Initial Public Offerings (IPOs) have seen a significant slowdown over the past few years, and although there has been a slight uptick recently, the landscape remains challenging, particularly for small-cap IPO issuers. One key issue has been the extended review timelines by the Nasdaq and NYSE and the difficulty in building sufficient allocations, which have lengthened the IPO process and increased costs. This extended timeline often results in financial statements becoming stale, requiring amendments, which adds further expense and complexity to the process. To mitigate some of these issues, issuers may choose to rely on SEC Rule 430A. However, doing so comes with its own set of risks and challenges, especially concerning reporting obligations under Section 15(d) of the Securities Exchange Act of 1934.

What is Rule 430A?

Rule 430A allows a company to go effective with its registration statement without finalizing the public offering price, underwriting syndicate, or the amount of proceeds. This rule permits companies to file a final prospectus with these omitted items no later than 15 business days after the effective date. This can be helpful when companies are close to the end of their financial reporting period and need to ensure their financials do not go stale, preventing the company from moving forward with the IPO.

Once the registration statement goes effective, the issuer is immediately subject to Section 15(d) reporting obligations under the Exchange Act, even if the IPO does not close within the 15-day window. This scenario presents a risk for companies that may end up subject to ongoing reporting obligations without having completed an IPO.

Section 15(d) Reporting Obligations

Section 15(d) of the Exchange Act imposes scaled-down reporting requirements compared to companies with a class of securities registered under Section 12. Companies subject to Section 15(d) are required to comply with Section 13 reporting, including filing annual reports on Form 10-K and quarterly reports on Form 10-Q. However, these companies are not subject to other stringent requirements, such as:

1. Proxy rules and tender offer rules (Section 14)
2. Reporting obligations for directors, officers, and 10% shareholders (Section 16)
3. Reporting obligations for 5% or greater shareholders (Section 13(d), (g), and (f))

In most cases, IPO issuers also file an Exchange Act registration statement on Form 8-A/12(b), which subjects them to full reporting obligations under the Exchange Act and facilitates the listing of securities on a national exchange. However, a Form 8-A/12(b) will not go effective unless the IPO closes. This means that if the IPO does not proceed as expected, the company will still be subject to Section 15(d) obligations, but not to the full reporting obligations under Section 12(b).

Abandoning an IPO: Terminating Reporting Obligations

If a company finds itself in a situation where it has filed an IPO registration statement but has not completed the offering, it may want to terminate its reporting obligations under Section 15(d). In 2010, the SEC issued Staff Legal Bulletin No. 18, which provides guidance for issuers that wish to suspend or terminate reporting obligations in the event of an abandoned IPO or acquisition.

To suspend reporting obligations, a company must file Form 15 and meet certain conditions, including:

1. Being current in its Exchange Act reporting obligations.
2. Having fewer than 300 record shareholders (or fewer than 500 with less than $10 million in assets, or 1,200 for bank holding companies).
3. Not having had an effective Securities Act registration statement in the fiscal year in which the suspension is requested, or if relying on the 500-shareholder threshold, within the two preceding fiscal years.

Suspension Under Special Circumstances

Under Rule 12h-3, companies can automatically suspend reporting obligations if they meet the shareholder thresholds. However, the SEC has recognized two specific circumstances where reporting obligations can be suspended, even if the company had an effective registration statement during the time period:

1. Abandoned IPO: A company may suspend its reporting obligations if it files an application to withdraw the registration statement under Securities Act Rule 477 and the SEC grants the withdrawal.
2. Acquisition: If a company is acquired and its securities are either extinguished or held solely by the acquirer, it may suspend its reporting obligations under Section 15(d).

Implications of Stale Financials and Reporting Obligations

As discussed earlier, financial statements for domestic issuers go stale every 135 days (and every nine months for foreign private issuers), necessitating a re-audit or quarterly review if the IPO process drags on. If issuers rely on Rule 430A and the IPO is delayed, they may find themselves subject to Exchange Act reporting obligations without completing the IPO.

It’s important to carefully manage the timeline for an IPO and ensure that any delays or changes to the IPO plan are accounted for, including addressing the risks of stale financials and potential reporting obligations under Section 15(d). Failing to do so could result in significant costs and ongoing reporting obligations, even if the IPO is abandoned.

Conclusion

The IPO process can be lengthy and fraught with challenges, especially for small-cap issuers navigating the complexities of Nasdaq or NYSE requirements, financial statement staleness, and other hurdles. Rule 430A offers flexibility in the final stages of the IPO, but companies should be aware of the risks, particularly with respect to becoming subject to Section 15(d) reporting obligations without completing the IPO. Companies considering an IPO should work closely with experienced legal counsel to ensure that they are fully prepared for any eventuality, including the need to suspend reporting obligations if the IPO is abandoned.

Source:Securities Law Blog - Terminating Reporting Obligations in an Abandoned IPO.