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.