May 31, 2012

The JOBS Act for Foreigners: Are Foreigners Interested?

Daniel Bushner

The Jumpstart Our Business Startups Act (the JOBS Act), as signed into law by President Obama on April 5, 2012, is clearly U.S. legislation intended to address a domestic issue: how to improve capital formation for growth companies in the United States. The legislation was adopted with considerable momentum, and with broad bipartisan support, in part because of the argument that growth companies post-initial public offering (IPO) generate more new jobs, when compared to growth companies that are sold in an M&A transaction. The proposition turned out to be highly attractive to legislators.

Many of the recommendations contained in the report prepared by the IPO Task Force for the Department of Treasury, Rebuilding the IPO On-Ramp: Putting Emerging Companies and the Jobs Market on the Road to Growth (October 20, 2011) (the IPO On-Ramp Report), were adopted in the JOBS Act. That report notes during the 1990s there were an average of 547 IPOs in the United States each year, compared to 192 each year during the following decade. In addressing the balance for regulatory burdens on IPO issuers, the IPO On-Ramp Report does not focus on "small" companies, but on "growth" companies, with the new category of emerging growth company (EGC) with revenues of up to $1 billion. The report, however, does not much mention foreign private issuers (FPIs). There is only mention of competition from foreign markets and the observation that the United States is no longer the "international destination of choice" for IPOs. A reasonable question is whether the statute extends to "your," as well as "our," business start-ups.

The JOBS Act is generating interest overseas for two reasons. First, the legislation will impact the ability of FPIs to access U.S. markets, in particular through SEC registered IPOs or through traditional Rule 144A/Regulation S global equity offerings. Second, there has been an active debate, at least in Europe, about whether the IPO process in local markets (especially London) is broken, having become too complex, expensive, and convoluted. Market participants abroad are likely to follow JOBS Act developments carefully, to inform the local regulatory debate. As Winston Churchill said, "You can always count on the Americans to do the right thing--after they have tried everything else."

SEC Registered IPOs by Foreign Private Issuers

The last 18 months have demonstrated a trend for non-U.S. companies, especially technology companies, turning to U.S.-registered public offerings. In that period, 90 FPIs have filed registration statements, including 30 based in Europe. The JOBS Act, depending on implementation, seems likely to accelerate that trend.

FPIs should benefit under Title I of the JOBS Act as do domestic issuers. The benefits can be broadly divided into (1) liberalised communications; (2) accommodations in the IPO process; and (3) relief from certain disclosure obligations as a reporting company post IPO, while on "the on-ramp," for up to five years. It appears that such relief and accommodations will be in addition to existing concessions afforded FPIs. If an FPI qualifies as an EGC, and elects to claim EGC status, "testing the waters" and the liberalized rules on research reports should apply equally to FPIs in their registered IPOs.

For the IPO process, confidential treatment for IPO registration statements is particularly interesting. FPIs have long benefited from the ability to submit a draft registration statement on a confidential basis. The IPO On-Ramp Report observed that such confidential treatment was a significant advantage for foreign issuers in resolving complex issues, and recommended that confidential treatment be granted to domestic companies as well as FPIs. The staff withdrew the confidential treatment for FPIs (except for dual listings/offerings and certain other limited circumstances) a month after the IPO On-Ramp Report was made public in October. The JOBS Act adopted the recommendation for confidential submissions, as long as there is a public filing 21 days before the start of the road show, and so confidential treatment is now available for domestic EGCs and has been restored for FPIs (that qualify for, and elect to claim, EGC status).

The liberalization of the disclosure regime under the JOBS Act will apply as much to FPIs as domestic companies, but with one big difference. Assuming the staff applies the act to the disclosure regime for FPIs on the "F-Forms," FPIs will be able to benefit from existing concessions to FPIs as well as those under the JOBS Act. For example, the executive compensation disclosure for FPIs is already much lighter than even relief under the JOBS Act. The relief from "say-on-pay" and "say-on-golden-parachute" votes, and "pay-versus-performance" and CEO/median employee compensation comparison tables relate to provisions that do not apply to an FPI because FPIs are already exempt. Financial disclosure under the JOBS Act (financial statements, MD&A, and selective financial data) is reduced under the JOBS Act, but presumably an FPI still will be able to present the reduced financial statements prepared in accordance with IFRS (or U.S. GAAP or local GAAP with a U.S. reconciliation). No doubt foreign EGCs as much as domestic issuers will welcome relief for up to five years from auditor internal control attestation.

Global ECM--Rule 144A/Regulation S Offerings

Title II (Access to Capital for Job Creators) directs the SEC to remove the prohibition on general solicitation and general advertising in offerings under Rule 506 and Rule 144A, as long as sales are limited to accredited investors and QIBs, respectively. Like Title I, this law seems intended to facilitate the private placement market that has been a foundation supporting U.S. EGCs, before they step through the threshold of a public offering. There seems to have been no particular consideration of the impact overseas, where private placement exemptions play a key role for Rule 144A/Regulation S global equity offerings.

The immediate issue is the relationship between Rule 144A and "directed selling efforts" under Regulation S in side-by-side offerings. The issue is whether a now permitted "general solicitation" in the United States under Rule 144A might be considered a prohibited "directed selling effort" under Regulation S. The staff informally has indicated that guidance may be issued, perhaps with the rule eliminating general solicitation that the SEC is required to adopt by July 4. Assuming that issue is resolved, the elimination of the prohibition on general solicitation may reinforce the growing practice of early marketing ("pilot fishing") but otherwise seems unlikely to have much immediate impact on the 144A/Regulation S global equity market.

Because Title II is limited to Rule 506 and Rule 144A, much else may not change in offshore equity capital markets. Offerings conducted under Securities Act Section 4(a)(2) (formerly Section 4(2), frequently used by foreign issuers in rights offerings) and under the so-called Section 4(1½) doctrine (frequently used in block trades where Rule 144A is not available) will continue to be subject to the prohibition on general solicitation and general advertising. Market participants are also considering state "blue sky" laws. Although securities offered under Rule 506 are "covered securities" for the exemption from state blue sky laws contained in Securities Act Section 18, securities offered in Rule 144A transactions are not. States over the years have adopted their own exemptions for Rule 144A type transactions. But virtually all states have their own prohibition on the equivalent of general solicitation and so it would appear that either individual states will need to adopt their version of Title II, or Rule 144A securities need to become "covered securities" under Section 18.

The greatest impact of the JOBS Act on the global Rule 144A ECM market may be indirect, arising from Title I and its reduced disclosure requirements in an SEC registered context. Because mandated registration statement disclosure provides critical guidance to practitioners on what is appropriate disclosure (including for purposes of 10b-5 disclosure letter coverage) in an unregistered Rule 144A/Regulation S offering, the reduced financial information permitted under Title I may offer greater flexibility, especially in the context of disclosure on a target for raising acquisition financing.

The Future Impact Abroad?

The relative quick passage of the JOBS Act has caught markets outside the United States a bit off guard. Crowd-funding and the expanded ability of companies to issue securities under Section 3(b) of the Securities Act (up to $50 million) are subject to substantial rule-making, and in any event seem unlikely to promise much impact on foreign markets, either because the amounts are too small or because the source of capital in the United States supporting those exemptions is unclear, and may have to develop. In particular, crowd-funding is only available for domestic companies, so any foreigner would have to re-incorporate in the United States.

The greatest impact of the JOBS Act seems likely to be to strengthen the growing trend for FPIs to access U.S. investors through an SEC registered IPO. The IPO On-Ramp Report refers to the golden era of U.S. IPOs, and in that era, before Sarbanes-Oxley, FPIs were active participants in the U.S. IPO market. Perhaps that will happen again. And if the JOBS Act proves successful, especially in attracting FPIs to the U.S. IPO market, its legacy abroad could be as a catalyst to foreign markets peeling back some of their burdensome regulation.

Daniel Bushner

Partner, Jones Day

Daniel Bushner is a partner of Jones Day in London.