On September 20, 2017, the staff of the SEC’s Division of Corporation Finance issued revised compliance and disclosure interpretations (“C&DIs”) for purposes reflecting updates for prior amendments to Securities Act Rules 147 and 504, the repeal of Securities Act Rule 505 and non-substantive changes throughout the Rule 147 and Regulation D C&DIs based on the SEC’s current rules.  Highlights of the C&DIs (Questions 257.08, 258.03, 258.05, 258.06 and 541.03) include, among other things, the following guidance:

  • A Securities Act Rule 506 offering will not lose “covered security” status under Securities Act Section 18 if an issuer fails to file a Form D with the SEC.
  • Rule 504 is available to a private fund excluded from the definition of “investment company” by Section 3(c)(1) or 3(c)(7) of the Investment Company Act so long as the offering under Rule 504 is not a “public offering.”
  • The example of the calculation of the aggregate offering price provided in the instruction to paragraph (b)(2) of Rule 504 does not contemplate integration of two or more offerings.
  • Rule 504 is not available to any issuer that is subject to disqualification under Rule 506(d) on or after January 20, 2017. On or after this date, issuers must determine if they are subject to bad actor disqualification any time they are offering or selling securities in reliance on Rule 504.
  • If a family trust that is not deemed to be a separate legal entity has two trustees, only one of which resides in a state where a Rule 147 offering is being made, the issuer may still offer and sell securities to the family trust in the Rule 147 offering.

Questions 258.04, 260.02 and 541.02 and Section 259 were removed.

The revised C&DIs are available here.

The SEC’s Investor Advisory Committee announced its next meeting on October 12, beginning at 9.30 am.  The agenda for the meeting includes remarks from Commissioners; a discussion regarding blockchain and other distributed ledger technology and implications for securities markets; an overview of law school clinic advocacy efforts on behalf of retail investors; a discussion regarding electronic delivery of information to retail investors (which may include a recommendation of the Investor as Purchaser Subcommittee); and subcommittee reports.  The meeting will be webcast on the SEC’s site.

Last week, the Senate passed three bipartisan bills that promote access to capital for small businesses and startups.  The Senate bills, the House corollaries of which originally passed on March 9, 2017, include the following:

  • S. 444, the Supporting America’s Innovators Act (H.R. 1219).  Amends the Investment Company Act of 1940 to exempt from the definition of an “investment company,” for purposes of specified limitations applicable to such a company under the Act, a qualifying venture capital fund that has no more than 250 investors. Specifically, the bill applies to a venture capital fund that has less than $10 million in aggregate capital contributions and uncalled committed capital.
  • S. 416, the Small Business Capital Formation Enhancement Act (H.R. 1312). Amends the Small Business Investment Incentive Act of 1980 with respect to the annual government-business forum of the SEC to review the current status of problems and programs relating to small business capital formation.
  • S. 488, Encouraging Employee Ownership Act (H.R. 1343). Requires the SEC to increase, from $5 million to $10 million the threshold beyond which an issuer is required to provide investors with additional disclosures related to compensatory benefit plans.

In a recent paper, “Squaring Venture Capital Valuations with Reality,” authors Will Gornall and Ilya A. Stebulaev review and consider valuations for a sample of unicorns.  The valuations are on average 49% above fair value largely because such analyses assume that all of a company’s shares have the same price as the most recently issued shares; however, the most recently issued shares have better cash flow and other rights than the prior series of shares.  The study also finds that 53% of unicorns give investors a return guarantee in an IPO, the ability to block an IPO that would not return their investment, and seniority over other series.  Much has been written about unicorns deferring their IPOs because private rounds yield higher valuations, as well as about IPOs coming at a valuation below the immediately preceding private round.  The paper reiterates that these observations gloss over the fundamental contractual differences between common stock and preferred stock, which has a liquidation preference and other rights.

On September 14, 2017, the staff of the SEC’s Division of Corporation Finance (the “Staff”) issued three new compliance and disclosure interpretations (“C&DIs”) addressing Regulation A offerings with a concurrent Exchange Act registration and clarifying when financial statements must be current and when annual and quarterly financial statements must be filed.  Highlights of the C&DIs (Questions 182.21, 182.22 and 182.23) include, among other things, the following guidance:

  • When an issuer registers a class of its securities pursuant to the Exchange Act on a Form 8-A concurrently with (i.e., within 5 days after) the qualification of a post-qualification amendment to a Form 1-A, the financial statements in the post-qualification amendment must be current at the time it is qualified.
  • If an issuer’s qualified Form 1-A did not contain financial statements for the last full fiscal year preceding the fiscal year of effectiveness of the Form 8-A (filed concurrently with the qualification of a post-qualification amendment to the Form 1-A), then the Staff would not object if the issuer files its first annual report on Form 10-K for the fiscal year preceding the fiscal year in which the Form 8-A went effective within 90 calendar days after effectiveness of the Form 8-A.
  • If an issuer’s qualified Form 1-A did not contain financial statements for one or more quarterly periods that followed the most recent annual or semi-annual period for which financial statements were included in the Form 1-A and that were completed prior to effectiveness of the Form 8-A, then the issuer is required to file quarterly reports for these quarterly periods.  The Staff would not object if the issuer files a Form 10-Q for the completed quarterly period, or two Forms 10-Q if financial statements for more than one quarterly period were not included in the Form 1‑A, within 45 days after effectiveness of the Form 8-A.

At today’s meeting of the American Bar Association, the Director of the Division of the SEC’s Corporation Finance provided some comments regarding the Division’s work and priorities.  Mr. Hinman reiterated the Division’s focus on capital formation related matters.  Mr. Hinman echoed concerns voiced by SEC Chair Clayton regarding the decline in the number of U.S. listed companies in recent years.  Mr. Hinman noted that there have been many reasons offered to explain the decline in the number of public companies and the increasing tendency of companies to remain private longer.  For example, he noted that there are many more types of investors in the private markets, private investors are being more innovative in how they provide capital, and there are new ways to provide liquidity for employees of private companies with stock-based compensation.  Mr. Hinman noted that there have been concerns expressed about valuations but that many articles, reports and studies noting the attractive private valuations (compared to IPO valuations) may fail to appropriately reflect the fact that valuations in private rounds relate to preferred stock with liquidation and other preferences, and not to common stock.  In any event, Mr. Hinman noted the Division’s interest in understanding the regulatory burdens placed on companies seeking to undertake IPOs and on public reporting companies.  He noted that a recent DERA report to Congress reiterated the difficulties associated with unwinding the effects of any particular regulatory requirement on capital raising.

Mr. Hinman discussed the Division’s policy of extending the confidential review process to non-EGCs and underscored the Division’s invitation to have companies and their counsel consult with the SEC on financial statement requirements.  He noted that the Staff would be responding very promptly to requests for waivers.

In a wide-ranging discussion, Mr. Hinman addressed a number of other topics, including the resource extraction rule.  He noted that the Congressional Review Act nullified the rule, but that the SEC still has a statutory mandate to act although there is a CRA requirement that the new rule cannot be substantially similar to the rule that was struck down.  The SEC will have to propose a new rule for comment in the near future.  Mr. Hinman also addressed other rules that had been proposed by the SEC, including proposed updates to Industry Guide 7 on mining disclosures, and amendments to the smaller reporting company definition.  While he noted that the there was a final rule under development regarding the SRC definition, there was ongoing discussion related to SOX 404 attestation requirements.  He noted that the SEC was seeking more information on the costs directly attributable to 404 attestation and was considering other tests, including revenue-based and market cap-based tests, as possible alternatives.  Mr. Hinman noted that there were very few comments submitted in response to the request for comment on Industry Guide 3 disclosures.  In response to questions, Mr. Hinman noted that the SEC expected to comply with the FAST Act-mandated timelines regarding the modernization of Regulation S-K and that the SEC’s changes to Regulation S-K are likely to be quite consistent with those discussed in the November 2016 report to Congress.  Again, in response to a question, Mr. Hinman noted that there may be some opportunity for clarifying guidance on integration issues.

On September 13, 2017, the SEC Advisory Committee on Small and Emerging Companies held an open meeting to discuss the Sarbanes-Oxley (“SOX”) auditor attestation requirement, the final report that will be issued prior to the expiration of the Committee’s current charter and whether updates are needed to Securities Act Rule 701.  In its discussion of the SOX auditor attestation requirement, the Committee considered the associated compliance costs and a proposal to change the “smaller reporting company” (“SRC”) and “non-accelerated filer” definitions to a company with either (1) a public float of less than $250 million or annual revenues of less than $100 million.  The SEC’s proposed amendments to the SRC definition from June 2016 did not cover non-accelerated filers.  The Committee then discussed its draft report to the SEC, which emphasized a number of recommendations it has made in the past, including the following:

  • Providing regulatory certainty for finders, private placement brokers and platforms that are not registered as broker-dealers and are involved in primary and secondary offerings of unregistered securities in order to help smaller businesses raise capital.
  • Supporting an expansion of the “accredited investor” definition to take into account measures of sophistication, regardless of income or net worth, thereby expanding rather than contracting the pool of accredited investors.
  • Extending to SRCs the same accommodations made to EGCs with respect to disclosure requirements, and finalizing the proposed amendments to increase the financial thresholds in the SRC definition and revising the definition of “accelerated filer” to include companies with a public float of $250 million or more, but less than $700 million.
  • Amending Item 407(c)(2) of Regulation S-K to require issuers to describe, in addition to their policy with respect to diversity, if any, the extent to which their boards are in fact diverse, by including disclosure regarding race, gender and ethnicity of each board member.
  • Preempting state regulation of secondary trading in securities of Tier 2 Regulation A issuers that are current in their ongoing reports in order to improve secondary market liquidity.
  • Allowing smaller exchange-listed companies to voluntary choose trading increments or tick-sizes greater than the one penny in order to help small and mid-cap companies raise capital.

The Committee then turned to a discussion of various proposed changes to Securities Act Rule 701, including, among others, removing the requirement that consultants be “natural persons,” removing the $5 million aggregate limitation (the “hard cap limit”), clarifying that material amendments to any security previously issued under Rule 701 does not result in a new grant or sale, clarifying the application of Rule 701 to RSUs, clarifying that expanded disclosure is only required to be provided for sales that occur after the hard cap limit is exceeded, and clarifying the timing and delivery requirements for expanded disclosure.

A copy of the Committee’s draft report is available here.

Monday,  September 25, 2017
11:00 a.m. – 12:30 p.m. EDT
4:00 p.m. – 5:30 p.m. BST

The cross-border private placement market has continued to grow, providing issuers with an opportunity to raise capital from US and European financial institutions. This market, which has seen incredibly robust activity this past year, has continued to attract issuers across a myriad of industries and from multiple worldwide jurisdictions. These issuers seek to, among other things, diversify their funding sources or supplement their bank lending, lengthen their existing debt profile, refinance acquisition debt or finance certain single-asset projects. In this webinar, speakers will discuss:

  • The global private placement market and recent trends;
  • Market participants;
  • Documentation requirements for traditional and structured transactions;
  • Financial covenants, “MFLs” and model form provisions;
  • New Issuers using the market (social housing trusts, universities, investment trusts, etc);
  • Marketing process with Agented and “direct” Private Placements; and
  • Ratings and the NAIC.

Speakers:

  • Scott Ashton, Partner, Morrison & Foerster
  • Brian Bates, Partner, Morrison & Foerster
  • Tarun Sakhrani, Director, Barclays

CLE credit is pending for California and New York.

For more information, or to register, please click here.

On September 5, 2017, the U.S. House of Representatives approved H.R. 2864 (Improving Access to Capital Act) by a vote of 403-3.  The bill, which was sponsored by Rep. Krysten Sinema and previously amended by the Committee on House Financial Services on September 5, 2017, directs the SEC to amend Regulation A to permit Exchange Act reporting companies who otherwise meet all of the requirements under Regulation A to issue securities under Regulation A.  Currently, Regulation A only applies to non-reporting companies.  Allowing reporting companies to use Regulation A would provide them with a cheaper and faster way to raise capital due to the shorter SEC review process, and in the case of Tier 2 offerings, exemption from state blue sky review.  The expansion of Regulation A to include reporting companies might also increase the quality of future Regulation A issuers, broaden the investor base for Regulation A offerings and ultimately enhance liquidity in the secondary market.  In addition, the ability to use Regulation A could prove useful to reporting companies that do not qualify to use Form S-3 for primary offerings.

The full text of the bill can be found here.

On August 25, 2016, the SEC’s Division of Corporation Finance (“Corp Fin”) updated its Financial Reporting Manual by making the following changes:

  • Adding a new section describing communications with Corp Fin’s Office of Chief Accountant (“CF-OCA”).
  • Clarifying that questions regarding the application of guidance on abbreviated financial statements to a predecessor entity should be directed to the CF-OCA (Section 2065).
  • Making corresponding changes in light of the Compliance and Disclosure Interpretations (“C&DIs”) relating to the omission of financial information from draft and filed registration statements (Sections 10220.1 and 10220.5).
    • The updates to Section 10220.1 refer to recently issued Securities Act C&DI Question 101.4 and note that Securities Act C&DI Question 101.05 addresses similar matters for non-EGC issuers.  Question 101.04 clarifies that an EGC may omit from its draft registration statements interim financial information that it reasonably believes it will not be required to present separately at the time of the contemplated offering.  Question 101.05 clarifies that an issuer that is not an EGC may omit from its draft registration statements interim and annual financial information that it reasonably believes it will not be required to present separately at the time it files its registration statement publicly.  For more information regarding Questions 101.01 and 101.05, see our prior blog post.
    • The updates in Section 10220.5 refer to FAST Act C&DI Question 2, which clarifies that an EGC may omit financial statements of other entities from its filing or submission if it reasonably believes that those financial statements will not be required at the time of the offering.

The updates to the Financial Reporting Manual are available here.