Laura Anthony

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    • Member Type(s): Expert
    • Title:Founding Partner
    • Organization:Legal & Compliance, LLC
    • Area of Expertise:Securities Law
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A comparison of Smaller Reporting Companies and Emerging Growth Companies – Part 2
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Uploaded By: Attorney Laura Anthony
Date Added: December 7, 2016
Description: A comparison of Smaller Reporting Companies and Emerging Growth Companies – Part 2- The FAST Act, passed into law on December 4, 2015, amended Form S-1 to allow for forward incorporation by reference by smaller reporting companies. A qualifying smaller reporting company may now incorporate any documents filed by the company, following the effective date of a registration statement, into such effective registration statement. In what was probably unintended in the drafting, the FAST Act changes only include smaller reporting companies and not emerging growth companies. Generally, forward incorporation by reference requires that the company be S-3 eligible. The FAST Act change has created an anomaly whereby a smaller reporting company can utilize forward incorporation by reference but an EGC could not unless it is also S-3 eligible. Test-the-waters communications involve solicitations of indications of interest for an offering prior to the effectiveness of a registration statement. Where Regulation A freely allows, and even encourages, test-the-waters communications, the standard IPO process using a Form S-1 still strictly limits solicitations of interest and offering communications overall. Communications made by the company during an IPO process, depending on the mode and content, result in violations of Section 5 of the Securities Act. Communication-related violations of Section 5 during the pre-filing and pre-effectiveness periods are often referred to as “gun jumping.” In April 2012, the JOBS Act was enacted, which, in part, established a new process and disclosures for public offerings by EGC’s. Section 105(c) of the JOBS Act provides an EGC with the flexibility to “test the waters” by engaging in oral or written communications with qualified institutional buyers (“QIB’s”) and institutional accredited investors (“IAI’s”) in order to gauge their interest in a proposed offering, whether prior to or following the first filing of any registration statement, subject to the requirement that no security may be sold unless accompanied or preceded by a draft prosecutes. Section 105(c) is not available for smaller reporting companies. 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 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 free writing prospectus and Rule 163 communications.
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