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/.
The Securities and Exchange Commission Advisory Committee on Small and Emerging Companies will hold an open, public telephone meeting on Wednesday, July 15, 2015, beginning at 1:00 p.m. EDT. The meeting will be webcast on the SEC’s site.
The SEC has provided guidance to issuers on Regulation A+ offerings. You can access the SEC’s Small Entity Compliance Guide here: http://www.sec.gov/info/smallbus/secg/regulation-a-amendments-secg.shtml.
In addition, the SEC Staff has published a number of Compliance and Disclosure Interpretations, which may be accessed here: http://www.sec.gov/divisions/corpfin/guidance/securitiesactrules-interps.htm#182.01.
For convenience, we have reprinted below the C&DIs.
Section 182. Rules 251 to 263
Question: Where an issuer elects to non-publicly submit a draft offering statement for staff review pursuant to Rule 252(d) of Regulation A before publicly filing its Form 1-A, Item 15 (Additional Exhibits) of Part III (Exhibits) to Form 1-A requires issuers to file as an exhibit to the publicly-filed offering statement: (1) any non-public, draft offering statement previously submitted pursuant to Rule 252(d), and (2) any related, non-public correspondence submitted by or on behalf of the issuers. Would an issuer that elects to make the non-public, draft offering statements public on the EDGARLink submissions page of EDGAR (see Chapter 7 (Preparing and Transmitting EDGARLink Online Submissions) of Volume II of the EDGAR Filer Manual, available at: http://www.sec.gov/info/edgar/edmanuals.htm) at the time it publicly files its Form 1-A also be required to refile such material as an exhibit pursuant to Item 15 of Part III?
Answer: No. If, at the time it first files the offering statement publicly, the issuer makes public on the EDGARLink submissions page all prior non-public, draft offering statements, the offering statements will no longer be non-public and the issuer will not be required to file them as exhibits. The issuer is still required to file as an exhibit any related, non-public correspondence submitted by or on behalf of the issuer regarding non-public draft offering statements submitted pursuant to Rule 252(d). [June 23, 2015]
Question: If an issuer elects to submit a draft offering statement for non-public staff review before public filing pursuant to Rule 252(d), and, as part of that process, submits correspondence relating to its offering statement, what must it do if it wants to protect portions of that correspondence from public release?
Answer: During the review of the draft offering statement, the issuer would request confidential treatment of any information in the related correspondence pursuant to Rule 83, in the same manner it would during a typical review of a registered offering. It would submit a redacted copy of the correspondence via EDGAR, with the appropriate legend indicating that it was being submitted pursuant to a confidential treatment request under Rule 83. At the same time, it would submit an unredacted paper version to the SEC, in the manner required by that rule. When the issuer makes its public filing of the offering statement, it will be required to file as an exhibit to the electronically filed offering statement any previously submitted non-public correspondence related to the non-public review. Since that correspondence will be information required to be filed with the SEC, the issuer must redact the confidential information from the filed exhibit, include the required legends and redaction markings, and submit in paper format to the SEC’s Office of the Secretary an application for confidential treatment of the redacted information under Rule 406. The staff will consider and act on that application in the same manner it would with any other application under Rule 406 for other types of filed exhibits. As with registered offerings, the review staff will act on Rule 406 confidential treatment applications before the offering statement is qualified. For the requirements a registrant must satisfy when requesting confidential treatment, see Division of Corporation Finance Staff Legal Bulletin No. 1 (with Addendum). [June 23, 2015]
Question: Would a company with headquarters that are located within the United States or Canada, but whose business primarily involves managing operations that are located outside those countries be considered to have its “principal place of business” within the United States or Canada for purposes of determining issuer eligibility under Regulation A?
Answer: Yes, an issuer will be considered to have its “principal place of business” in the United States or Canada for purposes of determining issuer eligibility under Rule 251(b) of Regulation A if its officers, partners, or managers primarily direct, control and coordinate the issuer’s activities from the United States or Canada. [June 23, 2015]
Question: Is a company that was previously required to file reports with the Commission under Section 15(d) of the Exchange Act, but that has since suspended its Exchange Act reporting obligation, an eligible issuer under Rule 251(b)(2) of Regulation A?
Answer: Yes. A company that has suspended its Exchange Act reporting obligation by satisfying the statutory provisions for suspension in Section 15(d) of the Exchange Act or the requirements of Exchange Act Rule 12h-3 is not considered to be subject to Section 13 or 15(d) of the Exchange Act for purposes of Rule 251(b)(2) of Regulation A. [June 23, 2015]
Question: Is a voluntary filer under the Exchange Act an eligible issuer for purposes of Rule 251(b)(2) of Regulation A?
Answer: Yes. A voluntary filer is not subject to Exchange Act Section 13 or 15(d) because it is not obligated to file Exchange Act reports pursuant to either of those provisions. [June 23, 2015]
Question: Is a private wholly-owned subsidiary of an Exchange Act reporting company parent eligible to sell securities pursuant to Regulation A?
Answer: Yes, although the Exchange Act reporting company parent could not be a guarantor or co-issuer of the securities of the private wholly-owned subsidiary. [June 23, 2015]
Question: Can Regulation A be relied upon by an issuer for business combination transactions, such as a merger or acquisition?
Answer: Yes. The final rules do not limit the availability of Regulation A for business combination transactions, but, as the Commission (SEC Rel. No. 33-9497) indicated, Regulation A would not be available for business acquisition shelf transactions, which are typically conducted on a delayed basis. [June 23, 2015]
Question: May a recently created entity choose to provide a balance sheet as of its inception date?
Answer: Yes, as long as the inception date is within nine months before the date of filing or qualification and the date of filing or qualification is not more than three months after the entity reached its first annual balance sheet date. The date of the most recent balance sheet determines which fiscal years, or period since existence for recently created entities, the statements of comprehensive income, cash flows and changes in stockholders’ equity must cover. When the balance sheet is dated as of inception the statements of comprehensive income, cash flows and changes in stockholders’ equity will not be applicable. [June 23, 2015]
Question: Can an issuer solicit interest (or “test the waters”) in a Regulation A offering on a platform that limits the number of characters or amount of text that can be included, thereby preventing the inclusion in such communication of the information required by Rule 255?
Answer: Yes. The staff will not object to the use of an active hyperlink to satisfy the requirements of Rule 255 in the following limited circumstances:
- The electronic communication is distributed through a platform that has technological limitations on the number of characters or amount of text that may be included in the communication;
- Including the required statements in their entirety, together with the other information, would cause the communication to exceed the limit on the number of characters or amount of text; and
- The communication contains an active hyperlink to the required statements that otherwise satisfy Rule 255 and, where possible, prominently conveys, through introductory language or otherwise, that important or required information is provided through the hyperlink.
Where an electronic communication is capable of including the entirety of the required statements, along with the other information, without exceeding the applicable limit on number of characters or amount of text, the use of a hyperlink to the required statements would be inappropriate. [June 23, 2015]
Question: Are state securities law registration and qualification requirements preempted with respect to resales of securities purchased in a Tier 2 offering?
Answer: No. State securities law registration and qualification requirements are only preempted with respect to primary offerings of securities by the issuer or secondary offerings by selling securityholders that are qualified pursuant to Regulation A and offered or sold to qualified purchasers pursuant to a Tier 2 offering. Resales of securities purchased in a Tier 2 offering must be registered, or offered or sold pursuant to an exemption from registration, with state securities regulators. [June 23, 2015]
Question: When is an issuer required to engage the services of a registered transfer agent before being able to avail itself of the conditional exemption from mandatory registration under Section 12(g) of the Exchange Act described in Exchange Act Rule 12g5-1(a)(7)?
Answer: An issuer that seeks to rely on the conditional exemption from mandatory registration under Section 12(g) of the Exchange Act must at the time of reliance on the conditional exemption satisfy the requirements of Rule 12g5-1(a)(7). [June 23, 2015]