New SEC Policy Permits the Exclusion of Certain Financial Information from Draft Registration Statements; Additional Detail Provided Regarding Recent Updates to Draft Registration Statement Procedures

On August 17, 2017, the Securities and Exchange Commission (“SEC”) issued new guidance regarding financial information that may be omitted from draft registration statements and also updated its recent expansion of the confidential review process for draft registration statements.[1] These measures represent the latest step in the SEC’s ongoing efforts to facilitate capital formation, highlighted by Chairman Clayton in his first public remarks following his confirmation.[2]

Under the new policy, any issuer may omit both interim and annual financial information from a draft registration statement to the extent the issuer reasonably believes the omitted financial information will not be required when the registration statement is publicly filed.[3] Therefore, as one example, an issuer with a December 31 fiscal year-end may exclude interim financial information for the quarter ended March 31 from a draft registration statement so long as the issuer reasonably believes it will not publicly file the registration statement until after its interim financial information for the six months ended June 30 becomes available and is included in the registration statement. Previously, this relief to exclude financial information from draft registration statements was available only to Emerging Growth Companies (“EGCs”) under Section 71003 of the FAST Act and was limited to financial information covering completed fiscal years. EGCs, however, remain the only type of issuer that can omit annual financial information from publicly filed registration statements under Section 71003 to the extent the issuer reasonably believes the annual financial information will not be required in the registration statement at the time of the contemplated offering.[4]

We believe this new policy will have a meaningful impact on companies preparing for an IPO and intending to use the confidential review process, because it could significantly reduce the amount of work required prior to submitting the initial draft of the registration statement and shorten the overall timeline. The SEC review of IPO registration statements typically spans a number of months and, therefore, the registration statement at the time it is declared effective often includes financial statements covering a more recent fiscal period than what was included in the initial draft submission or filing. For example, until this new guidance was issued, a pre-IPO issuer submitting its initial draft registration statement relatively early in the year, but after the prior-year audited financial statements had gone stale, was required to include first quarter financial statements in the first submission even though it was very unlikely the offering would be completed before they were superseded by the second quarter financial statements. Preparing these first quarter financial statements involves meaningful effort and expense that issuers can now avoid. The new policy may also allow the initial draft registration statement to be submitted earlier than under the prior guidance because our issuer need not wait for the completion of the first quarter financial statements before making the initial submission.

Once public, however, the issuer will likely be required to compile some portions of the interim financial information it avoided preparing in connection with the IPO as part of the required comparative disclosure in its Quarterly Report on Form 10-Q for the comparable quarter the following year.

Separately, the SEC updated its June 29, 2017 announcement expanding the availability of confidential draft registration submission procedures to all IPO registrations as well as the first registration statement filed within the first twelve months after an issuer’s IPO.[5] These updates clarify that an issuer with a publicly filed registration statement that is not yet effective may switch to the nonpublic review process for future pre-effective amendments to the registration statement, provided the issuer is eligible to use the nonpublic review process and agrees to abide by the requirements outlined in the original June 29 announcement. The SEC also announced the creation of a new e-mail address to submit questions regarding issuer eligibility to use the newly expanded procedures.[6]

Special thanks to Nick Dumont in New York and Bill Wortmann in DC for all their work on this posting.

[1] See our blog post on the original announcement: http://www.securitiesregulationmonitor.com/Lists/Posts/Post.aspx?ID=295

[2] See our blog post regarding Chairman Clayton’s remarks: http://www.securitiesregulationmonitor.com/Lists/Posts/Post.aspx?ID=296

[3] See: https://www.sec.gov/divisions/corpfin/guidance/safinterp.htm#101.05 (Questions 101.04 and 101.05)

[4] For example, a pre-IPO EGC with a December 31 fiscal year-end that submits a draft registration statement in October 2017 and reasonably believes it will commence its offering in April 2018 when annual financial information for 2017 will be required may omit from such draft 2014 (if the EGC intends to include 3 years of financial statements) and 2015 annual financial information. A non-EGC issuer under the same facts may omit 2014 annual financial information. Both issuers may omit interim financial information related to 2016 and 2017.

[5] See: https://www.sec.gov/corpfin/announcement/draft-registration-statement-processing-procedures-expanded

[6] Questions can be emailed to: CFDraftPolicy@sec.gov

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