Practical Law Company recently reviewed trends in the U.S. IPO market for the first half of 2017.  In the first five months of 2017, 46 IPO issuers identified themselves as emerging growth companies (EGCs). Under the JOBS Act, EGCs are able to confidentially submit draft registration statements prior to a public filing. Of the 46 EGC IPOs issuers, all but one submitted draft registration statements to the SEC. The first public filing followed, on average, 141 days after their draft filing. 12 of the 46 EGC IPO issuers were foreign private issuers (FPIs) and also submitted confidential draft registration statements.

Of the 46 EGC IPO issuers, 31 included two years of audited financial statements. For EGCs, including two instead of three years of audited financial statements is permitted under the JOBS Act. 14 EGC issuers included three years of audited financials, opting not to take advantage of the JOBS Act accommodation. Six FPIs elected to prepare their financial statements following the International Financial Reporting Standards (IFRS), while the other six opted for the US’s Generally Accepted Accounting Principles (GAAP).

To read Practical Law’s full article, click here.

On July 18, 2017, President Donald Trump announced his intent to nominate Ms. Hester Maria Peirce as a Commissioner of the Securities and Exchange Commission for the remainder of a five-year term expiring June 5, 2020.  This would be President Trump’s second nomination to the SEC, the first being the nomination of Mr. Jay Clayton as Chair of the SEC in January 2017.  If confirmed, Ms. Peirce would occupy one of the remaining two vacant Commissioner seats at the SEC.

See the White House press release on the nomination here.

On July 18, 2017, the House Subcommittee on Capital Markets, Securities and Investments held a hearing and heard testimony regarding the regulatory burdens facing public companies in the United States that may result in diminishing the appeal for privately held companies of undertaking an IPO.  The testimony focused principally on the requirements arising from the Sarbanes-Oxley Act, including auditor attestation, and the requirements arising from the Dodd-Frank Act.  Given that many private companies are less focused on disclosure burdens, it is a shame that almost all of the dialogue regarding the decline in the number of IPOs and the decline in the number of public companies in the United States has been limited to the same few themes.  Many private companies are more focused on other considerations, such as the availability of research coverage, liquidity in their stocks should they choose to become listed companies, short-termism and the pressures arising from the need to focus on each successive earnings announcement, litigation exposure, and a variety of issues that are broader than those considered by the witnesses.

Here is a link to the key takeaways:  https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=402173.

Securities and Exchange Commissioner Stein, speaking on the same day as Chair Clayton, in a speech that addressed principally market structure issues also made a number of observations on the current state of the markets. Commissioner Stein framed the market changes, such as the decline in the number of IPOs, somewhat differently than the Chair. She points out that framing matters as a “tug-of-war” between investors (demanding information) and issuers (seeking access to capital) may lead to viewing regulatory choices as a tradeoff between disclosure and capital formation. Such a view might not fully take into consideration the degree to which the market as a whole rely on access to information about private and public companies for price discovery and other purposes. Commissioner Stein observed that from “2009 through 2014, investors supplied nearly $17 trillion in primary capital – providing capital directly to companies in exchange for debt or equity securities.” During the same period, the amount of capital raised in the private markets outpaced the amount raised in the public market. Commissioner Stein noted that “during 2014, for every investor dollar raised in the public market, nearly $1.50 was raised in the private markets.” In her remarks, the Commissioner noted that there is an abundance of private capital that companies are able to access and, in addition, many companies are choosing to be acquired instead of going public. She observed that “One impact is a reduction in the aggregate amount of information available to the entire capital marketplace. On the whole, our markets are less transparent.” The complete remarks may be accessed here: https://www.sec.gov/news/speech/stein-lighting-our-capital-markets-071117.

In a speech earlier today, Securities and Exchange Commission Chair Clayton discussed the Commission’s guiding principles.  In his comments relating to disclosure requirements, Chair Clayton noted that “the roughly 50% decline in the total number of U.S.-listed public companies over the last two decades forces us to question whether our analysis should be cumulative as well as incremental.”  I believe it should be.  As a data point, over this period, studies show the median word-count for SEC filings has more than doubled, yet readability of those documents is at an all-time low.”  Clayton notes that the Commission needs to do more to make the public markets more attractive, without affecting adversely the private markets.  Consistent with the Commission’s statements a few days ago regarding the Commission’s willingness to consider requests from issuers regarding omitting certain information, Clayton noted that, “Under Rule 3-13 of Regulation S-X, issuers can request modifications to their financial reporting requirements in these situations.  I want to encourage companies to consider whether such modifications may be helpful in connection with their capital raising activities and assure you that SEC staff is placing a high priority on responding with timely guidance.”

Clayton also noted that the Staff of the Commission continues to work on recommendations following the report on modernizing and simplifying Regulation S-K requirements.  The full speech, which also addressed enforcement, the regulation of derivatives, and investment management, is available here:  https://www.sec.gov/news/speech/remarks-economic-club-new-york.

Recently, the SEC’s Office of Investor Advocate released the report it is required to file with the Committee on Banking, Housing and Urban Affairs of the U.S. Senate and the Committee on Financial Services of the House of Representatives.  In the report, the Office outlines its objectives for the 2018 fiscal year.

The report notes that the Office anticipates that the SEC will continue to advance the Disclosure Effectiveness initiative and intends to contribute to the SEC’s work in this area in order to update disclosure rules.

The report also discusses what it refers to as “the phenomenon of fewer initial public offerings,” and notes that that evidences suggests that disclosure and other related burdens do not account for the downturn in IPOs.  The report notes various studies that attribute the downturn to other causes.  For example, the report discusses the lack of institutional demand for smaller companies and the increased dominance of institutional investor participation (over retail participation) in the markets.  The report cites another study that attributes the decline to evidence that the benefits of being public have declined as significant capital has become available through private markets.  The report notes that the Office intends to focus on understanding better the dynamics of the public and private markets, including the demand of institutional investors for smaller company shares.

The full report is accessible here.

Renaissance Capital published their Review of the U.S. IPO Market for the second quarter of 2017.  In its most active quarter in two years, the IPO market saw 54 IPOs, raising approximately $11 billion.  The median deal size dropped to $115 million for the second quarter.

The healthcare and tech sectors accounted for more than 52% of IPOs in the second quarter with 16 healthcare deals, raising $1.2 billion and 12 tech IPOs, raising $1.6 billion.  The energy sector raised $1.9 billion, but included the worst-performing IPOs of the quarter.  The telecom sector warrants mention, raising $2.2 billion, which included the largest IPO of the quarter.

Private equity-backed IPOs have steadily increased in numbers.  There were 15 PE-backed IPOs this past quarter, raising $5.1 billion.

Biotech and tech IPOs accounted for the doubling of venture capital-backed IPOs since 2017Q1.  In the second quarter of 2017, VC-backed IPOs accounted for 16 IPOs, raising $1.8 billion.  There were seven tech IPOs that were VC-backed, which included three valued at more that $1 billion.

The second quarter included one withdrawal and 51 new IPO filings.  We will continue to monitor the activity of the U.S. IPO market on this blog.

The Staff of the Division of Corporation Finance has published these Frequently Asked Questions to assist issuers that are not emerging growth companies that would like to avail themselves of the confidential submission process. The FAQs also clarify that the ability to “test the waters” is limited to EGCs.

See here: https://www.sec.gov/corpfin/voluntary-submission-draft-registration-statements-faqs Continue Reading SEC Staff issues FAQs on Confidential Submissions

On June 8, 2017, the U.S. House of Representatives, by a vote mostly along party lines, approved a bill that would repeal many of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) requirements and significantly reduce the regulatory burden for financial institutions. If enacted in its current form, the Financial CHOICE Act of 2017 (the “CHOICE Act”) would also alter the regulatory landscape for business development companies (“BDCs”), investment companies and investment advisers. Among other things, the CHOICE Act would:

  • Loosen some restrictions on BDCs concerning leverage, preferred stock, proxy procedures and investments;
  • Tighten the burden of proof for plaintiffs suing investment advisers for breach of fiduciary duty;
  • Broaden the exemption from the definition of an “investment company” available to venture capital funds; and
  • Streamline the process for investment companies and investment advisers to obtain exemptive orders.

The CHOICE Act, which passed 233-186, was sent to the Senate for consideration on June 12, 2017. Here is a summary of key provisions of the CHOICE Act that affect BDCs, investment companies and investment advisers.

Read our client alert.

The Securities and Exchange Commission yesterday announced a new policy that essentially extends the confidential submission accommodation made available to emerging growth companies (EGCs) to all issuers.  The EGC process will continue unchanged.

Starting on July 10, the Commission will review a draft initial Securities Act registration statement and related revisions on a nonpublic basis subject to the same requirements applicable to EGCs that avail themselves of the confidential submission process.  Similarly, the Commission also will review a draft registration statement of a class of securities under the Exchange Act Section 12(b).  The Commission statement noted in its statement that it will also accept draft registration statements submitted prior to the end of the twelfth month following the effective date of an issuer’s initial Securities Act registration statement or an issuer’s Exchange Act Section 12(b) registration statement for nonpublic review.  A foreign private issuer may choose to rely on the policies applicable to EGCs, to the extent that they qualify, or rely on this new approach.

The full statement is available here.

Read our client alert.