Thursday, July 12, 2016
11:00 a.m. – 12:30 p.m. EDT
Volatile capital markets and the rapidly changing financial landscape make it important for issuers to recognize changes quickly and adjust their financing strategies accordingly. For example, for an issuer that contemplated an IPO or is in the IPO queue, it is important to become familiar with other financing alternatives, such as venture debt or late-stage or mezzanine debt, as well as institutional equity private placements. Each of these markets is quite different. Familiarity with investor expectations and documentation requirements is essential in order to put your company in the best position to make crisp decisions. For issuers that already have their securities listed on a non-U.S. securities exchange, which may offer limited liquidity, it may be time to consider undertaking a U.S. IPO in order to establish a more liquid market for their securities. Already public companies considering their next capital raise also must be nimble–a PIPE transaction may be an attractive (and available) financing alternative. During this session, the speakers will discuss:
- Current market conditions;
- Financing alternatives for pre-IPO companies;
- The market for venture debt;
- The late-stage (or “cross-over”) private placement market;
- Options to consider on the way to an IPO;
- The ReIPO™;
- Financing alternatives for recently public companies; and
- PIPE transactions and other financing alternatives.
CLE credit is pending for California and New York.
For more information, or to register, please click here.
The SEC has not explicitly defined the terms “general solicitation” or “general advertising” in Regulation D under the Securities Act of 1933. However, Rule 502(c) of Regulation D lists several examples of general solicitation and general advertising, including (1) any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio and (2) any seminar or meetings whose attendees have been invited by any general solicitation or general advertising. These are communications that are not targeted or directed to a specific individual or to a particular audience, but rather broad-based communications that may reach potential investors not known to the issuer or its financial intermediary. Over time, the SEC Staff has provided guidance, mainly through no-action letters and more recently through Compliance and Disclosure Interpretations, regarding the types of communications that would be viewed as a “general solicitation.” In our “Practice Pointers on Navigating the Securities Act’s Prohibition on General Solicitation and General Advertising,” we summarize the SEC Staff’s guidance in this area for issuers, broker-dealers and other third-party participants.
The practice pointers are available at: http://www.mofo.com/~/media/Files/Articles/2016/06/160600PracticePointersGeneralSolicitation.pdf
On June 14, 2016, the D.C. Circuit Court of Appeals in Lindeen v. SEC upheld Regulation A+, including the SEC’s definition of “qualified purchaser.” The decision comes after petitioners William F. Gavin and Monica J. Lindeen, the chief securities regulators for Massachusetts and Montana, respectively, petitioned the court to vacate the SEC’s promulgation of Regulation A+, arguing that it failed the statutory construction test established by the U.S. Supreme Court in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc. Regulation A+ defines “qualified purchaser” as any person to whom securities are offered or sold pursuant to a Tier 2 offering, thus preempting all state registration and qualifications for Tier 2 securities. However, Tier 2 offerings are still subject to an investment limit of no more than 10% of the greater of the investor’s annual income and net worth (for non-accredited, non-natural persons, the 10% limit is based on annual revenues and net assets), although the 10% investment limitation is not applicable to accredited investors or to offerings of listed securities.
The petitioners argued that (1) the commonly understood definition of “qualified,” which modifies “purchaser,” means that the SEC must in some way reduce the universe of “purchasers” from “any purchaser;” (2) the SEC’s definition is not consistent with the public interest and the protection of investors; (3) Regulation A+ renders the word “qualified” superfluous and otherwise conflicts with the structure of the Securities Act of 1933; (4) federal securities law has always linked the term “qualified” with a purchaser’s wealth or sophistication; and (5) the legislative history of the National Securities Markets Improvement Act (NSMIA) demonstrates that Congress wanted the SEC to limit a “qualified purchaser” to one with a certain level of wealth or sophistication. The court denied the petition on the grounds that Congress explicitly authorized the SEC to define qualified purchaser and to adopt different definitions for different types of securities. The court noted that the SEC acted within its grant of authority in determining that any Tier 2 securities purchaser would be qualified so long as it complied with the 10% investment limitation. The court held that the SEC appropriately balanced the goals of mitigating regulatory burdens for certain small offerings and adequately protecting investors in the securities markets. The court also noted that Tier 2 offerings provided sufficient protection, even in the absence of substantive state law review. Furthermore, both the federal and state antifraud statutes still apply to such offerings and the 10% investment limitation weighed in favor of reducing the need for additional state securities law review.
The court’s decision is available at: https://www.cadc.uscourts.gov/internet/opinions.nsf/2A89FF33F1B350E185257FD200505A56/$file/15-1149-1619182.pdf
The House Financial Services Committee held a markup session on June 15, 2016 to discuss a number of bills, including many relating to capital formation and the lessening of regulatory burdens for smaller reporting companies. On June 16, the Committee reconvened and approved twelve bills, including:
- H.R. 4850, Micro Offering Safe Harbor Act. This bill amends the Securities Act of 1933 to exempt certain micro-offerings from the Act’s registration requirements. To qualify for the exemption (1) each purchaser has a substantive pre-existing relationship with an owner; (2) there are 35 or fewer purchasers; and (3) the amount does not exceed $500,000. H.R. 4850 passed the committee 34-25.
- H.R. 4852, Private Placement Improvement Act of 2016. This bill directs the SEC to revise the filing requirements of Regulation D (which provides exemptions from securities registration requirements) to require an issuer that offers or sells securities in reliance upon a certain exemption from registration to file, no earlier than the date of first sale of such securities, a single notice of sales containing the information required by Form D for each new offering of securities. H.R. 4852 passed the committee 33-26.
- H.R. 4854, Supporting America’s Innovators Act of 2016. The Investment Company Act limits the number of investors in an investment company fund to 100 for the fund to be exempt from registration with the SEC. This bill raises the limit on the number of individuals, from 100 to 250, who can invest in certain “qualified venture capital funds” before those funds must register as “investment companies” under the Investment Company Act of 1940. H.R. 4854 passed the committee 57-2.
- H.R. 4855, Fix Crowdfunding Act. This bill would allow small businesses to benefit from Title III of the JOBS Act, which allows for equity crowdfunding. It proposes to increase financial thresholds in the Federal securities laws so as not to dissuade small businesses from using crowdfunding as a way to raise capital, and allows single purpose funds to utilize crowdfunding. H.R. 4855 passed the committee 57-2.
In a statement, Financial Services Committee Chairman Jeb Hensarling asserted the committee “…will remove duplicative burdens, reduce costs and support smart regulation that protects investors and maintains orderly and efficient markets – because this is key to economic growth.”
On June 28, 2016, Morrison & Foerster LLP, along with the Milken Institute, the U.S. Small Business Administration (SBA) and the Small Business Investment Alliance (SBIA), will be hosting the 2016 BDCs & Small Business Capital Formation Forum in Washington, DC. The forum will focus on best practices and key issues for business development companies (“BDCs”) and small business investment companies (“SBICs”) and will include a CEO/investor roundtable discussion, a discussion of the role of BDCs and SBICs, a discussion of BDC regulatory items, and a discussion of small business capital formation.
BDCs were created in 1980 in order to enhance capital formation for small- and medium-sized companies. BDCs also often establish wholly-owned subsidiaries which are licensed by the SBA to operate as SBICs and issue SBA-guaranteed debentures. Since the early 1980s, the number of BDCs has grown significantly. This growth was accelerated following the financial crisis of 2008, when BDCs were able to address the needs of small- and medium-sized businesses that did not have access to capital. Currently, there are over 80 BDCs and BDC loan balances have more than tripled since 2008. As of March 31, 2016, BDC aggregate loan commitments in the United States were over $82 billion and the top sectors included the following: (1) services ($24 billion), (2) manufacturing ($17 billion), (3) finance, insurance and real estate ($13 billion), (4) mining ($6 billion), and (5) transport, communication and electric/gas ($6 billion). (Source: Testimony by Michael J. Arougheti, Co-Chairman of the Board of Directors, Ares Capital Corporation, on behalf of the SBIA, at Hearing on “Improving Communities and Business Access to Capital and Economic Development,” Senate Banking Committee, Subcommittee on Securities, Insurance and Investment, May 19, 2016)
The program agenda for the forum is available here.
On June 7, in a speech to the Economic Club of New York, House Financial Services Committee Chairman Jeb Hensarling announced the Republican plan to replace the Dodd-Frank Act. The Financial Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs (CHOICE) Act is set to be introduced as legislation later this month. The Financial CHOICE Act proposes to end taxpayer-funded bailouts of large financial institutions; relieve banks that elect to be strongly capitalized from, what Hensarling called, “growth-strangling regulation”; impose tougher penalties on those who commit fraud; and hold Washington regulators more accountable.
An executive summary, made available on the House Financial Services Committee webpage, outlines the various components of the Financial CHOICE Act. Included in the proposal for the Financial CHOICE Act is the incorporation of various pending legislation focused on reducing regulatory burden on capital formation for small businesses. These bills would include: H.R. 1090 (Retail Investor Protection Act), H.R. 4168 (Small Business Capital Formation Enhancement Act), H.R. 4498 (Helping Angels Lead Our Startups “HALOS” Act) and H.R. 5019 (Fair Access to Investment Research Act).
In his speech, Hensarling called the Financial CHOICE Act “the foundation of the Republican plan to reignite growth…with real reforms that work.” We will continue to monitor developments of the Financial CHOICE Act on this blog.
On June 1, 2016, the SEC issued an interim final rule to implement Section 72001 of the Fixing America’s Surface Transportation (FAST) Act, which requires the SEC to issue regulations to permit issuers to submit a summary page on Form 10–K, but only if each item on such summary page includes a cross-reference (by electronic link or otherwise) to the material contained in Form 10–K to which such item relates. The interim final rule amends Part IV of Form 10-K to add new Item 16, which will expressly allow a registrant, at its option, to include a summary in the Form 10-K. New Item 16 requires that each summary topic be hyperlinked to the related, more detailed disclosure item in the Form 10-K. The interim final rule does not prescribe the length of the summary (other than to state that the summary shall be brief), specify the Form 10-K disclosure items that should be covered by the summary, or dictate where the summary must appear in the Form 10-K. The SEC indicated that the amendment is principles-based and affords a registrant choosing to include a summary the flexibility to decide which items to summarize, as long as the information is presented fairly and accurately.
Registrants electing to prepare a Form 10-K summary that discusses information that is incorporated by reference into the Form 10-K and for which an exhibit is filed with the form must include a hyperlink from the summary to the discussion in the accompanying exhibit. In addition, a registrant choosing to include a summary will only be able to summarize information that is included in the Form 10-K at the time the form is filed, and will not have to file a Form 10-K amendment to summarize Part III information that is incorporated by reference from a proxy or information statement that will be filed after the date that the registrant files its Form 10-K. In that case, however, the registrant must indicate that the summary omits the Part III information.
The SEC also requested comments on the interim final rule, including the estimated number or percentage of registrants that are likely to include a summary in their Form 10-K.
The interim final rule is available at: https://www.sec.gov/rules/interim/2016/34-77969.pdf
The SEC recently adopted rules implementing Title V and Title VI of the Jumpstart Our Business Startups Act (the “JOBS Act”) and Title LXXXV of the Fixing America’s Surface Transportation Act (the “FAST Act”). Title V and Title VI of the JOBS Act, in relevant part, amended Sections 12(g) and 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) to adjust the thresholds for registration, termination of registration and suspension of reporting, while Title LXXXV of the FAST Act remedied the omission from the JOBS Act of savings and loan holding companies in the revised thresholds for registration, termination of registration and suspension of reporting. The SEC’s implementing rules under the JOBS Act were originally proposed in December 2014, and the SEC received 11 comments letters that generally supported the proposals. With the adoption of these rule changes, the SEC has completed all rulemaking mandated by the JOBS Act. The amended rules reflect the new, higher registration, termination of registration and suspension of reporting thresholds. The amendments also establish a non-exclusive safe harbor for issuers when determining if securities held by persons who received them pursuant to an employee compensation plan in transactions exempted from the registration requirements of Section 5 of the Securities Act may be excluded when determining whether they are required to register under Exchange Act Section 12(g)(1).
Read our client alert.
On May 24, 2016, the Biotechnology Innovation Organization (BIO) published a study, “Emerging Therapeutic Company Investment and Deal Trends,” which collects ten years of data to identify trends affecting “emerging therapeutic companies” (“ETCs”). ETCs are companies that are (1) developing therapeutics with a lead drug in research and development (“R&D”), or (2) have a drug on the market, but have less than $1 billion in sales at the time of the transaction.
The study focuses on venture capital, initial public offerings (“IPOs”), follow-on public offerings, licensing, and acquisitions.
Venture Capital Trends
Venture funding reached a record high of $6.8 billion during 2015, which included the largest biotech venture capital deal on record, raising $446 million. The study also found that Series A financing nearly doubled from 2014 to 2015. The study found that nearly 70% of venture capital funding in 2015 went to early-stage companies and nearly $2 billion was invested in oncology companies. Although oncology companies were successful in obtaining venture capital funding, the study found that funding was inconsistent across disease areas, as companies in certain disease areas have not rebounded well since the financial crisis.
The study found that IPOs for ETCs were strong during 2015, with 39 companies going public. The study found that a positive effect of the JOBS Act has been the increase in the average amount raised per IPO for R&D stage companies from $68 million in 2012 to $90 million in 2015. Another trend that the study identified was that the clinical development stage that ETCs are in at the time of their IPOs has shifted in recent years. In the years approaching the financial crisis, there were no Preclinical or Phase I company IPOs in the United States, yet during 2012 to 2015, there were 34 such IPOs. According to the study, this shift in IPO activity may represent an increased preference for investing in early-stage companies. When considering the disease type for companies that have obtained IPO financing, the study noted that neurology companies raised $1.05 billion, the highest amount of capital across disease type.
The study also found that: (1) during 2014 to 2015, follow-on public offerings by ETCs increased from $8.9 billion to $16.1 billion; and (2) licensing proved to be a critical aspect of capital raising (reaching a record high of $7.1 billion) and an alternative investment strategy to acquisitions, as 38% of all ETCs partnered during 2015.
A copy of the study is available at: https://www.bio.org/sites/default/files/BIO_Emerging_Therapeutic_Company_Report_2006_2015_Final.pdf
Yesterday, May 24, 2016, the Staff of the Securities and Exchange Commission published a Small Entity Compliance Guide that is intended to help issuers navigate the changes to the Exchange Act Section 12(g) threshold in light of the JOBS Act and the FAST Act and the adoption by the Commission on May 3, 2016 of rules implementing the mandates of those two acts.
The Small Entity Compliance Guide provides an overview of the new Section 12(g) thresholds triggering registration, the new “held of record” definition, and the rules related to termination of registration.
Here is a link to the guide: https://www.sec.gov/info/smallbus/secg/jobs-act-section-12g-small-business-compliance-guide.htm.