SEC Expands Confidential Review of IPO Registration Statements

By: David M. Eaton

The SEC announced earlier this summer (and supplemented that announcement late last week with additional information) that it has expanded the availability of its popular procedure for confidential non-public review of, and comment on, draft initial public offering registration statements.  This procedure was originally mandated by 2012’s JOBS Act.

In its pre-existing iteration, the procedure allows “emerging growth companies” (EGCs) to submit draft registration statements confidentially to the SEC for review, provided that (1) the issuer has not yet sold common stock in an SEC-registered IPO and (2) the draft registration statements and all amendments thereto are publicly filed at least 15 days prior to any “road show”.  This process is available not just for a common stock IPO registration statement, but also for any pre-IPO registration statement an EGC might file.  An EGC is a company with annual gross revenues of less than $1.07 billion during its most recent fiscal year.

Now, in addition to the confidential review process for EGCs which remains in effect, the SEC announced that it will review, on a confidential basis, draft submissions of the following registration statements filed by any issuer (including foreign private issuers)—not just EGCs:

  • IPOs.  Securities Act IPO registration statements (or other initial Securities Act registrations)—again, from any issuer.  This will permit larger pre-public companies to take advantage of the confidential submission process.
  • Listings, But No OfferingsSpin Offs.  Securities Exchange Act registration statements that relate to an initial direct listing on a stock exchange without a concurrent public offering.  This will be useful to companies going public via a “spin off” from another public company.
  • Follow-On Offerings.  Securities Act registration statements for an offering within a year of the company’s initial Securities Act or Securities Exchange Act registration statement.  This should prove useful to companies conducting a “follow-on” stock offering in the wake of a successful IPO.  In addition to raising additional capital for the company, follow-ons have traditionally allowed pre-public shareholders to sell some of their holdings in the common situation where underwriters were reluctant to let them “piggy back” on the IPO registration statement (although often the follow-on registration statements are not selected for SEC review, as the recent IPO registration statement would have received a full inspection).

As with the EGC process, IPO and direct listing registration statements and amendments must be filed at least 15 days prior to any IPO roadshow, or 15 days prior to the requested effective date of the registration statement if there isn’t a road show.  One difference for follow-on offering registrations is that the SEC will only review the first draft submission confidentially, not subsequent amendments.

The confidential submission process has several advantages for issuers.  It allows the company to keep the registration statement and its exhibits out of the public domain until the company decides that it is ready to move forward with the offering, if at all.  If it abandons the offering before committing to a road show, its submission remains confidential.  In this manner, the company can avoid the risk of being perceived by the market as “damaged goods” by dint of abandoning its IPO.  It also facilitates pursuing “dual track” exit strategies for founders and/or venture investors—that is, exploring a sale of the company and an IPO simultaneously.

Even if the company goes forward with the offering, and consequently makes its confidential submissions publicly available, there is value to companies in not having to endure, in real time, the intense microscope of the media on the sometimes painful SEC review process. (On the other hand, some would probably say that undergoing that process in the open is beneficial to investors).

While the expansion of the useful confidential submission review process is a welcome development, it can fairly be characterized as an incremental improvement, not a transformational one.  Such “baby steps” may not be enough to reverse the continuing reduction in the overall number of U.S. publicly traded companies, a trend which is attracting growing concern.

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