On April 27, 2016, the House of Representatives passed the Helping Angels Lead Our Startups Act (H.R. 4498) (the “HALOS Act”), which was first introduced on April 16, 2015. The HALOS Act directs the SEC to amend Regulation D under the Securities Act to make the prohibition against general solicitation or general advertising inapplicable to events with specified sponsors (including angel investor groups not connected to broker-dealers or investment advisers) where:
- presentations or communications are made by or on behalf of an issuer;
- the advertising does not refer to any specific offering of securities by the issuer;
- the sponsor does not engage in certain activities (such as offering investment recommendations or advice to attendees); and
- no specific information regarding a securities offering is communicated (other than that the issuer is in the process of offering or planning to offer securities, including the type and amount of securities being offered).
In addition, the HALOS Act (1) limits the types of fees ‘‘demo day’’ sponsors can collect (cannot receive any compensation for making introductions between investors attending the event and issuers, or for investment negotiations between such parties), (2) limits attendance at “demo days” to only individuals with financial sophistication (members of an angel investor group or accredited investors), and (3) requires that an issuer not be in bankruptcy or receivership, an investment company, or a blank check, blind pool or shell company. H.R. 4498 is available at: https://www.congress.gov/114/bills/hr4498/BILLS-114hr4498rh.pdf
The HALOS Act would incorporate into regulation issues as to which the SEC Staff already has provided guidance either in the form of no-action letter guidance (on demo days, for example) or in Compliance and Disclosure Interpretations.
On April 21, 2016, the Fair Access to Investment Research Act of 2016 (H.R. 5019) (the “Fair Access to Investment Research Act”) was introduced in the House of Representative. The Fair Access to Investment Research Act directs the SEC to amend Rule 139 under the Securities Act to provide that a covered investment fund research report that is published or distributed by a broker-dealer will be deemed, for purposes of Sections 2(a)(10) and 5(c) of the Securities Act, not to constitute an offer for sale or an offer to sell a security that is the subject of an offering pursuant to a registration statement that is effective (even if the broker-dealer is participating or will participate in the registered offering of the covered investment fund’s securities). H.R. 5019 is available at: https://www.congress.gov/114/bills/hr5019/BILLS-114hr5019ih.pdf
On April 20, 2016, FINRA proposed delaying further the implementation date of its new debt research rule (Rule 2422) until July 16, 2016. Rule 2422 was set to take effect on April 22, 2016, after the implementation date was extended from the initial February 22, 2016 deadline. We will continue to monitor developments relating to the implementation date of Rule 2422 on this blog.
The proposed FINRA rule change is available at: http://www.finra.org/sites/default/files/rule_filing_file/SR-FINRA-2016-013.pdf.
While the JOBS Act helped spur larger, venture capital- and private equity-backed companies to consider IPOs, it has not served to revive the smaller IPO market. Perhaps the IPO market downturn will cause market participants to consider the merits of a Regulation A+ offering with an exchange listing. To read this CFO magazine guest article by partner Anna Pinedo, click here: http://ww2.cfo.com/capital-markets/2016/04/will-reg-a-offerings-flourish-in-the-ipo-downturn/.
Even before the JOBS Act had been proposed, policymakers focused on the downturn in the number of initial public offerings (IPOs) speculated that the burdensome disclosure requirements applicable to public companies were deterring private companies from undertaking public offerings. A number of market participants, including even a few then-Commissioners of the Securities and Exchange Commission (the “Commission”), noted that the disclosures contained in IPO prospectuses, as well as those contained in Securities Exchange Act (“Exchange Act”) filings, had consistently become longer in recent years. Then-Commissioner Paredes noted that disclosure overload brought with it the possibility that investors might no longer be able to identify the information that was material to an investment decision amidst pages of generic or repetitive text. In an effort to jumpstart the IPO market and reduce the regulatory burdens for IPO candidates, Title I of the JOBS Act (the “IPO on ramp” provisions) required that the Commission produce a report to Congress examining the requirements of Regulation S-K with a view to modernizing and simplifying the registration process for emerging growth companies (EGCs). The SEC Staff’s 2013 report identified a number of guiding principles that should inform a review of the effectiveness of disclosure requirements. Paramount among these is the notion of promoting investor confidence in the reliability of public filings through enhanced transparency, while encouraging capital formation. These and other objectives have been at the center of the Commission’s “Disclosure Effectiveness” initiative, which has been underway since 2013. Last week, the Commission took another step toward furthering its review of Regulation S-K requirements by voting to issue a Concept Release requesting comment on the business and financial disclosures that public companies provide in their Exchange Act filings. The release specifically does not comment on the other disclosure requirements of Regulation S-K, such as corporate governance or compensation-related items, or the required disclosures for foreign private issuers, business development companies or other types of registrants.
Read our client alert.
On Thursday, April 14th, the House Financial Services Subcommittee on Capital Markets and GSEs held a hearing at 10 am titled, The JOBS Act at Four: Examining its Impact and Proposals to Further Enhance Capital Formation. The hearing considered the following four proposed bills, about which we previously have reported:
- H.R. 4850, the “Micro Offering Safe Harbor Act;”
- H.R. 4852, the “Private Placement Improvement Act of 2016;”
- H.R. 4854, the “Supporting America’s Innovators Act of 2016;” and
- H.R. 4855, the “Fix Crowdfunding Act.
The witnesses included Paul Atkins of Patomak Global Partners; William Beatty, Washington Securities Division Director, on behalf of the North American Securities Administrators Association; Nelson Griggs, Executive Vice President-Global Listing Services, NASDAQ OMX; Raymond Keating, Chief Economist, Small Business & Entrepreneurship Council; and Kevin Laws, Chief Operating Officer, AngelList. Their prepared remarks and other hearing details may be accessed at: http://financialservices.house.gov/calendar/eventsingle.aspx?EventID=400536.
On April 27, 2016, Morrison & Foerster Partner David M. Lynn will serve as Co-Chair of PLI’s “Global Capital Markets & the U.S. Securities Laws 2016” program with Paul M. Dudek – Chief, Office of International Corporate Finance, Division of Corporation Finance, U.S. Securities and Exchange Commission. The Co-Chairs will provide opening remarks.
This program will keep securities lawyers up-to-date on domestic and international regulatory and market developments, bringing together an engaging group of expert practitioners and senior regulators for an in-depth look at how the U.S. securities laws work in the context of a rapidly evolving global regulatory environment.
Morrison & Foerster Partner Marty Dunn will speak on a panel entitled “Hot Topics in Capital Markets.” Topics will include:
- Disclosure developments;
- The latest developments with Rule 144A and Regulation S offering;
- The impact of the JOBS Act; and
- Global offering techniques.
For more information, please click here.
PLI will provide CLE credit.
At this morning’s open meeting, the SEC voted in favor of a concept release on Regulation S-K. In her opening remarks, Chair White noted that the disclosure regime is central to the SEC’s mission of fostering transparency and promoting investor confidence. Regulation S-K has become the key regulation addressing the business and financial information that is required to be included in public company periodic filings. Chair White noted that “optimizing Regulation S-K is crucial.” The concept release is the next step in the Division of Corporation Finance’s disclosure effectiveness initiative. See the concept release here: https://www.sec.gov/rules/concept/2016/33-10064.pdf.
Renaissance Capital released its 1Q16 US IPO Market Review. The healthcare sector accounted for all eight IPOs completed, which raised approximately $700 million. This has been the slowest quarter for IPOs in the US since 2009. Seven of these eight IPOs were VC-backed, raising approximately $600 million—the lowest levels since 4Q in 2012. According to Renaissance, the average first-day return for the IPOs was -0.1%, the worse first-day-performance metric since 4Q in 2008.
IPO filings have also gone down from 48 in last year’s first quarter to 24 filings in 2016—a new post-JOBS Act low. Renaissance reports, however, that there are 118 companies in the IPO pipeline, which aim to raise $30 billion. 42 of these 118 companies have submitted new/updated filings since January 1, 2016, making up the active pipeline. 18 companies in the active pipeline are healthcare companies, which include 11 companies in the biotech sector.
Renaissance remains optimistic in its outlook of the IPO market. In the report, they expect the market to continue cautiously until an “icebreaker” IPO proves to be a catalyst for the market. They elaborate on this outlook in their IPO Icebreakers 2.0 report. IPO recovery, Renaissance states, will rely on stronger/established tech, consumer and healthcare companies going public, as well as the reconciliation of valuation differences between public and private markets. Renaissance also looks toward the 281 private companies that are poised to go public within the next few years to aid with the recovery of the IPO market.
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 that are distinct from those arising in earlier stage and venture transactions. Also, for some companies, the late stage private is a prelude to a strategic transaction or an IPO.
- Timing and process;
- How are the terms of late stage private placements different;
- Diligence, projections and information sharing;
- Providing liquidity to early investors and founders through a secondary component;
- IPO and acquisition ratchets;
- Governance issues;
- Valuation issues;
- The placement agent’s role; and
- Planning for a sale or an IPO in your negotiations.
- Anand Subramanian, Qatalyst Partners
- Barb Izzo, former Managing Director at a Fortune 100 public company, advisor to several successful Silicon Valley tech companies.
- Jeff Thomas, NASDAQ Private Market
- Anna Pinedo, Morrison & Foerster LLP
- Susan Mac Cormac, Morrison & Foerster LLP
SAN FRANCISCO SESSION:
Tuesday, April 26, 2016
Registration/Breakfast: 8:00 AM – 8:30 AM
Session: 8:30 AM – 11:00 AM
Morrison & Foerster LLP
425 Market Street
San Francisco, CA 94105
To register for the San Francisco session on April 26, simply email firstname.lastname@example.org.
CLE credit is pending for California and New York.
PALO ALTO SESSION:
Wednesday, April 27, 2016
Registration/Lunch: 11:30 a.m.
Session: 12:00 p.m. – 2:30 p.m.
Morrison & Foerster LLP
755 Page Mill Road
Palo Alto, CA 94304
To register for the Palo Alto session on April 27, simply email email@example.com.
CLE credit is pending for California and New York.
As privately held companies choose to remain private longer and defer their initial public offerings or other liquidity opportunities, these companies are focused on raising capital in private placements made principally to institutional investors, cross-over funds and strategic investors. Late-stage private placements have almost become a prerequisite to an IPO, or perhaps they are the new IPOs. See our infographic below.