Section 105 of the JOBS Act sets out to improve the availability of information about emerging growth companies by eliminating some of the prohibitions on communications and activities that can take place around a registered offering.
Under the Securities Act of 1933, the offering registration process is divided into three periods:
- the “pre-filing period” which begins with the decision to publicly offer securities and continues until the filing of a registration statement with the Securities and Exchange Commission;
- the “waiting period” or “quiet period” which begins with the filing of a registration statement and continues until the Commission declares that registration statement effective; and
- the “post-effective period” which begins once the registration statement is declared effective.
The kinds of communications and activities that are permissible vary depending on where you are in the registration process. For example, prior to enactment of the JOBS Act, the Securities Act generally prohibited any communications containing oral or written offers of securities during the pre-filing period. During the waiting or quiet period, the Securities Act permitted oral offers as well as written offers made by means of a Section 10 prospectus.
The term “offer” is broadly defined to encompass “every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value” and has been construed by the courts and the Commission to include “the publication of information and statements, and publicity efforts … [that], although not couched in terms of an express offer, may in fact contribute to conditioning the public mind or arousing public interest … ” in a company or its securities.
Pre-Filing and Waiting or Quiet Period Communications
The JOBS Act significantly changes the communications rules is by allowing an emerging growth company, or any person authorized to act on behalf of an emerging growth company, to engage in oral or written communications with potential investors that are qualified institutional buyers (QIBs) or institutional accredited investors (IAIs) in order to gauge their interest in an offering prior to or following the company’s filing of a registration statement (i.e., during the pre-filing and waiting or quiet periods). A practice often referred to “testing the waters”. Unlike many of the other changes addressed below, an emerging growth company’s ability to test the waters is neither limited to its IPO nor offerings of its common equity and, as such, can be used in follow-on offerings and offerings of debt securities.
Again, prior to enactment of the JOBS Act, oral and written offers of securities were generally prohibited during the pre-filing period and while there were no explicit restrictions on oral offers during the waiting or quiet period written offers had to be made by means of a Section 10 prospectus.
Another way the JOBS Act changes the communications rules is by allowing a broker-dealer to publish and distribute research reports about an emerging growth company that proposes to or is in the process of registering its common equity (i.e., during the pre-filing and waiting or quiet periods) without the reports being deemed an offer of securities, even if the broker-dealer will also be participating as an underwriter in the offering.
For purposes of the exclusion the JOBS Act carves out a slightly expanded definition of the term “research report”, which covers oral as well as written and electronic communications that provide information, analysis, opinions or recommendations about an emerging growth company or its securities, whether or not the information is reasonably sufficient to base an investment decision on.
In addition, the JOBS Act prohibits the Commission or any national securities association, FINRA presently being the only one, from adopting or maintaining any rule or regulation that would prohibit a broker-dealer from publishing or distributing a research report or from making a public appearance with respect to the securities of an emerging growth company following the company’s IPO or in advance of the expiration of its IPO related lock-up agreements (i.e., during the post-effective period).
Before the JOBS Act went into effect, a broker-dealer participating as an underwriter in a company’s IPO was prohibited from publishing and distributing research reports and from making public appearances with respect to the company’s securities prior to and for a period of 40 days following the IPO, and for a period of 15 days both prior to and after the expiration of its IPO related lock-up agreements (these rules remain unaffected with respect to IPOs of non-emerging growth companies).
The JOBS Act also prohibits the Commission or any national securities association from adopting or maintaining any rule or regulation in connection with the IPO of an emerging growth company’s common equity that would restrict who at a broker-dealer may arrange for communications between a research analyst and a potential investor, or restrict a research analyst from participating in any meetings with the company’s management that non-analyst employees of the broker-dealer also attend.
Before the JOBS Act went into effect, a research analyst was prohibited from directly or indirectly engaging in communications with current or prospective investors in the presence of a company’s management or a broker-dealer’s non-analyst employees, and was prohibited from participating in company road shows or other meetings.
One thing the JOBS Act doesn’t do is relieve broker-dealers of their obligations related to conflicts of interest or research analysts from the disclosure and certification requirements of Regulation AC.