The SEC’s Division of Economic and Risk Analysis (DERA) recently produced a Report to Congress regarding the impacts of the Dodd-Frank Act on access to capital for consumers, investors, and businesses, and market liquidity.  Although the Report is principally focused on liquidity, it does provide some interesting statistics regarding the primary issuance of equity securities.

The Report notes that total capital formation from 2010 when the Dodd-Frank Act was enacted through year-end 2016 was approximately $20.2 trillion, of which $8.8 trillion was raised through registered offerings, and $11.38 trillion was raised in exempt offerings.  The report notes the substantial increase in reliance on exempt offerings.  Regulation D offerings have more than doubled since 2009.  However, the report notes that the amount sold in reliance on Rule 506(c) represented only 3% of the amount sold in reliance on Rule 506.  The average amounts raised in initial Rule 506(c) offerings is much smaller than the average amount reported sold in  Rule 506(b) offerings.  Rule 144A issuances remain stable.

The Report also provides data regarding Regulation A and crowdfunded offerings, and may be accessed here:

The growing use of social media has created challenges for federal securities regulators, who must enforce antifraud rules that were written at a time when the prevailing technology was the newspaper.

This Guide summarizes how regulation has evolved in the face of the growing use of social media.  Our guide discusses the principal areas of focus for SEC-reporting companies, registered investment advisers, registered investment companies, and registered broker-dealers that use social media.

Read our Guide to Social Media and the Securities Laws.

In addition, readers may also be interested in our FAQs about the FINRA Communication Rules and our FAQs about Liability of Public Companies and Companies in Registration for Website and Social Media Content.

Even amidst all the other news crowding the headlines these days, it would be hard to miss the many stories discussing the U.S. initial public offering (“IPO”) market. By now, the trends are well-reported. Many promising U.S. companies are choosing to remain privately held longer and defer their IPOs. The once well-defined stages in a company’s funding life, from friends and family rounds to angel investor rounds to venture capital rounds to IPO have been disrupted. It is not uncommon for a company to remain private for ten to twelve years prior to pursuing an IPO or an M&A exit. As a result, generally, the companies that undertake IPOs are more mature and have a higher median market capitalization at the time of their IPOs than their predecessors in prior periods. There are fewer smaller IPOs. There now are many investors that are willing to invest in privately held companies, including family offices, sovereign wealth funds, venture and private equity funds, and cross-over funds. The valuations available to promising companies in private financing rounds often may be more attractive than the valuations that may result from an IPO. Some of these developments may account for the “unicorn” phenomenon. There are nearly 200 private companies valued by venture capital firms at $1 billion or more and few of these of these companies have taken the plunge and pursued IPOs. Studies indicate that the number of individual investors that own stocks directly has declined and institutional investors are disinclined to invest in small-cap and even smaller mid-cap stocks. Companies are experiencing much of their most significant growth while they are privately held, rather than in the years immediately following their IPOs, and institutional investors that participate in private funding rounds may stand to benefit most from this growth. In light of all of these changes, it is understandable that policymakers are focused on the ways to revive the U.S. IPO market and make regulatory changes that may remove some of the perceived impediments to pursuing public offerings.

To view our Bloomberg BNA article, click here.

On July 31, 2017, the NYSE amended its proposal, originally issued on March 13, 2017 and then withdrawn on July 19, 2017, to modify its listing qualifications to facilitate direct offerings. Section 102.01B of the NYSE Listed Company Manual currently recognizes that some companies that have not previously registered their common equity securities under the Exchange Act, but which have sold common equity securities in a private placement, may wish to list those common equity securities on the NYSE at the time of effectiveness of a resale registration statement filed solely for the resale of the securities held by selling stockholders.  Footnote (E) of Section 102.01B currently provides that the NYSE will exercise its discretion to list these companies by determining that a company has met the $100 million aggregate market value of publicly-held shares requirement based on a combination of both (1) an independent third-party valuation of the company (the “Valuation”) and (ii) the most recent trading price for the company’s common stock in a trading system for unregistered securities operated by a national securities exchange or a registered broker-dealer (a “Private Placement Market”).

The amended proposal retains the changes to Footnote (E) included in the original proposal, including, among others, changes to (1) explicitly provide that these provisions apply to companies listing upon effectiveness of a Form 10 or 20-F without a concurrent Securities Act registration and (b) upon effectiveness of a resale registration statement, and (2) provide an exception to the Private Placement Market trading requirement for companies with a recent Valuation available indicating at least $250 million in market value of publicly-held shares.

The amended proposal also includes the following new changes:

  • Amending Footnote (E) to establish criteria for assessing the independence of a valuation agent;
  • Amending NYSE Rule 104(a)(2) to specify the role of a financial adviser to an issuer that is listing under Footnote (E) and that has not had any recent trading in a Private Placement Market;
  • Amending NYSE Rule 123D to provide that the NYSE may declare a regulatory halt in a security that is the subject of: (1) an IPO on the NYSE; or (2) an initial pricing on the NYSE of a security that has not been listed on a national securities exchange or traded in the over-the-counter market pursuant to FINRA Form 211 immediately prior to the initial pricing.

The SEC has until September 18, 2017 to approve, disapprove or institute proceedings for the amended proposal.

The independence criteria and the provisions addressing the role of a financial advisor added to this amended NYSE proposal would seem to provide a roadmap for any issuer seeking to undertake a direct listing, perhaps as an alternative to a traditional IPO, and that might have engaged or is considering engaging advisers to assist the issuer with the direct listing process.

MoFo is rolling out the classics—MoFo Classics Series, that is. These two CLE sessions will focus on developments in the private placement market. Mark your calendar for these in-person only sessions, held at our New York office from 8:30 a.m. to 9:30 a.m.

Private Placement Market Developments – Thursday, September 14, 2017
Morrison & Foerster LLP
250 West 55th Street
New York, NY 10019

During this session, we will discuss developments affecting private placements, including:

  • Increased reliance on Section 4(a)(2) instead of the Rule 506 safe harbor;
  • Addressing no registration opinions;
  • Bad actor diligence for issuers and placement agents;
  • Diligence and the use of “big boy” letters;
  • FINRA Rule 5123 updates;
  • FINRA and SEC enforcement developments affecting private placements; and
  • Nasdaq’s 20% rule.

Late Stage Private Placements – Tuesday, September 19, 2017
Morrison & Foerster LLP
250 West 55th Street
New York, NY 10019

Successful privately held companies considering their liquidity opportunities or eyeing an IPO often turn to late stage private placements. Late stage private placements with institutional investors, cross-over investors and strategic investors raise a number of considerations distinct from those arising in earlier stage and venture financing transactions. During this session, we will discuss:

  • Timing and process for late stage private placements;
  • Terms of late stage private placements;
  • Principal concerns for cross-over funds;
  • Diligence, projections and information sharing;
  • IPO and acquisition ratchets;
  • Governance issues;
  • The placement agent’s role; and
  • Planning for a sale or an IPO.

NY and CA CLE credit is pending for both sessions.

To register, please click here.

On July 31, 2017, S&P Dow Jones Indices (“S&P”) issued a press release announcing a methodology change for multi-class shares following its consultation published on April 3, 2017.  The S&P Composite 1500 and its component indices will no longer add companies with multiple share class structures, such as Snap Inc. and Blue Apron Holdings, Inc.  The methodology change is effective immediately.  However, existing constituents of the S&P Composite 1500 will be grandfathered in and will not be affected by the methodology change, such as Alphabet Inc. and Facebook, Inc.  The S&P Global BMI Indices and S&P Total Market Index will continue to include companies with multiple share classes or with limited or no shareholder voting.  S&P noted that unlike the S&P Global BMI Indices and S&P Total Market Index, the S&P Composite 1500 (comprised of the S&P 500, S&P MidCap 400 and S&P SmallCap 600) follows more restrictive eligibility rules including a minimum float of 50% and positive earnings as measured by GAAP.  S&P also clarified that the methodologies of other S&P and Dow Jones branded indices remain unchanged.

A copy of the S&P press release is available here.

On July 27, 2017, Ranking Member of the House Committee on Financial Services, Congresswoman Maxine Waters, introduced the Bad Actor Disqualification Act of 2017.  This draft legislation directs the SEC to implement more rigorous and public processes for granting waivers that restore certain benefits to bad actors.  These benefits include reduced oversight, reduced disclosure requirements and limited liability.  The current draft of the bill specifically requires:

  • that the waiver process be conducted and voted on at the Commission level, rather than staff level;
  • that the SEC consider whether granting a waiver would protect investors, be in the public’s interest and promote market integrity;
  • that the SEC to publish notice and allow for public comment on whether a particular waiver will be approved or denied; and
  • that the SEC create a public database of all disqualified actors and keep complete/public records of all waiver requests.

This legislation follows the Congresswoman’s previous legislation from 2015 aimed at reforming the SEC’s waiver approval process, which was in response to a 2014 study that concluded that 82% of waivers were granted to financial firms in the last 11 years.

The full text of the bill can be found here.

Global fintech venture capital-backed financings are on course to hit record highs, according to a recent research briefing by CB Insights. For the first half of 2017, there have been 496 VC-backed financings that raised over $8.0 billion for fintech companies around the world. U.S. fintech issuers represented almost 40% of the total number of fintech financings in the first half of the year with 198 deals raising $3.1 billion.

Financings for blockchain and bitcoin companies globally in the first half of 2017 raised $343 million over 36 deals. Wealth tech company financings, which include robo-advisors and mobile investing platforms, raised $661 million across 33 financings. Financings for insurance tech companies accounted for over 15% of financings by number of deals, raising $826 million over 76 deals.

There are now 26 fintech unicorns, companies with a valuation of over $1 billion, which include 15 U.S.-based fintech companies. This follows an ongoing trend of privately held companies choosing to remain private longer. Late-stage investments have been ever more present with companies going through multiple rounds of financings due to increased access to capital. Both global and U.S. late-stage investments in fintech companies hit five-quarter highs, with a median deal size of $34 million and $38.5 million, respectively.

To see CB Insight’s full report, click here.

In our Practising Law Institute treatise Exempt and Hybrid Securities Offerings, we refer to the concept of “integration” under the securities law as a bogeyman of sorts for practitioners. In this day and age of tweets and posts, and where public and “private” offerings are hard to distinguish from one another, is the concept of integration antiquated? Or is it perhaps due for a comprehensive re-examination by the Securities and Exchange Commission? As we discuss below, many of the fundamental principles of integration of offerings, aggregation of offerings for purposes of securities exchange rules, and communications issues like “gun-jumping” and “quiet periods” may have been so eroded as to no longer be meaningful.

To view our article, click here.

This article has been published in The Current: The Journal of PLI Press, Vol. 1, No. 1, Summer 2017 (© 2017 Practising Law Institute).