A divided Securities and Exchange Commission today adopted rules that will require floating net asset values (NAVs) for institutional money market funds and give most money market funds the discretion to impose liquidity fees and gates. The 3-2 vote, which closes the latest tumultuous chapter of money market fund regulatory reform, will fundamentally change the way that most money market funds operate.
The floating NAV requirement will not apply to retail money market funds, including retail funds and all government money market funds (whether or not they are institutional funds).
The new rules increase responsibility on money market fund boards. Fund boards will be authorized to temporarily “gate” redemptions and impose redemption fees of up to two percent when a fund’s weekly liquidity falls below 30 percent of its total assets; but when weekly liquidity drops to 10 percent, the fund must impose a one percent redemption fee. The original proposal would have required a mandatory two percent redemption fee at the 15 percent level, although the fund’s board could waive that fee or impose gates.
The rules will impose additional disclosure, reporting and stress testing requirements.
To read more, see our Client Alert.
This Thursday, July 24th, the Capital Markets and Government Sponsored Enterprises Subcommittee will hold a hearing with Keith Higgins, Director of the SEC’s Division of Corporation Finance, to review the SEC’s rule proposals to implement the JOBS Act and the Dodd-Frank Act, proxy advisory firms, as well as Chair Mary Jo White’s call for a holistic review of public company disclosure. The hearing will be live streamed on the committee’s website: http://financialservices.house.gov/.
The first half of 2014 has seen the hottest IPO market in 14 years – 133 IPOs priced, raising more than $30 billion in proceeds. This is already greater than the total number of IPOs priced during 2011 and 2012. The second quarter even included five IPOs that raised more than $1 billion each. There were many active sectors, including biotech, as always, even after correction in March-April, healthcare, technology, energy, industrial, consumer and financial companies. Chinese company IPOs were very active, with ten companies going public, including JD.com, a China-based e-commerce company that raised $1.78 billion. The NYSE dominated the IPO market with more than 61% of the IPO proceeds. Most of the IPOs continued strong in their after-offering trading.
The impact of the JOBS Act, particularly its confidential submission process, is clear. More than 85% of the IPOs used the confidential submission process. At June 30th, the backlog (defined as U.S. IPOs initially filed or revised within the past 180 days) was 93 deals, representing more than $11.5 billion in proceeds. However, the backlog does not include JOBS Act confidential filings. Given the typical offering lull in August, there is no pressure for the confidential filings to become publicly available until at least August, when the companies get ready for launch in September or Q4.
And the IPO world continues to wait for the multi-billion dollar Alibaba IPO – now expected to price in September.
Download a free copy of our recently updated JOBS Act book, http://www.mofo.com/~/media/Files/PDFs/jumpstart/140700JOBSAct.pdf.
The updated book discusses emerging practices in IPOs by emerging growth companies, the SEC’s final Rule 506 rules and investor verification and other developments.
You also may email us to obtain hard copies. Send an email to Harrison Lawrence at email@example.com.
The text of S. 2498, introduced by Senator Murphy in late June, was finally released. The bill is titled the “HALOS Act”, or “Helping Angels Lead our Startups Act.” Angel investors have expressed concerns regarding the definition of the term “general solicitation” following the adoption of Rule 506(c), which permits issuers to use general solicitation in connection with certain offerings. Specifically, angel investors have noted that there is a lack of certainty regarding the types of communications that might be deemed to constitute a general solicitation and, if an issuer uses general solicitation, it must undertake certain additional investor verification procedures to ensure that purchasers in Rule 506 offerings are “accredited investors.”
The proposed bill would exclude certain presentations from constituting a general solicitation if such presentations are made by or on behalf of an issuer at an “event (1) sponsored by (A) the United States or any territory thereof, by the District of Columbia, by any State, by a political subdivision of any State or territory, or by any agency or public instrumentality of any of the foregoing; (B) a college, university, or other institution of higher education; (C) a nonprofit organization; (D) an angel investor group; (E) a venture forum, venture capital association, or trade association; or (F) any other group, person or entity as the Securities and Exchange Commission may determine by rule; (2) where any advertising for the event does not reference any specific offering of securities by the issuer; (3) the sponsor of which—(A) does not make investment recommendations or provide investment advice to event attendees; (B) does not engage in an active role in any investment negotiations between the issuer and investors attending the event; and (C) does not charge event attendees any fees other than administrative fees; and (4) where no specific information regarding an offering of securities by the issuer is communicated or distributed by or on behalf of the issuer, other than–(A) that the issuer is in the process of offering securities or planning to offer securities; (B) the type and amount of securities being offered; (C) the amount of securities being offered that have already been subscribed for; and (D) the intended use of proceeds of the offering.
Historically, the SEC Staff has provided guidance in the form of no-action letters that address the types of communications that might be considered to constitute a “general solicitation” or “general advertising.” The focus in such letters generally has been on whether communications were bilateral or, in other words, addressed to a specific person or group of persons with which the issuer or the issuer’s financial intermediary had a pre-existing relationship, as compared to communications that were general, not targeted, communications.
The SEC Staff recently provided further guidance on the provisions of Rule 506(c) of Regulation D which permit the use of general solicitation and general advertising when sales are made only to accredited investors and the issuer verifies the accredited investor status of the purchasers. The Staff has now clarified certain aspects of the verification process through a series of new Securities Act Rules Compliance and Disclosure Interpretations.
When a purchaser holds assets in an account jointly or holds property jointly with an individual that is not the person’s spouse, the Staff has said that the assets in the account or property held jointly can be taken into account for the net worth test set forth in Rule 501(a)(5), but only to the extent of the purchaser’s percentage ownership of the account or property (Question 255.49).
The Staff has indicated that in a situation where a purchaser’s annual income is not reported in U.S. dollars, the issuer may use either the exchange rate that is in effect on the last day of the year for which income is being determined or the average exchange rate for the year (Question 255.48). If a purchaser is not a U.S. taxpayer and therefore cannot provide an IRS form to report income, the non-exclusive method for verification set forth in Rule 506(c)(2)(ii)(A) would not be available; however, the Staff has said that the principles-based verification method could be utilized where an issuer could reasonably conclude that a purchaser is an accredited investor based on a review of tax forms that report income in a foreign jurisdiction which imposes penalties for falsely-reported information that are comparable to those of the U.S (Question 260.36).
If an issuer is seeking to rely on the non-exclusive method for verification set forth in Rule 506(c)(2)(ii)(A) and thus wants to review the purchaser’s income as reported on IRS forms for the two most recent years, but the most recent year is not yet available, it would not necessarily be appropriate for the issuer to then review years prior to the two most recent years. However, the Staff believes that an issuer could reasonably conclude that a purchaser is an accredited investor and satisfy the verification requirement under the principles-based verification approach by:
- reviewing the Internal Revenue Service forms that report income for the two years preceding the recently completed year; and
- obtaining written representations from the purchaser that (i) an Internal Revenue Service form that reports the purchaser’s income for the recently completed year is not available, (ii) specify the amount of income the purchaser received for the recently completed year and that such amount reached the level needed to qualify as an accredited investor, and (iii) the purchaser has a reasonable expectation of reaching the requisite income level for the current year. (Question 260.35).
With respect to the review of tax assessments for the purposes of determining an accredited investor’s net worth under the non-exclusive verification method set forth in Rule 506(c)(2)(ii)(B), the Staff notes that reviewing a tax assessment that is more than three months old would not be appropriate when relying on the verification safe harbor. That said, the Staff believes that an issuer could reasonably conclude that a purchaser is an accredited investor and satisfy the verification requirement of Rule 506(c) under the principles-based verification method, if the issuer uses the most recently available tax assessment when determining whether the purchaser has the requisite net worth (Question 260.37).
Lastly, in reviewing consumer reports for the purposes of determining a purchaser’s liabilities under the non-exclusive verification method set forth in Rule 506(c)(2)(ii)(B), the Staff indicates that while a consumer report from a non-U.S. entity would not work for the purposes of the safe harbor, an issuer could reasonably conclude that a purchaser is an accredited investor and satisfy the verification requirement under the principles-based verification method by reviewing s foreign report report and taking any other steps necessary to determine the purchaser’s liabilities (such as a written representation from the purchaser that all liabilities have been disclosed) in determining whether the purchaser has the requisite net worth (Question 260.38).
In those interpretation where the Staff noted that an issuer could reasonably conclude that a purchaser is an accredited investor based on the principles-based verification method, the Staff further noted that when the issuer has reason to question the information that is being considered or, depending on the test, the purchaser’s net income or net worth, then additional verification measures may be necessary in order to verify that the purchaser is an accredited investor.
The North American Securities Administrators Association, Inc. (NASAA) posted a web notice requesting comment on model rules that would provide for electronic filings with the states of Form D and other state securities registration and notice filing materials.
One version of the model rule would provide for Form D, amendments and the related processing fees to be filed with NASAA’s Electronic Filing Depository (EFD). An alternative version would require all state securities registration and notice filings (including Form D), amendments and exemption filings, and the related fees, to be filed with the EFD. Both rules would require electronic filings after the EFD is capable of receiving these filings and an appropriate notice has been provided to issuers by the relevant state administrator. Both proposed rules allow electronic signature.
The EFD system will initially be limited to Form D filings and is expected to be deployed in November 2014. NASAA expects to expand the EFD’s capabilities to accept all state securities registration and notice filing materials.
Comments on the proposed rules are due on or before July 30, 2014.
The NASAA notice can be found at: http://www.nasaa.org/31855/notice-request-comment-regarding-proposed-model-rule-electronic-filing-form-d-securities-registration-notice-filing-documents/
In a Guidance Update published on June 30, 2014 by the SEC’s Division of Investment Management, the staff closed a loophole that allowed business development companies (BDCs) with wholly owned Small Business Investment Company (SBIC) subsidiaries to avoid meeting asset coverage requirements when the SBIC subsidiaries issue debt that is not guaranteed by the Small Business Administration (SBA).
Sections 18(a) and 61(a) of the Investment Company Act of 1940 (1940 Act) generally require BDCs to meet asset coverage requirements when they issue “senior securities,” including debt instruments. A BDC may be deemed an indirect issuer of any class of “senior security” issued by its direct or indirect wholly owned SBIC subsidiaries.
The SEC has regularly granted BDCs limited exemptive relief from these asset coverage requirements. The relief allows the BDCs to treat certain indebtedness issued by their wholly owned SBIC subsidiaries as indebtedness not represented by senior securities for purposes of determining the BDC’s consolidated asset coverage. The SEC exemptive orders are, in part, based upon the representation that SBIC subsidiaries are subject to the SBA’s regulation of leverage.
The staff said that it learned that some BDCs have sought to rely on this limited relief in connection with SBICs that have not issued indebtedness that is held or guaranteed by the SBA.
Although in most cases the representations and condition in the orders have not explicitly required that an SBIC subsidiary have issued indebtedness held or guaranteed by the SBA, the staff said that this requirement is implicit in the rationale for the relief because the SBA’s independent oversight of SBIC debt makes the protections of the 1940 Act unnecessary. The staff said that when an SBIC subsidiary issues debt that is not backed by the SBA, the subsidiary is not subject to the full oversight of the SBA, and thus the protections of Section 18(a) are required.
Going forward, the staff will require that BDC applications for relief from the Section 18 asset coverage requirements include a condition providing that:
[A]ny senior securities representing indebtedness of an SBIC Subsidiary will not be considered senior securities and, for purposes of the definition of “asset coverage” in section 18(h), will be treated as indebtedness not represented by senior securities but only if that SBIC Subsidiary has issued indebtedness that is held or guaranteed by the SBA.
We expect that as BDCs grow in popularity and assets, the staff will issue more regulatory guidance for BDCs.
On June 25, 2014, the Securities and Exchange Commission (the “SEC”) announced that it had ordered the national securities exchanges and the Financial Industry Regulatory Authority, Inc. (“FINRA”) to act jointly to develop and file with the SEC a national market system plan to implement a targeted 12 month pilot program that will widen minimum quoting and trading increments (“tick sizes”) for certain smaller capitalization stocks. The SEC indicated that it plans to use the pilot program to assess whether these tick size changes would enhance market quality to the benefit of U.S. investors, issuers and other market participants. More specifically, the pilot program should facilitate studies of the effect of tick size on liquidity, execution quality for investors, volatility, market maker profitability, competition, transparency and institutional ownership. The SEC order requires the national securities exchanges and FINRA to submit a national market system plan detailing the pilot program by August 25, 2014.
The pilot program, which will be designed so as to not cause excessive disruption to the market and to limit increases in transaction costs, will last for one year and include stocks with: (1) a market capitalization of $5 billion or less; (2) an average daily trading volume of one million shares or less; and (3) a share price of $2 per share or more. The pilot program will consist of one control group and three test groups with 300 securities in each test group selected by stratified sampling. Pilot securities in the control group will be quoted at the current tick size increment of $0.01 per share, and trade at the increments currently permitted. Pilot securities in the first test group will be quoted in $0.05 minimum increments. Pilot securities in the second test group will be quoted in $0.05 minimum increments, and traded in $0.05 minimum increments subject to certain exceptions. Pilot securities in the third test group will be subject to the same minimum quoting and trading increments (and the same exceptions) as the second test group, but would also be subject to a “trade-at” requirement.
For more information, see Press Release, “SEC Announces Order for Tick Size Pilot Plan – Pilot to Assess Impact of Tick Size on Market Quality for Small Cap Companies” (June 25, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542172819#.U62K7ovD-9I, and SEC Release No. 34-72460 (June 24, 2014), available at http://www.sec.gov/rules/other/2014/34-72460.pdf
SIFMA has issued a Memorandum intended to provide broker-dealers and advisers with guidance regarding procedures for investor verification in connection with offerings made pursuant to Rule 506(c).
Morrison & Foerster has signed on to support the procedures, which are useful examples of possible approaches to verification. The white paper and forms may be viewed here.
Other market participants may find these examples helpful as well.