Jumpstart Our Business Startups (JOBS) Act Applies to Debt-Only Issuers

April 23, 2012

On April 5, 2012, President Obama signed the Jumpstart Our Business Startups Act ("JOBS Act" or the "Act") into law.  While the Act and recent commentary have focused primarily on common equity issuances by "Emerging Growth Companies" (or "EGCs"), the JOBS Act also impacts companies that have issued only debt securities in registered transactions, typically pursuant to an "A/B" exchange for privately offered high-yield debt securities.  Many of these companies subsequently become "voluntary filers" of SEC Exchange Act reports to comply with on-going debt covenants.

The attached chart summarizes how certain JOBS Act provisions apply to these debt-only issuers.  As indicated in the chart, they may benefit from a number of JOBS Act provisions with regard to their Securities Act registration statements and Exchange Act reports, including:

  • potentially indefinite EGC status, assuming the $1 billion revenue, $1 billion debt issuance every three years, and certain other thresholds are never crossed;
  • the option to submit to the SEC confidential drafts of Securities Act registration statements for any offering prior to the issuer’s first sale of its common equity securities pursuant to an effective Securities Act registration statement;
  • the option to comply with new accounting standards applicable to public companies on the schedule that is applicable to private issuers; and
  • the option to provide scaled back executive compensation disclosure.

In addition, after the SEC adopts implementing rules, companies that issue debt securities privately will be permitted to engage in general solicitation and general advertising in connection with offerings made in reliance on Rule 506 of Regulation D and Rule 144A under the Securities Act, just as they will be able to do with respect to equity offerings.

Our client alert with respect to the JOBS Act, which includes a summary of effectiveness times of various JOBS Act provisions, is available here:

Jumpstart Our Business Startups (JOBS) Act Changes the Public and Private Capital Markets Landscape 

A recording of Gibson Dunn’s recent webcast regarding the JOBS Act and related materials are available here:

The JOBS Act: What companies need to know about this legislation and its impact on capital markets practices


Effect of JOBS Act on Debt-Only Issuers

We expect interpretations from the staff of the SEC (Staff) and market practices will continue to develop rapidly in the coming weeks and months, even before the Commission issues any of the rules mandated by the JOBS Act. In the two weeks since the enactment of the JOBS Act, the Staff has posted written guidance on its website on four separate occasions and spoken publicly at least once about the JOBS Act.  Many questions about the interpretation and implementation of the JOBS Act remain.  This chart is provided based on the JOBS Act as signed by President Obama April 5, 2012 and available guidance from the Staff as of April 20, 2012.

EGC STATUS AND CONFIDENTIAL SUBMISSION

Eligible to be Emerging Growth Companies ("EGCs")?

YES.  May be an EGC even if registration statement became effective prior to December 8, 2011.  We refer to debt-only issuers that are EGCs as "debt-only EGCs."

For how long will a debt-only EGC retain EGC status?

POTENTIALLY INDEFINITELY.  Section 101(a) provides that a company that is an EGC will retain EGC status until (1) the last day of the fiscal year in which it has total annual gross revenues of at least $1 billion;[1] (2) the last day of the fiscal year following the fifth anniversary of the date of the first sale of common equity securities pursuant to a Securities Act registration statement (referred to herein as the "initial public offering");[2] (3) the date on which the issuer has, during the previous three-year period, issued more than $1 billion in non-convertible debt; or (4) the date on which the issuer is deemed to be a "large accelerated filer."

If no sale of a debt-only EGC’s common equity securities pursuant to a Securities Act registration statement ever occurs, a debt-only EGC may never reach any of these triggers.

Eligible to confidentially submit draft registration statements for offerings to the SEC?

YES, POTENTIALLY FOR MULTIPLE TRANSACTIONS.  This provision applies to any EGC prior to its initial public offering.  So long as a debt-only EGC remains an EGC, prior to the date of its initial public offering, a debt-only EGC may take advantage of the ability to confidentially submit registration statements for multiple transactions.

FINANCIAL DISCLOSURE

Permitted to present only two years of audited financial statements in Securities Act registration statements relating to debt securities?

NO.[3]  Section 102(b)(1)(B) provides that an EGC "need not present more than 2 years of audited financial statements in order for the registration statement . . . with respect to an initial public offering of its common equity securities to be effective".  Thus, only issuers filing a registration statement with respect to an initial public offering of equity may submit two years of audited financial statements.

SEC guidance states that the Staff "will not object if, in other registration statements, an emerging growth company does not present audited financial statements for any period prior to the earliest audited period presented in connection with its initial public offering of common equity securities."  See FAQ no. 12 to April 16, 2012 JOBS Act Frequently Asked Questions.  So while an IPO EGC that subsequently files a debt securities registration statement may be able to take advantage of this provision with respect to the debt securities registration statement, debt-only EGCs will not because, by definition, a debt-only EGC has not filed an IPO registration statement.

Permitted to limit disclosure of selected financial data to fewer than five years in Securities Act registration statements relating to debt securities?

NO.[3]  Similar to above, in "any other registration statement," an EGC need not present selected financial data for any period prior to the earliest audited period presented in connection with its initial public offering.  In the absence of an IPO registration statement, however, debt-only EGCs may not take advantage of this provision.

As above, although SEC guidance states that the Staff "will not object if an emerging growth company presenting two years of audited financial statements in its initial public offering registration statement in accordance with Section 7(a)(2)(A) limits the number of years of selected financial data under Item 301 of Regulation S-K to two years as well," debt-only EGCs will not be able to take advantage of this provision because, by definition, a debt-only EGC has not filed an IPO registration statement.  See FAQ no. 11 to April 16, 2012 JOBS Act Frequently Asked Questions. 

Permitted to limit disclosure of selected financial data in Exchange Act reports to three years?

YES.  A debt-only EGC need not present selected financial data for any period prior to the earliest audited period presented in connection with its first registration statement that became effective under the Exchange Act or Securities Act, which would be three years of audited financial statements. 

This option may, as a practical matter and in most circumstances, ultimately save a debt-only EGC only a limited amount of time and effort, as five years of selected financial data will have previously been presented for the debt-only EGC’s first registration statement.

Permitted to comply with new accounting standards applicable to public companies on the schedule that is applicable to private issuers?

YES.

EXECUTIVE COMPENSATION

Permitted to present scaled-back executive compensation disclosure?

YES.

Exempt from requirement to hold say-on-pay, frequency of future say-on-pay, and say-on-golden parachute votes?

NOT APPLICABLE.  Debt-only EGCs are not required to hold these votes because debt-only issuers are not subject to proxy rules.

Exempt from requirement to disclose the ratio between CEO pay and median employee pay?

YES.  Although debt-only issuers are generally subject to the disclosure requirements set forth in Item 402 of Regulation S-K, Section 102(a)(3) of the JOBS Act exempts EGCs generally from the requirement to report the CEO pay ratio (when adopted by the Commission).

Exempt from requirement to disclose "pay versus performance"?

NOT APPLICABLE.  Debt-only EGCs will not be subject to the obligation to disclose "pay versus performance" (when adopted by the Commission) because this disclosure requirement relates to proxy solicitations and debt-only issuers are not subject to proxy rules.

SARBANES-OXLEY REQUIREMENTS RELATED TO INTERNAL CONTROLS AND AUDITOR MATTERS

Exempt from Sarbanes-Oxley Section 404(b)’s requirement to produce an auditor attestation report on internal control over financial reporting?

YES, but the option given by the JOBS Act is of limited practical effect because debt-only issuers generally are never required to comply with Section 404(b).

Exempt from requirements of any rules adopted by the PCAOB regarding auditor rotation or a supplement to the auditor’s report?

YES.


  [1]   The Staff has indicated that all non-convertible securities issued that constitute indebtedness, irrespective of whether such securities were issued publicly or privately and whether or not such indebtedness remains outstanding, will be included in this calculation. FAQ no. 17 to April 16, 2012 JOBS Act Frequently Asked Questions (available at http://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-title-i-general.htm).  The Staff has also stated that the calculation will be made on the basis of a rolling three-year period without respect to any fiscal year end.  Id. The statute does not specify whether registered debt securities issued in an A/B exchange offer will be counted in this calculation and, to date, the Staff has not commented on this question.  Because the registered debt securities represent, effectively, the same indebtedness that was issued in the initial private issuance, the Commission or the Staff may determine that such securities should not be included in the calculation in order to prevent "double counting" this indebtedness.

  [2]   The Staff has indicated that "The phrase ‘date of the first sale’ in the definition of initial public offering date is not limited to the date of a company’s initial primary offering of common equity securities for cash.  It could also include an offering of common equity pursuant to an employee benefit plan registered on a Form S-8 as well as a selling shareholder’s secondary offering registered on a resale registration statement."  FAQ no. 1 to April 10, 2012 JOBS Act Frequently Asked Questions (available at http://www.sec.gov/divisions/corpfin/guidance/cfjumpstartfaq.htm).  Although "initial public offering" is not defined in the statute, it is used in the statute in a manner consistent with the understanding expressed by the Staff in this FAQ.

  [3]   As indicated above, Staff guidance regarding the JOBS Act is developing rapidly, and it is possible that the SEC will extend the benefits of reduced presentation of audited financial statements and selected financial data in Securities Act registration statements to debt-only issuer EGCs.

Gibson, Dunn & Crutcher LLP 

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