during the pendency of its IPO. For some time, practitioners relied on existing no-action letter guidance that was somewhat narrowly construed as permitting a concurrent private placement to QIBs and to a handful of institutional accredited investors.2
This fairly limited
approach was modified over time and a more expansive view was expressed by the SEC first in 2007 and confirmed in Compliance and Disclosure Interpretations.3
The
C&DI, confirming the guidance in the SEC’s 2007 release, provides that under appropriate circumstances, there can be a side-by- side private offering under Securities Act section [4(a)(2)] or the Securities Act Rule 506 safe harbor with a registered public offering without having to limit the private offering to qualified institutional buyers and two or three additional large institutional accredited investors, as under the Black Box (June 26, 1990) and Squadron, Ellenoff (Feb. 28, 1992) no-action letters issued by the Division, or to a company’s key officers and directors, as under our so-called “Macy’s” position.4 The SEC also clarified that a company can make a valid
private placement if the investors are identified by means other than the registration statement. Given this viewpoint, and even without considering the
relaxation of the prohibition on general solicitation in respect of certain Rule 506 offerings, it is clear that an EGC could either during the confidential phase or after the public filing of its registration statement contact institutional investors and discuss a potential private financing. It is easy to envision that a test-the-waters conversation may morph into a discussion with an institutional investor about a potential private placement. An EGC should take care to be clear in its conversations with potential investors, and ensure that any potential investors understand whether they are participating in a private placement transaction, and purchasing securities that will be restricted securities, and not expressing an interest in participating in the IPO. The JOBS Act has contributing to a further blurring of
the lines between private placements and public offerings given the relaxation of the prohibition against general solicitation and the introduction of exemptions for certain limited offerings pursuant to section 3(b)(2) and crowdfunding.
Flipping from confidential to public In a typical IPO, the issuer will continue to work with its counsel during the waiting period in order to address the SEC’s comments on its filing, and also concurrently work on finalising various ancillary agreements, including the underwriting agreement and lock-up agreements. The
32 JOBS Act Quick Start
underwriter and its counsel usually recommend that an issuer wait to finalise, and print a preliminary prospectus or red herring until the issuer and its counsel have responded to and addressed all of the significant comments raised by the SEC during the review process. This ensures that the issuer will not have to recirculate its preliminary prospectus as a result of any change arising during the review process. The underwriter will wait to commence the road show until the preliminary prospectus is prepared. In the case of an EGC IPO, there may be an additional dynamic to be considered. An EGC that is relying on the confidential submission process may want to consider when to make its first “public” filing. As discussed in Chapter 1, and above, an EGC is required to file publicly with the SEC at least 21 days before the commencement of the issuer’s road show. The EGC may want to make a public filing before that for a variety of reasons, however. The EGC may want to file publicly earlier in the process, perhaps after it has undergone one or two amendments, in order to have it known to competitors or to strategic investors that the company is proceeding with an IPO and to make the registration statement available freely. This may be helpful if the issuer is contemplating a dual-track approach. It may be helpful in order to permit the underwriter to interest institutional investors in preliminary test-the-waters type discussions. Some institutional investors may be reluctant to commit the time and resources to meeting with a company or evaluating a potential investment if they believe that the offering is in a very preliminary stage. An EGC will want to consult with counsel and consider carefully its decision to transition from a confidential process to a public process.
Disclosures and other accommodations We noted that one of the principal benefits of the IPO on- ramp approach is that an EGC may choose to rely on some of the disclosure accommodations made available by Title I of the JOBS Act. An EGC may choose to present only two years of audited financial information (and only two years of summary and selected financial data, as well as an abbreviated MD&A discussion) in its registration statement. An EGC and its counsel will want to consider whether the EGC will want to present information for a third year although it is not required. In some cases, the underwriter will have strong views regarding the information that should be presented in the registration statement. For example, the underwriter may take the view that the issuer’s competitors that are already SEC-reporting companies provide financial information for a longer period and it will be important to investors that the EGC
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