SEC’s Division of Corporation Finance Issues JOBS Act Guidance
On April 5, 2012, President Obama signed the Jumpstart Our Business Startups Act (JOBS Act) into law. Previously, both houses of Congress overwhelmingly passed the JOBS Act.1 While certain provisions of the JOBS Act require the Securities and Exchange Commission (SEC) to conduct rulemaking before they take effect, other provisions became immediately effective on April 5, 2012, creating numerous interpretive questions.2 As expected, the staff of the SEC’s Division of Corporation Finance (Staff) has commenced providing guidance on those JOBS Act provisions that are immediately effective.
On April 5, 2012, the Staff issued an announcement regarding the process for qualifying companies to confidentially submit draft registration statements.3 Over the past week, the Staff has issued frequently asked questions regarding the confidential submission process,4 the changes to the requirements for registration and deregistration under the Securities Exchange Act of 1934 (Exchange Act)5 and generally applicable questions on Title I of the JOBS Act.6
This alert summarizes key aspects of the Staff’s recent JOBS Act guidance.
Determining Emerging Growth Company Status
Title I of the JOBS Act created a new category of public company known as an “emerging growth company,” which is defined as an issuer, including a foreign private issuer, with less than $1 billion of total annual gross revenues during the most recently completed fiscal year.
Emerging growth company revenue test.
The Staff interprets the phrase “total annual gross revenues” in the emerging growth company definition to mean total revenues as presented on the income statement presentation under U.S. GAAP (or International Financial Reporting Standards as issued by the International Accounting Standards Board, if used as the basis of reporting by a foreign private issuer). If a foreign private issuer’s financial statements are presented in a currency other than U.S. dollars, total annual gross revenues should be calculated in U.S. dollars using the exchange rate as of the last day of the most recently completed fiscal year. If the financial statements for the most recent year included in an issuer’s registration statement are those of its predecessor, the predecessor’s revenues should be used when determining if the issuer meets the emerging growth company definition.
Emerging growth company definition effective date.
The JOBS Act provides that an issuer whose first sale of common equity securities pursuant to an effective registration statement under the Securities Act of 1933 (Securities Act) occurred on or before December 8, 2011, cannot qualify as an emerging growth company. An issuer may qualify as an emerging growth company (assuming the other requirements of the definition are satisfied) if it had a Securities Act registration statement declared effective on or before December 8, 2011, as long as the first sale of common equity securities occurred after December 8, 2011.
The phrase “first sale of common equity securities” includes any sale of an issuer’s common equity securities. Thus, the first sale is not limited to an issuer’s initial primary offering of common equity securities for cash, but could also include an offering of common equity securities pursuant to an employee benefit plan registered on Form S-8 as well as a selling shareholder’s secondary offering on a resale registration statement.
Emerging growth company determination date.
The Staff has indicated that they will apply the following general principles with respect to the dates on which emerging growth company status must be determined:
- An issuer must qualify as an emerging growth company at the time of submission of a confidential draft registration statement and each subsequent amendment that is submitted confidentially. If an issuer ceases to qualify as an emerging growth company while undergoing the confidential review of its draft registration statement (for example, since the initial submission date, a fiscal year has been completed with revenues over $1 billion), it would need to publicly file a registration statement to continue the review process and comply with current SEC rules and regulations applicable to issuers that are not emerging growth companies.
- As long as an issuer qualifies as an emerging growth company at the time it first publicly files its registration statement, the disclosure provisions for emerging growth companies would apply through effectiveness of the registration statement even if during registration the issuer subsequently loses its emerging growth company status.
- An issuer must determine whether it qualifies as an emerging growth company at the time it engages in permissible test the waters communications. For example, if an issuer made permissible test the waters communications before filing a registration statement at a time when it qualifies as an emerging growth company, but is no longer an emerging growth company at the time it files a registration statement, the Staff would not view the earlier communications as a violation of Section 5 of the Securities Act. However, further test the waters communications would not be permitted if the issuer no longer qualifies as an emerging growth company.
Disclosing emerging growth company status.
An emerging growth company should disclose its emerging growth company status on the cover page of its prospectus included in both its confidentially submitted draft registration statement and in its publicly filed registration statement.
The Staff has indicated that they will consider it important for an issuer to discuss its emerging growth company status and the risks associated with such status. For example, the Staff noted that an emerging growth company should consider discussing that it is exempt from the auditor attestation requirement for internal control over financial reporting and the related risks.
Non-convertible debt issuance disqualification provision.
An emerging growth company will lose that status on the date on which it has issued more than $1 billion in non-convertible debt during the previous three-year period. This test is applied on a three-year rolling period basis. The phrase “non-convertible debt” means any non-convertible security that constitutes indebtedness (as opposed to bank debt), whether issued in a registered or unregistered offering and whether or not it is still outstanding at the determination date.
Scaled Disclosure Available to Emerging Growth Companies
Elective nature of scaled disclosure.
With the exception of the extended transition period for complying with new or revised accounting standards discussed in the next paragraph, an emerging growth company has the ability to comply with all, some or none of the scaled disclosure provisions available to emerging growth companies in Title I of the JOBS Act.
Notification of decision on transition period for complying with new or revised accounting standards.
An emerging growth company must choose whether or not it will take advantage of the extended transition period for complying with new or revised accounting standards “at the time the company is first required to file a registration statement, periodic report, or other report with the [SEC] under section 13 of the Securities Exchange Act of 1934” and notify the SEC of such choice.7 This decision should be taken seriously as any decision to opt out of the extended transition period is irrevocable.
If an emerging growth company decides not to take advantage of the extended transition period, it should:
- if using the confidential submission process, notify the Staff of its choice in the initial confidential submission;
- if currently in registration, disclose its choice in its next amendment to the registration statement; and
- if already subject to Exchange Act reporting, disclose its choice in its next periodic report.
If an emerging growth company decides to take advantage of the extended transition period, it should disclose for each recently issued accounting standard during the transition period the date on which adoption is required for non-emerging growth companies and the date on which it will adopt the recently issued accounting standard, assuming it remains an emerging growth company as of such date.
Conflicts between Title I of the JOBS Act and SEC rules.
Until the SEC amends its form requirements and rules to be consistent with the emerging growth company scaled disclosure provisions in Title I, an emerging growth company may comply with those disclosure provisions in its registration statements, periodic reports and proxy statements, even if doing so would be inconsistent with existing SEC rules and regulations. In other words, the disclosure provisions in Title I supersede, in relevant part, existing SEC rules and regulations.8
An emerging growth company’s CEO and CFO are required to certify in their Sarbanes-Oxley Act Section 906 certifications that the issuer’s periodic report fully complies with the requirements of Exchange Act Sections 13(a) or 15(d). The Staff has indicated that it views compliance with applicable JOBS Act sections as being consistent with full compliance with the requirements of Exchange Act Sections 13(a) or 15(d).
Foreign private issuers.
A foreign private issuer that qualifies as an emerging growth company may comply with the scaled disclosure provisions available to emerging growth companies to the extent relevant to the form requirements for foreign private issuers.
A Canadian issuer filing under the Multi-Jurisdictional Disclosure System (MJDS) that satisfies the emerging growth company definition can qualify as an emerging growth company. The disclosure requirements for such a Canadian issuer would continue to be established under its home-country standards in accordance with MJDS. However, the other provisions of Title I, including the test the water provision and the deferral of compliance with the auditor attestation requirement, would be available to such a Canadian issuer.
Switching to scaled disclosure.
An issuer that qualifies as an emerging growth company and that has a registration statement that was initially filed before April 5, 2012 may switch to the scaled disclosure provisions available to emerging growth companies in a pre-effective amendment to a pending registration statement or in a post-effective amendment. However, the Staff has indicated that if an issuer takes advantage of this accommodation, the Staff may seek other disclosures in response to the removal of disclosure and issuers should consider adding disclosure regarding the omitted information (for example, if the third year of audited financial statements removed represents poor financial results).
An emerging growth company whose initial public offering of common equity securities (IPO) occurred after December 8, 2011 and before April 5, 2012, may file its next periodic report using the scaled disclosure provisions available to emerging growth companies.
Scaled selected financial data in IPO registration statement.
An emerging growth company presenting two years of audited financial statements in its IPO registration statement, as permitted under the JOBS Act, may also limit the selected financial data presented in the registration statement to two years as well.
Audited financial statements in non-IPO registration statements.
Although the scope of the JOBS Act is limited to the audited financial statements contained in the IPO registration statement for an emerging growth company, the Staff will not object if in other registration statements an emerging growth company does not present audited financial statements for any period before the earliest audited period presented in connection with its IPO.
Audited financial statements of other entities.
Generally, when an issuer acquires a business (or makes an investment in a business recorded under the equity method) that is deemed “significant” under the relevant tests found in Regulation S-X, the issuer would be required to present up to three years of financial statements in its registration statement. However, for an emerging growth company that only presents two years of audited financial statements in its IPO registration statement, the Staff will not object if only two years of financial statements are presented for such significant acquired businesses in the same registration statement.9
Confidential Submission Process for Emerging Growth Companies
Confidential submission of draft registration statements.
An emerging growth company may submit to the SEC a draft registration statement for the first sale of its common equity securities and related amendments for confidential, non-public review, so long as the initial submission and all amendments are publicly filed on the SEC’s EDGAR filing system at least 21 days before the road show.10 As a result, an emerging growth company that previously had registered sales of securities other than common equity under the Securities Act would still qualify to use the confidential submission process.
Confidential submission process.
For now, an eligible emerging growth company submitting its draft Securities Act registration statement confidentially should file the draft in a text searchable PDF file on a CD/DVD or in paper.11 The confidential submission should be accompanied by a transmittal letter in which the issuer confirms its emerging growth company status, but need not be filed under cover of a Rule 83 confidential treatment request to preserve the confidentiality of the filing. This confidential submission process announced by the Staff will only serve as a stopgap until it can fully implement a system that allows electronic transmission and receipt of confidential submissions.
A foreign private issuer that is eligible to confidentially submit draft registration statements either as an emerging growth company or pursuant to the Staff’s policy on non-public submissions from foreign private issuers12 must submit its draft registration statements in the same manner and to the same address as domestic issuers because the email address previously available for foreign private issuer non-public submissions is no longer active.
If a foreign private issuer that qualifies as an emerging growth company chooses to take advantage of any accommodation available to emerging growth companies, then it will be required to publicly file its confidential submissions at least 21 days before the road show. If the foreign private issuer chooses not to take advantage of any accommodation available to emerging growth companies, it may still qualify to submit a draft registration statement on a non-public basis if it meets the requirements for non-public submissions set forth in the Staff’s policy on non-public submissions from foreign private issuers.
The Staff noted that it does not currently expect the confidential submission process would change the typical review times for registration statements.
A filing fee is not required in connection with the confidential submission of a draft registration statement. The filing fee is not due until the registration statement is first publicly filed on EDGAR.
Pre-filing offer prohibition.
After the confidential submission of a draft registration statement, the existing prohibition under the Securities Act against making offers of a security in advance of filing a registration statement still applies because a confidential submission does not constitute a “filing” for purposes of the Securities Act prohibition. Nevertheless, the JOBS Act provides that an emerging growth company may engage in test the waters communications with qualified institutional buyers (QIBs) and institutional accredited investors prior to filing a registration statement with respect to the sale of securities referenced in such communications, which represents a significant change to the long-standing “gun-jumping” restrictions. While it's uncertain as to how quickly standardized practices will develop, we expect that ultimately test the waters communications with QIBs and institutional accredited investors will become a customary part of the offering process for emerging growth companies.
Content of draft registration statement.
The JOBS Act does not specify what needs to be included in a draft registration statement that is submitted confidentially. However, the Staff has stated that it will continue its policy of not reviewing any registration statement, including a confidentially submitted draft, that is materially deficient or incomplete. Thus, draft registration statements should be substantially complete at the time of initial submission, including a signed auditor's report and exhibits. As a confidential submission does not constitute a “filing” for purposes of the Securities Act, it is not required to be signed or to include the consent of auditors and other experts. As is the case with publicly filed registration statements, an emerging growth company may omit certain limited information from its initial submissions pursuant to existing rules and regulations governing the content of filed registration statements, including the public offering price and other offering-related information.
Calculating the 21-day period.
An emerging growth company’s IPO registration statement, including its confidential submissions, must be publicly filed at least 21 days before it conducts a “road show” as defined in the Securities Act.13 Notwithstanding the road show definition, the Staff has indicated that an emerging growth company’s permissible test the waters communications with QIBs and institutional accredited investors will not be treated as a “road show” for the purpose of calculating the 21-day period. As a result, the road show would only consist of those meetings traditionally viewed as the road show when an emerging growth company and underwriters begin actively marketing the offering. As is currently the case with publicly filed registration statements, an emerging growth company should keep the Staff that is reviewing the registration statement informed about the expected schedule.
If an emerging growth company does not conduct a traditional road show and does not engage in activities that would come within the definition of road show, then its registration statement and confidential submissions should be publicly filed on EDGAR at least 21 days before the anticipated date of effectiveness of the registration statement. If an emerging growth company does not conduct a traditional road show, but will have communications that would come within the definition of road show and do not meet the conditions for permissible test the waters communications (for example, holding an investor meeting to market the offering that is not limited to QIBs or institutional accredited investors), then the registration statement would need to be filed at least 21 days before those communications.
An eligible emerging growth company should carefully consider the timing of its initial public filing in relation to its road show as the Staff may still issue comments on the initial public filing.
Form of first public filing.
When the registration statement is first publicly filed, each confidential submission should be filed as a separate Exhibit 99. The first publicly filed registration statement should be complete, including signatures, signed audit reports, consents, exhibits and filing fees.
Transition for issuers in IPO registration as of April 5, 2012.
An issuer that qualifies as an emerging growth company and that is currently in registration with an IPO registration statement as of April 5, 2012 can switch to the confidential submission process for future amendments so long as it is eligible to submit its registration statement on a confidential basis. An emerging growth company that wants to make the transition to confidential submissions should contact its Staff review team to coordinate the process.
If an emerging growth company makes the transition, its prior public filings will not count for purposes of the requirement to publicly file the registration statement at least 21 days before the road show. As a result, the emerging growth company must publicly file all of its confidential submissions at least 21 days before the road show.
Limited offering communications safe harbor.
An emerging growth company that relies on the confidential submission process may not rely on the Rule 134 safe harbor for limited offering communications until it publicly files its registration statement on EDGAR.
Changes to Exchange Act Registration and Deregistration Requirements
Treatment of issuers that triggered Exchange Act registration obligations before April 5, 2012.
Any issuer (other than a bank holding company) that triggered an Exchange Act Section 12(g) registration obligation with respect to a class of equity securities as of a fiscal-year end before April 5, 2012,14 but would not trigger such obligation under the JOBS Act’s amended shareholder of record thresholds (2,000 or 500 who are not accredited investors), would no longer be subject to Section 12(g) registration obligations for that class so long as the issuer has not yet registered that class under Section 12(g). If such an issuer has filed an Exchange Act registration statement that is not yet effective, it may withdraw the registration statement. If such an issuer has registered a class of equity securities under Section 12(g), it must continue that registration unless it is eligible to deregister under Section 12(g) or current rules.15
Determining accredited investor status.
Since the Exchange Act Section 12(g) registration threshold changes were effective as of April 5, 2012, issuers should evaluate whether, under the amended thresholds, they could be subject to Exchange Act registration at the end of their next fiscal year-end. The greatest difficulty for issuers that are not bank holding companies will be the determination of whether they have 500 non-accredited investors. The Staff has indicated that issuers will be responsible for making the accredited investor status determination and has not yet decided whether it will provide guidance or rulemaking to assist issuers in making the determination.
Even if the Staff does not issue guidance or rulemaking in this area, the SEC must revise Securities Act Rule 506 to, among other things, require issuer verification of accredited investor status for Rule 506 offerings and specify the methods an issuer would use to verify accredited investor status. In the absence of Staff guidance in the Section 12(g) arena, the upcoming Rule 506 rulemaking may prove instructive for issuers trying to determine accredited investor status for Section 12(g) purposes.
Exclusion of certain current and former employees from shareholder of record calculation.
As of April 5, 2012, an issuer, including a bank holding company, may exclude from its shareholder of record calculation persons who received securities pursuant to an employee compensation plan in Securities Act-exempt transactions whether or not those persons are current employees of the issuer. Accordingly, an issuer can exclude such persons now even though the SEC has yet to adopt the related safe harbor provisions required by the JOBS Act.
Status of transferees.
The JOBS Act allows an issuer to exclude certain current and former employees and, once the SEC adopts rules, will allow an issuer to exclude crowdfunding investors. However, it is silent on the treatment of transferees, leading many to believe transferees would not be excluded from the shareholder of record calculation. The Staff has indicated that transferees would generally count as shareholders of record and not be excluded from the count. As a result, share sales in secondary market trading by employees or crowdfunding investors would generally increase the number of outstanding shareholders. As the JOBS Act may lead to increases in secondary market trading of private company securities, privately held issuers should consider methods for tracking transfers and transferees in order to determine compliance with the new thresholds.
Test the Waters Materials
The Staff has confirmed that an emerging growth company will not be required to file any test the water materials. However, the Staff indicated that it will be interested in any test the water materials used and will be concerned about the possibility of “uneven information” between these materials and the registration statement and whether all investors would be interested in the information in the test the waters materials. Accordingly, it would be prudent for emerging growth companies that take advantage of test the waters communications to only include information in the test the waters materials that will also be included in the registration statement. Moreover, emerging growth companies will be subject to potential liability under Securities Act Section 12(a)(2) and Exchange Act Rule 10b-5 for an untrue statement of a material fact or omission of a material fact in such materials.
SEC Seeks Comments Before JOBS Act Rulemaking
The JOBS Act includes provisions that require the SEC to undertake various rulemakings and studies. Last week, the SEC announced that it is seeking comments on these initiatives in advance of its proposed rulemaking.16 Interested persons may submit their positions on these matters before the official comment periods are opened via the links on the SEC’s JOBS Act public comments page. The SEC will publicly post all submissions on that page.
Interested persons who wish to submit official comments on particular SEC rulemaking proposals pursuant to the JOBS Act may still submit comments during the official comment period through the SEC’s website as described in the notice of the proposal published in the Federal Register.
1. Please see our client alert dated March 28, 2012, "Congress Passes the JOBS Act to Ease IPO Process for “Emerging Growth Companies” and Enhance Capital Formation".
2. Generally, Titles I (commonly referred to as the “IPO on-ramp” provisions), V (Exchange Act registration thresholds) and VI (Exchange Act registration and deregistration/suspension thresholds for banks and bank holding companies) became immediately effective on April 5, 2012. Despite the immediate effectiveness of these provisions, the SEC is still required to conduct rulemaking for Titles V and VI. The staff of the SEC’s Division of Corporation Finance has indicated that it will need to conduct rulemaking to include certain of the IPO on-ramp provisions in its rules even though such rulemaking is not required by the JOBS Act.
3. See SEC Division of Corporation Finance, Division announcement regarding confidential submission of draft registration statements under the Jumpstart Our Business Startups Act (Apr. 5, 2012), available at http://sec.gov/divisions/corpfin/cfannouncements/draftregstatements.htm.
4. See SEC Division of Corporation Finance, Jumpstart Our Business Startups Act Frequently Asked Questions - Confidential Submission Process for Emerging Growth Companies (Apr. 10, 2012), available at http://sec.gov/divisions/corpfin/guidance/cfjumpstartfaq.htm.
5. See SEC Division of Corporation Finance, Jumpstart Our Business Startups Act Frequently Asked Questions - Changes to the Requirements for Exchange Act Registration and Deregistration (Apr. 11, 2012), available at http://sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-12g.htm.
6. See SEC Division of Corporation Finance, Jumpstart Our Business Startups Act Frequently Asked Questions - Generally Applicable Questions on Title I of the JOBS Act (Apr. 16, 2012), available at http://sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htm.
7. See Section 107(b)(1) of the JOBS Act.
8. For example, the Staff noted that the JOBS Act provides that an emerging growth company may comply with Regulation S-K Item 402 by providing only the scaled executive compensation disclosure required of a smaller reporting company, even if it does not qualify as a smaller reporting company, and that an emerging growth company is not required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act. These provisions of the JOBS Act were not enacted as part of the Exchange Act.
9. This approach is similar to how smaller reporting companies report the financial statements of businesses acquired or to be acquired pursuant to Rule 8-04(c) of Regulation S-X.
10. The confidential submission process is only available for Securities Act registration statements. An Exchange Act registration statement on Form 10 or Form 20-F would not be eligible for the confidential submission process.
11. Only one copy of the draft registration statement should be submitted to: Draft Registration Statement, U.S. Securities and Exchange Commission, 100 F Street, N.E., Washington, D.C. 20549. If the confidential submission is in paper, the Staff requests that the issuer not staple or bind the draft registration statement.
12. See SEC Division of Corporation Finance, Non-Public Submissions from Foreign Private Issuers (Dec. 8, 2011), available at http://sec.gov/divisions/corpfin/internatl/nonpublicsubmissions.htm.
13. Securities Act Rule 433(h)(4) defines “road show” as “an offer…that contains a presentation regarding an offering by one or more members of the issuer’s management…and includes discussion of one or more of the issuer, such management, and the securities being offered.”
14. Prior to April 5, 2012, an issuer would trigger a Section 12(g) registration obligation if as of the last day of its most recent fiscal year it had total assets exceeding $10 million and a class of equity securities (other than certain exempted securities) held of record by 500 persons.
15. New Exchange Act Section 12(g)(1)(B) triggers Section 12(g) registration obligations for any bank holding company if, as of any fiscal-year end after April 5, 2012, it has total assets exceeding $10 million and a class of equity securities (other than certain exempted securities) held of record by 2,000 or more persons. The Staff considers that the effect of this new provision is to eliminate any Section 12(g) registration obligation for a bank holding company with respect to a class of equity securities as of a fiscal-year end on or before April 5, 2012. Therefore, if a bank holding company has filed an Exchange Act registration statement that is not yet effective, it may withdraw the registration statement. If a bank holding company has registered a class of equity securities under Section 12(g), it must continue that registration unless it is eligible to deregister under Section 12(g) or current rules.