On June 19, 2017, the NYSE withdrew its proposed rule, originally issued on March 13, 2017, to modify the provisions regarding the qualification of companies listing on the NYSE to allow for a listing without an IPO.  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.  The proposed rule change was published for comment in the Federal Register on March 31, 2017, and the SEC received no comments on the proposed rule.

For more information regarding the proposed rule, see our prior blog post available at: http://www.mofojumpstarter.com/2017/04/25/nyse-issues-proposed-rule-allowing-listing-without-an-ipo/.

The notice of withdrawal for the proposed rule is available at: https://www.sec.gov/rules/sro/nyse/2017/34-81000.pdf.

The Committee devoted the morning’s session to a discussion of the decline in the number of U.S. IPOs.  Chair Clayton addressed the Committee and noted that the decline in the number of U.S. IPOs and in the number of listed companies was concern.  The Chair noted that the Director of the Division of Corporation Finance is “actively exploring ways in which we can improve the attractiveness of listing on our public markets, while maintaining important investor protections.”  The panel heard from academics (see, for example, this article), as well as bankers about the changes in market dynamics that may be at the root of the decline in the number of IPOs.  Slides from one of the presentations are available here.

Nasdaq posted the following notice and request for comment:

“Last year, Nasdaq, solicited comments on our shareholder approval rules. These rules were adopted in 1990 and have remained largely unchanged since then. The comment solicitation was designed to elicit views on whether the rules could be updated given changes in the capital markets since then, without sacrificing the crucial investor protections they provide.

Following review of the comments provided, Nasdaq is considering a rule amendment to: (i) change the definition of market value for purposes of the shareholder approval rules from the closing bid price to a five day trailing average of the closing price; and (ii) eliminate the requirement for a company to obtain shareholder approval for issuances of common stock at a price less than book value.  As part of these changes, Nasdaq would also require that an issuance of 20% or more of the company’s outstanding securities be approved by the company’s independent directors where shareholder approval is not required.

We encourage all interested parties to review the detailed description of these proposed changes in our Comment Solicitation and provide comments before July 31, 2017.”

See Nasdaq statement.

See Nasdaq comment solicitation.

The SEC’s Investor Advisory Committee has announced the agenda for its June 22 meeting.  The committee will discuss issues relating to capital formation for smaller companies, including the decline in IPOs. The committee will also review certain provisions of the Financial CHOICE Act, as they relate to the SEC.

The meeting is open to the public and will be webcast live from the SEC’s website.

On June 1, 2017, the Public Accounting Oversight Board (PCAOB) adopted Auditing Standard No. 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, which the PCAOB believes will increase the relevance and utility of auditors’ reports by including additional information regarding the audit process, and other disclosures. Most significantly, the new standard requires inclusion in the audit report of a discussion of critical audit matters (CAMs) identified in the course of the audit. The new standard also contains an auditor tenure disclosure requirement and standardizes the format of the report, among other changes. The new standard retains the pass/fail opinion of the existing auditor’s report.

The new standard and other changes are subject to Securities and Exchange Commission (SEC) approval. Assuming that approval is obtained, the PCAOB expects the provisions, other than those related to CAMs, to take effect for audits for fiscal years ending on or after December 15, 2017. Provisions related to CAMs will take effect for (1) large accelerated filers, in connection with audits for fiscal years ending on or after June 30, 2019, and (2) all other filers, in connection with audits for fiscal years ending on or after December 15, 2020.

Read our client alert.

Below, a continuation of our bibliography of thought-provoking articles on issues related to right-sizing regulation, staying private versus going public, and related topics:

The effects of removing barriers to equity issuance, Journal of Financial Economics, July 14, 2016.  This article examines whether the relaxation of the eligibility requirements for use of a shelf registration statement, permitting smaller issuers to use a shelf registration statement, contributed to a decline in reliance by such companies on PIPE transactions for their follow-on capital-raising efforts.

Principles for Publicness, Florida Law Review, Omnig H. Dombalagian.  This article considers the duties that “public” companies owe investors and considers a tiered regulatory framework for companies as companies mature.

The Law and Economics of Scaled Equity Market Regulation, The Journal of Corporation Law, Jeff Schwartz.  This article reviews the concept of tiered regulation based on the size and age of companies using a marginal analysis model and concludes that size-based regulatory scaling is beneficial.

The Monitoring Role of the Media: Evidence from Earnings Management, Yangyang Chen, C.S. Agnes Cheng, Shuo Li, and Jingran Zhao, May 2017.  This article looks at the effect of media coverage on earnings management.  Media scrutiny serves to limit management of earnings in ways that favor insiders.

On June 8, 2017, the House passed H.R. 10, the Financial “CHOICE” Act with a vote of 233 to 186.  Introduced on April 27, 2017, the Financial CHOICE Act proposes to amend the Dodd-Frank Act to repeal the Volcker Rule, eliminate the FDIC’s orderly liquidation authority, and repeal certain limitations imposed by the Durbin Amendment.  The bill would also remove FSOC’s authority to designate non-bank financial institutions and financial market utilities as “systemically important” (also known as “too big to fail”).

Furthermore, in addition to the numerous amendments to the Consumer Financial Protection Act of 2010, the bill intends to (1) modify provisions related to the SEC’s managerial structure and enforcement authority; (2) eliminate the Office of Financial Research within the Department of the Treasury; and (3) revise provisions related to capital formation, insurance regulation, civil penalties for securities laws violations, and community financial institutions.

The bill would also repeal the Department of Labor’s fiduciary rule which, when fully implemented, significantly expands the categories of persons considered fiduciaries.  The DOL would be prohibited from adopting any similar rule until after the U.S. Securities and Exchange Commission (“SEC”) adopts a fiduciary standard for broker-dealers.

Chairman of the House Financial Services Committee, Jeb Hensarling, said in a statement after the passing of the bill: “We will make sure there is needed regulatory relief for our small banks and credit unions, because it’s our small banks and credit unions that lend to our small businesses that are the jobs engine of our economy and make sure the American dream is not a pipe dream.”

For a summary of current pending legislation relating to capital formation, click here.

On June 1, 2017, the Public Company Accounting Oversight Board (PCAOB) adopted a new standard for auditor’s reports that requires a description of “critical audit matters,” for purposes of providing investors with information regarding the most challenging, subjective or complex aspects of the audit. Under the new standard, critical audit matters are defined as any matter arising from the current period’s audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective or complex auditor judgment. If no critical audit matters arose from the audit, the auditor’s report must state that there were no critical audit matters. The communication of each critical audit matter in the auditor’s report must include: (a) the identification of the critical audit matter; (b) a description of the principal considerations that led the auditor to determine that the matter was a critical audit matter; (c) a description of how the critical audit matter was addressed in the audit; and (d) a reference to the relevant financial statement accounts or disclosures. Additional changes to the auditor’s report under the new standard include items that are intended to clarify the auditor’s role and responsibilities, provide additional information about the auditor and make the auditor’s report easier to read for investors. Under the new standard, the auditor’s report will still retain the pass/fail opinion of the existing auditor’s report.

The new standard will apply to audits conducted under PCAOB standards, but communication of critical audit matters will not be required for audits of: (1) broker-dealers reporting under Exchange Act Rule 17a-5; (2) investment companies other than business development companies (BDCs); (3) employee stock purchase, savings and similar plans; and (4) emerging growth companies (EGCs) as defined under Exchange Act Section 3(a)(80). The new standard is still subject to approval by the SEC. If approved, all provisions other than those related to critical audit matters will take effect for audits for fiscal years ending on or after December 15, 2017. The provisions related to critical audit matters will take effect for audits for fiscal years ending on or after June 30, 2019 for large accelerated filers and for fiscal years ending on or after December 15, 2020 for all other companies subject to such provisions.

A copy of the PCAOB’s fact sheet on the new standard is available at: https://pcaobus.org/News/Releases/Pages/fact-sheet-auditors-report-standard-adoption-6-1-17.aspx.

A copy of the PCAOB’s release on the new standard is available at: https://pcaobus.org/Rulemaking/Docket034/2017-001-auditors-report-final-rule.pdf.

Ernst & Young LLP recently published a report, which contains useful data, regarding the U.S. IPO market and the factors contributing to a decline in the number of IPOs.  In particular, the study notes the contribution of increased M&A activity as a factor in the decline.  These charts show the very significant jump in acquisitions of private companies from the IPO peak in 1996 (about 1,950 acquisitions) to 2016 when more than 4,800 private companies were acquired.  We reprint below the three most relevant charts illustrating this trend.

 

CHART 1

CHART 2

CHART 3

The full report may be accessed here.

Amongst other limitations, an issuer will cease to be considered an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act and unable to take advantage of the accommodations for such issuers set forth in the Jumpstart Our Business Startups Act if it has issued more than $1.0 billion of non-convertible debt securities over a rolling three-year period (not limited to completed calendar or fiscal years).  In general, all non-convertible debt securities issued over the prior three-year period, whether outstanding or not, are required to be counted against the $1 billion debt limit.  “Non-convertible debt” in this context means any non-convertible security that constitutes indebtedness, whether issued in a registered offering or not.  In calculating whether an issuer exceeds this $1 billion debt limit, the SEC Staff has interpreted all non-convertible debt securities issued by an issuer and any of its consolidated subsidiaries, including any debt securities issued by such issuer’s securitization vehicles, to count against the $1 billion debt limit.  As a result, asset-backed securities that are considered non-recourse debt and consolidated on a parent issuer’s financial statements for accounting purposes should be included when calculating the applicability of the $1 billion debt limit.  However, the SEC Staff does not object if an issuer does not count debt securities issued in an A/B exchange offer, as these debt securities are identical to (other than the fact that they are not restricted securities) and replace those issued in a non-public offering.