New SEC IPO Rules in Effect

• Posted on: Aug 7 2017

On July 10, 2017, new Securities and Exchange Commission (“SEC”) rules went into effect that permit companies, regardless of their size, to file  paperwork for initial public offerings without immediately making public disclosures.  The SEC’s announcement of the new policy can be found here. 

“This is an important step in our efforts to foster capital formation, provide investment opportunities, and protect investors,” said 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.”

The new policy is an expansion of rules promulgated under the Jumpstart Our Business Startups (“JOBS”) Act of 2012 that allowed emerging growth companies (those with under $1 billion in revenue) to make such confidential filings. The new policy is intended to help companies resolve any issues during the registration process out of public view, further restore the market for IPOs and subsequently boost job growth.

“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,” said Chairman Jay Clayton. “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.”

Under the new policy, the SEC will review a draft of the initial “S-1” registration statement and amendments filed pursuant to the Securities Act of 1933 on a non-public basis. The new policy applies to both domestic and foreign issuers. However, responses to any SEC staff comments must be made in a public filing, not in a revised, non-public draft of the registration statement. Additionally, issuers must publicly file registration statements at least 15 days prior to any road show presentations to investors, or in the alternative, 15 days prior the the requested effective date of the registration statement.

The so-called “stealth” filing procedures should help issuers time their IPOs with favorable market conditions. At the same time, companies have the option of withdrawing a filing in the event of a market downturn or other adverse event. The confidential filing procedures will also help issuers maintain the privacy of sensitive financial and business information. Nonetheless, a company that proceeds with a public offering after filing must disclose the S-1 according to the 15-day requirements mentioned above.

Since emerging growth companies were given the option of making confidential filings under the JOBS Act, it has proven to be a popular option, with companies like Snapchat, Shake Shack and Twitter taking that route.

While the JOBS Act was intended to increase the number of IPOs, the market continues to face a number of challenges. These include a rise in merger and acquisition activity and the ability of companies to raise capital through multiple rounds of venture funding. At this juncture, it remains to be seen what effect the new rules will have on the IPO market or whether the new registration procedures will trigger investor lawsuits.