Testing the Waters – Smaller Reporting Company
Posted by Attorney Laura Anthony on October 25, 2016
Testing the Waters – Smaller Reporting Company- The opportunities for a smaller reporting company to engage in marketing, test-the-waters, and other pre-effective communications related to a public offering are limited. A “smaller reporting company” is defined as one that, among other things, has a public float of less than $75 million in common equity, or if unable to calculate the public float, has less than $50 million in annual revenues. The SEC has proposed amending this definition to raise the public float threshold to $250 million but the change is not final.
Separate from a smaller reporting company, an “emerging growth company” is one with total annual gross revenues of less than $1 billion during its most recently completed fiscal year and that first sells equity in a registered offering after December 8, 2011. At times a company will qualify as both a smaller reporting company and an emerging growth company, but not always.
A smaller “reporting” company is, by definition, a company subject to the “reporting” requirements of the Securities Exchange Act. Companies that are subject to the Exchange Act do not qualify to use Regulation A. Accordingly, a smaller reporting company cannot avail itself of the broad allowable pre-offering test-the-waters communications allowed in a Regulation A public offering. I do note that some smaller reporting companies are voluntary filers. That is, they voluntarily file reports with the SEC and are not actually subject to the Exchange Act reporting requirements. These companies can complete a Regulation A public offering. Where a smaller reporting company is not also an EGC, it cannot engage in Section 105(c) test-the-waters communications made available under the JOBS Act. This is clearly a legislative miss. The JOBS Act is intended to create capital raising opportunities for small companies. Although I understand that the thought was to assist EGC’s in the IPO process, the fact is that many smaller reporting companies engage in a series of follow-on public offerings before reaching a size and level of maturity where they no longer need the assistance of rules and laws designed to encourage capital investments in smaller companies. Ironically, by that point, these companies will be able to engage in additional communications only available to eligible larger issues, such as a free writing prospectus.
That leaves a smaller reporting company with only using the actual filed registration statement, Rules 134 and 135 for written communications and live road shows to market initial and follow-on public offerings before effectiveness of the registration statement. Smaller reporting companies are often better off engaging in a Rule 506(c) advertised private offering than a registered public offering from a marketing perspective. This likely unintended consequence seems a dichotomy to the SEC objective of preferring registration and its accompanying complete disclosure in the issuance of securities.