Financial Regulatory Forum

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

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 U.S. CAPITAL MARKETS

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.

CHANGES TO ONGOING REPORTING OBLIGATIONS

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:

Time to merge risk management and compliance?

By Rachel Wolcott

LONDON/NEW YORK, April 5 (Thomson Reuters Accelus) – Regulators’ rising interest in risk management combined with a long trail of big fines for compliance failures has some consultants and industry leaders wondering whether it is time for the two disciplines to come closer together if not merge completely.

More than ever there are areas of overlap between risk and compliance. Risk management is now hardwired into more rules and regulations since the beginning of the financial crisis. In the UK, for example, the Financial Services Authority (FSA) hasincreased its fines for risk management failures . The U.S.’s Securities and Exchange Commission (SEC) has also indicated that it intends to take risk management as well as other governance and compliance issues even more seriously than in the past. (more…)

SEC examiners enter U.S. boardrooms to gauge compliance

By Nick Paraskeva

NEW YORK, April 4 (Thomson Reuters Accelus) - The U.S. Securities and Exchange Commission plans to reach into the boardroom to assess a financial firm’s culture of compliance, a senior commission official told a conference in New York.

The agency, departing from traditional practice to take a page from bank regulators, intends to have direct discussions with the firm’s board about the regulatory issues board members and senior management team are paying attention to, and how they are navigating them. (more…)

Companies should use metrics to defend themselves from Dodd-Frank whistleblower claims, report says

By Emmanuel Olaoye

NEW YORK, March 5 (Thomson Reuters Accelus) - Companies in the United States should focus on implementing performance metrics to defend themselves from whistleblower claims and to prevent misconduct within the company, according to a report from consultancy PricewaterhouseCoopers.

Using metrics such as the turnover of compliance staff and the percentage of anonymous reports can help a company monitor the performance of its compliance program. It can also help to reduce the chances of an employee reporting misconduct directly to the Securities and Exchange Commission, PwC said in the report, which is an analysis of whistleblower rules included in the Dodd-Frank regulatory overhaul and adopted last May by the SEC. (more…)

Corporate governance: SEC, shareholder activism driving enhanced director disclosure

By Alex Lee

NEW YORK, Feb. 17 (Business Law Currents) – With a slew of Dodd-Frank and SEC driven regulations headlining the 2012 proxy season, enhanced director disclosure will be a prominent issue as investors demand heightened corporate accountability and broader levels of transparency. Rules put in place a couple years ago on compensation policies, risk incentivizing, director/nominee disclosure, board structure and oversight have now had the time to incubate sufficiently for companies to respond in a serious manner.

The Main Street versus Wall Street debate and the ensuing Occupy Wall Street movements have done much to expand public angst from mere disgruntlement with corporate America to even more emphasis on corporate governance in general. The public battle is now being waged increasingly on the battlefield of executive compensation, and as a consequence, on director disclosure. (more…)

SEC’s “re-markable” action against Credit Suisse traders

By Thomson Reuters Accelus – Staff

NEW YORK, Feb.10 (Business Law Currents) - A new SEC complaint against former Credit Suisse (CS) employees shines a harsh light on an underappreciated aspect of the financial crisis: mark-to-market manipulation. Charging four traders and investment bankers with violating securities laws, the commission’s civil action (“the complaint”) alleges a “colossal fraud” to misstate the value of bonds held in the bank’s portfolio. U.S. Attorney Preet Bharara of the Southern District of New York also filed a criminal indictment against CS investment banker David Higgs, a managing director of the bank’s London office. Bharara likewise filed a criminal information against CS trader Salmaan Siddiqui, who held the title of vice president.

Unlike more high-profile litigation revolving around the residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs), this particular case is noteworthy in that it attacks the accounting behind publicly filed documents, rather than allegations of material misrepresentations in the sales of securities. (more…)

Evidence, access aid job security when compliance staff raise a red flag

By Emmanuel Olaoye

NEW YORK, Feb. 9 (Thomson Reuters Accelus) - Two vivid reminders of the job-security perils faced by compliance officers and others who sound alarms at company practices were provided last week by a congressional hearing into the MF Global bankruptcy and a federal appeals court ruling on whistleblower law.

The risks may be part of the job, but skillful management of internal policies and wise self-protection can help avoid career-threatening retaliation, experts said. (more…)

Funds auditing expert network relationships, asking for guidance

By Rachel Wolcott

NEW YORK, Feb. 3 (Thomson Reuters Accelus) - Fund managers and investment firms are auditing their expert network relationships to ensure they do not breach insider trading rules. While many are reinforcing their rules and policies around these relationships, the fund industry has sought additional guidance from the U.S. Securities Exchange Commission (SEC) and its international counterparts.

The Galleon Case in 2010 started the industry’s self-examination of expert networks’ role in insider trading, and last week the UK Financial Services Authority (FSA) reinvigorated the issue with a £7.2 million fine given to David Einhorn and his Greenlight Capital fund.  (more…)

Corporate Governance: proxy advisory guidelines and the shifting landscape of benchmarking executive compensation

By Alex Lee

NEW YORK, Jan. 30 (Business Law Currents) – Last year’s introduction of say-on-pay regulations via Dodd-Frank helped to arm shareholders with the capacity to disapprove compensation policies, but the SEC’s evolving compensation disclosure regulations and recent updates from proxy advisory firms’ guidelines indicate that executive compensation remains a key issue. While the post-Lehman headlines of public outrage and calls for legislative scrutiny over executive compensation may have waned, now more than ever, companies need to exercise great care when considering executive compensation policies.

Boards are stuck between a rock and a hard place. On one hand, they must recruit, retain, incentivize, and properly compensate prized executives. On the other, the must deal with a growing public animosity towards excessive executive compensation and shareholder unrest, especially in periods where companies are not performing optimally. (more…)

UK insider trading fine against Einhorn a non-starter in U.S., experts say

By Stuart Gittleman

NEW YORK, Jan. 27 (Thomson Reuters Accelus) - The circumstances that led to UK trading-abuse penalties against U.S. fund manager Greenlight Capital and its portfolio manager David Einhorn probably would not have led to a similar case in the United States, securities lawyers told Thomson Reuters.

The UK Financial Services Authority (FSA) this week fined Greenlight Capital, a U.S. fund manager, and David Einhorn, its portfolio manager, for selling shares after receiving a tip that the issuer was planning an offering that would dilute the fund’s position.  (more…)

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