of the registration statement pursuant to Securities Act Rule 162 must publicly file the registration statement (including the initial confidential submission and all amendments) at least 21 days before the earlier of any road show or the anticipated effective date of the registration statement, but no later than the commencement date of the exchange offer. Similarly, for the early commencement of exchange offers subject only to Regulation 14E, the registration statement must be filed at least 21 days before the earlier of any road show or the anticipated effective date of the registration statement, but no later than the commencement date of the exchange offer.
- An EGC must make the required filings under Securities Act Rule 425 (unless it is relying on the Securities Act Section 5(d) provision for test the waters communications) and Exchange Act Rules 13e-4(c) and 14d-2(b) for pre-commencement tender offer communications.
- An EGC must file the tender offer statement on Schedule TO on the commencement date of the exchange offer.
- In a merger where the target is subject to Regulation 14A or 14C and the registration statement of the EGC acquiror includes a prospectus that also serves as the target’s proxy or information statement, the acquiror must publicly file the registration statement (including the initial confidential submission and all amendments) at least 21 days before the earlier of any road show or the anticipated effective date of the registration statement. The acquiror must also make the required filings under Securities Act Rule 425 (unless it is relying on the Securities Act Section 5(d) provision for test the waters communications) and Exchange Act Rule 14a-12(b) for any soliciting material, as applicable.
Determining EGC status post-merger. The Staff provided the following two merger examples to illustrate how EGC status should be evaluated post-merger. In each example, the issuers’ fiscal year is the calendar year, the transactions occurred on September 30, 2012 and Title I FAQ number 24, which relates to the determination of EGC status following the succession of Exchange Act reporting obligations, is not implicated.
- Example 1 - Company A acquires Company B for cash or stock, in a forward acquisition. Company A is both the legal and the accounting acquiror.
- Example 2 - Company C undertakes a reverse merger with Company D, an operating company. Company D is presented as the predecessor in the post-transaction financial statements.
The Staff noted that Company A’s and Company C’s EGC status post-merger should be evaluated as follows:
Financial statement requirements. If an EGC acquiror is not a shell company and presents only two years of audited financial statements in its merger registration statement, it may also present only two years of audited financial statements for the target.
If an EGC that is not a shell company presented only two years of audited financial statements in its IPO registration statement and has not yet filed three years of audited financial statements in an annual report on Form 10-K, it may present in its Form 8-K reporting an acquisition only two years of audited financial statements for an acquired business whose significance would otherwise require three years.
As the JOBS Act provision that allows the presentation of two years of audited financial statements (instead of three years) applies only to an IPO registration statement:
- unless it is a smaller reporting company, an EGC that has not yet conducted an IPO, but is required to register a class of equity securities under the Exchange Act because it has more than $10 million in assets and 2,000 or more stockholders of record at the end of its most recent fiscal year, must file three years of audited financial statements in its Exchange Act registration statement on Form 10 or 20-F; and
- an EGC whose initial public offering involves debt securities (instead of common equity securities) must file three years of audited financial statements in its registration statement.
Despite the Staff’s position in the last bullet, if an EGC conducts a registered debt offering after its IPO it would not be required to present financial statements prior to the earliest audited period presented in its IPO registration statement.
An issuer that has lost its EGC status is not required to present in subsequently filed registration statements and periodic reports selected financial data or a ratio of earnings to fixed charges for periods prior to the earliest audited period presented in its initial Securities Act or Exchange Act registration statement.
EGC status for formerly public issuers. An issuer whose IPO occurred on or before December 8, 2011, and who was once an Exchange Act reporting company but is not currently required to file Exchange Act reports, can take advantage of all of the benefits of EGC status for its next registered offering and thereafter until it triggers one of the EGC disqualification provisions. This position is not available to an issuer that has had the registration of a class of its securities revoked pursuant to Exchange Act Section 12(j). Based on the particular facts and circumstances, the Staff may question the EGC status of an issuer if it appears that the issuer ceased to be an Exchange Act reporting company for the purpose of conducting a registered offering as an EGC.
EGC status for subsidiaries. The Staff posed the question of how to determine EGC status when a parent decides to spin-off a wholly-owned subsidiary, register an offer and sale of the wholly-owned subsidiary’s common stock for an IPO or transfer a business into a newly-formed subsidiary for purposes of an IPO of that subsidiary’s common stock. In general, the analysis to determine whether an issuer is an EGC focuses on whether the issuer, and not its parent, meets the requirements of an EGC. Based on the particular facts and circumstances, however, the Staff may question the EGC status of an issuer if it appears that the issuer or its parent is engaging in a transaction for the purpose of converting a non-EGC into an EGC, or for the purpose of obtaining the benefits of EGC status indirectly when it is not entitled to do so directly.
EGC revenue test determination. The EGC revenue test applies to the most recently completed fiscal year, regardless of whether financial statements for the fiscal year are presented in the registration statement. For example, a calendar-year issuer that wants to file an IPO registration statement in January 2013 would look to 2012 revenues even though the registration statement would contain only financial statements for the nine months ended September 30, 2012 rather than for all of 2012.
Signature and consent requirements for draft registration statements. The Staff reiterated that a draft registration statement is not required to (1) be signed by the issuer or any of its officers or directors or (2) include the consent of auditors and other experts. The Title I FAQs noted that upon public filing, the previous confidential submissions are not required to be signed or to include consents.
Submitting Draft Registration Statements Using EDGAR
The JOBS Act allows eligible EGCs to submit draft registration statements for confidential, non-public Staff review. From May 14 to October 1, 2012, eligible EGCs were required to submit draft registration statements and amendments using a secure email system. From October 1 to October 14, 2012, eligible EGCs could choose to submit their draft registration statements and amendments using either the secure email system or EDGAR.5 Beginning October 15, 2012, eligible EGCs must use EDGAR to submit draft registration statements and amendments as well as related correspondence. Going forward, the Staff will deliver comment letters related to draft registration statements following its normal procedures unless an EGC requests otherwise.
The SEC recently issued instructions on how to use EDGAR to submit initial confidential registration statements and amendments and to publicly file previously submitted confidential registration statements and amendments.6 The Staff also sent a letter to issuers whose confidential registration statements were under review to explain how they could transition to electronic submissions using EDGAR.7 Submitting draft registration statements and amendments using EDGAR will eliminate the need for EGCs to file copies of previously submitted draft registration statements as exhibits to their first publicly filed registration statements to comply with the JOBS Act. Instead, issuers can direct the EDGAR system to publicly file them as individual documents on EDGAR.
Submission of a draft registration statement or amendment on EDGAR requires EDGAR access codes. An issuer that has not yet submitted a Form ID to apply for the codes must do so, and receive the codes, prior to making a submission on EDGAR.
Amendments to FINRA Research Rules
Analyst participation in communications with management. NASD Rule 2711(c)(4) currently prohibits a research analyst from participating “in efforts to solicit investment banking business,” including any “pitches” for investment banking business or other communications with companies for the purpose of soliciting investment banking business. To reflect the guidance in the Research FAQs, the Financial Industry Regulatory Authority (FINRA) amended NASD Rule 2711(c)(4) to indicate that it will not prevent a research analyst from attending a pitch meeting in connection with an EGC’s IPO that is also attended by investment banking personnel so long as the analyst does not engage in otherwise prohibited conduct in such meetings, including efforts to solicit investment banking business.
Like the Research FAQs, the amendment does not offer any relief to analysts at firms subject to the Global Research Settlement. Thus, research analysts at Global Research Settlement firms may not attend such pitch meetings. As noted in the Research FAQs, a research analyst from a non-Global Research Settlement firm that attends a pitch meeting for an EGC IPO may introduce themselves, outline their research program and the types of factors considered in their analysis, and ask follow-up questions to better understand management’s factual statements.
As the amendment only relates to EGC IPOs, research analysts will still be prohibited from participating in pitch meetings in connection with EGC secondary offerings and non-EGC securities offerings. Moreover, as noted in the Research FAQs, research analysts may not attend meetings with EGC management where investors are also present.
Research quiet periods. The JOBS Act prohibits any registered national securities association from restricting the publication of any research report or the making of a public appearance by an investment bank with respect to an EGC’s securities at any time after an EGC’s IPO date or prior to the expiration date of any lock-up agreements entered into in connection with an EGC’s IPO. The JOBS Act refers only to the “expiration” of a lock-up agreement and does not explicitly address the period prior to a “waiver” or “termination” of a lock-up agreement. In accordance with the guidance in the Research FAQs, FINRA amended NASD Rule 2711(f) to eliminate the following quiet periods:
- the 40-day quiet period after an EGC IPO imposed on a FINRA member that acts as manager or co-manager;
- the 25-day quiet period after an EGC IPO imposed on a FINRA member that participates as an underwriter or dealer (other than manager or co-manager); and
- the 15-day quiet period applicable to FINRA members that act as manager or co-manager prior to the expiration, waiver, or termination of a lock-up agreement or any other agreement that such member has entered into with the EGC or its stockholders that restricts or prohibits the sale of securities held by the EGC or its stockholders after an IPO or secondary offering.
The JOBS Act makes no reference to research quiet periods during a period of time after the expiration of a lock-up agreement (as opposed to prior) entered in connection with an EGC IPO, or after a secondary offering of an EGC’s securities (as opposed to an IPO). In accordance with the guidance in the Research FAQs, FINRA amended NASD Rule 2711(f) to eliminate the following quiet periods:
- the 15-day quiet period applicable to FINRA members that act as manager or co-manager after the expiration, waiver, or termination of a lock-up agreement or any other agreement that such member has entered into with the EGC or its stockholders that restricts or prohibits the sale of securities held by the EGC or its stockholders after an IPO or secondary offering; and
- the 10-day quiet period after an EGC secondary offering imposed on a FINRA member that acts as manager or co-manager.
The amendments only relate to EGC IPOs and secondary offerings. Thus, existing quiet period restrictions will continue to apply in connection with non-EGC IPOs and secondary offerings.
Corresponding amendments to NYSE rules. FINRA made corresponding amendments to Incorporated NYSE Rule 472.
Effective dates. The amendments:
- allowing analysts to attend pitch meetings in connection with an EGC IPO and eliminating the 25- and 40-day post-IPO quiet periods and the 15-day quiet period prior to the expiration, termination or waiver of a lock-up agreement, and the corresponding changes to Incorporated NYSE Rule 472, became effective retroactively to April 5, 2012 (the date the JOBS Act was enacted); and
- eliminating the 10-day quiet period after an EGC secondary offering and the 15-day quiet period after the expiration, termination or waiver of a lock-up agreement, and the corresponding changes to Incorporated NYSE Rule 472, became effective on October 11, 2012.
1. See SEC Div. of Corp. Fin., JOBS Act Frequently Asked Questions - Generally Applicable Questions on Title I of the JOBS Act, Questions 42 - 54 (Sep. 28, 2012), available at http://sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htm.
2. See SEC Div. of Corp. Fin., Draft Registration Statements Required to Be Submitted and Filed Using EDGAR Beginning October 15, 2012 (Oct. 11, 2012), available at http://sec.gov/divisions/corpfin/cfannouncements/drsfilingprocedures101512.htm.
3. Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change to Amend NASD Rule 2711 and Incorporated NYSE Rule 472 to Conform with the Requirements of the Jumpstart Our Business Startups Act and Related Changes, Release No. 34-68037 (Oct. 11, 2012), 77 Fed. Reg. 63908 (Oct. 17, 2012), available at https://federalregister.gov/a/2012-25501.
4. Please see our client alert dated September 24, 2012, SEC Issues Guidance on JOBS Act Research Provisions.
5. See SEC Div. of Corp. Fin., Draft Registration Statements to Be Submitted and Filed on EDGAR (Sep. 26, 2012), available at http://sec.gov/divisions/corpfin/cfannouncements/drsfilingprocedures.htm.
6. See How to Use EDGAR to Submit Draft Registration Statements and Amendments and File Them in Accordance with the Requirements of the JOBS Act (Sep. 26, 2012), available at http://sec.gov/divisions/corpfin/guidance/drsfilingprocedures.pdf.
7. See SEC Div. of Corp. Fin., Sample Letter Explaining Transition to EDGAR Submission and Filing of Draft Registration Statements (Oct. 3, 2012), available at http://sec.gov/divisions/corpfin/guidance/draftregstatementedgar1012.htm.