Every few years, when the IPO market takes a dip, the SEC’s disclosure requirements get blamed. But it might be time to step back and take account of all of the ways that the Congress and SEC have made it easier for young companies to access the U.S. capital markets through an initial public offering. Perhaps the “market” is using the regulators as a scapegoat?
The SEC takes very seriously its co-equal missions to protect investors and promote capital formation, and nowhere do those two missions dovetail better than in the rules that apply to IPO companies. The SEC has taken numerous steps in recent years to make it easier for emerging companies to navigate and complete the IPO process.
Only five years ago, Congress passed the JOBS Act to literally “jumpstart” the IPO market. Under the law, “emerging growth companies” (which captures companies with less than $1 billion in revenue) were permitted to file their IPO registration statements “confidentially.” That was designed to address the competitive concerns of younger companies that didn’t want to risk publicly disclosing sensitive competitive information and executive compensation until it knew for sure that it wanted to go public and that the market was there to permit it to go public.
The JOBS Act also permitted EGCs to avoid, for up to five years in some cases, the following “burdensome” disclosure requirements:
- The auditor attestation requirements for internal controls over financial reporting, which Sarbanes-Oxley put in place after WorldCom and Enron
- The full executive compensation disclosure requirements (EGCs are permitted to provide a “scaled” version)
- The shareholder advisory votes on executive compensation required by Dodd-Frank
- New or revised financial accounting standards under U.S. GAAP, until those standards become applicable to private companies
- Mandatory audit-firm rotation rules of the PCAOB
EGCs were also permitted to test the waters for an IPO by meeting with institutional accredited investors to gauge their interest in the contemplated offering and providing both oral and written information about the company. Previously this type of communication would have been seriously chilled by the “gun jumping” laws under the Securities Act.
The SEC has continued to seek accommodations for IPO issuers.
In July 2017, the SEC announced that any issuer may file an IPO (or even a follow-on) registration statement confidentially as long it confirms that it will publicly file the registration statement at least 15 days prior to any road show for the offering.
Moreover, the SEC has announced that issuers (both EGCs and non-EGCs) generally do not need to include financial statements in a draft registration statement that it doesn’t expect to be required in the registration statement when the offering is launched. This rule change addresses the frequent issuer complaint that time and money are wasted preparing financial statements for inclusion in draft registration statement filings that become stale and superseded when the SEC review process is completed and the issuer is ready to market the offering.
These IPO-specific rule changes also dovetail with an overall SEC initiative to streamline the disclosure requirements for all public companies. The SEC has published a comprehensive concept release on ways to reduce redundancy and immaterial disclosure from Regulation S-K, the primary source of all public-company disclosure requirements.
Most recently, pursuant to the FAST Act, the SEC on Oct. 11 proposed a sweeping “modernization” of the disclosure requirements of Regulation S-K to reduce redundant or immaterial disclosure requirements, so as to streamline the disclosure process for all issuers, including IPO companies.
From securities offering reform, to the JOBS Act, to the more recent FAST Act, the rules relating to conducting initial public offerings have been dramatically liberalized since the “old days.” As such, existing IPO disclosure regulations do not need to be relaxed.
Thomas Conaghan is a partner with the law firm McDermott Will & Emery and co-head of its capital markets and public companies group.