Header graphic for print

MoFo Jumpstarter

For jumpstarts, upstarts and start-ups

Capital Markets and Securities FAQs – 11th Edition

Posted in Resource, Welcome












We can help you keep your head above water.

Sometimes the water is deep and can get choppy. You may find that the 11th edition of our Capital Markets and Securities FAQs can help you get to firm ground.

The FAQs (or Frequently Asked Questions), written and published by MoFo lawyers, provide plain English explanations of the most popular types of financing or capital formation transactions, as well as discussions of securities law issues.

To request a copy of the new FAQ books for you or for your colleagues, e-mail tstarer@mofo.com.

PLI Seminar: Marketplace Lending and Crowdfunding 2016

Posted in Crowdfunding, Events

2015 saw the transformation of marketplace lending from a FinTech fad to a bona fide change in the way consumers and small businesses access credit. As the industry continues to mature and evolve, more changes are on the horizon, including new business practices and regulatory challenges. Crowdfinance has also developed and diversified.

At this year’s PLI Marketplace Lending and Crowdfunding seminar on September 9, 2016, Partner James R. Tanenbaum will speak on a panel entitled “Legal Issues for Equity Crowdfunding Platforms.” Topics will include:

  • Crowdfunding under Title II – Solicitation vs. Non-Solicitation;
  • “Reasonable Steps to Verify”;
  • The preexisting relationship and CitizenVC: Myth vs. Facts;
  • Working with broker-dealers and other intermediaries; and
  • Liquidity and secondary markets including the new FAST Act and Section 4(a)(7).

To register for this conference, or for more information, please click here.

Practice Pointers on Non-GAAP Financial Measures

Posted in C&DI, Disclosure Requirements, SEC News

The use of non-GAAP financial measures by public companies continues to be an area of growing concern and focus of the Securities and Exchange Commission (“SEC”). On June 27, 2016, SEC Chair Mary Jo White, speaking at the International Corporate Governance Network’s Annual Conference in San Francisco, lamented that “[i]n too many cases, the non-GAAP information, which is meant to supplement the GAAP information, has become the key message to investors, crowding out and effectively supplanting the GAAP presentation.” That sentiment has been shared by senior SEC staff and articulated in recent speeches and pronouncements by James Schnurr, the SEC’s Chief Accountant, Wesley R. Bricker, the SEC’s Deputy Chief Accountant and Mark Kronforst, the Chief Accountant in the SEC’s Division of Corporation Finance.

More importantly, on May 17, 2016, the staff of the SEC’s Division of Corporation Finance (the “Staff’) issued updated Compliance and Disclosure Interpretations (the “Updated C&DIs”) on the use of non-GAAP financial measures. The Updated C&DIs build on previous C&DIs issued by the Staff in 2011, 2010 and 2003 and provide further SEC guidance on Regulation G (“Regulation G”) under the Securities Act of 1933, as amended (the “Securities Act”), and Item 10(e) of Regulation S-K under the Securities Act (“Regulation S-K”), the two principal rules enacted by the SEC in 2003 to address the use of non-GAAP financial measures.

Over the past few months, we have noticed an increase in the number of SEC comments to public companies relating to their non-GAAP financial measures disclosures. With the recent SEC focus on this topic and the release of the Updated C&DIs, registrants must be extra careful in their public disclosures and filings to ensure they are complying with Regulation G, Item 10(e) of Regulation S-K and the Updated C&DIs.

In our latest “Practice Pointers on Non-GAAP Financial Measures,” we discuss the nature of non-GAAP financial measures, the disclosure rules governing them, and the Updated C&DIs. We also look at some recent SEC comment letters addressing non-GAAP financial measures and offer some practical guidance for public companies to comply with the updated SEC guidance.

For more information, see our “Practice Pointers on Non-GAAP Financial Measures” available at: https://media2.mofo.com/documents/160816-practice-pointers-on-non-gaap-financial-measures.pdf

The Role of BDCs in the Middle Market

Posted in BDCs

Business development companies (“BDCs”) provide an important and growing alternative source of capital to small and middle market companies that may not otherwise have access to bank financing.  However, BDCs have been facing challenges raising money partly due to the recent decline of institutional ownership resulting from (1) the requirement of the SEC for registered open-end funds to disclose “acquired fund fees and expenses” (“AFFE”) of other funds they invest in (including BDCs) and (2) the limitation under Section 12(d)(1) of the Investment Company Act of 1940 (“Section 12(d)(1)”) of the ability of other registered investment companies (including exchange-traded funds) to acquire more than 3% of a BDC’s total outstanding stock.  In addition, the recent release of the U.S. Department of Labor’s final fiduciary rule (the “DOL final rule”) will likely result in ERISA plans avoiding investments in BDCs, whether directly or indirectly through an index.  The recent decline of institutional ownership in BDCs has negatively impacted the ability of BDCs to provide capital to small and middle market companies, although the increasing use of unitranche financing has created new financing opportunities for middle market companies.

For more information regarding the disclosure of AFFE, see our client alert:
Acquired Fund Fee Expenses and Business Development Companies.”

For more information regarding Section 12(d)(1), see our client alert:
Section 12(d)(1) and Business Development Companies.”

For more information regarding the DOL final rule, see our client alert:
Impact of DOL’s Final Rule on Business Development Companies.”

For more information regarding unitranche financing, see our article:
Developments in Unitranche Financing (2016).”

SEC Revises C&DI on Selling Securityholder Disclosure

Posted in C&DI, Disclosure Requirements, SEC News

On July 26, 2016, the SEC revised Question 140.02 of its Compliance and Disclosure Interpretations (“C&DIs”) on Regulation S-K, pertaining to selling securityholder disclosure.  Revised Question 140.02 states that a registrant must disclose for any selling securityholder that is not a natural person, in addition to any material relationships between the registrant and such selling securityholder, the information required under Item 507 of Regulation S-K regarding any persons (entities or natural persons) who:

  • have control over such selling securityholder; and
  • have had a material relationship with the registrant or any of its predecessors or affiliates within the past three years.

In such case, the registrant must identify each such person and describe the nature of any relationships.  Previously, if a selling securityholder was not a natural person, a registrant only needed to identify in its registration statement the person or persons who had voting or investment control over the registrant’s securities owned by such selling securityholder.  In addition to revising Question 140.02, the SEC concurrently withdrew Question 240.04, which had stated that an issuer with a resale registration statement naming several investment funds as selling shareholders must name the natural persons who have or share voting or investment power for each fund as part of its Item 507 disclosure, even if voting or investment power for any fund is controlled by an investment committee consisting of a large number of individuals who each have a vote to approve the exercise of such power.

Revised Question 140.02 is available at:  https://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm#140.02.

Late-Stage Private Placements: A Life Sciences Sector Survey

Posted in IPO On-Ramp, JOBS Act News, Late Stage Investments, Private Placements, Resource

As privately held companies choose to remain private longer and defer their initial public offerings (IPOs), these companies are increasingly reliant on raising capital in successive private placements. For companies in the life sciences sector, for instance, a late-stage private (or mezzanine) placement made to known and well-regarded life science investors may serve to validate the company’s technology. We have compiled data on late-stage private placements in the life sciences sector.

Read our Life Sciences Sector Survey of Late-Stage Private Placements for more information.

SEC Advisory Committee on Small and Emerging Companies Meets

Posted in Accredited Investor Standard, Advisory Committee on Small and Emerging Companies, Regulation A+, SEC News

On July 19, 2016, the Advisory Committee on Small and Emerging Companies met to discuss the “accredited investor” definition, the Regulation A market, and the Commission’s recent proposal regarding the definition of “small reporting companies.”  In introductory remarks, Chair White shared that the Commission has received 40 comment letters regarding the Commission’s study on the definition of “accredited investor” and hopes to receive further input from the investment community and the Advisory Committee.  The Advisory Committee confirmed its proposed recommendations to the Commission Staff, which include expanding the definition of “accredited investor” to encompass those with professional accreditations (including Series 7, 65, 82 and Chartered Financial Analyst), prior investment experience and, those who pass an accredited investor examination, among other criteria.  Commissioner Stein, in discussing the proposal for modifying the thresholds for SRCs, expressed particular concern about whether the benefits of scaled disclosure will outweigh the potential lower liquidity and high cost of capital that may result from such changes.  By expanding the definition to include companies with up to a $250 million public float, Committee members stressed that companies, including those prospering through successful Regulation A+ offerings, will enjoy a lighter regulatory burden, which should make offerings more attractive.  The SEC has requested comment on this proposal.

Chair White’s remarks are available at https://www.sec.gov/news/statement/opening-remarks-before-the-sec-advisory-committee-on-small-and-e.html

SEC Approves NASDAQ’s Proposed Rule on Golden Leash Arrangements

Posted in SEC News

On July 1, 2016, the SEC approved NASDAQ’s proposed Rule 5250(b)(3), as amended by Amendment No. 2 filed on June 30, 2016 (the “Final Rule”), requiring NASDAQ-listed companies to publicly disclose third-party compensation arrangements for board members and board nominees, which are commonly referred to as “golden leash” arrangements.  The Final Rule requires each NASDAQ-listed company to disclose, by the date the company files its definitive proxy statement for its next annual meeting, the material terms of all agreements and arrangements between any director or nominee, and any person or entity other than the company, relating to compensation or other payment related to that person’s candidacy or service as a director.  The disclosure must be made at least annually until the earlier of the resignation of the director or one year following the termination of the agreement or arrangement, and can be made on a company’s website or in the definitive proxy or information statement (or, if the company does not file proxy or information statements, in its Form 10-K or Form 20-F).  The Final Rule further provides that a company would not need to make disclosure for agreements and arrangements that (1) relate only to reimbursement of expenses in connection with candidacy as a director; (2) existed prior to the nominee’s candidacy (including as an employee of the other person or entity) and the nominee’s relationship with the third party has been publicly disclosed in a definitive proxy or information statement or annual report (such as in the director or nominee’s biography); or (3) have been disclosed under Item 5(b) of Schedule 14A of the Securities Exchange Act of 1934 or Item 5.02(d)(2) of Form 8-K in the current fiscal year.  The Final Rule will be effective on August 1, 2016.  The SEC Release approving the Final Rule is available at: https://www.sec.gov/rules/sro/nasdaq/2016/34-78223.pdf.

For additional information, read our client alert: http://www.mofo.com/~/media/Files/ClientAlert/2016/07/160725SECApprovesNasdaqRule.pdf

IPO Market Update

Posted in IPO On-Ramp

During the second quarter 2016, the IPO market improved with 34 IPOs raising approximately $5.5 billion, according to Renaissance Capital.  While activity in the quarter was significantly higher than the first quarter (there were only eight IPOs in Q1), overall IPO levels are down.  Healthcare continues to represent the most significant sector, accounting for 15 of the 34 IPOs during the quarter.  There were a few tech company IPOs, as well as two REITs, a untility, and four consumer IPOs.  Many of the quarter’s IPO issuers are venture-backed companies.  Private equity backed IPOs have not returned to typical levels.  The depressed levels are attributable to uncertainty regarding interest rates, disparities in valuations between the private and public markets, and Brexit concerns.

Renaissance graph



Renaissance chart

Congressmen Question IPO Fees

Posted in IPO On-Ramp, SEC News

Congressman Himes (CT) and eight other members of Congress wrote to FINRA and to the Securities and Exchange Commission questioning the typical 7% gross spread in U.S. IPOs.  The letter appears to have been prompted by a somewhat dated journal article that discusses fees in European IPOs.  A link to the text of the letter is available here: https://himes.house.gov/press-release/himes-leads-letter-sec-finra-regarding-ipo-gross-spreads.