Friday, October 30, 2015

Senior SEC Staff Discusses Issues, Concerns with IPOs, Regulation A+

By John Filar Atwood

On the eve of the SEC’s consideration of crowdfunding proposals, Commission staff members and industry experts took the opportunity to review the impact of Regulation A+ and other capital-raising initiatives at Practising Law Institute’s securities regulation conference. The emerging growth company (EGC) provisions of the JOBS Act have had a measurable impact, according to SEC Chair Mary Jo White, as EGCs have accounted for 85 percent of IPOs since the JOBS Act was enacted.

The confidential filing provision of the JOBS Act has been particularly effective at encouraging companies to move down the path toward an IPO, said Davis, Polk & Wardwell’s Richard Truesdell. Virtually all companies that are eligible take advantage of this provision, he noted. It allows a company to test the offering process before having to disclose critical strategic information to competitors, he added.

Areas of focus. Keith Higgins, director the SEC’s Division of Corporation Finance, noted that there have been about 1,000 confidential filings since the JOBS Act was put in place. When reviewing the filings, the staff focuses on accounting issues, metrics and non-GAAP measures, he advised.

The staff examines issues of predecessor accounting, which determines which company’s financials need to be disclosed. Higgins acknowledged that this is a complicated question since the definition of predecessor is not clear. He urged companies to contact the staff before filing to let the staff walk them through the financial statements process.

Use of metrics. The staff is very concerned with metrics, and how companies present their results, Higgins said. IPO filings are very important, he noted, because they are a company’s first chance to form a strategy of what investor s are going to see in the company’s public documents.

Companies should clearly define what metrics they are using, and describe any important assumptions, Higgins advised. He said that if a company’s metrics are different from its industry competitors the staff will ask about it. It is okay for a company to be an outlier, he noted, as long as its metrics are meaningful. He added that if a company discusses a metric in the prospectus summary, but not in the MD&A section, it will get an inquiry from the staff.

Non-GAAP measures always get the staff’s attention, according to Higgins. He said that it is okay for companies to use them, but the staff expects clear disclosure surrounding them. He noted that the staff has not seen any particular problems in this area as companies generally do a good job with disclosure surrounding non-GAAP measures.

The staff places a lot of emphasis on trends information in its review of IPO filings, Higgins said. Checking for the forward-looking information that MD&A requires is an important part of the staff’s review, he added.

Higgins said that his staff wants to make the filing process as efficient as possible, and that communication is a key to accomplishing that. He advised that if a company has gone through two rounds of staff comments without a resolution, it is time to call the staff. If the issues are not getting resolved, the staff can work through it more quickly on a call than by passing letters back and forth, he said.

Truesdell advised IPO filers to be prepared to show the SEC copies of all testing the waters materials they have used. With IPOs, the first thing the staff asks is what the company has been telling, and distributing to, investors, he noted.

Regulation A+. Sebastian Gomez Abero, head of the Office of Small Business Policy in the Division of Corporation Finance, reviewed statistics that have been compiled on new Regulation A+, which pertains to offerings of up to $50 million. To date, 34 companies have publicly filed Form 1A, and 16 non-public companies have submitted draft offering statements, he said. The staff has seen a variety of issuers among the filers, he noted, although scale is tilting slightly toward real estate companies. He said that the filing advice that Higgins provided for IPOs also applies to these offerings.

Private offerings. Abero also discussed the Commission’s 2013 lifting of the ban on general solicitations for certain private offerings under Rule 506(c). The staff has been surprised that more companies have not taken advantage of Rule 506(c), choosing instead to continue to make private offerings under Rule 506(b). As of June 2015, the number of 506(b) offerings was 12 times greater than 506(c) offerings, and the money raised under 506(b) was 30 times more than the 506(c) total.

He said that it is difficult to tell if there is a single reason behind the imbalance. The 506(c) offerings are not causing a drop in 506(b) statistics, so the answer may be simply that more capital raising is getting done, he noted.

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