On Thursday, September 10, 2015, Morrison & Foerster Partners David M. Lynn and Scott Lesmes will lead a teleconference entitled “Final SEC CEO Pay-Ratio Rule”. On August 5, 2015, the Securities and Exchange Commission, in a 3-2 vote, adopted a final CEO pay-ratio rule, which requires public companies to disclose the ratio of the compensation of its chief executive officer to the median compensation of its employees. This session, which will take place from 12:00 p.m. to 1:00 p.m. EDT, will discuss:
- Disclosure requirements;
- Covered employees;
- Identifying the median employee;
- Calculating median annual compensation;
- Excepted companies and transition periods; and
- Preparing for the new rule.
CLE credit is pending.
To register for this session, or for more information, please email email@example.com.
The Securities and Exchange Commission is requesting comments prior to August 31, 2015 regarding whether the Commission should approve or disapprove a proposed change to the NYSE Listed Company Manual Sections 312.03 and 312.04. The NYSE Listed Company Manual contains a number of regulations requiring that a listed company obtain shareholder approval for certain issuances of securities, which provisions are often referred to as the “shareholder vote provisions” or the “20% rule.” In this case, the NYSE proposes to amend the referenced sections in order to provide an exemption pursuant to which an “early stage company” the securities of which are listed on the NYSE may issue shares of common stock (or exchangeable or convertible securities) to certain related parties without shareholder approval. The exemption from the requirement to obtain shareholder approval would be available only to an “early stage company,” which would be defined as a company that has not reported revenues in excess of $20 million in any two consecutive fiscal years since incorporation. The early stage company’s audit committee would be required to review and approve the proposed transaction prior to completion. The exemption would only be available for sales for cash and would not be available for issuances in connection with an acquisition. Many of the securities exchanges’ rules imposing shareholder approval in connection with certain transactions serve to deter companies from raising much-needed capital. This modest positive change would prove beneficial to shareholders.
In recent years, there has been increased focus on “short-termism” within public companies—some speculate that the rise of high frequency trading, activism, and similar developments have exacerbated the focus on short-term returns. A number of academics, including Patrick Bolton and Frederic Samama, have proposed contractual approaches to reward loyal holders of public companies through the issuance of L-shares or L-warrants. A stockholder that had held for a specified period (say, three years) would be entitled to receive a warrant to receive additional shares of the public company’s stock. One could envision any number of other alternative structures designed to reward long-term investors and a number of French and other European issuers already have adopted approaches designed to do just that. For U.S. investors, the concept may not be all that familiar. The proposed initial public offering of Ferrari (see http://www.sec.gov/Archives/edgar/data/1648416/000164841615000004/newbusinessnetherlands.htm) may present a fresh opportunity for U.S. investors to consider the loyalty share approach. The Netherlands-based company will adopt a “loyalty voting program.” Any holder can opt to participate in the loyalty voting program and, after a three-year holding period, the loyal holder will be entitled to receive one special voting share for each such common share that has been registered. U.S. IPO investors are fairly accustomed to dual-class and multiple-class voting structures, especially for IPO issuers that use an up-C IPO approach or have insiders that are intent on preserving control; however, they are not so familiar with rewarding loyalty.
A flurry of activity was seen last week on the House floor as the Financial Services Committee reported on various bills, many of which JOBS Act related. These bills propose to change registration and reporting requirements for small reporting companies, Small Business Investment Companies (SBICs) and savings and loan companies, as well as affect the treatment of Emerging Growth Companies (EGCs). On July 14, the House passed the following bills, and on July 15, referred them to the Senate Committee on Banking, Housing and Urban Affairs:
- The SBIC Advisers Relief Act of 2015, H.R. 432, would amend the Investment Advisers Act of 1940 to exempt SBICs from certain SEC registration and reporting requirements;
- The Holding Company Registration Threshold Equalization Act of 2015, H.R. 1334, would amend Title VI of the JOBS Act and raise the threshold number of shareholders of record at which savings and loan companies must register with the SEC. H.R. 1334 also raises the threshold number of shareholders of record below which a savings and loan company may terminate its registration;
- The Small Company Simple Registration Act of 2015, H.R. 1723, proposes to have the SEC revise Form S-1 to allow smaller reporting companies to incorporate by reference any documents it files with the SEC after the effective date of a registration statement on Form S-1;
- The Swap Data Repository and Clearinghouse Indemnification Correction Act of 2015, H.R. 1847, proposes to amend the Securities Exchange Act of 1934 and the Commodity Exchange Act to repeal the indemnification requirements for regulatory authorities to obtain access to swap data;
- The Access to Capital for Emerging Growth Companies Act, H.R. 2064, proposes to make changes to the treatment of EGCs as defined by the JOBS Act. The bill would reduce the number of days that an EGC is required to have a confidential registration statement on file with the SEC before a “road show,” and would allow an issuer to retain EGC status through the date of its IPO if it was considered an EGC at the time of filing its confidential registration statement.
In contrast, plans to consider H.R. 1675 and H.R. 2354 were scrapped by House Republicans, according to CQ News. H.R. 1675 would have directed the SEC to revise regulations relating to compensatory benefit disclosures by issuers. H.R. 2354 planned to reduce the number excessive and costly regulations issued by the SEC by requiring a review of each significant regulation it had issued.
During their July 15 open telephone meeting, the SEC’s Advisory Committee on Small and Emerging Companies continued discussion on the regulatory treatment of “finders” and disclosure effectiveness relating to small businesses.
The Committee acknowledged the importance of “finders” and other intermediaries in the capital-raising efforts of small businesses, citing limited broker-dealer involvement due to the smaller deal sizes these efforts yield. It was expressed that although “finders” and similar intermediaries have always been present in our economic system, they currently operate outside regulatory guidance. In order to legitimize this practice and move forward with any recommendations to the SEC, the Committee agreed that certain issues such as the definition and segmentation of covered persons, scope of activities of “finders,” thresholds, disqualifications and regulation and reporting should first be considered and resolved.
The Committee also announced the SEC’s continued consideration of the recommendations made on February 1, 2013 regarding regulatory relief provided to smaller reporting companies with regard to disclosure. The Committee discussed expanding this regulatory relief to include relief provided to EGCs under the JOBS Act. Specific issues and considerations were identified to achieve this proposed expansion, of which the effectiveness of disclosing the ratio of median annual total compensation of all employees to that of CEOs garnered further deliberation, as did mandatory audit firm rotation requirements. Additionally, the definition of an “accelerated filer” was proposed as a topic of discussion for the upcoming September committee meeting.
A full replay of the meeting webcast will be made available on the SEC website: http://www.sec.gov/news/otherwebcasts/2015/advisory-committee-small-emerging-companies-071515.shtml
Last week, BDO USA released its 2015 IPO Halftime Report which surveyed capital markets executives from various investment banks on IPO activity and trends for 2015. The report found that the number of U.S. IPOs and aggregate proceeds are down significantly when compared to the same period in 2014 and notes that predictions point toward a similar volume of offerings in the second half of 2015. While there are many contributing factors to this decrease in number of offerings and proceeds raised, a majority (56%) of the capital markets executives surveyed believe that the availability of private funding at favorable valuations is a principal cause, particularly for technology companies.
In addition to the drop in number of IPOs in the first half of 2015, the average size of offerings has decreased as well when compared to 2014. A significant portion (41%) of the executives surveyed attributed this decline in average deal size to fewer large deals coming from private equity and venture capital firms who have already exited many mature businesses. Only 6% of those surveyed believed the JOBS Act contributed to the decrease in average offering size.
Capital markets executives are still divided on the impact of the three-year old JOBS Act on the IPO market. Accordingly, a slight majority (51%) of those surveyed believed the Act has had a positive impact on companies going public. However, when compared to the percentage of bankers who felt this way two years ago (14%), this majority represents a significant change in sentiment towards the JOBS Act. Despite this attitude shift, a majority of executives felt that the JOBS Act’s confidential filing process and corresponding lack of transparency has had a negative impact on their capability to advise clients resulting from a lack of knowledge about competing offerings.
For the second half of 2015, the report indicates an expected increase in healthcare, technology and biotech IPOs and cited private equity firms and venture capital portfolios are cited as the primary source of IPOs. For these and other findings, the full report can be accessed here.
Since the Regulation A+ effective date last month, a number of websites have emerged that promote “Regulation A+ crowdfunding” contributing even further to the confusion in the market regarding “crowdfunding.”
Colloquially perhaps any attempt to raise capital through the use of an internet-based platform may be thought of as crowdfunding; however, to a securities lawyer, this usage of the term “crowdfunding” may be misleading.
Title III of the JOBS Act establishes a securities offering exemption for “crowdfunding” (some refer to this as Title III crowdfunding or refer to the new exemption, Section 4(a)(6)), which is available only to certain issuers, and only to raise up to a specified amount of proceeds ($1 million in a twelve-month period). A Title III crowdfunded offering must be made through a registered broker-dealer or a funding portal. The SEC has proposed rules for Title III crowdfunding that, among other things, limit advertising and marketing of such offers, prescribe certain disclosure requirements, impose limited ongoing disclosure requirements, and mandate that certain investor educational materials be prepared and disseminated. At present, Title III crowdfunding is not available to issuers. The SEC must release final rules. As we have commented on in prior posts, a number of states have moved forward and have adopted crowdfunding exemptions for intrastate offers.
Title II of the JOBS Act required that the SEC relax the prohibition against general solicitation for certain Rule 506 offerings, and the SEC adopted final rules to do so. In a Rule 506(c) offering, an issuer may use general solicitation to identify potential investors; provided that investors are verified to be “accredited investors.” If an issuer enlists the services of a financial intermediary to assist with the offering and the intermediary receives transaction-based compensation, the intermediary generally will be required to be a registered broker-dealer.
Title II also provided greater certainty regarding the activities that a “matchmaking” portal may conduct without being subject to the requirement to register as a “broker-dealer.” Matchmaking platforms that rely on Rule 506(c) or that, alternatively, rely on pre-JOBS Act no-action letter guidance to make offers to investors with whom a pre-existing substantive relationship has been established and who are determined to be accredited investors prior to any offers being made, may engage in “accredited investor crowdfunding.”
The final rules relating to Regulation A+ permit issuers to “test the waters” subject to compliance with a number of requirements. Certainly, an issuer that is contemplating a Regulation A+ offering may use internet-based communications to test the waters. However, the final rules for a Regulation A+ offering have little in common with the proposed rules implementing Title III crowdfunding and, also, little to do with “accredited investor crowdfunding.” To the extent that offers are made using an internet-based platform and the intermediary expects to receive transaction-based compensation, it generally will be required to be a registered broker-dealer. The Regulation A+ framework is complex, and requires the preparation of, and review by, the SEC of a disclosure document. In addition, any “test the waters” materials used after an offering is qualified will need to be updated and filed with the SEC. The issuer will be required to comply with the investor limitation for individuals. Issuers considering using a platform should take care to ensure that they will be able to comply fully with applicable regulations.
According to a recent report by Wolters Kluwer, non-U.S. companies completing IPOs in the United States account for 21% of all U.S. IPOs in 2015, to date. These non-U.S. companies have completed 23 IPOs and raised an aggregate $2.29 billion, indicating strong interest by foreign issuers to list in the U.S. In addition, non-U.S. issuers currently hail from various companies around the world, in contrast to China’s historically strong presence in the U.S market—as shown, for instance, by Finland’s first IPO in the U.S. since 1999, completed this June. Visit http://www.ipovitalsigns.com/public/IPOQueue to read more about these findings.
The SEC Advisory Committee on Small and Emerging Companies plans to continue discussions from its June 3 meeting regarding public company disclosure effectiveness and the regulatory treatment of “finders” at its July 15, 2015 public meeting. The open conference call is set to begin at 1:00pm EDT. For more information, see the SEC’s press release here: http://www.sec.gov/news/pressrelease/2015-142.html
A press release by the National Venture Capital Association (NVCA) and Thomson Reuters reports a significant jump in the number of VC-backed IPOs during the second quarter of 2015. The release notes a 59 percent increase by number of offerings totaling $3.4 billion, more than two times the amount raised during the first quarter of 2015, according to a report conducted by Thomson and NVCA. Life sciences related IPOs accounted for 19 of the 27 total VC-backed IPOs for the second quarter. In addition, the largest IPO for the quarter was Fitbit Inc.’s $841.2 million offering, one of eight IPOs in the quarter relating to information technology. For more on these findings, read NVCA’s press release: http://nvca.org/pressreleases/ipo-activity-for-venture-backed-companies-picks-up-steam-in-second-quarter/.