The U.S. Securities and Exchange Commission (SEC) is expanding a popular provision of the Jumpstart Our Business Startups (JOBS) Act that allowed "early growth companies" (EGCs) – generally those with annual revenues under $1 billion – to file materials related to an initial public offering (IPO) confidentially before officially filing public materials. Now that process, known as Title I nonpublic draft registration statements, is being extended to all companies considering going public with an IPO.
The benefit of a nonpublic draft registration statement is that companies can decide to pull back on their IPO – whether its due to changing market conditions, revisions or any other reason – without signaling to the public at large that the company hesitated to move forward with its public offering, David Hooper, corporate attorney at the firm Barnes and Thornburg, told Business News Daily.
"Before [the] JOBS Act, if a smaller company was going public and made their filing … available for everyone to see and the IPO was later pulled, that was a pretty negative connotation on the company itself, and the market typically looked at that as there must be something fatally wrong with this company," Hooper said. "But oftentimes companies may pull an IPO for other reasons. It's seen as a significant benefit to those companies to give them the freedom to potentially terminate an IPO process – or revise, or delay, or test it – to see if market would be able to absorb the offering or have an adverse reaction to it."
According to Ernst & Young's JOBS Act update, 87 percent of the emerging growth companies (EGCs) that have filed IPO registration statements since Title I was enacted have taken advantage of the confidential registration statement SEC review process. Now that the process is open to all companies considering filing IPOs, the SEC is hoping to see more companies going public.
"This is an important step in our efforts to foster capital formation, provide investment opportunities and protect investors," said the SEC's Director of the Division of Corporation Finance, Bill Hinman. "This process makes it easier for more companies to enter and participate in our public company disclosure-based system."
Easing of policy limited to confidential filings
While the SEC's new policy expands confidential filing from EGCs to all companies mulling a public offering, it does not exempt larger companies from other disclosure requirements not applicable to EGCs. For example, Hooper said larger companies still require three years of financials, while EGCs only require two.
"The relief that was provided to the non-EGCs is limited in certain aspects as it compares to the EGCs … so a number of other provisions in [the] JOBS Act for EGCs doesn't necessarily apply to relief to other companies," Hooper said. "If you're a company with $5 billion in revenues, you still have to provide the full disclosures that you otherwise would have had to provide."
Ultimately, though, Hooper said market conditions at large and by sector tend to drive the amount of IPOs seen in a given year. While the changes make it easier, there are many factors to look out for; still, Hooper said, he expects the SEC's policy update will give the number of IPOs a boost.
"Under these current market conditions, I think this provision would have a positive effect on [the] number of IPOs coming to fruition," Hooper said.
The SEC echoes those sentiments. SEC Chairman Jay Clayton said in a statement the overarching goal of the policy update is to streamline the process by which companies go to the public market for capital. While larger companies are still required to abide by the more stringent disclosure requirements, they will have the flexibility to test the waters with a nonpublic draft registration statement – a noncommittal investigation of the IPO process.
"By expanding a popular JOBS Act benefit to all companies, we hope that the next American success story will look to our public markets when they need access to affordable capital," Clayton said. "We are striving for efficiency in our processes to encourage more companies to consider going public, which can result in more choices for investors, job creation and a stronger U.S. economy."