Friday, May 18, 2012

Securities Industry Comments on Impending SEC JOBS Act Regulations

In a letter to the SEC, the Securities Industry and Financial Markets Association (SIFMA) posited that, whether or not a subsidiary of a private company contemplating an IPO has previously issued debt or equity should not affect its ability to enjoy the benefits of the JOBS Act. Thus, SIFMA believes that the definition of issuer for purposes of determining emerging growth company status should be limited to the legal entity that is the issuer of the securities in the proposed or completed offering. For example, the issuance of debt or a registered sale of common equity by a subsidiary should not disqualify an issuer from being an emerging growth company.

SIFMA supports the SEC staff guidance regarding the time of determination of emerging growth status, namely, that for conduct the status should be tested as of the time of such conduct, but for any registration statement it should be determined as of the time of the first filing thereof as provided in Securities Act Rule 401(a). However, there remain other ambiguities regarding the timing of determination of  emerging growth company status.

In particular, noted SIFMA, the interplay between qualifying as an emerging growth company "as of the first day of that fiscal year" and loss of that status on the "earliest of " raises the issue as to whether once an issuer qualifies as an emerging growth company and thereafter loses that status it can ever regain such status.
SIFMA believes the answer should depend on whether the issuer is a reporting company at the time of determination. An issuer that at the relevant time of determination is not a reporting company should not be disqualified from status as an emerging growth company by the fact that in the past it had qualified and thereafter ceased to qualify as such.

For example, a non-reporting issuer that issued $1 billion of debt ten years ago should not be disqualified from qualifying even if immediately prior to such issuance it was an emerging growth company and such issuance caused it to lose that status. Similarly, an issuer that was an emerging growth company but thereafter disqualified because it became a large accelerated filer should not be disqualified if it went private or otherwise ceased to be a reporting company and the thereafter seeks to go public again.

 A reporting company that ceases to be a reporting company should be able to reset its status and not be disqualified from emerging growth company status by  revenues of greater than $1 billion in a fiscal year prior to its most recently completed fiscal year, prior issuances of equity securities in a registered offering or prior status as a large accelerated filer. Conversely, once an emerging growth company becomes a reporting company, noted, SIFMA, and thereafter ceases to qualify as such, it should no longer be eligible to qualify as an emerging growth company for so long as it is a reporting company.

Whether an issuer previously qualified and then ceased to qualify as an emerging growth company should not be relevant to whether it is entitled to the flexibilities of the JOBS Act at the time it pursues an initial public offering. On the other hand, there is no need to provide that a reporting company that ceases to qualify, for example by having revenues in excess of $1 billion, can thereafter requalify when it is still a reporting company, for example by having revenues of less that $1 billion in a subsequent year.

Under the JOBS Act, an issuer loses status as an emerging growth company if it has issued more than $1 billion of non-convertible debt during the previous three-year period. Noting that including all debt issued regardless of whether it was issued in exchange for other debt or still remains outstanding can lead to incongruous results, SIFMA urged that only debt that remains outstanding at the time of determination be taken into account. Including all debt issued, reasoned SIFMA, would mean that debt issued with traditional registration rights requiring a registered exchange offer would be double counted. Similarly, commercial paper or other debt that is rolled-over or refinanced could be counted multiple times resulting in an issuer losing emerging growth company status even though the actual capital raised might have only been a fraction of $1 billion threshold.  

SIFMA urged the SEC staff to reconsider its interpretive guidance that the first sale of common equity securities pursuant to a registration statement could also include an offering of common equity pursuant to an employee benefit plan registered on Form S-8. The exclusion in the JOBS Act of issuers that had completed their first sale of common equity securities prior to December 8, 2011, reasoned SIFMA, was intended to exclude issuers that had gone public prior to December 8. 2011 and therefore did not need the benefits of such provisions as opposed to intending to exclude issuers that may have technically issued some common equity under a registration statement pursuant to compensation plans but for all practical purposes are still private companies.

SIFMA asked the SEC to adopt a grace period for loss of emerging growth company status. While certain disqualifying events will be readily ascertainable and within the issuer's control, such as issuing more than $1 billion of debt, said the association, other events, such as achieving $1 billion of revenues or qualifying as a large accelerated filer, may not be immediately ascertainable or within the issuer's control.
This is especially problematic with respect to long lead time items such as compliance
with Section 404(b) of the Sarbanes-Oxley Ac, with respect to which issuers typically begin preparing over a year in advance. The SEC staff has recognized the long lead time required for compliance by providing a phase in for newly public companies, effectively not requiring 404(b) compliance until the issuer's second annual report on form 10-K after going public. A similar grace period should be afforded to emerging growth companies.

 Issuers that lose such status should not be required to comply with the requirements of 404(b) until their second annual report on Form 10-K after losing status. To provide otherwise would effectively require many emerging growth companies to undertake the burdensome time and expense of Section 404(b) compliance whether or not they are entitled to relief under the JOBS Act. If the SEC staff is unwilling to treat emerging growth companies like new reporting companies for 404(b) purposes, continued SIFMA the staff should, at a minimum, consider providing a determination date for 404(b) purposes as of the end of the issuer's second fiscal quarter, similar to the test for large accelerated filers.

SIFMA asked the Staff to confirm that the date for determination of whether a financial accounting standard is "new or revised" for purposes of Section 102 of the JOBS Act is the date of adoption of the JOBS Act. Providing for an issuer specific date, said the industry group, such as the initial filing date of the registration statement for its initial public offering could create countless versions of GAAP that would lead to confusing incomparability for investors.

SIFMA believes that an issuer that ceases to be a reporting company should get to reset the clock for purposes of the definition of initial public offering date just as they should for purposes of the definition of emerging growth company. An issuer that is no longer a reporting company should not be precluded from making a confidential submission of a registration statement as contemplated by Section 106 of the JOBS Act notwithstanding that such submission is technically after its initial public offering date. Finding no policy reason to distinguish between issuers that once were public, regardless of how long ago,
And those that are not, SIFMA said that the benefit of the IPO on ramp should be available to all private companies regardless of whether they once were a reporting company or not.

SIFMA urged the SEC staff to reconsider its guidance that registration statements on Form10 will not be eligible for the confidential submission process. Whether a company goes public using a registration statement on Form10 or FormS-1 is a purely a function of whether it happens to be raising capital in the process at the same time or not. The content of the two documents is substantially the same. In addition to facilitating capital creation, the JOBS Act was also designed to make it easier for emerging growth companies to go public and to reduce the burdens on them as public companies. These latter two objectives are unaffected by whether an emerging growth company is raising capital at the time it becomes a public company. Limiting the confidential submission process to registration statements under the Securities Act serves no public policy, posited SIFMA, and will only incentivize issuers to include a concurrent nominal capital raise so that they can file a registration statement on FormS-1or F-l as opposed to Form 10..

The JOBS Act requires that the initial confidential submission and all amendments thereto be publicly filed not later than 21 days before the road show. The JOBS Act does not require, and SIFMA asked the SEC staff to confirm that they will not require, that any correspondence related thereto, such as comment letters and responses, be publicly filed. In SIFMA’s view, the congressional intent that such correspondence need not be filed is clear based on the explicit reference in the JOBS Act to the initial submission and each amendment thereto and the absence of any reference to correspondence.

The JOBS Act permits emerging growth companies to engage in oral or written communications with potential investors that are qualified institutional buyers or that are institutions that are accredited investors. Unlike Rule 144A or Regulation D. however, it does not provide for any reasonable belief standard regarding the status of such investors. SIMA believes that the JOBS Act exemption should be based on a reasonable belief standard similar to that in Rule 144A and Rule 506. Any securities sold to such investors will ultimately be sold in a registered offering, reasoned, SIFMA, thus there is no policy reason to impose a higher standard that that which would be required if the transaction were not registered. To provide otherwise would expose issuers and underwriters to a potential put right where they reasonably believed that the investor was a qualified institutional buyer or an accredited investor.

While the SEC and national securities associations are prohibited from adopting or maintaining regulations regarding research, many broker dealers are subject to similar restrictions as a result of the Global Research Settlement. Thus, in order to create a level playing field, SIFMA asked that the SEC adopt regulations superseding the portions of the Global Research Settlement that are inconsistent with the spirit of the JOBS Act.