The JOBS Act contains a number of provisions intended to encourage emerging growth companies to access the US public securities markets. A company is considered to be an emerging growth company and will continue to be considered one until the earliest of:
- the last day of the fiscal year during which it had total annual gross revenues of at least US$1 billion;
- the last day of the fiscal year following the fifth anniversary of the initial public offering of its common equity in the United States;
- the date on which it has, during the previous three-year period, issued more than US$1 billion in non-convertible debt; or
- the date on which it is considered to be a “large accelerated filer” under the US Securities Exchange Act of 1934, as amended (the Exchange Act), a classification which includes companies with a worldwide public float of $700 million or more.
Emerging growth company status will not be available retrospectively to companies who sold common shares in an IPO on or before 8 December 2011, the date on which the relevant legislation was first introduced in the US House of Representatives.
Relief relating to IPOs. The JOBS Act establishes a number of accommodations to encourage emerging growth companies to access the US public capital markets by reducing the costs and other burdens associated with being a public company in the United States. In summary, these include:
- Reduced financial information requirements. An emerging growth company will be permitted to include two years of audited financial statements in its IPO registration statement (rather than the typically required three years) under the US Securities Act of 1933, as amended (the Securities Act). Likewise, it will not be required to present selected financial data in accordance with the SEC’s rules for periods prior to the earliest audited period included in the registration statement (rather than the five years of data typically required).
- Confidential submissions. An emerging growth company will be permitted to submit its IPO registration statement and amendments on a confidential basis for review by the SEC’s staff in advance of public filing, provided that any such submissions are publicly filed at least 21 days before any “road show” in connection with the IPO.
- Expanded permitted marketing. An emerging growth company and persons acting on its behalf will be permitted to have oral and written communications with qualified institutional buyers (QIBs) and institutional accredited investors either before or after the filing of its registration statement. Other companies would remain subject to much more stringent restrictions on communications in relation to US public offerings.
We believe all these accommodations should be welcomed by non-US companies and should address some of the costs, risks and issues currently associated with the intentionally transparent nature of the US IPO process. The reduced financial information requirements for emerging growth companies have obvious advantages for any eligible company. They may also give rise to somewhat surprising situations where the financial statement requirements for a US offering (at least in terms of periods covered) may be less onerous than those of the company’s home market.
On 8 December 2011, the SEC staff narrowed its policy that previously allowed non-US companies to submit registration statements and amendments on a confidential basis in connection with their first-time registration with the SEC. While under the narrowed policy a non-US company that is listed or is concurrently listing its securities on a non-US securities exchange (among others) generally continues to be allowed to submit its first time registration statement on a confidential basis, the JOBS Act extends a similar accommodation to all emerging growth companies and therefore could be of benefit to a number of other non-US companies. The confidential review process clearly provides the eligible companies with significant advantages in terms of the timing of the public announcement of their offering and in dealing with the rigorous preparation process for a US IPO outside of the public view. However, there are two notable differences between the SEC’s existing confidential treatment policy for certain non-US companies and the one contemplated by the JOBS Act: (i) under the latter all previous confidential submissions will have to be publicly filed retrospectively and (ii) that filing must be made at least 21 days in advance of the IPO road show, neither of which is the case with the former.
The expansion of permitted marketing in relation to QIBs and institutional accredited investors also has obvious advantages in terms of permitting a company to test the waters on a confidential basis, although no doubt market participants will consider the need to develop practices to address potential antifraud liability in connection which such activities. In addition, to the extent the non-US company already has a listing in its home jurisdiction or in an international market such as London or Hong Kong, there will be “wall crossing” type issues that will need to be considered.
All that said, for many non-US companies a major concern in accessing the US capital markets is potential securities fraud liability and in particular the possibility of class actions by US shareholders. None of the reforms provided for in the JOBS Act meaningfully reduces this inherent risk associated with being a public company in the United States.
Relief relating to reporting requirements. The JOBS Act also eases the on-going reporting and related obligations for an emerging growth company for up to its first five years as a US public company. In particular, the statute grants an emerging growth company:
- relief from the auditor attestation report requirements of the Sarbanes-Oxley Act of 2002.
- relief from any rules of the PCAOB requiring mandatory audit firm rotation or a supplement to the auditor’s report.
- relief from certain executive compensation disclosure requirements, including new disclosures required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act relating to the ratio between a CEO’s total compensation and the median total compensation for all other company employees; however, whether or not these new disclosure requirements will apply to non-US companies at all will ultimately be determined by the SEC in a proposed rulemaking expected possibly later this spring.
- relief from rules requiring non-binding shareholder advisory votes on executive compensation for up to six years from their IPO; however, non-US companies are generally not subject to these requirements in any event.
Relief from the auditor attestation report requirement, in particular, is a significant concession, with meaningful cost savings implications for virtually all eligible companies. This requirement was perhaps one of the most hotly contested elements of Sarbanes-Oxley because of its cost implications for US public companies. Of course, that relief only will last for up to five years. Moreover, most of the other on-going reporting and related requirements and risks associated with being a public company in the United States that generally apply to non-US companies will continue to apply to them.
Relief relating to research. Although the use of research in connection with initial public offerings is common in many jurisdictions outside of the United States, currently investment banks may not publish research in advance of US initial public offerings. In addition, current US rules restrict research during the 40 days following an initial public offering and around the time of the expiration of lock-up agreements. The JOBS Act seeks to end these restrictions in relation to emerging growth companies, so, for example, an investment bank will be permitted to publish research related to an emerging growth company prior to the initial public offering of that company (even if the investment bank is participating or will participate in the distribution of the offering). It also will ease rules prohibiting research analysts from participating in meetings with the emerging growth company that are also attended by investment banking employees, although how this will work in practice remains to be seen given the historical basis for those rules.
Significantly, the JOBS Act implements this by providing that research will not constitute “an offer for sale or offer to sell a security” for purposes of the definition of “prospectus” and certain related provisions of the Securities Act. However, this approach does not appear to provide relief from potential liability under the general securities fraud provision under Section 10(b) of the Exchange Act (and Rule 10b-5 thereunder) if it can be established that the investment bank acted recklessly or with the requisite intent. Given this, as well as the reputational risk inherent in the activity, it is to be seen whether investment banks in the United States will be prepared to commence this practice and if so on what basis, particularly in pre-IPO the context.