As we previously discussed in our post on May 16th, the recently enacted Jumpstart Our Business Startups Act (JOBS Act) allows an “emerging growth company” to submit a draft of its IPO (or pre-IPO) registration statement for confidential non-public review and comment by the SEC. We thought we would share with you some potentially interesting questions-and-answers about the confidential submission process.
Will my confidential submission stay confidential forever? While the draft registration statement, amendments and related documents submitted to the SEC pursuant to this confidential submission and review process are initially confidential, they do not remain confidential if a company proceeds with the IPO or pre-IPO offering. The JOBS Act requires that companies publicly file with the SEC the initial confidential submission and all amendments thereto within 21 days prior to the road show (or in the case of an offering that doesn’t include a road show or similar investor communications, 21 days prior to the anticipated effectiveness of the registration statement). These prior confidential submissions should be included as exhibits to the company’s later publicly filed registration statement, if any.
As an example, see the recently filed Form S-1 registration statement of iWatt Inc. iWatt’s initial confidentially submitted draft Form S-1 registration statement is filed as Exhibit 99.1 to its publicly filed Form S-1. No amendments are filed as Exhibit 99.2 et seq., so it would appear iWatt did not submit any confidential amendments.
Will SEC comment letters and company responses remain confidential? Consistent with the SEC’s normal process for comment and response letters, these documents will be made publicly available after the completion of the offering. Specifically, SEC comment letters and company response letters exchanged in connection with the confidential review process will be posted to the SEC’s EDGAR website no earlier than 20 business days following the effective date of the registration statement.
If it won’t remain confidential, why bother submitting a confidential draft registration statement to the SEC? The confidential submission process allows the company to keep the registration statement and its exhibits out of the public domain until the company decides that it is ready to move forward with the offering, if at all. If it abandons the offering before committing to a road show, its submission remains confidential. In this manner, the company can avoid the risk of being perceived by the market as “damaged goods” by dint of abandoning its IPO.
Even if the company goes forward with the offering, and consequently makes its confidential submissions publicly available, we perceive some value to companies in not having to endure the intense microscope of the media on the sometimes painful SEC review process in real-time (although some would say that undergoing that process in the open is beneficial to investors). We note for instance that during its IPO process, Groupon made significant changes to its accounting practices, which drew much contemporaneous media scrutiny. While the JOBS Act confidential submission process ultimately exposes the changes a company may have made during the SEC review process, it only does so after the presumably successful completion of that process.
Can a company publicly announce it is pursuing an IPO while still taking advantage of the confidential submission process for its draft IPO registration statement? Yes. The SEC’s Rule 135 permits public notice of a registered offering, although the content of that notice is fairly limited—you cannot, for instance, identify the underwriters. A number of companies have issued press releases under Rule 135 announcing the confidential submission of a draft registration statement.
Can a company keep anything confidential in its filing or SEC correspondence if it goes forward with the offering? Yes, in a limited fashion. You can use the SEC’s longstanding Rule 406 to try to keep discrete portions of your filing confidential. With respect to SEC correspondence, you can seek to utilize the SEC’s Freedom of Information Act confidentiality procedures.
The traditional confidential treatment procedures are much more limited than the JOBS Act procedure. The JOBS Act permits emerging growth companies to keep an entire registration statement and its exhibits confidential (pending the pre-road show deadline for making them public) without requiring that the company offer any justification for such treatment. Rule 406 on the other hand requires the party requesting confidential treatment to state the grounds for such request and provide a detailed explanation of why, based on the facts and circumstances of the particular case, disclosure of the information is unnecessary for the protection of investors. The specified grounds upon which confidential treatment can be obtained are limited, with the most commonly used exemption being for trade secrets and privileged or confidential commercial or financial information the disclosure of which would cause substantial competitive harm to the company.
Confidential treatment under the traditional procedures can only be obtained for discrete portions of a filing, versus an entire registration statement or exhibit. A typical application of Rule 406 would be to request the omission of a pricing term from a material contract a company is filing as an exhibit to a registration statement.
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The SEC has posted other FAQs on confidential submissions here. Please contact us if you have any questions on the process.