“Matchmaking sites,” also referred to as “matchmaking platforms,” have come to play a more significant role in capital formation in recent years. A matchmaking site generally relies on the Internet in order to “match” or introduce potential investors to companies that may be interested in raising capital. However, in order to avoid the requirement to register with the SEC as a broker-dealer, a matchmaking site generally will limit the scope of its activities. The determination as to whether an entity is acting as a “broker” is complex. The SEC closely considers many criteria and the specific facts and circumstances. Generally, though, the SEC has attributed great significance to whether the entity receives transaction-based compensation. For more information about matchmaking sites, how they work, current regulations and key considerations, see our client alert, “Matchmaking Basics: How it Works, Current Regulations and Key Considerations,” available at http://www.mofo.com/~/media/Files/UserGuide/2015/150129MatchMakingGuide.pdf.
Join Morrison & Foerster on February 5, 2015 for a teleconference on Digital Wallets, Mobile Payments and the CFPB’s Prepaid Proposal. This session, which will be led by Partner Obrea Pointdexter, and Associates Jeremy Mandell, James Nguyen and Ryan Rogers, will discuss the CFPB’s Proposed Rule and how it could apply to digital wallet products and mobile payment platforms. Speakers will provide an overview of the Proposed Rule, which will cover:
- The proposed definition of “prepaid account,” including the proposed coverage of digital wallets and P2P payment products, as well as potential carve-outs from those definitions;
- The extensive disclosure requirements detailed in the Proposed Rule, how such disclosure requirements would apply to prepaid accounts acquired through the Internet or on mobile devices, and whether E-SIGN Act requirements may apply; and
- Potential new mandates for providing consumers with access to prepaid account information and the impact such mandates could have on mobile payment product innovation and the delivery of account information.
Time: 1:00 pm – 2:00 pm EST
CLE credit is pending for New York and California.
To register, or for more information, please email Harrison Lawrence at firstname.lastname@example.org.
Today, the House voted (271-154) to pass H.R. 37, titled “Promoting Job Creation and Reducing Small Business Burdens Act.” Among other things, the bill includes a number of measures that correct issues arising in the JOBS Act, or that otherwise are intended to promote capital formation. For example, the bill:
Addresses the Exchange Act 12(g) threshold for savings and loan holding companies to align the provisions with those available to bank holding companies;
Clarifies the termination of EGC status;
Requires a study of XBRL requirements;
Provides an exception from adviser registration for advisers to SBICs and VC funds;
Permits issuers to submit a summary page on Form 10-K; and
Mandates time period during which the SEC must complete a Regulation S-K study and report intended to simplify disclosure requirements.
Earlier this week, FINRA published its annual priorities letter. Again, FINRA includes among the areas of concern private placements. FINRA cites particular issues relating to inadequate due diligence by broker-dealers in connection with private placements, inadequate suitability assessments, misleading offering documents, and deficiencies in procedures in offerings that use escrow accounts. The letter also raises heightened concerns in exempt offerings involving the use of general solicitation. See: http://www.finra.org/web/groups/industry/@ip/@reg/@guide/documents/industry/p602239.pdf.
According to Renaissance Capital, there were 273 IPOs that raised $85 billion of gross proceeds. The number of offerings in 2014 increased by nearly 23% and the proceeds raised increased by 55% over 2013. Alibaba’s $25 billion offering was the largest IPO in history, and there were 11 IPOs that exceeded $1 billion in proceeds.
The number of healthcare IPOs doubled in 2014 to 100. Biotechs comprised 25% of total deal volume, with 69 IPOs, an 86% increase over 2013. Financial industry proceeds were up by 82% over 2013, including the proceeds from seven billion dollar IPOs, although the number of offerings fell by 20%. Energy IPOs also reached a new proceeds record of $12 billion, but consumer IPOs raised only about one-third of the proceeds from 2013.
Post-IPO returns remained strong. Average first-day returns were 13.3% in 2014 compared to 17.3% in 2013, and the average total return at year end was approximately 16% compared to nearly 41% in 2013. There was also significant valuation pressure in 2014 compared to 2013. IPOs priced 7% below the midpoint on average and 40% of the offerings came to market below the proposed range. Some companies appear to have postponed their offerings in response to valuation pressures. Cohn Reznick, an accounting, tax and advisory firm specializing in middle market ($10 million to $2 billion market capitalization) companies, using a somewhat different set of IPO issuers, has noted that while there was a 24% increase in the number of middle market IPOs, there was an 11.4% decrease in proceeds from 2013.
The New York Stock Exchange continued its market leadership in 2014 with 129 IPOs that raised $70 billion, including eight of the 10 largest U.S. IPOs and several of the largest non-U.S. issuer offerings.
As the year comes to a close, the pipeline currently consists of 107 companies seeking to raise $19.3 billion, excluding confidential submissions that could become public in 2015.
The SEC proposed rules for comment that address the JOBS Act mandate to revise the thresholds for registration, termination of registration, and suspension of reporting under Section 12(g) of the Exchange Act. The proposed rules would:
- Amend Exchange Act Rules 12g-1 through 4 and 12h-3 which govern the procedures relating to registration, termination of registration under Section 12(g), and suspension of reporting obligations under Section 15(d) to reflect the new thresholds established by the JOBS Act;
- Revise the rules so that savings and loan holding companies are treated in a similar manner to banks and bank holding companies for the purposes of registration, termination of registration, or suspension of their Exchange Act reporting obligations; and
- Apply the definition of “accredited investor” in Securities Act Rule 501(a) to determinations as to which record holders are accredited investors for purposes of Exchange Act Section 12(g)(1). The accredited investor determination would be made as of the last day of the fiscal year.
The proposed rules also would amend the definition of “held of record” used in determining whether an issuer is required to register a class of equity securities under Exchange Act Section 12(g)(1) to exclude certain securities.
Here is a link to the proposed rule: http://www.sec.gov/rules/proposed/2014/33-9693.pdf
If the current 113th Congress is any measure, we can expect the coming 114th Congress to introduce and promote bills seeking, among other matters, to facilitate capital formation, to correct oversights in the original JOBS Act, to make crowdfunded equity offerings a reality and to ease reporting complexity for smaller issuers. Here is a link to our chart discussing the bills currently pending. Most of these bills did not progress very far. For example, of the nineteen JOBS Act related bills we tracked, only two — H.R. 4200, “Small Business Investment Company (SBIC) Advisers Relief Act of 2014,” and H.R. 4569, “Disclosure Modernization and Simplification Act of 2013” — were successfully passed in the House. However, regardless of whether they were passed in one chamber, all bills will need to be re-introduced in 2015 There is a reasonable expectation that the new Congress, which will be majority Republican in both Houses, will be able to pass some of these bills and present them to the President for signing. We look forward to an interesting 2015 in securities regulation.
The SEC announced that at the December 17th meeting of the Advisory Committee on Small and Emerging Companies, the group will focus on the definition of “accredited investor.” As we have written in prior posts, the Dodd-Frank Act requires that every four years the SEC consider the definition. In addition, following the relaxation of the prohibition on general solicitation, consumer groups and state securities regulators have focused on the appropriateness of the definition. The meeting is webcast on the SEC’s site. Here is the SEC’s press release:
Today the House of Representatives approved several bills including these two, which we have previously commented on:
H.R. 4569, the Disclosure Modernization and Simplification Act, sponsored by Rep. Scott Garrett (R-NJ). This bipartisan bill will help investors navigate lengthy and confusing company disclosures by allowing public companies to submit a summary page of all material information included in annual Securities and Exchange Commission (SEC) filings. The bill directs the SEC to also simplify financial reporting requirements for small and emerging growth companies.
H.R. 4200, the Small Business Investment Companies Advisers Relief Act, sponsored by Rep. Blaine Luetkemeyer (R-MO). H.R. 4200 amends the Investment Advisers Act of 1940 to reduce unnecessary regulatory costs and eliminate duplicative regulation of advisers to Small Business Investment Companies, which are professionally-managed investment funds that finance small businesses.
We have previously commented on the lock-up requirement in connection with IPOs and noted that it has become somewhat more frequent for underwriters to release issuers and/or their shareholders (including directors and officers) from their lock-up requirements early. Generally, this has been the case where the IPO has performed well and there is interest in selling additional primary or secondary (selling security holder) shares in a follow-on offering before the expiry of the 180-day period. In prior posts, we have noted that the FINRA rules require public disclosure of an early lock up. We also have discussed the importance of disclosing in any prospectus exceptions to the lock-up requirements, and giving thought to which members of the underwriting syndicate will have the authority to release parties from the lock-up.
Recently, courts have been asked to consider claims arising in connection with lock-up releases. For example, in a recent Delaware Chancery Court case, a claim by shareholders for breach of fiduciary duty against an issuer’s board of directors for its waiver of a post-IPO lock-up as to certain existing shareholders survived a motion to dismiss. The court in that particular case dismissed aiding and abetting claim against the underwriters. Noting that the requisite underlying requirements of existence of a fiduciary relationship and its breach existed, the Court held that the element of “knowing participation in the breach by the non-fiduciary defendants” was missing. In waiving the lock-ups, there were insufficient facts alleged to demonstrate that the underwriters knowingly participated in the directors’ (alleged) breach of fiduciary duty or that they extracted “unreasonable” compensation or an “improper side deal” in order to consent to the selective lock-up waivers.
In other instances, where an early lock-up release has permitted a follow-on offering to proceed or has enabled shareholders to sell into the market, shareholders have sought to bring a class action in connection with losses suffered as a result of the drop in the issuer’s stock price.
In planning for an IPO and the capital-raising transactions that inevitably will follow, it will be important for companies and their boards to consider the terms of any lock-up agreement, and, if locked-up shareholders are to be treated differently, the rationale for doing so. If directors are participating in a follow-on transaction occurring during the lock-up period, it will be important to make sure a majority consisting of disinterested directors approves the transaction and their participation. And analyze such disinterestedness on the record. If it is a potentially “hot stock” with or without a disproportionately small public float, consider building in staggered lock-up releases from the beginning. Lock-ups are a lesser concern in follow-on offerings because typically only directors, officers and a select number of larger shareholders will be locked up. And, of course, never assume that stock prices can only go up.