The SEC Provides Further Guidance On Financial Statement Requirements In Registration Statements

On August 17, 2017, the SEC issued guidance on financial statement requirements for confidential and public registration statement filings by both emerging growth companies (EGC) and non-emerging growth companies. The new Compliance and Disclosure Interpretations (C&DI’s) follow the SEC’s decision to permit all companies to submit draft registration statements, on a confidential basis (see HERE). The newest guidance is in accord with the SEC’s announced policy to take active measures to promote the U.S. IPO market and small business capital-raise initiatives.

Earlier in the summer, the SEC expanded the JOBS Act benefit available to emerging growth companies, to be able to file confidential draft registration statements, to all companies. Confidential draft submissions are now available for all Section 12(b) Exchange Act registration statements, initial public offerings (IPO’s) and for secondary or follow-on offerings made in the first year after a company becomes publicly reporting.

Title I of the JOBS Act initially allowed for confidential draft submissions of registration statements by emerging growth companies but did not include any other companies, such as smaller reporting companies. Regulation A+ as enacted on June 19, 2015, also allows for confidential submissions of an offering circular by companies completing their first Regulation A+ offering.

The new C&DI’s expand certain FAST Act benefits also only statutorily available to emerging growth companies, to all companies. Like the earlier expansion of the JOBS Act benefit, the new extension of rights was made by staff policy and not a formal rule change.

Background on Section 71003 of the FAST Act

Section 71003 of the FAST Act allows an EGC that is filing a registration statement under either Form S-1 or F-1 to omit financial information for historical periods that would otherwise be required to be included, if it reasonably believes the omitted information will not be included in the final effective registration statement used in the offering, and if such final effective registration statement includes all up-to-date financial information that is required as of the offering date. As directed by the FAST Act, the SEC revised the instructions to Forms S-1 and F-1 to reflect the new law.

The Section 71003 provisions do not allow for the omission of stub period financial statements if that stub period will ultimately be included in a longer stub period or year-end audit before the registration statement goes effective. In a C&DI under the prior SEC administration, the SEC clarified that the FAST Act only allows the exclusion of historical information that will no longer be included in the final effective offering. The C&DI clarifies that “Interim financial information ‘relates’ to both the interim period and to any longer period (either interim or annual) into which it has been or will be included.” For example, an issuer could not omit first-quarter financial information if that first quarter will ultimately be included as part of a second- or third-quarter stub period or year-end audit.

An SEC C&DI clarified that Section 71003 allows for the exclusion of financial statements for entities other than the issuer if those financial statements will not be included in the final effective registration statement. For example, if the EGC has acquired a business, it may omit that acquired business’ historical financial information as well. In a C&DI, the SEC confirms that: “Section 71003 of the FAST Act is not by its terms limited to financial statements of the issuer. Thus, the issuer could omit financial statements of, for example, an acquired business required by Rule 3-05 of Regulation S-X if the issuer reasonably believes those financial statements will not be required at the time of the offering. This situation could occur when an issuer updates its registration statement to include its 2015 annual financial statements prior to the offering and, after that update, the acquired business has been part of the issuer’s financial statements for a sufficient amount of time to obviate the need for separate financial statements.”

As a reminder, an EGC is defined as an issuer with less than $1,070,000,000 in total annual gross revenues during its most recently completed fiscal year. If an issuer qualifies as an EGC on the first day of its fiscal year, it maintains that status until the earliest of the last day of the fiscal year of the issuer during which it has total annual gross revenues of $1,070,000,000 or more; the last day of its fiscal year following the fifth anniversary of the first sale of its common equity securities pursuant to an effective registration statement; the date on which the issuer has, during the previous 3-year period, issued more than $1,070,000,000 in non-convertible debt; or the date on which the issuer is deemed to be a “large accelerated filer.”


Financial Statement Requirements for Emerging Growth Companies

Using staff policy, the SEC will not require an EGC to include interim financial information in its draft registration statements, that it reasonably believes it will not be required to present separately at the time of the contemplated offering. For example, if an EGC with a calendar fiscal year-end submits a draft registration statement in November 2017, but does not expect to launch the offering until April 2018, after the full 2017 audit would be required, such EGC could omit the 2015 annual financial statements and stub period information for both 2016 and 2017. That is, since only full-year audits for 2016 and 2017, and no stub period statements for nine months ended 2016 and 2017, would be included in the final effective registration statement, neither the stub periods nor the 2015 statements would need to be included in the draft registration.

Financial Statement Requirements for Companies Other than an Emerging Growth Company

The SEC has extended the benefit of Section 71003 of the FAST Act to companies that do not qualify as an EGC to allow for the omission of historical financial statements in its confidential draft registration statements, that it reasonably believes will not be required to be included at the time it files its registration statement publicly.

A company must publicly file its registration statement and all nonpublic draft submissions at least 15 days prior to any road show, and in the absence of a road show, at least 15 days prior to the requested effective date of the registration statement.