disclosure requirements applicable to smaller reporting companies and the disclosure accommodations made available to EGCs by the JOBS Act, the SEC disclosure requirements and disclosure practices still seem to result in incredibly detailed and lengthy IPO documents that are often hundreds of pages long. Commentators have noted that, for a retail investor, it may be difficult to wade through dense disclosures, and to assess which risks are most critical to the issuer’s future prospectus and business results. For this reason, some commentators have encouraged the SEC to review whether certain disclosure requirements may be modernised or simplified.
The in-betweeners As we have noted elsewhere, over time, the SEC has done much to modernise its regulations relating to offering communications, and also has adopted changes to improve the capital formation process. Securities Offering Reform in 2005 simplified the offering process for the largest and most sophisticated public companies, WKSIs, and provided these companies with greater flexibility for offering related communications. Companies that are considered smaller reporting companies are entitled to rely on certain scaled disclosure requirements. Now, EGCs may elect to take advantage of the IPO on-ramp disclosure accommodations. Many mid-sized companies cannot benefit from EGC status (due to the timing of their initial offerings of equity securities) and are larger than smaller reporting companies and not entitled to scaled disclosure provisions. We refer to these companies as in-betweeners. Their disclosure and reporting concerns have not been addressed. In addition, these companies have capital- raising needs that also have not been addressed by Securities Offering Reform or by the modifications made to the eligibility requirements for use of shelf registration statements for primary offerings. We anticipate that the SEC will continue to evaluate the need to address capital formation issues, and will consider making appropriate adjustments to existing regulations for these issuers.
Information requirements and continuing reporting requirements In the post-JOBS Act world, there may be some disparities in the information requirements that arise for an issuer depending on the securities offering exemption that the issuer chooses to rely on in connection with its capital- raising efforts. For example, following enactment of the JOBS Act, an issuer may conduct a Rule 506 offering using general solicitation and make sales to investors that are verified to be accredited investors. The issuer is not subject to any information requirements. The securities
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sold in a Rule 506 offering will be covered securities. The securities also will be restricted securities. Conceivably, an issuer could conduct multiple Rule 506 offerings, and, if the issuer remains below the holder-of-record threshold, the issuer would remain exempt from any requirement to provide information to security-holders. By contrast, an issuer might choose to raise modest amounts of capital in crowdfunded offerings through a funding portal or a broker-dealer made to a broader universe of potential investors, provided that the issuer complies with certain limited information requirements and thereafter makes publicly available certain limited information. The securities sold in a crowdfunded offering will be restricted securities. Title IV of the JOBS Act contemplates that an issuer that is not an SEC-reporting company may rely on the new section 3(b)(2) exemption to offer securities publicly, which will not be restricted securities, provided that the issuer satisfies certain information requirements. Following a section 3(b)(2) offering, the issuer may choose to remain private although it will have issued shares in a broad-based offering, and may be subject to certain SEC reporting requirements, although these are likely to be limited. In addition, given the growth of private secondary markets, the securities of a private company may be actively traded through the facilities of a private secondary market and, provided the issuer remains under the holder- of-record threshold, it will not be subject to information requirements. There also may be issuers that have securities that trade on the Pink Sheets and there may not necessarily be robust publicly available disclosures for investors. It is likely that this is an area on which the SEC will focus as part of its investor protection mission.
Going forward Given that the SEC still must undertake significant rulemaking in order to comply with the mandate of the JOBS Act, it would be premature to make any assessments regarding the impact that the Act has had (or will have) on capital formation in the United States. It is not too early, however, to conclude that it has been a catalyst for important discussions regarding the appropriate balance between regulation and disclosure requirements and efficient access to the capital markets. We hope that the lively dialogue that the JOBS Act has reignited will continue as it will lead to innovation and interesting and worthwhile emerging companies being given an opportunity to reach the public markets.
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