The SEC recently provided some data on registered offerings by foreign issuers, noting that
- In 2013, there were approximately 50 new foreign registrants;
- Since the passage of the JOBS Act, there have been over 100 foreign private issuers making confidential submissions to the SEC;
- Over half of these submissions resulted in public filings of registration statements;
- Approximately 50% of the draft submissions since the JOBS Act was adopted include financial statements prepared in accordance with IFRS.
Recently, Craig Lewis, the Chief Economist and Director of the SEC’s Division of Economic and Risk Analysis, commented (see speech at: http://www.sec.gov/News/Speech/Detail/Speech/1370541497283#.U08MNVTD_zY ) on the economic impact of various JOBS Act reforms, or the effects on “efficiency, competition, and capital formation” (ECCF).
In his remarks, Lewis notes that smaller companies may face informational frictions that may affect negatively their ability to raise capital. Of course, smaller companies now reach investors beyond those with whom they have a pre-existing relationship through use of general solicitation in certain Rule 506 offerings or by using matchmaking services that may rely on general solicitation to reach investors. In the future, smaller companies might be able to rely on Regulation A+ offerings to cast a wider net and conduct offerings that use general solicitation. Presumably, these approaches lessen the informational frictions. However, in practice, at conferences, presenters frequently note that companies that “need” to use general solicitation may be companies that are not appealing to venture or private equity funds. This would make it sound like using general solicitation is a last resort rather than a desired approach and suggests that there is some stigma, at least within certain communities, associated with communicating more broadly. It would be an unfortunate result to assume that companies are relegated to using general solicitation when they have run out of options or are unable to attract experienced investors. These perceptions in fact may counter all the rational conclusions that may be reached regarding lower search costs and lessened informational frictions.
Many companies may engage a placement agent or financial intermediary that has close relationships with institutional investors, but the companies may still find it appealing to engage in communications that may be construed as “general solicitation” in order to raise awareness about their businesses. Funds may choose to engage in a broader range of communications even if they continue to seek investments principally from high net worth individuals, family offices and institutional investors.
On April 10, 2014, the Division of Corporation Finance of the Securities and Exchange Commission (the “SEC”) issued one revised and two new compliance and disclosure interpretations (“C&DIs”) regarding crowdfunding and Rule 147 under the Securities Act of 1933, as amended (the “Securities Act”), which are summarized below. Section 3(a)(11) of the Securities Act (“Section 3(a)(11)”) provides an exemption from the registration requirements of the Securities Act for any security which is a part of an issue offered and sold only to persons who reside in a single state or territory, where the issuer of such security is a person resident and doing business within or, if a corporation, incorporated by and doing business within, such state or territory. Rule 147 under the Securities Act (“Rule 147”) provides a safe harbor for offerings conducted pursuant to Section 3(a)(11), which requires that the issuer must be a resident of, and doing business in, the same state in which all offers and sales are made, and the offering may not be offered or sold to non-residents.
Rule 147 does not prohibit general advertising or general solicitation (Question 141.03)
While this revised CD&I did not change substantively, the SEC Staff reiterated that Rule 147 does not prohibit general advertising or general solicitation. However, any general advertising or general solicitation must be conducted in a manner consistent with the requirement that offers made in reliance on the intrastate exemption under Section 3(a)(11) and Rule 147 be made only to persons resident in the state or territory of which the issuer is a resident.
Use of a third-party internet portal to promote an intrastate offering does not preclude reliance on Rule 147 (Question 141.04)
This CD&I notes that an issuer claiming an exemption under Rule 147 may use a third-party internet portal to promote an offering to residents of a single state in accordance with a state statute or regulation intended to enable crowdfunding within that state if the portal implements measures to ensure that offers of securities are made only to persons resident in the relevant state or territory. These measures must include, at a minimum:
- disclaimers and restrictive legends which make clear that the offering is limited to residents of the relevant state under applicable law; and
- limiting access to information about specific investment opportunities to persons who confirm they are residents of the relevant state (examples of an acceptable confirmation are a representation as to residence or in-state residence information, such as a zip code or residence address).
An issuer’s use of its own website or social media presence to offer securities would likely involve offers to residents outside the state, making the offering inconsistent with Rule 147 (Question 141.05)
This C&DI notes that issuers generally use their websites and social media presence to communicate in a broad and indiscriminate manner. Therefore, although the specific facts and circumstances would determine whether a particular communication is an offer of securities, using an established internet presence to issue information about specific investment opportunities would likely involve offers to residents outside the state in which the issuer does business.
On April 8, Commissioner Aguilar and Commissioner Stein spoke at the North American Securities Administrators Association conference.
Commissioner Aguilar noted in his remarks that “Regulation A-plus remains a work in progress, and no one can say what the ultimate outcome will be.” The Commissioner went on to note that a workable exemption would “attract issuers that might otherwise choose more opaque exemptions for their capital-raising needs.” Indeed, in Rule 506 offerings to accredited investors, there are no disclosure requirements, no investment limit, and no ongoing reporting obligations. The proposed Reg A+ framework provides enhanced investor protections that should mitigate any concerns; however, the debate regarding pre-emption continues.
Even with coordinated review, an issuer faced with a range of capital-raising alternatives, will not choose a Tier 2 offering if state review is necessary. Tier 2 offerings are unlikely to be “local” in nature. Statements of Policy applied by state regulators have not been updated in a meaningful way and are inconsistent with practices in “public” offerings.
A Tier 2 Reg A+ offering will have more in common with a public offering than with a private placement. Many states require that each investor in their state sign a subscription agreement. Of course, in a registered offering that clears and settles through DTC and is sold by a broker-dealer, individual subscription agreements generally are not used. A recent state review triggered comments from examiners inquiring about the rules of DTC, and requested more information about Cede & Co, DTC’s nominee, as well as about the “officers, directors and purpose/role of Cede & Co.” Presumably, Tier 2 Reg A+ offerings will clear through DTC. These are the just examples of speed bumps that do little to add to investor protection.
Having just marked the second anniversary of the JOBS Act, it seems that more regulatory change may be under consideration. We previously reported on various bills that were introduced in the House of Representatives to address parts of the existing JOBS Act framework. This week, the House Financial Services Committee will hold a hearing on a group of proposed bills that would take things one step farther by:
- Amending the definition of “non-accelerated filer”;
- Simplify the annual report on Form 10-K through the addition of a “summary” page;
- Mandate that the SEC simplify and modernize Regulation S-K’s disclosure requirements;
- Increase the dollar threshold for issuances under Rule 701;
- Revise the definition of “WKSI” so that more issuers benefit from the flexibility permitted to these issuers;
- Shorten the Rule 144 holding period;
- Amend Form S-1 to permit smaller reporting companies to forward incorporate; and
- Amend Form S-3 for smaller reporting companies to eliminate the current one-third restriction on primary offerings.
More on these proposed bills is available here: http://financialservices.house.gov/calendar/eventsingle.aspx?EventID=375104.
The Division of Investment Management provided additional guidance for advisers using social media. Read our recent alert http://www.mofo.com/files/Uploads/Images/140404-Use-of-Social-Media-by-Investment-Advisers.pdf.
Despite a recent upsurge in U.S. IPO activity, including the high-profile Facebook and Twitter public offerings, IPO activity has been on the decline over the past decade. In fact, between 2001 and 2011 fewer than 100 companies went public each year, compared to an average of 311 annual IPOs between 1980 and 2000.
To read the rest of this post, please visit the Milkin Institute’s blog, Currency of Ideas.
Today is the end of the comment period on the SEC’s proposing release concerning Regulation A+. A number of comment letters already have been filed and are available here: http://www.sec.gov/comments/s7-11-13/s71113.shtml. Additional comment letters are likely to be received in the next few days. The letters overwhelmingly support the SEC’s approach.
In a recent speech, SEC Chair White noted that the SEC remains focused on various investor protection measures related to the JOBS Act. She noted that the SEC is considering Staff recommendations for final rules related to the SEC’s proposal from last summer relating to proposed amendments to Regulation D, Form D and Rule 156. Read her full remarks here: http://www.sec.gov/News/Speech/Detail/Speech/1370541226174#.UzC3CyXD8xo. White noted that the SEC’s “ultimate goal is to craft rules that provide effective, workable paths for companies to raise capital that also protect investors.” So, it would appear that we should expect to learn more soon on this.
Governor Jeremy C. Stein spoke at the Crowdfunding for Community Development Finance Conference today (see remarks at: http://www.federalreserve.gov/newsevents/speech/stein20140324a.htm). Fed Governor Stein’s remarks emphasized that perhaps all too often crowdfunding is associated only or primarily with tech companies or start-ups, but that crowdfunding may be used for other purposes. In particular, he focused attention on crowdfunding to support community development.
At the end of last week, the House Financial Services Committee approved two bills, H.R. 3623 and H.R. 4164.
H.R. 3623, titled the Improving Access to Capital for Emerging Growth Companies Act, was introduced by Stephen Fincher (R-TN). H.R. 3623 builds on the successes of Title I of the JOBS Act, which created a new class of publicly traded companies known as Emerging Growth Companies (EGCs). The bill reduces burdensome Securities and Exchange Commission (SEC) registration and disclosure requirements to help EGCs access the capital markets more efficiently, streamline the Initial Public Offering process and allow EGCs to deploy their assets to grow and create jobs. Most significantly, the bill would reduce the 21-day period (during which a confidential submission must be made public) to 15 days.
H.R. 4164, titled the Small Company Disclosure Simplification Act, was introduced by Robert Hunt (R-VA). H.R. 4164 provides a voluntary exemption for all EGCs and other issuers with annual gross revenues under $250 million from the SEC’s onerous requirements to file their financial statements in an interactive data format knows as eXtensible Business Reporting Language (XBRL). The bill also requires the SEC to conduct a cost-benefit analysis on the XBRL requirement and report to Congress within one year after enactment. H.R. 4164 allows small businesses to spend more time focusing on expanding and creating jobs rather than on redundant SEC compliance requirements.