A lot of the things IROs know about companies going public have changed, cautions securities lawyer
The Jumpstart Our Business Startups (JOBS) Act, signed into law last week, is intended to lighten securities regulatory requirements in disclosure and registration on so-called emerging growth companies. Now that the SEC is asking for public comments, it’s time for IROs to also take a step back and pay attention.
‘A lot of the things IROs have learned about companies going public and what they need to do or can’t do during the IPO process has changed,’ says Michael Littenberg, partner and head of the public companies group at New York City-based Schulte Roth & Zabel.
‘Emerging growth companies aren’t required to have a compensation discussion and analysis section. They’re required only to have two years of audited financials. They’re not subject to say on pay. There will be some changes to the [IRO] job description.’
The new law will affect many companies, and not always in a neat and tidy way. For example, the term ‘emerging growth company’ can be deceptive. It technically means a company whose annual gross revenue was under $1 bn in its most recently completed fiscal year.
‘An emerging growth company can be a fairly decent sized company out of the box,’ Littenberg says.
How companies can lose 'special' status
Although the special regulatory status lasts up to five years, a number of factors can kick a company out of the category earlier than that – for example, if it has more than $1 bn in annual revenue in a year or issues more than $1 bn in non-convertible debt during a three-year period.
‘If you get large fairly quickly, you can cease to be an emerging growth company early on,’ Littenberg says. That means the five-year period for favorable regulatory treatment can end prematurely.
IROs also should be aware that many types of communications once prohibited in the IPO process are now allowed for emerging growth companies.
‘All of these restrictions we’ve had on private placements – like general solicitation and advertising – are being changed,’ says Littenberg. ‘You can now talk to anybody you want. Private placements can still only be made with accredited investors, however.’
Analyst restrictions raised
Another change has been the lifting of restrictions on analysts. ‘There will be less restriction around communications by analysts as well as participations by analysts in the offering process,’ Littenberg says, so analysts won’t be absolutely prohibited, as under Sarbanes-Oxley, from attending any meetings.
‘There has been a lot of criticism of loosening restrictions on analysts, but the JOBS Act isn’t removing all the restrictions.’ The main point is that analysts will have fewer restrictions on publishing research, giving emerging growth companies more opportunity to get coverage, he explains.
For all the relaxing of rules, Littenberg cautions that IROs must still be careful. ‘When communications practices are less restrictive, it creates a set of challenges when people put out more information,’ he explains. ‘There is still liability under securities legislation. IROs have to be sensitive, understand the new rules and think through the implications.’