The Jobs Act: Capital Access Reforms - The "IPO On-Ramp"

Summary

One of the key provisions of the new JOBS Act is the "IPO On-Ramp," which will facilitate capital raising and ease ongoing disclosure requirements for certain issuers of securities.

On April 5, 2012, the President signed the Jumpstart Our Business Startups Act (the JOBS Act). The JOBS Act is intended to increase American job creation and economic growth by improving access to the public capital markets for emerging growth companies. Among the key provisions of the JOBS Act are a variety of reforms, referred to as the "IPO On-Ramp," that will facilitate capital raising through public offerings of securities and ease ongoing disclosure requirements for certain issuers of securities.

Who will qualify?: An "emerging growth company" (or EGC) is defined as an issuer of securities that has total annual gross revenues of less than $1 billion¹ in its most recently completed fiscal year. An issuer of securities that had its first sale of common equity securities pursuant to an effective registration statement under the Securities Act of 1933, as amended (its IPO)² on or before December 8, 2011 is excluded and will not qualify as an EGC for purposes of these reforms.

How long will an EGC qualify under the JOBS Act?: An EGC will continue to qualify as such under the JOBS Act, until the earliest of:

A. The last day of the issuer's fiscal year in which it had total annual gross revenues of $1 billion¹ or more;

B. The last day of the issuer's fiscal year following the fifth anniversary of the date of the issuer's IPO;

C. The date on which the issuer has, during the previous 3-year period, issued more than $1 billion in non-convertible debt; or

D. The date on which the issuer is deemed to be a "large accelerated filer" as defined in other securities regulations (presently includes issuers with an aggregate worldwide market value of voting and non-voting common equity securities held by its non-affiliates of $700 million or more).

What are the offering and disclosure reforms affecting EGCs?: The JOBS Act will facilitate the offering and sale of securities by an EGC in the following ways:

• Financial Information and Discussion: The amount of financial information included in the registration statement for an EGC's IPO is reduced to not more than two years of audited financial statements, and no registration statement need include selected financial data for any period prior to the earliest audited period included in the registration statement for the EGC's IPO. In addition, an EGC's MD&A for full fiscal years will be limited to the periods covered by the required financial information.

• Internal Control Audit: An EGC will not be subject to Section 404(b) of the Sarbanes-Oxley Act of 2002, which requires an issuer's audit firm to attest to, and report on, the issuer's management assessment of the effectiveness of its internal control structure and procedures for financial reporting.

• Executive Compensation: An EGC will be exempt from (i) "Say-on-Pay" requirements for non-binding shareholder votes on executive compensation, the frequency of such votes and golden parachute compensation relating to a merger, consolidation, or other fundamental transaction submitted to the shareholders for approval; and (ii) "Pay-for- Performance" and pay ratio disclosures required by the Dodd-Frank Act. In addition, an EGC's disclosures of executive compensation will be scaled as for a smaller reporting company.

• Accounting Pronouncements: An EGC will not be required to comply with any new or revised financial accounting standard until the date that such standard would be applicable to a company that is not required to file reports with the SEC. An EGC may choose to comply with such new standards, but only if it makes such choice at the time it is first required to file a registration statement or periodic report with the SEC, and then the EGC may not selectively comply, but must comply with all such standards for as long as the company remains an EGC.

• Auditing Standards: An EGC will not be subject to any rules of the PCAOB that may require mandatory audit firm rotation or a supplement to the auditor's report providing additional information regarding the audit and the financial statements of an issuer. In addition, any new or revised rules adopted by the PCAOB will only apply to an EGC if the SEC determines that such requirement is necessary or appropriate in the public interest.

• Confidential Submission: An EGC, prior to its IPO, may confidentially submit a draft registration statement for nonpublic review by the staff of the SEC, provided that not later than 21 days before the date on which the issuer begins a road show, the initial confidential submission and all amendments thereto are publicly filed with the SEC.³

• Communications: An EGC is permitted to communicate with potential investors that are qualified institutional buyers or institutions that are accredited investors, to determine whether such investors might have an interest in a securities offering, prior to or after filing a registration statement. In addition, in connection with the EGC's IPO, the JOBS Act relaxes certain restrictions on the communications between a securities analyst and a potential investor and between a securities analyst and management of the EGC.

• Research Reports: Any broker, dealer or member of a national securities association may publish and distribute research reports and make public appearances with respect to the securities of an EGC, without a waiting period after the EGC's IPO and before the expiration of any lock-up agreement between the broker, dealer or member of a national securities association and the EGC or its shareholders after the EGC's IPO. In addition, the JOBS Act makes clear that research reports about an EGC that is the subject of a proposed public offering of common equity securities and that has filed or proposes to file a registration statement for such securities, will not be deemed to be an offer for sale, even if the broker or dealer is participating or will participate in the offering.

These provisions of the JOBS Act are effective without further rule-making by the SEC, although additional rule-making will likely follow to adopt conforming and potentially clarifying changes, so the final contours implementing these reforms will not be fully known until any such rules are adopted. Also, please note that this is one of a series of alerts relating to the various JOBS Act reforms. For information on the other reforms, please visit our website: www.saul.com. We will amend this alert if necessary once final rules are adopted. For more information on any of these reforms, please contact Patricia Gritzan at pgritzan@saul.com or Craig Zappetti at czappetti@saul.com.

1. This amount will be indexed for inflation every five years.

2. Note that the date of first sale is not limited to the date of an issuer's initial primary offering of common equity securities for cash. It could also include an offering of common equity pursuant to an employee benefit plan registered on a Form S-8 as well as a selling shareholder's secondary offering registered on a resale registration statement.

3. See the SEC website for the procedures for confidential submission: www.sec.gov/divisions/corpfin/cfannouncements/draftregstatements.htm.