New Policy Provides Substantial Flexibility for Non-EGC and Foreign Issuers, Direct Listings, and Select Follow-On Transactions

On June 29, 2017, the U.S. Securities and Exchange Commission (SEC) Division of Corporation Finance announced the expansion of its registration statement review process to allow registrants to voluntarily seek nonpublic draft review of:

• initial registration statements under the Securities Act of 1933 (Securities Act) for non-emerging growth companies;
• initial registration statements for a class of securities listing on a national exchange (i.e., direct-listing registration statements); and
• Securities Act registration statements submitted within one year of the effective date of a prior initial registration statement under the Securities Act or the Exchange Act of 1934 (Exchange Act) (e.g., non-shelf follow-on offerings).

These expanded procedures are available for submissions made on or after July 10, 2017. These changes have been implemented administratively by the SEC staff and are not mandated by statute or regulation. Prior to these changes, only IPOs by emerging growth companies (EGCs) and certain foreign private issuer offerings were allowed to engage in confidential reviews of draft registration statements, in the case of EGCs pursuant to the provisions of the Jumpstart Our Business Startups (JOBS) Act adopted in April 2012 and in the case of foreign private issuers pursuant to SEC staff policy. The new guidance also expressly provides that a foreign private issuer may use these new procedures as well.

Non-EGCs should take note, however, that the new guidance does not extend to them the other benefits of EGC status, such as reduced disclosure requirements for compensation information and financial statement audits, reduced governance requirements for delay of internal controls audits and say-on-pay votes, and test-the-water communication safe harbors.

Initial Public Offerings

All issuers will be permitted to submit draft registration statements, typically Forms S-1 or F-1 for most IPOs, under the Securities Act to the SEC for a confidential nonpublic review. Non-EGC issuers (including foreign private issuers) must confirm in a cover letter to the SEC staff accompanying the draft registration statement that they will publicly file the registration statement, along with the initial draft submission and all draft amendments, at least 15 days before the issuer begins its road show, or if the issuer does not conduct a road show, at least 15 days prior to the anticipated effective date of the registration statement. This 15-day requirement generally aligns with the current statutory and related SEC staff interpretative guidance for EGC filers.

Key takeaways for issuers:

• Non-EGCs taking advantage of confidential review will have the same flexibility as EGCs to resolve potentially complicated SEC staff comments before publicly disclosing their intention to access the public markets.
• Non-EGCs taking advantage of confidential review will have the same advantages as EGCs to minimize negative publicity if the IPO "window" closes due to market factors or if they otherwise abandon the IPO process for operational reasons or to pursue a sale as part of a "dual-track" IPO/M&A process during the registration statement review.
• Non-EGCs should carefully consider the implications of confidential review with their underwriters and counsel if they expect to engage in "non-deal roadshow" communications during the review process. Under Section 5 of the Securities Act, issuers and their underwriters can engage in oral offers once a registration statement is filed. However, a confidential submission of a draft registration statement is not deemed filed, and non-EGCs do not have the benefit of the test-the-water communication safe harbors available to EGCs under Section 5(d) of the Securities Act.

Exchange Act Registration Statements for Direct Listings

Section 12(b) of the Exchange Act requires registration of classes of securities listed on a national securities exchange that has registered with the SEC under Section 6 of the Exchange Act, which include the New York Stock Exchange, the Nasdaq Stock Market, and several others. If the registration is in connection with a registered initial public offering under the Securities Act, the Exchange Act registration requirement is a short form that incorporates much of the disclosure already under review pursuant to the Securities Act registration statement review procedures. However, for a direct listing of securities by an issuer that is not conducting a concurrent public offering, the registration statement, typically filed on Form 10 for domestic registrants and generally including much of the same content required on a Form S-1, is subject to a comment review process with the SEC staff. Before the SEC's expansion of draft registration statement review procedures, such registrants were required to publicly file the registration statement, wait for approval from the national exchange, and then seek effectiveness from the SEC, which could take as long as 30 days after the exchange certifies the application, and were subject to the SEC's comment process.

Similar to the expanded process for Securities Act registration statements, registrants now may seek confidential review of the draft registration statement for direct listings. Under this new guidance, the registrant must provide a letter accompanying the draft registration statement confirming that it will publicly file the registration statement along with the draft submission and all amendments with the SEC at least 15 days prior to the anticipated effective date of the registration statement.

Key takeaways for direct-listing registrants:

• Registrants taking advantage of confidential review will have more flexibility to resolve potentially complicated SEC staff comments before publicly disclosing their intention to list on a national securities exchange.
• Registrants taking advantage of confidential review will have greater control over negative publicity if they otherwise abandon the direct-listing process for operational reasons or to pursue a sale as part of a "dual-track" IPO/M&A process during the listing application and registration statement review.

Offerings Within One Year of an IPO

All issuers will also be permitted new nonpublic review of Securities Act registration statements in the first year after their initial public offering. Section 6(e) of the Securities Act currently only mandates confidential review of Securities Act draft registration statements for an initial public offering by EGCs. The new SEC staff guidance substantially expands the nonpublic review process for all issuers and includes additional registration statements beyond the initial offering.

Under the new guidance, issuers may submit Securities Act draft registration statements to the SEC staff for limited nonpublic review prior to the end of the twelfth month following the effective date of the issuer's initial Securities Act registration statement or Section 12(b) Exchange Act registration statement, generally aligning with the time when most issuers may first become eligible to use a short-form Securities Act registration statement, such as Forms S-3 or F-3. Issuers must confirm in a cover letter to the SEC staff accompanying the draft registration statement that they will publicly file the registration statement, along with the initial draft submission, at least 48 hours before the anticipated effective time and date of the registration statement.

Unlike the review process for initial offerings and direct listings, however, the SEC staff will only review the initial submission confidentially. The issuer must make any further amendments, including any response to SEC staff comments, in public filings following the SEC's normal procedures for public review of filed registration statements. However, the SEC staff's new guidance generally aligns with its frequent approach of screening, but not necessarily reviewing and providing comments on, registration statements filed shortly after an issuer has been through the extensive review and comment process of an initial public offering or a direct-listing registration.

Key takeaways for follow-on issuers:

• Issuers taking advantage of confidential review will have greater flexibility to resolve potentially complicated SEC staff comments before publicly disclosing their intention to launch a follow-on offering. This is particularly useful because the SEC staff often declines to review registration statements for follow-on offerings filed within a short time period following IPOs, and any prolonged review creates greater execution risks. Issuers taking advantage of confidential review may be able to reduce negative publicity if the offering "window" closes due to market factors or price changes, or if the issuer otherwise abandons the offering for operational reasons during the registration statement review process.
• Issuers should carefully consider the implications of confidential review with their underwriters and counsel. The short time period of required public disclosure prior to the launch of the road show may create greater volatility as the market reacts to the impact of the proposed offering, potentially making price discovery more difficult and risky for the issuer and its underwriters.

Foreign Private Issuers

The SEC staff clarified that all foreign private issuers are permitted to follow these updated procedures, those available to EGCs (if they qualify as an EGC), or the guidance provided in the SEC's statement on May 30, 2012.

Content of Submissions: Financial Disclosure Requirements

As a general matter, the SEC staff requests that all draft registration statements are substantially complete when submitted. However, the staff has indicated in public statements that it will commence a review as long as the required financial statements are included at submission. Section 71003 of the Fixing America's Surface Transportation (FAST) Act of 2016 provided certain relief for EGCs to submit registration statements without certain historical financial statements if those statements would not otherwise be required at the time of the offering. The SEC subsequently amended the instructions to Forms S-1 and F-1 to indicate that an EGC must have amended to include the financial statements required at the time a preliminary prospectus is sent to investors.

The new guidance from the SEC staff will allow all issuers to omit financial information for historical periods otherwise required by Regulation S-X as of the time of confidential submission of a draft registration statement, provided that the omitted financial information relates to a historical period that an issuer company reasonably believes will not be required to be included at the time the registration statement is publicly filed. Although similar to the relief provided under the FAST Act to EGCs, non-EGC issuers should take note that the new guidance determines the required financial statements as of the first public filing, rather than at the date of the preliminary prospectus.

Key takeaways for issuers:

• Issuers taking advantage of these rules will have greater flexibility to initiate an SEC staff review of a draft registration statement if historical financial statements are not available or audited and will not be needed at the expected time of public filing.
• Issuers and their underwriters should continue to consider the implications of the absence of historical financial statements, whether not available or not audited, on their marketing and due diligence needs.