Today, the US Chamber of Commerce’s Center for Capital Markets Competitiveness hosted a half-day session on “Corporate Disclosure Reform: Ensuring a Balanced System that Informs and Protects Investors and Capital Formation.” The session, which was webcast through the Chamber’s site, included various presentations from former SEC officials, as well as from Keith Higgins, Director of the SEC’s Division of Corporation Finance. The various panels discussed their views on various alternative approaches for modernizing corporate disclosures through more effective use of company websites, streamlining of certain SEC Exchange Act forms, and a variety of other means.
Higgins urged the public to send in comments, including their suggestions, regarding the disclosure reform project. He noted that the SEC had received very few comment letters in the period leading up to the SEC’s publication of the JOBS Act-mandated Regulation S-K study. Higgins noted many of his own suggestions regarding disclosure reform, such as the need to reduce repetition in corporate filings.
The Center also published a white paper on disclosure reform, which may be accessed here:
As we previously reported, the Director of the SEC’s Division of Corporation Finance, Keith Higgins, testified before the House Financial Services Committee on a broad range of matters, including the SEC’s progress in implementing the rules required by the Dodd-Frank Act and the JOBS Act, as well as the Division’s disclosure reform initiative. Congressmen commented on the SEC’s proposed amendments to Regulation D and Form D, as well as on the SEC’s crowdfunding proposal. A few mentioned bills that had been introduced in, or had been passed by, the Committee, such as the bill that provides relief to small issuers from XBRL compliance. Various Congressmen commended Chair White and the SEC for undertaking a review of the disclosure system. Several urged the SEC to consider the recommendations of the SEC’s Forum on Small Business Capital Formation. A number expressed interest in the SEC’s Dodd-Frank Act-mandated study of the definition of “accredited investor.” Rep Hultgren pointed to the test recently adopted in the United Kingdom that permitted individuals that did not meet a net worth test to meet a financial sophistication requirement by either taking a test or demonstrating understanding as a result of their education or an advanced degree. He asked Higgins whether the Division was considering an “educational component” as part of the accredited investor definition. Higgins noted that it was one of the things that the Division was reviewing. Higgins also noted that the Division is preparing recommendations for final rules on the Regulation D, crowdfunding and Regulation A+ proposals, as well as on proposals to implement the changes in JOBS Act Title V and Title VI.
The prepared testimony can be accessed here: http://www.sec.gov/News/Testimony/Detail/Testimony/1370542357516#.U9U8naXD_FM.
Earlier this month, we commented on some statistics regarding the number of IPOs and the IPO backlog (based on public filings). Here, we offer a few more insights into recent trends in the IPO market based on various publicly available sources.
There were 70 IPOs that priced in the second quarter of 2014. Of those almost 60% priced within or above the stated price range—this is fairly consistent with the experience of the last several quarters. Perhaps it is too early to assess, but some have speculated that test-the-waters meetings for EGC IPOs are providing useful information regarding pricing and that is contributing to more deals pricing within the filing range compared to pre-JOBS Act periods. IPOs priced in the first half of the year have outperformed the major equity indices.
Sponsor-related deals continue to represent an important component of the 2014 IPOs; however, not as high a percentage as of the 2012 and 2013 IPOs. This may suggest that financial sponsors took their exit opportunity earlier in the IPO cycle. The percentage of sponsor-backed companies also may correlate to the high number of IPOs that have had a selling stockholder component. About a third of recent deals have had a selling stockholder component.
We are still not seeing a return of “smaller” company IPOs. For almost 50% of the IPOs undertaken since the JOBS Act was passed, the issuer’s market capitalization at the offering was between $150 million and $750 million. Average IPO offering sizes continue to be substantially higher than in the late 1990s and early 2000s. This suggests that Regulation A+ may still be an important “IPO alternative” for smaller companies.
We continue to see occasional variations on the traditional 180-day lock-up period for directors, officers and principal stockholders of the IPO issuer. Post-JOBS Act IPOs have incorporated a number of permutations, including, for example, staggered lock-up periods wherein the term of the restrictions varies by category of holder; lock-up periods that are tied to certain stock price levels and fall away if the IPO issuer’s stock price has performed well; and shorter lock-up periods. Also, we continue to see a number of IPO issuers coming back to market for follow-on offerings, usually comprised largely of selling stockholder shares, within the IPO period.
A divided Securities and Exchange Commission today adopted rules that will require floating net asset values (NAVs) for institutional money market funds and give most money market funds the discretion to impose liquidity fees and gates. The 3-2 vote, which closes the latest tumultuous chapter of money market fund regulatory reform, will fundamentally change the way that most money market funds operate.
The floating NAV requirement will not apply to retail money market funds, including retail funds and all government money market funds (whether or not they are institutional funds).
The new rules increase responsibility on money market fund boards. Fund boards will be authorized to temporarily “gate” redemptions and impose redemption fees of up to two percent when a fund’s weekly liquidity falls below 30 percent of its total assets; but when weekly liquidity drops to 10 percent, the fund must impose a one percent redemption fee. The original proposal would have required a mandatory two percent redemption fee at the 15 percent level, although the fund’s board could waive that fee or impose gates.
The rules will impose additional disclosure, reporting and stress testing requirements.
To read more, see our Client Alert.
This Thursday, July 24th, the Capital Markets and Government Sponsored Enterprises Subcommittee will hold a hearing with Keith Higgins, Director of the SEC’s Division of Corporation Finance, to review the SEC’s rule proposals to implement the JOBS Act and the Dodd-Frank Act, proxy advisory firms, as well as Chair Mary Jo White’s call for a holistic review of public company disclosure. The hearing will be live streamed on the committee’s website: http://financialservices.house.gov/.
The first half of 2014 has seen the hottest IPO market in 14 years – 133 IPOs priced, raising more than $30 billion in proceeds. This is already greater than the total number of IPOs priced during 2011 and 2012. The second quarter even included five IPOs that raised more than $1 billion each. There were many active sectors, including biotech, as always, even after correction in March-April, healthcare, technology, energy, industrial, consumer and financial companies. Chinese company IPOs were very active, with ten companies going public, including JD.com, a China-based e-commerce company that raised $1.78 billion. The NYSE dominated the IPO market with more than 61% of the IPO proceeds. Most of the IPOs continued strong in their after-offering trading.
The impact of the JOBS Act, particularly its confidential submission process, is clear. More than 85% of the IPOs used the confidential submission process. At June 30th, the backlog (defined as U.S. IPOs initially filed or revised within the past 180 days) was 93 deals, representing more than $11.5 billion in proceeds. However, the backlog does not include JOBS Act confidential filings. Given the typical offering lull in August, there is no pressure for the confidential filings to become publicly available until at least August, when the companies get ready for launch in September or Q4.
And the IPO world continues to wait for the multi-billion dollar Alibaba IPO – now expected to price in September.
Download a free copy of our recently updated JOBS Act book, http://www.mofo.com/~/media/Files/PDFs/jumpstart/140700JOBSAct.pdf.
The updated book discusses emerging practices in IPOs by emerging growth companies, the SEC’s final Rule 506 rules and investor verification and other developments.
You also may email us to obtain hard copies. Send an email to Harrison Lawrence at email@example.com.
The text of S. 2498, introduced by Senator Murphy in late June, was finally released. The bill is titled the “HALOS Act”, or “Helping Angels Lead our Startups Act.” Angel investors have expressed concerns regarding the definition of the term “general solicitation” following the adoption of Rule 506(c), which permits issuers to use general solicitation in connection with certain offerings. Specifically, angel investors have noted that there is a lack of certainty regarding the types of communications that might be deemed to constitute a general solicitation and, if an issuer uses general solicitation, it must undertake certain additional investor verification procedures to ensure that purchasers in Rule 506 offerings are “accredited investors.”
The proposed bill would exclude certain presentations from constituting a general solicitation if such presentations are made by or on behalf of an issuer at an “event (1) sponsored by (A) the United States or any territory thereof, by the District of Columbia, by any State, by a political subdivision of any State or territory, or by any agency or public instrumentality of any of the foregoing; (B) a college, university, or other institution of higher education; (C) a nonprofit organization; (D) an angel investor group; (E) a venture forum, venture capital association, or trade association; or (F) any other group, person or entity as the Securities and Exchange Commission may determine by rule; (2) where any advertising for the event does not reference any specific offering of securities by the issuer; (3) the sponsor of which—(A) does not make investment recommendations or provide investment advice to event attendees; (B) does not engage in an active role in any investment negotiations between the issuer and investors attending the event; and (C) does not charge event attendees any fees other than administrative fees; and (4) where no specific information regarding an offering of securities by the issuer is communicated or distributed by or on behalf of the issuer, other than–(A) that the issuer is in the process of offering securities or planning to offer securities; (B) the type and amount of securities being offered; (C) the amount of securities being offered that have already been subscribed for; and (D) the intended use of proceeds of the offering.
Historically, the SEC Staff has provided guidance in the form of no-action letters that address the types of communications that might be considered to constitute a “general solicitation” or “general advertising.” The focus in such letters generally has been on whether communications were bilateral or, in other words, addressed to a specific person or group of persons with which the issuer or the issuer’s financial intermediary had a pre-existing relationship, as compared to communications that were general, not targeted, communications.
The SEC Staff recently provided further guidance on the provisions of Rule 506(c) of Regulation D which permit the use of general solicitation and general advertising when sales are made only to accredited investors and the issuer verifies the accredited investor status of the purchasers. The Staff has now clarified certain aspects of the verification process through a series of new Securities Act Rules Compliance and Disclosure Interpretations.
When a purchaser holds assets in an account jointly or holds property jointly with an individual that is not the person’s spouse, the Staff has said that the assets in the account or property held jointly can be taken into account for the net worth test set forth in Rule 501(a)(5), but only to the extent of the purchaser’s percentage ownership of the account or property (Question 255.49).
The Staff has indicated that in a situation where a purchaser’s annual income is not reported in U.S. dollars, the issuer may use either the exchange rate that is in effect on the last day of the year for which income is being determined or the average exchange rate for the year (Question 255.48). If a purchaser is not a U.S. taxpayer and therefore cannot provide an IRS form to report income, the non-exclusive method for verification set forth in Rule 506(c)(2)(ii)(A) would not be available; however, the Staff has said that the principles-based verification method could be utilized where an issuer could reasonably conclude that a purchaser is an accredited investor based on a review of tax forms that report income in a foreign jurisdiction which imposes penalties for falsely-reported information that are comparable to those of the U.S (Question 260.36).
If an issuer is seeking to rely on the non-exclusive method for verification set forth in Rule 506(c)(2)(ii)(A) and thus wants to review the purchaser’s income as reported on IRS forms for the two most recent years, but the most recent year is not yet available, it would not necessarily be appropriate for the issuer to then review years prior to the two most recent years. However, the Staff believes that an issuer could reasonably conclude that a purchaser is an accredited investor and satisfy the verification requirement under the principles-based verification approach by:
- reviewing the Internal Revenue Service forms that report income for the two years preceding the recently completed year; and
- obtaining written representations from the purchaser that (i) an Internal Revenue Service form that reports the purchaser’s income for the recently completed year is not available, (ii) specify the amount of income the purchaser received for the recently completed year and that such amount reached the level needed to qualify as an accredited investor, and (iii) the purchaser has a reasonable expectation of reaching the requisite income level for the current year. (Question 260.35).
With respect to the review of tax assessments for the purposes of determining an accredited investor’s net worth under the non-exclusive verification method set forth in Rule 506(c)(2)(ii)(B), the Staff notes that reviewing a tax assessment that is more than three months old would not be appropriate when relying on the verification safe harbor. That said, the Staff believes that an issuer could reasonably conclude that a purchaser is an accredited investor and satisfy the verification requirement of Rule 506(c) under the principles-based verification method, if the issuer uses the most recently available tax assessment when determining whether the purchaser has the requisite net worth (Question 260.37).
Lastly, in reviewing consumer reports for the purposes of determining a purchaser’s liabilities under the non-exclusive verification method set forth in Rule 506(c)(2)(ii)(B), the Staff indicates that while a consumer report from a non-U.S. entity would not work for the purposes of the safe harbor, an issuer could reasonably conclude that a purchaser is an accredited investor and satisfy the verification requirement under the principles-based verification method by reviewing s foreign report report and taking any other steps necessary to determine the purchaser’s liabilities (such as a written representation from the purchaser that all liabilities have been disclosed) in determining whether the purchaser has the requisite net worth (Question 260.38).
In those interpretation where the Staff noted that an issuer could reasonably conclude that a purchaser is an accredited investor based on the principles-based verification method, the Staff further noted that when the issuer has reason to question the information that is being considered or, depending on the test, the purchaser’s net income or net worth, then additional verification measures may be necessary in order to verify that the purchaser is an accredited investor.
The North American Securities Administrators Association, Inc. (NASAA) posted a web notice requesting comment on model rules that would provide for electronic filings with the states of Form D and other state securities registration and notice filing materials.
One version of the model rule would provide for Form D, amendments and the related processing fees to be filed with NASAA’s Electronic Filing Depository (EFD). An alternative version would require all state securities registration and notice filings (including Form D), amendments and exemption filings, and the related fees, to be filed with the EFD. Both rules would require electronic filings after the EFD is capable of receiving these filings and an appropriate notice has been provided to issuers by the relevant state administrator. Both proposed rules allow electronic signature.
The EFD system will initially be limited to Form D filings and is expected to be deployed in November 2014. NASAA expects to expand the EFD’s capabilities to accept all state securities registration and notice filing materials.
Comments on the proposed rules are due on or before July 30, 2014.
The NASAA notice can be found at: http://www.nasaa.org/31855/notice-request-comment-regarding-proposed-model-rule-electronic-filing-form-d-securities-registration-notice-filing-documents/