The JOBS Act and the Capital Raising Process (The On Ramp and the Secret Review Process)

The On Ramp provisions exempt "emerging growth companies" from certain requirements of the securities law.  In addition, these companies are entitled to special access to the staff of the Commission.  Specifically, Section 106 of the JOBS Act added a provision that provides: 

(e) EMERGING GROWTH COMPANIES.—  (1)  IN  GENERAL.—Any emerging growth company, prior to its initial public offering date, may confidentially submit to the Commission a draft registration statement, for confidential nonpublic review by the staff of the Commission prior to public filing, provided that the initial confidential submission and all amendments thereto shall be publicly filed with the Commission not later than 21 days before the date on which the issuer conducts a road show, as such term is defined in section 230.433(h)(4) of title 17, Code of Federal Regulations, or any successor thereto.

Section 6(e) of the Securities Act of 1933, 15 USC 77f(e). In other words, companies considering an IPO can have a "secret" review of the registration statement by the staff of the Commission.  The information will also be exempt from disclosure under the FOIA. 

Companies that "secretly" file draft registration statements will not generally be able to keep the fact secret.  They may announce the filing or it may leak to the public.  Secret or not, the company will presumably have to go into the quiet period.  As a result, anyone watching the company will likely know that a registration statement has been filed since the company's approach to public communications will change.

Concern has also arisen that the "secret" review process will delay the market's awareness of problems raised with a registration statement.  During the registration process, Groupon had a number of "well-publicized disagreements with the SEC over its accounting."  Critics, according to the WSJ, have asserted that the JOBS Act, had it been in place, would have allowed the disagreements to be resolved "under the radar, without investors learning of them until later although still before any IPO." 

The benefits of this system of "secret" review may ultimately prove illusory.  First, without the pressure of a public filing, the staff of the Commission may take its time in commenting on draft registration statements, adding delay to the process.  Moreover, without the pressure from the public to have the IPO go forward, the staff may prove more intransient with respect to issues raised in the comment process.  

With the benefits questionable, the harm is not.  The provision will ultimately reduce the time that the market has to assess an IPO.  To the extent that all issues have been resolved with the staff during this "secret" process, the company may be able to go effective very quickly after the public filing of a registration statement.  There will be less time for the public to identify issues that might become part of the SEC review process or to publicize concerns that help ensure informed decision making.

J Robert Brown Jr.