SEC proposes to give big investors IPO information edge over retail investors



Jay Clayton, chairman of the U.S. Securities and Exchange Commission

A new Securities and Exchange Commission proposal is aiming to make good on Chairman Jay Clayton’s pledge to increase the number of initial public offerings.

On Tuesday the SEC issued a proposal that would give another benefit of the 2012 JOBS Act to all companies. The proposal expands a so-called “testing-the-waters” technique to all potential public companies so they can gauge institutional investor interest in advance of an IPO filing.

The benefit is currently available to only to emerging growth companies or EGCs — generally companies with less than $1 billion in annual revenue. It was an idea that Congress pursued in the stalled JOBS Act 3.0 legislation.

According to a Wall Street Journal article, about a quarter of EGCs that went public in 2016 and were eligible to “test the waters” took advantage of the benefit by sharing details about revenue sources, corporate strategy, and the background of top management.

The “testing the waters” provision would be extended to all issuers, including investment company issuers. It would allow companies to communicate with certain institutional investors regarding a potential IPO prior to, or following, the filing of the registration statement with the SEC. These communications with big investors would be exempted from securities law restrictions.

The SEC says giving big investors a heads-up on what’s in the filing is intended to provide “increased flexibility to issuers with respect to their communications with institutional investors about contemplated registered securities offerings, as well as a cost-effective means for evaluating market interest before incurring the costs associated with such an offering.”

See also: Behind the push at the SEC to make it easier for IPOs to be launched

Clayton said in the press release, “The proposed rules would allow companies to more effectively consult with investors and better identify information that is important to them in advance of a public offering.”

The SEC’s comments and responses will become publicly available after the completion of the securities offering but not earlier than 20 business days following the effective date of the registration statement. If a company changes its mind about the IPO before its registration statement becomes effective, its submission remains totally confidential.

Attorney Ira Brad Matetsky of Ganfer Shore Leeds & Zauderer LLP told MarketWatch that the confidential IPO filing provision and the new institutional “test the waters” proposal are related but different.

“Large issuers previously had to choose between confidentiality and publicity and public input when considering an IPO. Now they won’t have to,” said Matetsky.

“It will be interesting to see if any retail investor advocates object to the proposal on the grounds it gives institutional investors access to IPO information for a greater period of time than retail investors,” Matetsky added.

Barbara Roper, director of investor protection for the Consumer Federation of America, told MarketWatch that the CFA is considering submitting a comment about the proposal. “In the meantime, we would expect at the very least for the SEC to provide concrete evidence that the current ‘test the waters’ provision has already benefited investors and EGCs,” said Roper.

Two years ago the SEC gave all companies the benefit of a confidential IPO filing process. Going through the sometimes lengthy and messy SEC review process in public is no longer necessary. However, the provision means the back-and-forth when a company’s “tests the waters” with the SEC about its IPO is not available for retail investors to scrutinize until the agency has given its final blessing on the filing. Companies are required to publicly file the final IPO registration statement and all prior nonpublic draft submissions at least 15 days prior to any road show or, in the absence of a road show, at least 15 days prior to when it will go live on a national securities exchange.

The SEC has already followed through on another promise to re-consider quarterly reporting requirements, when it issued a proposal in December that said it was looking for ways to “reduce burdens on reporting companies associated with quarterly reporting while maintaining, and in some cases enhancing, disclosure effectiveness and investor protections.”

The 90-day public comment period for the quarterly reporting proposal expires in mid-March.

Read: The questions every investor should ask about Trump’s proposal to radically change how companies report earnings

The public has 60-days to comment on the “testing the waters” provision.

Source : MTV