Q. How exactly will the JOBS Act be implemented – and how will it affect my middle market company?
by David Scileppi on May 22, 2012A.
The JOBS Act, which was signed into law on April 5, 2012, is designed to invigorate the capital markets by removing restrictions on capital raising. It will fundamentally alter the way all companies raise capital, not just small and micro-cap companies, as has been reported in the press.
The U.S. Securities and Exchange Commission (SEC) has been busy over the past several weeks rapidly issuing interpretations and procedures to implement the JOBS Act. Here is how the JOBS Act is shaping up so far:
Confidential Submission Process
The SEC has implemented a secure email system that allows Emerging Growth Companies (as defined in the JOBS Act) to confidentially file draft registration statements with the SEC. Instructions on how to use the secure e-mail system are fairly easy to follow.
Whether the confidential submission process becomes widely used is still up for debate. While there are large advantages for keeping initial submissions private (keeping information secret from competitors until you decide to go forward with the IPO, shortening the “in registration” period to better time the markets, and avoiding embarrassing registration statement withdrawals) – there are also some potential disadvantages.
For example, often companies filing initial registration statements are simultaneously reviewing other strategic options such as selling the company. Filing the registration statement publicly effectively alerts the markets that your company is “in play.” In addition, the initial filing of a registration statement usually prompts potential plaintiffs with claims to file their lawsuits, which gives management time to amend the registration statement to disclose the risks of the lawsuit. By not filing a publicly available registration statement until 21 days before the road show, plaintiffs may not have an opportunity to file the lawsuit before marketing commences.
Emerging Growth Companies
The SEC has issued a set of FAQs regarding Emerging Growth Companies; here are some of the more important questions and answers:
- An Emerging Growth Company needs to identify itself as such on the cover page of its prospectus.
- Other than accounting standards (which must either be fully adopted or delayed), Emerging Growth Companies may elect the new scaled disclosure on an á la carte basis. This gives a company going public extra flexibility in its disclosures.
- The SEC confirmed that an Emerging Growth Company’s selected financial data needs to cover only two years.
- If an Emerging Growth Company elects to take advantage of the extended transition period for complying with new or revised accounting standards, the company should make this election at the time the initial submission is made. Once an Emerging Growth Company elects to “opt out” of the transition period, the decision is irrevocable. Companies should refer to Staff Accounting Bulletin Topic 11M for guidance on providing disclosure on adoption dates of the delayed accounting standards. The extended transition period applies only to standards that also apply to nonpublic companies.
- Even if a company exceeded $1 billion in revenue in a previous year, it may still qualify as an Emerging Growth Company if revenue was less than $1 billion in the most recently completed fiscal year.
- Comment letters and issuer responses (even those submitted confidentially) will be released publicly 20 business days following the effective time of the registration statement.
- Emerging Growth Companies must comply with XBRL. No relief will be provided.
- If a company restates financial statements after submitting a draft registration statement (even confidentially), the company must include the restatement disclosures in its financial statements.
Until the SEC adopts rules to implement the new crowdfunding exemption under the JOBS Act, offers or sales of securities attempting to rely on the crowdfunding exemption are unlawful, according to the SEC.
Under the crowdfunding provisions of the JOBS Act, an issuer must use a “funding portal” to take advantage of the new crowdfunding exemption from registration. A funding portal is merely an intermediary between the investor and the issuer. The Division of Trading and Markets has issued a set of FAQs related to the crowdfunding intermediary provisions. Generally, these FAQs remind potential intermediaries that they will need to register with the SEC and FINRA, but such registration cannot occur until the SEC has issued rules on the registration process.
The SEC issued a set of FAQs in April specifically addressing the deregistration process. Some of the most pertinent questions and answers related to the process of deregistration, including how to terminate Sections 12(g) and 15(d) registration obligations. This process, known as “going dark,” while not as prone to litigation risk as a “going private” transaction, is a fairly complicated process.
One of the stumbling blocks we have found is that while a company may be eager to suspend its reporting obligations, if it has an outstanding registration statement on Form S-3 or Form S-8 and it has filed its Form 10-K already, then the company will likely be compelled to continue filing its periodic reports through its next Form 10-K because of its Section 15(d) obligations. For further information, you can listen to our recent podcast at the thecorporatecounsel.net.
This post is for general information only. It is not legal advice, and legal counsel should be contacted before any action is taken that might be influenced by this information.