Written by Paul Berkowitz
On February 13, 2013, the United States Securities and Exchange Commission (“SEC”) issued a publication entitled, Accessing the U.S. Capital Markets — a Brief Overview for Foreign Private Issuers. 1 The publication opened by stating that “[t]he U.S. capital markets have long been a favorite destination for foreign companies wishing to raise capital or establish a trading presence for their securities.” For a number of years, however, many non-U.S. companies have not seen the sale of debt or equity securities in the U.S. public markets as a viable means of raising capital. As a result of the significant regulatory changes brought about by 2012’s Jumpstart Our Business Startups Act, or the JOBS Act, we think this negative view is changing and non-U.S. issuers are beginning to refocus on the real benefits of becoming a publicly-traded company in the U.S. markets. Most significantly:
- An initial public offering registered in the U.S. provides access to one of the world’s deepest and most liquid capital markets;
- U.S. publicly registered equity often can be a valuable “acquisition currency” for stock-based acquisitions, particularly for companies with growth strategies that are fueled by acquisitions in the U.S.;
- A U.S. listing may allow certain capital structures not permitted on other stock exchanges, such as a dual class voting stock structure, which allows founders or other large shareholders to maintain voting control even if a majority of the economic value of the equity is sold to the public in the initial public offering or in follow on offerings and stock funded acquisitions;
- U.S. publicly registered equity can be used for incentive compensation for U.S.-based employees;
- Some evidence that cross-listing in the U.S. may lead to a meaningful valuation premium, through, among other things, increasing the pool of potential investors, higher corporate governance standards and enhanced disclosure obligations;
- A U.S. listing is often thought to increase the visibility of a corporation and its products and services, particularly in the U.S.; and
- U.S. public companies can typically complete subsequent equity or debt securities capital raising transactions quickly.
While the stated purpose of the JOBS Act was to ease the path to the capital markets for U.S. companies, the SEC has confirmed that it clearly permits non-U.S. companies which qualify as foreign private issuers2 to take advantage of the benefits of the law (in addition to certain concessions already available to foreign private issuers).3 The JOBS Act specifically addresses some of the burdens imposed by the U.S. securities laws and regulations that have resulted in non-U.S. issuers abandoning the U.S. markets.
The JOBS Act creates a new classification of issuers referred to as “emerging growth companies”. To qualify as an emerging growth company, an issuer must:
- not have sold stock in an offering registered with the SEC on or before December 8, 2011;
- have annual gross revenues of less than U.S.$1billion (determined as of the last day of the issuer’s most recently completed fiscal year);4
- not have issued within the previous three years more than U.S.$1 billion in non-convertible debt securities; and
- not be a “large accelerated filer” as that term is used in the U.S. securities laws (generally, an issuer with an aggregate worldwide market value of voting and non-voting common equity held by non-affiliates of U.S.$700 million or more).
A company will remain an emerging growth company until the earliest of (1) the last day of the fiscal year during which it has total annual gross revenues of U.S.$1 billion or more; (2) the last day of the fiscal year following the fifth anniversary of its initial public offering (regardless of revenues); (3) the date on which the company has issued more than U.S.$1 billion in non-convertible debt securities during the trailing three-year period; or (4) the date on which the company becomes a “large accelerated filer”.
A recent study indicates that since the JOBS Act went into effect approximately 75% of the issuers pricing an IPO had identified themselves as an emerging growth company, and a significant minority of those were foreign private issuers.
Confidential Treatment of Registration Statement Drafts. Emerging growth companies are able to take advantage of a number of relaxed regulatory requirements when registering securities for sale. Perhaps the most significant advantage for a foreign private issuer under the JOBS Act is the ability to file an initial public offering registration statement on a confidential basis.5 Confidential filing is important for a number of reasons. Foreign private issuers often are concerned about how the SEC will view certain disclosure items or financial reporting matters. Confidential filing allows the opportunity to gauge the reaction of the SEC through its comment process and resolve any issues without premature disclosure to the marketplace. Confidential filing also shields from disclosure the wealth of information on company operations and plans contained in the initial public offering prospectus, as well as the intention to raise capital, until the company is more certain the offering will go forward. It appears that approximately 65% of emerging growth companies elected to use the confidential filing procedure.
Reduced Financial Statement Requirements. An emerging growth company may provide two years of audited financial statements instead of the three years required for other issuers. It may omit Selected Financial Data (normally five years of historical financial data) for any period prior to the earliest audit period presented in the registration statement and its Management’s Discussion and Analysis of Financial Condition and Results of Operations (or as it is known for foreign private issuers, Operating and Financial Review and Prospects) is similarly limited to the number of years of financial statements provided (rather than the three year period normally required). Perhaps most significantly, an emerging growth company is exempt from the requirement for auditor attestation of internal controls. Thus, although emerging growth companies must comply with the Sarbanes-Oxley requirement for establishing and maintaining internal controls over financial reporting, they are not required to obtain an annual attestation report from a registered public accounting firm. This frequently costly process was, from at least anecdotal evidence, one of the principal reasons that foreign private issuers exited or chose never to enter the U.S. securities markets.6
Other Benefits. Non-U.S. offerings frequently entail meetings with prospective investors to ascertain interest in an offering. Prior to the JOBS Act, these meetings were prohibited in the U.S. before the filing of a registration statement. Under the new law, emerging growth companies are permitted to engage in oral or written communications with potential investors that are either qualified institutional buyers or institutions that qualify as “accredited investors”. This practice is known as “testing the waters”. Although not universally adopted, there are at least some underwriters that are taking advantage of this opportunity. Note that this permits an underwriter to ask its institutional investor customers for a non-binding indication of interest, which may include the amount of shares the customer may be willing to purchase at particular price levels, but does not include asking the customer for a commitment to purchase.
The JOBS Act has also made a number of liberalizing changes with respect to research analysts and research reports in the IPO process. While prohibited from soliciting investment banking business, research analysts may now attend meetings with issuer management and investment banking personnel including pitch meetings. In addition, the ability of a research analyst affiliated with the issuer’s underwriters has been liberalized to facilitate analyst coverage of an emerging growth company. These, too, are available for IPOs by foreign private issuers.
In summary, the U.S. markets are now open again for non-U.S. companies. There are sound business reasons for pursuing a U.S. listing and we expect that the number of foreign private issuers seeking to raise capital in the U.S. markets using the newly relaxed regulatory regime will only increase from what we have seen to date. For some issuers, that will mean a primary listing on a U.S. stock exchange; for others, the inclusion of a U.S.-registered tranche and possibly a secondary listing on a U.S. stock exchange may be the better approach. We would be very happy to discuss with you the benefits of the JOBS Act and your many efficient options to raise capital in the U.S.
2 Generally, a “foreign private issuer” is a corporate entity organized under the laws of a country other than the U.S., unless (i) more than 50% of the issuer’s outstanding voting securities are directly or indirectly held of record by U.S. residents; and (ii) any one of the following is true: (a) the majority of the executive officers or directors are U.S. citizens or residents,
(b) more than 50% of the issuer’s assets are located in the U.S., or (c) the issuer’s business is administered principally in the U.S. up
3 The SEC clarified the issue in Question 8 of “Jumpstart Our Business Startups Act Frequently Asked Questions” dated April 16, 2012. up
4 Annual revenues are determined under U.S. generally accepted accounting principles or International Financial Reporting Standards, as promulgated by the IASB. For issuers whose reporting currency is not U.S. dollars, revenues should be converted using the relevant exchange rate on the last day of the fiscal year. up
5 Although this opportunity was provided to foreign private issuers in the past, in 2011, the SEC significantly restricted the ability of non-U.S. companies to file confidentially other than, generally, in circumstances where the offering involved a dual-listing. up
6 Registration statements must include a description of the reduced requirements applicable to emerging growth companies and the related risks. These disclosures have become somewhat routine and do not appear to have raised issues with investors. It is to be noted that, other than with respect to compliance with new or revised accounting standards as to which the election is irrevocable, an emerging growth company issuer can opt not to use certain of the benefits and retain the right to use others. up