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What to make of the SEC’s rule change on confidential IPOs

Can it reverse the downward trend in the number of annual IPOs?

IPOs among tech's elite are on the decline. An SEC rule change could reverse that trend. (Photo courtesy of Nasdaq)
This is a guest post by Ernie Holtzheimer, an associate at the law firm Montgomery McCracken Walker & Rhoads LLP.

Effective yesterday, July 10, 2017, the U.S. Securities and Exchange Commission expanded its confidential initial public offering filing option to all companies seeking to go public.

For those who are unaware, in order to become publicly traded on U.S. equity markets, companies must first file a Form S-1 registration statement with the SEC. This filing, which has historically been made available to the public via the SEC’s EDGAR system as soon as it is filed, must be submitted months before an IPO and requires the disclosure of detailed information that is of interest to potential investors and competitors (i.e. future plans, risk factors and financial statements).

The SEC first changed this rule in 2012, when then-President Obama signed the Jumpstart Our Business Startups (“JOBS”) Act into law. Prior to July 10, 2017, the confidential filing option was only available to “emerging growth companies,” defined in the JOBS Act as companies with $1 billion or less in revenue. The legislation was introduced to provide smaller companies with the ability to resolve any issues raised by the SEC with respect to the company’s S-1 without the scrutiny of the public eye.

A step in the right direction toward revitalizing public capital markets.

In addition to confidentially amending a registration statement, the new rules also allow companies to withdraw their filing altogether. This a noteworthy benefit because in the event of significant market fluctuation (such as in 2007) or a change in corporate plan, the company’s S-1 information would not be made public. In addition, if a company decides to withdraw its S-1, it would not need to pay the requisite filing fee. The statutory provision requiring payment of a registration fee under the Securities Act, Section 6(b), applies at the “time of filing a registration statement.” The confidential submission of a draft registration statement under Section 6(e) is not a filing of a registration statement, so the filing fee is not due at that time.

Companies that do eventually choose to go public after their confidential filing must pay the filing fee and disclose their S-1 at least 15 days before the start of their “road show” as defined in Rule 433(h)(4). That rule defines “road show” as “an offer … that contains a presentation regarding an offering by one or more members of the issuer’s management … and includes discussion of one or more of the issuer, such management, and the securities being offered.” If the company does not conduct a traditional road show and does not engage in activities that would come within the definition of road show, then its registration statement must be filed publicly on EDGAR no later than 15 days before the anticipated date of its effectiveness.

During his confirmation process, SEC Chairman Jay Clayton, who recently took over for former Chair Mary Jo White, said he wanted to make it more appealing for companies to sell shares to the public rather than rely on private investments. The recent expansion of the confidential filing option is Clayton’s first major policy move since becoming Chairman and is a step in the right direction toward revitalizing public capital markets. The legislation is designed to make it “easier” for larger companies such as Uber, Dropbox and Airbnb to decide to go public. Since the JOBS Act was introduced, more than 100 eligible companies — including the likes of Snapchat and Twitter — have taken advantage of the confidential IPO option.

The question is, will this effort be enough to reverse the downward trend in the number of annual IPOs?

Numerous companies, especially those in the technology industry, have remained private longer than ever by continuously choosing private venture funding over entering the public markets. Only time will tell if companies can be swayed to go public rather than continuing to raise private capital until they run out of letters in the alphabet (Uber is up to a Series H round), but it’s likely we will see additional changes from the SEC to try to change the trend.

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