SEC expands confidential submission programme
September 2017 | SPECIAL REPORT: PRIVATE EQUITY
Financier Worldwide Magazine
September 2017 Issue
The Securities and Exchange Commission (SEC) will allow all issuers to confidentially submit draft registration statements with the SEC in connection with their initial public offerings (IPOs). The programme represents the first major policy change under chairman Jay Clayton in an attempt to reverse the trend of fewer companies going public. For example, according to Pitch Book, during the first six months of 2017, only 30 venture-backed companies went public, significantly fewer than the 202 venture-backed companies that went public in 2014.
Before the SEC’s new policy took effect on 10 July, only certain foreign issuers and companies that qualified as emerging growth companies (EGCs) pursuant to the Jumpstart Our Business Startups (JOBS) Act could confidentially submit a registration statement for an IPO. The JOBS Act allowed EGCs – generally companies with revenues less than $1.07bn for the year prior to their IPO – to submit a draft registration statement to the SEC for non-public review in lieu of a public filing. No public disclosures are required until 15 days before the company begins promoting its shares at roadshows. Since the JOBS Act was enacted in 2012, nearly all EGCs conducting an IPO, including high-profile venture-backed companies such as Snap, Blue Apron and Twitter, have chosen to confidentially submit draft registration statements.
Under the new policy, all issuers may now take advantage of the confidential submission programme for IPOs, providing numerous benefits to prospective issuers and their affiliates.
Before the new policy, most companies that did not qualify as EGCs were required to file public registration statements long in advance of the actual roadshow and subsequent pricing, resulting in a months-long waiting period that exposed them to potentially negative market and other forces outside of their control. This process often required companies to publicly disclose operating performance, business strategies and other potentially sensitive information (such as executive officer compensation) – and to publicly revise such disclosure in response to comments from the SEC staff – well in advance of being in a position to assess the viability of completing an IPO at the desired valuation (or at all). Even the fact that a company is pursuing an IPO can constitute competitively sensitive information that some prospective issuers are reluctant to reveal.
Moreover, if, over the course of the IPO process, market conditions deteriorated, a prospective issuer could encounter weak investor interest at the time of marketing and pricing and be forced to postpone or cancel its IPO. Postponing or cancelling an IPO after disclosing IPO plans may harm companies in numerous ways: creating negative perceptions within the company’s industry or in the market generally and potentially undermining its competitive position, harming employee morale and potentially ‘tainting’ the company if it seeks an IPO or other strategic transaction in the future.
By delaying a company’s obligation to publicly disclose its plans for a public offering, the expanded confidential submission programme gives companies more flexibility to conduct their offerings without risking the negative consequences of a long waiting period. Under the new policy, companies that confidentially submit their registration statement have an opportunity to discuss and resolve any issues with their disclosure through a private comment and response process with the SEC; if the company ultimately decides to postpone or cancel plans for an IPO, it can do so without the risk of public scrutiny. This increased privacy prevents potential competitors from gaining premature access to the company’s financial and other information if the company ultimately decides not to move forward with the IPO. It likewise reduces the potential public and employee relations headache that can result from cancelled IPO plans.
Additionally, for a venture capital or private equity fund sponsor seeking to exit its investment in a portfolio company, the ability to keep private the company’s financial and other information may help the sponsor more effectively conduct a dual-track process, whereby the sponsor can simultaneously undertake an IPO process for the portfolio company and negotiate a sale of the company to prospective buyers.
Implications for capital markets
Although the benefits of confidential submission have been available to EGCs since 2012, chairman Clayton has expressed hope that expanding the programme to all companies will help reverse the decline in the number of IPOs over the past decade. In discussing the new policy, chairman Clayton recently 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 US economy.”
According to Credit Suisse, the number of publicly traded companies in the US is down nearly 50 percent since peaking at 7322 in 1996. This decrease is partially attributable to a growing preference among investors for larger investment opportunities and a resulting increase in M&A activity among already-listed companies. At the same time, younger companies – particularly in the technology industry – have been able to raise significant amounts of capital privately, reducing the need for public equity. Chairman Clayton referenced Uber in his confirmation hearing as an example of a company that would likely have gone public 20 years ago. Instead, Uber has reportedly raised $14bn since 2009 without a public offering and remained a private company. By minimising the public exposure previously required by the IPO process, chairman Clayton expressed hope that public equity will become an increasingly viable funding strategy for companies that, like Uber, have access to alternative funding sources.
While chairman Clayton and others believe the policy change will ease access to public capital and increase the number of IPOs, sceptics of the programme question its ultimate impact. University of Florida business professor Jay R. Ritter expressed support for confidential submission in principle, but has questioned whether it sufficiently incentivises companies to go public. “This is not necessarily going to encourage more companies to go public—the whole JOBS Act has had very marginal impact,” Ritter recently stated.
This criticism may be justified. According to Proskauer’s 2017 IPO Study, confidential submission has been broadly adopted by IPO issuers: from 2013 to 2016, over 94 percent of the 303 EGCs covered by the study took advantage of confidential submission. However, over the same time period, the overall number of IPOs covered by the study that priced declined by an average of approximately 10 percent per year. Although this trend may be primarily attributable to unfavourable market conditions (particularly in 2016), it is not clear that confidential submission and other JOBS Act accommodations have actually had their desired effect, i.e., of prompting companies that were not otherwise inclined to pursue an IPO to do so. As such, expanding the confidential submission programme to all IPO issuers may simply smooth the path for companies that would have pursued an IPO in any event.
Pippa Bond is a partner and co- head of the global capital markets practice at Proskauer Rose LLP. Ms Bond can be contacted on +1 (310) 284 5607 or by email: email@example.com. Kaitlin Hulbert and Spencer Brass are both summer associates at Proskauer. The authors would like to thank Charles Lee, a senior associate at the firm, for his assistance with this article.
© Financier Worldwide
Pippa Bond, Kaitlin Hulbert and Spencer Brass
Proskauer Rose LLP