Today, the House of Representatives by a vote of 416-6 approved H.R. 701, a bipartisan bill that directs the SEC to finalize rules by Oct. 31 to implement Title IV of the JOBS Act. Rep. Patrick McHenry (R-NC), who serves as Chairman of the Subcommittee on Oversight and Investigations, sponsored the legislation along with Reps. Anna Eshoo (D-CA), David Scott (D-GA), David Schweikert (R-AZ) and Scott Garrett (R-NJ). Rep. McHenry stated that, “To cultivate a stronger economy, we have to build a more vibrant marketplace for our startups and entrepreneurs, which is what this legislation is all about. It’s critical that the SEC finally start to implement the JOBS Act – a bipartisan bill that was signed into law more than a year ago. Small businesses and entrepreneurs are starving for capital, and this legislation simply sets a firm deadline for the SEC to get its job done.”
On June 5, 2013, David Lynn will co-chair a Practising Law Institute program in New York City (with several groupcast locations, as well as a live webcast) entitled Global Capital Markets & the U.S. Securities Laws 2013: Raising Capital in an Evolving Regulatory Environment. This year’s conference will consist of a number of sessions that focus on global regulatory efforts and their effects on the capital markets, including public and private offering practices. Anna Pinedo will speak on a panel that deals with the impact of the JOBS Act, and other timely capital markets issues. For more information about the program, please visit: http://www.pli.edu/Content/Seminar/Global_Capital_Markets_the_U_S_Securities/_/N-4kZ1z12owf?ID=157170.
A bill was introduced today in the House of Representatives (HR 1952) by Rep. Schweikert that proposes to amend the Securities Exchange Act of 1934 to require the Securities and Exchange Commission to allow publicly traded companies with a certain sized public float to change their stocks’ tick sizes to increase liquidity by incentivizing capital commitment, research coverage, and brokerage support, thereby increasing the stocks’ liquidity and investor interest, and for other purposes. The bill was referred to the Committee on Financial Services.
In a recent speech (see http://www.sec.gov/news/speech/2013/spch041913laa.htm), SEC Commissioner Aguilar addressed the “scale back” of disclosures in connection with the JOBS Act, and the role of institutional investors in the capital markets. Commissioner Aguilar cited a paper noting that institutional investors were better at avoiding the worst-performing investors—presumably based on their analysis of financial information made available by public companies. He noted that the JOBS Act reduces the amount of information required to be made public by emerging growth companies. This raises a number of interesting questions. The accommodations available to EGCs under Title I of the JOBS Act relate principally to scaled back executive compensation disclosures. Would more fulsome executive compensation disclosures be helpful or informative to investment decisions? It is unlikely that more robust compensation disclosures would be essential to an investment analysis. Title I also permits EGCs to present two years of financial information in their filings. Perhaps it could be argued that two rather than three years of data would make a difference to an initial investment analysis; however, there is no data yet that would substantiate whether there is a measurable difference to institutional investor decisions based on the availability of a third year of data. Before concluding that the relatively modest scaled disclosures available to EGCs pose an issue, should we consider whether institutional investors simply have resources to conduct their own analysis, and have access to information (often from investment banks) that is not available to retail investors?
Following the House Financial Services Committee mark-up session, HR 701 and HR 801 were both approved by voice vote. Yesterday, a bill was introduced in the Senate by Senator Toomey, S.872, to amend the Securities Exchange Act of 1934, to make the shareholder threshold for registration of savings and loan holding companies the same as for bank holding companies.
The SEC has made available the archived version of the webcast from the most recent meeting, held on May 1, 2013. The meeting included presentations from Duncan Niederauer, Chief Executive Officer of NYSE Euronext, and William Hambrecht, CEO of WR Hambrecht + Co., as well as discussions with several Commissioners. The webcast is accessible from here: http://www.sec.gov/news/otherwebcasts/2013/acsec050113.shtml.
Niederauer discussed the decline in small company IPOs, as well as the IPO market generally, and the need for tick size changes. Hambrecht reviewed with the Committee his views regarding the potential utility of the Section 3(b)(2) exemption (or Reg A+) for smaller companies, and how Reg A+ offerings might well serve to revive the IPO market for smaller companies that undertake a Reg A+ offering with a contemporaneous exchange listing. Hambrecht urged the Committee to recommend that the Staff of the SEC move forward with rulemaking to implement the exemption and take into account in their rulemaking addressing the obstacles that render current Regulation A of limited use compared to Rule 506 under Regulation D. Hambrecht also discussed his recommendations for additional reforms to the IPO process generally. Bob Greifeld, CEO of NASDAQ, also supported changes to tick sizes, as well as the creation of a separate market for the securities of small companies.
The glory days of IPOs are long gone (734 IPOs in 1996!), and IPO metrics continue to shift. So where are we following the end of Q1 2013? There were a total of 133 IPOs in 2012, and just 21 in Q1 2013 (compared to 39 in Q1 2012 (excluding in each case, closed end funds and offerings under $15M)). But the 21 raised $6.4B in gross proceeds compared to the 39 that raised $5.8B.
At the end of Q1, there were 27 companies in the visible pipeline. Since passage of the JOBS Act in April 2012, which permits confidential submissions until just before the IPO roadshow, it is hard to determine the total pipeline, but perhaps there is better likelihood that the companies in the visible pipeline might complete an IPO. A little more than a third of the pipeline consists of healthcare-related companies with the next two largest sectors being technology and financial, at about 18.5% each.
The average IPO size continues to decline. Since the beginning of 2011, there have been only 11 IPOs exceeding $1B in gross proceeds. Excluding the Facebook IPO, the average size of a 2012 IPO was $198M, continuing the decline from over $542M in 2008. Further, in 2012, nearly half of the IPOs resulted in gross proceeds between $50M and $250M. The good news about this—at least for some—is that smaller investment banks, both established and relatively new, have more of a chance to lead manage the IPO.
Foreign-headquartered companies continue to disappear from the IPO market. There were no foreign private issuer IPOs in Q1 although there were three in April. And the Chinese have largely disappeared, probably because of continuing U.S. investor concerns about audit quality and ownership of assets. However, 2012 did see a more diversified mix of foreign private issuer IPOs with 15 different countries being the headquarters for at least one foreign IPO.
Total dollar volume decreased by 50.7% for financial sponsor-related IPOs in 2012, as only five sponsor-backed offerings were larger than $500 million, compared to fourteen in 2011. Sponsor-backed issuers accounted for about a third of the backlog at the end of Q1 2013.
While analysts have different views about the remainder of 2013, there is strong hope that if the economy continues to stabilize and there is more certainty about its path, IPO activity will continue to grow.
William Blair & Company, Equity Capital Markets Review (January 2013) and Equity Capital Markets Update, 1Q13
IPO Vital Signs
The SEC recently posted on its website the Final Report from the 2012 SEC Government-Business Forum on Small Capital Formation, which was held in the fall of 2012. The report may be accessed at http://www.sec.gov/info/smallbus/sbforum.shtml. The report includes 35 recommendations from the Forum, with quite a number of these focused on crowdfunding. Setting aside those related to crowdfunding, not surprisingly, the Forum recommends that the SEC finalize the Rule 506 rulemaking; address the Section 3(b)(2) (or Reg A+) exemption; implement the bad actor provisions that were required to be adopted some time ago; and relax the eligibility criteria for use of Form S-3. The Forum also recommends retaining the current income and net worth levels in the “accredited investor” definition. The definition of “accredited investor” has come under close scrutiny in recent months and many commentators have advocated adding a financial literacy prong, as well as an invested assets prong.
The SEC recently announced an action where the promoter allegedly told investors that the 2012 JOBS Act would allow his fund to raise billions of dollars by advertising to the general public and produce large profits for early investors. (SEC v. USA Real Estate Fund I, Inc. and Daniel F. Peterson.) In the press release announcing the offering, and SEC official is quoted as saying “The JOBS Act is intended to help small businesses raise capital, not to legalize fraud or give unscrupulous entrepreneurs a right to make false claims to fleece investors.” It does not appear that this action involves allegations that the promoters conduct ran afoul of the JOBS Act’s effective or yet-to-be implemented provisions, rather that statements about the JOBS Act were used in the alleged illegal marketing efforts.
In separate enforcement matters, FINRA has recently been entering into enforcement agreements in matters which relate to insufficient information communicated by broker-dealers in the course of private placements. In a recent Letter of Acceptance, Waiver and Consent with MD Sass Securities, LLC (No. 2009018187701), FINRA settled alleged rule violations relating to the broker-dealer’s use of sales literature and institutional sales material to institutional customers, prospective customers and retail customers. The literature was distributed on behalf of hedge funds and private equity funds that the firm marketed. Among the allegations are that these private placement materials included misstatements regarding objectives, misleading, exaggerated, promissory or unwarranted claims, statements and presentations, and unwarranted performance projections. Moreover, the marketing materials did not adequately disclose risks and failed to provide a sound basis for evaluating the information presented. In one case, contradictory information was provided. In another recent Letter of Acceptance, Waiver and Consent with James S. Turo (No. 2010022672001), FINRA alleged that a company conducted live webinars for a private offering that did not limit access and thereby served as a general solicitation. In both of these FINRA settlements, we may be seeing that organization’s approach to a post-JOBS Act world, particularly when Title II gets implemented and the ability to more broadly solicit investors in private placements becomes a reality.
The Treasury Department is seeking information about leading innovators using technology to promote capital formation, and address the capital-raising challenges of small and emerging companies. Read the blog post and provide a submission at: http://www.treasury.gov/connect/blog/Pages/Let-Us-Know-About-Innovators-and-Leaders-in-Small-Business-Financing.aspx