The Jumpstart Our Business Startups Act ("JOBS Act"),
as signed into law by President Obama on April 5, 2012, is clearly
U.S. legislation intended to address a domestic issue: how to
improve capital formation for growth companies in the United
States. The legislation was adopted with considerable momentum, and
with broad bipartisan support, in part because of the argument that
growth companies, post-initial public offering ("IPO"),
generate more new jobs, when compared to growth companies that are
sold in an M&A transaction. This proposition turned out to be
highly attractive to legislators.
Many of the recommendations contained in the report prepared by the
IPO Task Force for the Department of Treasury, Rebuilding the
IPO On-Ramp: Putting Emerging Companies and the Jobs Market on the
Road to Growth (October 20, 2011) ("Report"), were
adopted in the JOBS Act. That Report notes during the 1990s, there
were an average of 547 IPOs in the United States each year,
compared to 192 each year during the following decade. In
addressing the balance for regulatory burdens on IPO issuers, the
Report does not focus on "small" companies but on
"growth" companies, with the new category of emerging
growth company ("EGC") with revenues of up to $1 billion.
The Report, however, does not mention foreign private issuers
("FPIs"). There is only mention of competition from
foreign markets and the observation that the United States is no
longer the "international destination of choice" for
IPOs.
The JOBS Act, however, will have a significant impact on foreign
issuers accessing U.S. markets, either through initial public
offerings registered with the U.S. Securities and Exchange
Commission ("SEC") or through traditional Rule
144A/Regulation S global equity offerings. As described below,
foreign private issuers already enjoy significant concessions for
SEC-registered IPOs, and the SEC has made clear that FPIs
qualifying as EGCs can enjoy concessions both under the JOBS Act
and the current accommodations for FPIs.
There also may be, depending on SEC rulemaking, a liberalization in
communications for the traditional Rule 144A/Regulation S global
equity market. The key is the rulemaking, scheduled for
announcement on August 22, on removing the prohibition on general
solicitation in connection with Rule 144A offerings. Other parts of
the JOBS Act (exempt offerings, crowdfunding, and registration
thresholds) seem much more directed to the domestic U.S. market and
are less likely to have much impact on foreign companies and
foreign markets.
This Commentary focuses on what we see as being important
for non-U.S. issuers.
Why the JOBS Act Is Important
The last 18 months have demonstrated a trend for non-U.S.
companies, especially technology companies, turning to
U.S.-registered public offerings. In that period, 98 FPIs have
filed registration statements, including 40 based in Europe. The
JOBS Act, depending on implementation, seems likely to accelerate
that trend.
FPIs should benefit under the JOBS Act, as do domestic issuers. The
benefits can be broadly divided into (i) liberalized communications
for IPOs and (ii) reduced disclosure. The relief for disclosure
obligations has a double impact. The JOBS Act relief applies both
to the prospectus for the IPO and, thereafter, as a reporting
company post IPO, while "on the on-ramp" for up to five
years.
The SEC has made clear that such relief and accommodations will be
in addition to existing concessions afforded
FPIs. So it may be even easier for an FPI EGC to go the route of an
SEC-registered IPO than it is for a domestic EGC.
Double Relief
The following chart compares (i) relief under the JOBS Act, (ii)
relief under the traditional FPI disclosure requirements (Form 20-F
concessions), and (iii) how the concessions under each of the JOBS
Act and Form 20-F can be combined, so that an FPI has more
flexibility than either a U.S. domestic EGC under the JOBS Act or
an FPI under the traditional Form 20-F concessions.
EGCs/JOBS Act |
Non-EGC FPIs (Existing FPI Relief) |
EGC FPIs (If the FPI Elects EGC Status) |
|
IPO Communications |
|||
Confidential Review of IPO Registration Statements |
SEC confidential review of IPO registration statements w/ public filing 21 days before commencement of "roadshow." |
As of December 2011, SEC confidential review of FPI IPO registration statements limited to (i) non-U.S. dual listing, (ii) foreign government privatization, or (iii) public filing conflicts w/ foreign law. Public filing required before commencement of "offers." |
May choose either JOBS Act EGC process or, if criteria met, SEC FPI policy (but if SEC FPI policy chosen, other JOBS Act relief for EGCs is not available). |
"Test the Waters" Communications |
EGCs and representatives (including underwriters) can have oral and written communications with IAIs and QIBs (defined below) to ascertain interest in offering prior to launch of road show, even before public filing of registration statement. |
No offers (oral or written) prior to first public filing of registration statement and no written offers prior to completion of preliminary prospectus. |
JOBS Act relief. |
IPO Research Reports |
Syndicate members permitted to publish research reports around time of EGC equity offerings with no blackout periods. |
Syndicate managers and co-managers prohibited from publishing research reports until 40 days (25 days for other syndicate members) post-IPO or 10 days post-follow-on offering. |
JOBS Act relief. |
IPO Disclosure / Subsequent Reporting |
|||
Financial Statements |
Two years audited financial statements required for IPO (three years required previously). Post-IPO reporting commences with IPO audited financial statements as earliest audited financial statements in reports. Within one year of IPO, three years of audited financial statements would be presented. |
Three years audited financial statements prepared in accordance w/ (i) U.S. GAAP, (ii) IFRS as adopted by IASB, or (iii) local GAAP w/ U.S. GAAP reconciliation required, as per Form 20-F. Earliest year balance sheet can be omitted in IPO registration statement if not required by foreign regulator/exchange if dual listing. Two years of audited financial statements permitted for first–time adopters of (i) U.S. GAAP or (ii) IFRS as adopted by the IASB. |
JOBS Act, plus Form 20-F use of IFRS. |
Selected Financial Data |
Selected financial data covering period of audited financial statements (two years). Within three years of IPO, five years of selected financial data would be presented. |
Five years of selected financial data. |
JOBS Act, plus Form 20-F use of IFRS. |
MD&A (Operating and Financial Review "OFR") |
Discussion need only go back over period of audited financial statements (two years). Within one year of IPO, MD&A discussion covering three years of audited financial statements would be presented. |
Discussion of three years of required financial statements. |
JOBS Act, plus Form 20-F use of IFRS. |
Executive Compensation |
Reduced executive compensation disclosure, the same as permitted for "smaller reporting companies" under Regulation S-K item 402, and not subject to additional Dodd-Frank disclosure requirements. |
Aggregate compensation information under Form 20-F unless more detailed information required in foreign jurisdiction or otherwise made public. No compensation discussion and analysis. |
FPI relief. |
"Say-on-Pay" Votes |
Exempt from nonbinding executive compensation arrangement votes while an EGC and for up to three years after loss of EGC status. |
FPIs exempt. |
FPI relief. |
Section 404(b) Auditor Internal Control Attestation |
Exempt from requirement for auditor attestation of internal controls as long as EGC status retained. |
Auditor attestation of internal controls required for second annual report on Form 20-F following IPO. |
JOBS Act relief. |
Communications
Confidential SEC Filings for IPOs.
EGCs may file an IPO registration statement with the SEC for
review on a confidential basis, although public filing is required
at least 21 days prior to commencement of the road show.
Observations. The SEC discontinued
confidential reviews of FPI registration statements (except for
IPOs by FPIs listed or concurrently listing securities on a
non-U.S. exchange, being privatized by a foreign government, or
where public filing would conflict with applicable foreign law) in
December 2011 ("2011 Policy"). The JOBS Act restores this
accommodation, which is available only for IPO registration
statements, for FPIs that are also EGCs.
Some FPIs, however, still qualify for full confidential treatment
under the 2011 Policy. FPIs that qualify for confidential reviews
under the 2011 Policy are currently not subject to the 21-day
required period between the first public filing of the registration
statement and commencement of the road show. The SEC has stated
that any such FPIs that are also EGCs must choose between the
confidential review process under the JOBS Act or the 2011 Policy
(in which case the other benefits of EGC status will be
lost).
Liberalized Pre-Road Show Communications. The JOBS
Act relaxes the "gun jumping" rules to permit EGCs and
their representatives (including underwriters) to communicate with
institutional "accredited investors" ("IAIs")
and "qualified institutional buyers" ("QIBs")
in advance of potential IPOs, as well as follow-on and secondary
public offerings.
Observations. By permitting these
"test the waters" communications prior to an IPO, the
JOBS Act incorporates a common feature of IPOs in other
jurisdictions (also known as "pilot fishing" or
"pre-sounding") into the U.S. IPO context.
Syndicate Research Reports Permitted. The JOBS Act
permits research to be published around the IPO offering
period.
Observations. The distribution of pre-IPO
research in the U.S., even in unregistered Rule 144A/Reg S
offerings by FPIs, has historically been constrained by both
Securities Act Section 5 concerns as well as disclosure liability
concerns. The JOBS Act addresses the former in the context of
registered offerings but does not change the latter. Research
reports remain subject to the general anti-fraud provisions of
Section 10 of the Exchange Act and Rule 10b-5 thereunder, as well
as Section 17 of the Securities Act. The JOBS Act's elimination
of the ban on general solicitation and advertising in Regulation D
and Rule 144A offerings also raises the potential for research
reports being used in connection with those offerings.
If embraced by the market, the greater use of research reports in
connection with U.S. offerings could move U.S. IPO practice closer
to the prevailing model in many other jurisdictions, where pre-IPO
research is common, and facilitate a global approach in
multijurisdictional offerings by FPIs. To date, concerns about U.S.
disclosure liability has resulted only in limited relaxation of
past practice. Generally underwriters of U.S. IPOs so far have only
reduced the black-out period for managers and co-managers to 25
days, the same as historically applied to other syndicate
members.
Disclosure: IPO and Post-IPO "On the
On-Ramp"
Relaxed Financial Disclosure Requirements.
An EGC's IPO registration statement is not required to
include more than two years of audited financial statements and
selected financial data, and there is no mandatory selected
financial data or MD&A discussion for periods prior to those
presented in the EGC's financial statements.
Observations. FPIs that are EGCs may now
find the U.S. requirements less onerous than those of other
jurisdictions. Not only would it be possible for an FPI to present
only two years of financial statements, but an FPI could make that
presentation using IFRS.
Relief from Auditor Internal Control Attestation.
EGCs are exempt from auditor attestation of internal control
assessments under Sarbanes-Oxley Section 404(b). However,
management will still need to report on its assessment of the
effectiveness of the internal controls under Section 404(a), and
the CEO and CFO will still need to certify as to that assessment
under Sarbanes-Oxley.
Observations. Relief from what has long
been viewed as Sarbanes-Oxley's most onerous provision in terms
of compliance costs may make the U.S. public markets more
attractive to FPIs. Even so, as compliance with Sarbanes-Oxley has
become more routine, these requirements are no longer viewed by all
companies as unduly burdensome.
Relaxed Executive Compensation Requirements. EGCs
are exempt from certain compensation disclosure requirements, as
well as Dodd-Frank Act "say-on-pay" voting.
Observations. FPIs continue to be able to
report executive compensation based on home jurisdiction standards
and to be exempt from U.S. proxy rules and thus are already
enjoying relief, as an FPI, from these requirements.
Traditional 144A/Regulation S Global
Equity
Private Placements.
The JOBS Act requires the SEC to revise Regulation D to remove
the prohibition against general solicitation and advertising in
offers and sales of securities conducted under Rule 506, provided
that the ultimate purchasers of securities qualify as
"accredited investors" under the SEC's current
definition. The legislation also requires the SEC to make
comparable changes to Rule 144A to permit solicitation of non-QIBs,
provided that only investors reasonably believed to be QIBs
purchase the offered securities. This will be a hot topic depending
on SEC rulemaking. The SEC is scheduled to provide information
about its rules on August 22.
Observations. The JOBS Act provisions
apply only to offerings conducted under Rule 506 and Rule 144A.
Offerings conducted under Securities Act Section 4(2) (now 4(a)(2))
(frequently used by foreign issuers in rights offerings) and under
the Section 4(1-1/2) doctrine (frequently used in block trades
where Rule 144A is not available) will still be subject to the
prohibition on general solicitation and advertising.
Although securities offered under Rule 506 are "covered
securities" for purposes of the exemption from U.S. state
"blue sky" laws contained in the Securities Act,
securities issued in Rule 144A transactions are not covered
securities and are subject to state blue sky law regulation that
may preclude general solicitation or advertising in connection with
a Rule 144A offering. Further state or SEC action will be required
to address the inability of Rule 144A offerings to take advantage
of the JOBS Act's liberalizations due to U.S. state blue sky
law concerns.
Other
Small Exempt Offerings.
Regulation A currently establishes an alternative public
offering regime without full SEC registration for offerings of less
than $5 million. The JOBS Act requires the SEC to adopt rules to
exempt offerings of up to $50 million in any 12-month period and to
address the required content of the offering document and
subsequent periodic reports, all of which will need to be filed
with the SEC. The securities may be sold publicly, and they will
not be "restricted securities" for purposes of further
resale. The SEC has not set a deadline as to the required
rulemaking.
Observations. Rather than
beingjust for small offerings, FPIs may be able to use the
expanded exemption for the U.S. piece of a larger global offering.
This would offer investors unrestricted securities, although the
issuer would be subject to some SEC disclosure and reporting
obligations and stricter anti-fraud standards than would be the
case for a Rule 144A offering. The "public" nature of
this U.S. offering in terms of the publicity permitted could be
restricted by the prohibition on directed selling efforts under
Regulation S unless the SEC takes action to modify it.
Crowdfunding. The JOBS Act amends the Securities
Act to permit crowdfunding, by which a company can raise limited
amounts of capital from investors without registering the offering
under the Securities Act. No more than $1 million can be raised by
an issuer in reliance on the exemption in any 12-month period, and
the amount sold to any individual investor is limited based on the
investor's annual income and net worth. Securities issued in a
crowdfunding transaction are restricted securities.
Observations. The crowdfunding exemption
is not available for foreign issuers. Thus, an FPI wishing to take
advantage of the crowdfunding exemption would need to reincorporate
in the U.S.
Registration Threshold. The JOBS Act revises the
threshold for registration under the Exchange Act to increase the
limit on shareholders of record from 500 to 2,000 or, in the
alternative, 500 persons who are not IAIs. Employees of the issuer
who received shares pursuant to an employee compensation plan and
investors who received shares under the crowdfunding exemption of
the JOBS Act are excluded from this calculation.
Observations. Currently, Exchange Act
registration thresholds are typically not an issue for FPIs, and
this change should have little impact on most FPIs. FPIs that have
not conducted a U.S. public offering or obtained a U.S. listing can
avoid Exchange Act registration requirements through satisfying the
requirements of Rule 12g3-2(b), which relies on the availability of
home country disclosure. This change could help some FPIs that do
not want to make the required 12g3-2(b) disclosures or that lose
their FPI status. FPIs that seek to terminate their SEC reporting
obligations (and any U.S. listing) may rely on alternative trading
volume tests under revisions made in 2007 to the SEC's
deregistration rules for FPIs.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.