U.S. Congress Makes Sweeping Changes that will Ease Access to the U.S. Capital Markets

March 30, 2012

Recently, both the House of Representatives and the Senate passed the Jumpstart Our Business Startups Act, or the “JOBS Act”. Once signed into law by President Obama, the JOBS Act will make sweeping changes to the U.S. federal securities laws, making access to the U.S. capital markets easier for both domestic and foreign issuers of securities.1

Ease of Access and Regulation for Most New IPO Companies

The JOBS Act defines a class of issuers that file for an IPO – the “emerging growth company”, or “EGC”. Under the JOBS Act, an EGC is a company that had total annual gross revenues of less than $1 billion during its most recently completed fiscal year.2 A company can retain EGC status for more than five years following the completion of its IPO.3 Among the features of the JOBS Act that ease access to the IPO market are:

  • The return of the “quiet filing”. EGCs will be able to submit their IPO registration statements to the SEC on a confidential basis for review, without any public filing. However, that registration statement and any amendments submitted in response to SEC comments or otherwise must be filed publicly at least 21 days before the IPO road show commences.4
  • U.S. market testing allowed. EGCs will be able to communicate in writing or orally with certain institutional investors (such as “qualified institutional buyers”, or “QIBs”), even before filing, to determine the level of interest that may exist for securities to be offered by the EGC.5
  • Analyst coverage allowed. Wall Street broker-dealer firms that provide analyst coverage of an EGC, even if they are participating in the IPO or other public offering by the EGC, can publish reports on the EGC without timing restrictions, including before the IPO and before the related lock-up agreements expire.
  • Only two years of audited financial statements and selected financial data needed. EGCs will only need to include in an IPO registration statement audited financial statements and selected financial data for the past two fiscal years (as opposed to the current three-year/five-year requirement).

The JOBS Act will relax certain disclosure and regulatory compliance requirements for EGCs, such as:

  • No “Sarbox” auditor’s attestation. EGCs will not be required to provide with their annual reports an auditor’s attestation report on internal financial controls, as otherwise mandated by Section 404(b) of the Sarbanes-Oxley Act.
  • No audit firm rotation. EGCs will not be required to comply with future PCAOB rules that may mandate audit firm rotation and the provision of additional information by the auditors in their report on the financial statements.
  • Relaxed “Say-on Pay” and other rules concerning executive compensation. EGCs will not be required to conduct shareholder advisory votes mandated by the Dodd-Frank Act, and will benefit from relaxed disclosure requirements concerning executive compensation matters.6

General Solicitation and General Advertising Permitted in Rule 144A Offerings

In a significant reversal from the current requirement, the JOBS Act will permit issuers to engage in general solicitation and general advertising in certain private offerings. The JOBS Act will require the SEC to eliminate, within 90 days after enactment of the JOBS Act, the ban on general solicitation and general advertising in its rules as follows:

  • Rule 144A, provided that the issuer or seller has taken reasonable steps to ensure that securities are resold only to persons that the seller and any person acting on behalf of the seller reasonably believes is a QIB, and
  • Rule 506 of Regulation D, provided that the issuer or seller has taken reasonable steps to ensure that all purchasers of the securities in the private offering are accredited investors.

New Small Issuer Exemption for Public Offerings Up To $50 Million

The JOBS Act directs the SEC to adopt rules that add a new small issuer exemption from Securities Act registration that eases procedural and disclosure requirements for public securities offerings by small issuers (other than by certain excluded issuers) in amounts up to $50 million, subject to the SEC’s authority to increase that amount at specified times in the future.7 The JOBS Act has not established a time frame for the SEC to make these new rules. A public offering under this new exemption will require that the issuer provide to investors an offering circular containing annual audited financial statements in such form as the SEC will determine. In addition, the SEC will have authority to require issuers availing themselves of this new exemption to make periodic filings containing disclosure of certain matters about their operations, financial condition, corporate governance, use of funds from investors and other matters as the SEC determines.

If you have any questions concerning this bulletin, please contact any attorney in the Capital Markets Group at Seward & Kissel LLP.


1 It is expected that President Obama will sign the legislation shortly.

2 An issuer selling securities under a registration statement filed with the U.S. Securities and Exchange Commission, or the “SEC”, on or prior to December 8, 2011, is not eligible for EGC status.

3 EGC status would cease on the earliest of (i) the last day of the first fiscal year in which the company achieves annual gross revenues of at least $1 billion, (ii) the last day of the fiscal year following the fifth anniversary of the first sale of common equity securities by the company pursuant to an effective registration statement under the Securities Act of 1933, as amended, or the “Securities Act”, (iii) the date on which the company has, during the previous 3-year period, issued more than $1 billion of nonconvertible debt securities, and (iv) the date that the company achieves “large accelerated filer” status under the SEC’s rules, which generally occurs when the company has an aggregate worldwide market value of common equity securities held by non-affiliates of at least $700 million.

4 We believe that the SEC will continue to provide draft confidential review of first time registration statements of foreign private issuers that are or will be dual listed without regard to the 21-day requirement.

5 As defined in SEC Rule 144A, QIBs are generally entities that own and invest on a discretionary basis securities of non-affiliated issuers with a value of at least $100 million.

6 Many foreign companies are already exempt from theses rules.

7 Generally, a small issuer under current SEC rules is a public company with public float of less than $75 million or a private company with annual revenues of less than $50 million.