The U.S. JOBS Act and non-U.S. companies: changes to the offering process and compliance challenges

May 8, 2012

By Robert Evans, Thomson Reuters Accelus contributing author

NEW YORK, May 8 (Thomson Reuters Accelus) – In April 2012, the U.S. securities laws changed significantly with the Jumpstart Our Business Startups Act, also known as the JOBS Act. The JOBS Act is deregulatory, easing some of the rules for companies seeking to access the U.S. capital markets. The offering process for SEC-registered IPOs is changing as a result and the U.S. Securities and Exchange Commission staff is working on further rule changes. Publicity restrictions will be eased for private placements and Rule 144A offerings. Offerings of up to $50 million will be exempted from registration. These changes pose interesting compliance challenges.


Non-U.S. companies accessing the public U.S. equity capital markets for the first time after December 8, 2011 may benefit from the JOBS Act changes. To qualify, a company must have annual revenues of less than $1 billion. Issuers in this new category are called emerging growth companies (EGCs). The most significant changes to the securities offering process for EGCs include:

  • Communications: A company making a public offering in the United States and its underwriters are strictly limited by the U.S. Securities Act of 1933 in their ability to communicate about the offering. No offers, written or oral, are permitted before a registration statement is filed with the SEC. Only oral offers, or offers made with a compliant prospectus, are permitted after filing but before the registration statement is declared effective. Under the JOBS Act, EGCs, directly or through representatives they authorize, may now test the waters with qualified institutional buyers (QIBs) and institutional accredited investors (IAIs). That is, without violating the pre-filing and waiting period restrictions, they may communicate with those potential investors to gauge whether they might be interested in an SEC-registered securities offering.
  • EGCs and underwriters that test the waters remain subject to potential securities law liability for those communications, including for any material misstatement or omission. As a result, issuers and investment banks are likely to be cautious in testing the waters. Communications will be oral (which can include use of slides or flip books that are not left with investors). If written materials are used, they will likely be limited to information from the registration statement. Because the JOBS Act creates a limited carve-out to the Securities Act restrictions on communication, there will be compliance challenges. For example, market participants will need to ensure that testing the waters communications are limited to QIBs and IAIs and only used in offerings by EGCs. Also, investors may have to agree to treat information confidentially to avoid market abuse and selective disclosure concerns.
  • Confidential submission of registration statements: In December 2011, the SEC staff severely limited access to confidential submission of registration statements, which had been available to all first time non-U.S. issuers that qualified as foreign private issuers. The JOBS Act gives that access back to issuers that qualify as EGCs prior to pricing of their first SEC-registered sale of equity securities. EGCs are required to include the initial confidential submission and all confidentially submitted amendments as exhibits to a publicly filed registration statement no later than 21 days before the road show. The December 2011 SEC staff policy still allows some non-U.S. issuers to confidentially submit draft registration statements if they meet the conditions outlined in the policy and either are not EGCs or do not take advantage of any benefit available to EGCs. Draft registration statements submitted confidentially must be substantially complete at the time of initial submission, including exhibits and a signed audit report covering the fiscal years presented in the registration statement.
  • Financial statements and selected financial data: An EGC need only provide two years of audited financial statements in its initial public offering of common equity securities registered with the SEC, rather than the three years that are generally required. Instead of five years of selected financial data, an EGC need only present selected financial data for periods beginning with the earliest audited period presented in its IPO registration statement. Although the JOBS Act only refers to the disclosure rules for U.S. domestic issuers, EGC foreign private issuers may follow these reduced disclosure requirements.
  • Research reports: The JOBS Act makes it easier for investment banks to write research reports about EGCs. Pre- JOBS Act and under the current rules for non-EGCs, underwriters in an IPO cannot publish research in advance of the IPO or during a 40-day quiet period after pricing and may not publish research for 15 days before and after the release or expiration of any lock-up agreement. There are also restrictions limiting contact between bankers and research analysts designed to separate investment banking from research in investment banks.

The JOBS Act:

  • exempts broker-dealer research reports on EGCs before, during or after common equity offerings of an EGC (including an IPO) from being considered an offer or a prospectus under the Securities Act;
  • permits broker-dealers to write research on EGCs after their IPOs (so no 40-day quiet period) and before the expiration of IPO lock-up agreements; and
  • allows research analysts to communicate with management in connection with the IPO of an EGC even if investment bankers are present.

In practice, however, major investment banks seem unlikely to change their research practices much, though the quiet period may be 25 days instead of 40. The flexibility provided by the JOBS Act may be limited by the restrictions imposed by the Global Research Analyst Settlement in 2003 and concerns over 10b-5 liability.


The JOBS Act reduces SEC reporting and other requirements for EGCs until they cease to be EGCs. A company cannot be an EGC if it conducted its U.S. IPO on or before December 8, 2011. A company that has annual gross revenues (the Division of Corporation Finance April 16, 2012 FAQs say that “total annual gross revenues” means total revenues as presented on the income statement under U.S. GAAP (or International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), if used as the basis of reporting by a foreign private issuer). If a foreign private issuer prepares its financial statements in a currency other than U.S. dollars, it can use the exchange rate as of its most recent fiscal year-end) of less than $1 billion that qualifies as an EGC will be an EGC until the earliest of:

  • the last day of the fiscal year following the fifth anniversary of its IPO in the United States;
  • the last day of the fiscal year during which it has gross revenues of $1 billion or more;
  • the date on which it has issued more than $1 billion in non-convertible debt securities during the previous three years; and
  • when it becomes a “large accelerated filer,” generally meaning that its public float is $700 million or more.

The most significant change to the ongoing reporting regime relates to the Sarbanes Oxley requirement for an annual evaluation of internal controls. While EGCs must continue to comply with the requirement to maintain internal controls over financial reporting, EGCs are now exempt (for as long as they remain EGCs) from Sarbanes-Oxley Section 404’s requirement to obtain an annual attestation report on their internal control over financial reporting from their auditors. The existing requirement for CEOs and CFOs to certify public companies’ financial statements is not affected.

EGC foreign private issuers that prepare their financial statements in accordance with U.S. generally accepted accounting principles (GAAP) are also permitted to delay application of any new or revised U.S. GAAP financial accounting standard applicable to public companies until the standard becomes mandatory for private companies.


The JOBS Act directs the SEC, within 90 days after April 5, 2012, to revise Rule 144A to permit general solicitation and advertising in Rule 144A offerings, provided that the securities are only resold to persons the seller reasonably believes are QIBs. The JOBS Act also directs the SEC to make a similar change to Rule 506 under Regulation D governing private placements. Until the SEC adopts rule changes, offers will be subject to the same limitations as sales.

After the rules are amended and before making offers in Rule 144A offerings to non-QIBs, issuers and sellers of securities should confirm they have appropriate compliance procedures, including verification procedures to be provided by the SEC in its rules, to avoid sales to ineligible investors. Also, general solicitation and advertising will remain subject to the anti-fraud liability provisions of the U.S. securities laws. The JOBS Act does not direct any change to the prohibition on “directed selling efforts” in offerings pursuant to Regulation S under the Securities Act. As a result, side-by-side Rule 144A and Regulation S offerings may be subject to tighter limits than offerings only under Rule 144A.


The JOBS Act directs the SEC to exempt public offerings that, in the aggregate, do not exceed $50 million in any 12-month period. No deadline is specified and no change occurs in the rules until the SEC acts.

(Robert Evans is a partner at Shearman & Sterling LLP. The views expressed are his own.)

(This article was published by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete ( ions/regulatory-intelligence/compliance- complete/) provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.)


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