On April 21, 2017, FINRA announced updates to the Private Placement Filer Form (“Filer Form”) that FINRA members complete when submitting private placement filings under FINRA Rules 5122 (Private Placements of Securities Issued by Members) or 5123 (Private Placements of Securities).  FINRA originally proposed the updates on March 17, 2017 for purposes of improving the information available to it about the nature of a private placement and a FINRA member’s role in the securities offering.  The updated Filer Form will be available electronically on FINRA’s Firm Gateway beginning May 22, 2017.

The updated Filer Form adds, clarifies and removes certain questions or information in each of three sections as summarized below:

  1. Participating Member Information. This section includes additional questions regarding whether the member making the filing is the exclusive selling agent in the private placement and whether there is any affiliation between any member participating in the private placement offering and the issuer or sponsor of the offering.  FINRA members will no longer be required to provide the title and email address for the contact persons of the FINRA member making the filing nor the contact name, title and telephone number for any other FINRA members identified in the filing.
  1. Issuer Information. This section includes an additional question asking whether the issuer is a reporting company and no longer requires the name, title or email address of the contact person at the issuer.
  1. Offering Information. This section includes additional questions regarding: (i) the type of security being offered; (ii) whether the issuer has raised capital in the preceding 12 months; (iii) the minimum investment amount and whether such minimum can be waived by the issuer; (iv) whether the FINRA member making the filing sold or will sell the offering to any non-accredited investors; (v) which Securities Act exemption the issuer is relying on; (vi) for contingency offerings, whether the contingency has been met as of the date of filing; and (vii) the date on which the FINRA member first offered or sold the private placement or whether sales have yet to commence. The Offering Information section also no longer requires the filer to provide: (a) the aggregate amount of non-commission compensation; (b) the offering’s conclusion date; (c) whether the FINRA member used a term sheet; (d) whether the issuer has any independently audited financial statements; or (e) whether the issuer’s directors are independent.  In addition, the Offering Information section clarifies that the requirement to provide the stated or target rate of return is only relevant if the applicable offering documents state that the investment will provide an actual or target rate of return to investors, and clarifies that the question regarding the use of general solicitation is only asking whether either the FINRA member making the filing or the issuer has, in fact, engaged in general solicitation in connection with the private placement at or prior to the time of the filing.

Copies of the FINRA notice announcing the updates as well as the updated Filer Form are available at: http://www.finra.org/sites/default/files/notice_doc_file_ref/Regulatory-Notice-17-17.pdf.

On April 19, 2017, the staff of the SEC’s Division of Corporation Finance issued a new compliance and disclosure interpretation (“C&DI”) addressing intrastate offerings pursuant to new Securities Act Rule 147A. The C&DI clarified that under new Rule 147A(g)(1), offers and sales made in reliance on new Rule 147A will not be integrated with prior offers and sales of securities, including offers and sales made in reliance on amended Securities Act Rule 147. The C&DI also noted that an issuer must still comply with all applicable state securities law requirements. Amended Rule 147 facilitates offerings relying upon recently adopted intrastate crowdfunding exemptions under state securities laws, while new Rule 147A further accommodates offers accessible to out-of-state residents and companies that are incorporated or organized out-of-state.

For more information regarding new Rule 147A and amended Rule 147, read our client alert.

On March 13, 2017, the NYSE issued a proposed rule to modify the provisions regarding the qualification of companies listing on the NYSE to allow for a listing without an IPO. Section 102.01B of the NYSE Listed Company Manual currently recognizes that some companies that have not previously registered their common equity securities under the Exchange Act, but which have sold common equity securities in a private placement, may wish to list those common equity securities on the NYSE at the time of effectiveness of a resale registration statement filed solely for the resale of the securities held by selling stockholders. Footnote (E) of Section 102.01B currently provides that the NYSE will exercise its discretion to list these companies by determining that a company has met the $100 million aggregate market value of publicly-held shares requirement based on a combination of both (1) an independent third-party valuation of the company (the “Valuation”) and (ii) the most recent trading price for the company’s common stock in a trading system for unregistered securities operated by a national securities exchange or a registered broker-dealer (a “Private Placement Market”). The NYSE then attributes a market value of publicly-held shares to the company equal to the lesser of (1) the value calculable based on the Valuation and (2) the value calculable based on the most recent trading price in a Private Placement Market.

Although Footnote (E) provides for a company NYSE listing upon effectiveness of a resale registration statement, it currently does not provide for a company listing in connection with the effectiveness of an Exchange Act registration statement in the absence of an IPO or other Securities Act registration. However, a company can become an Exchange Act registrant without a concurrent public offering by filing with the SEC a Form 10 or an annual report (such as a Form 10-K or Form 20-F).

The proposed rule would amend Footnote (E) to explicitly provide that it applies to companies listing (1) upon effectiveness of an Exchange Act registration statement without a concurrent Securities Act registration and (2) upon effectiveness of a resale registration statement. The proposed rule would also amend Footnote (E) to provide an exception to the Private Placement Market trading requirement for companies with a recent Valuation available indicating at least $250 million in market value of publicly-held shares. The valuation used for this purpose would need to be provided by an entity that has significant experience and demonstrable competence in the provision of these valuations.

This approach could be of significant interest for issuers that have completed 144A equity offerings, which are still popular among REITs, for issuers that have completed numerous private placements and have VC or PE investors that need liquidity, and for issuers, including foreign issuers, that are well-funded and do not need a capital raise through an IPO, but would still like to have their securities listed or quoted on a securities exchange.

The proposed rule is available at: https://www.sec.gov/rules/sro/nyse/2017/34-80313.pdf.

The Committee on Capital Markets Regulation released a report setting forth certain recommendations that are intended to revive the public equity markets. The report cites certain statistics regarding equity capital markets activity, noting the decline in the volume of equity capital raised in IPOs and a decline in the number of U.S. IPOs, as well as a decline in the number of public companies in the United States. By contrast, the report notes that more capital is being raised through Regulation D offerings than through registered offerings and notes the rise in privately held companies valued over a $1 billion. The study attributes the decision to defer IPOs to excessive regulation, increased costs of being a U.S. public company, short-term investor focus, increased litigation risk, and the increasing value of securities related settlements. The Committee recommends that the Securities and Exchange Commission meet with private companies to understand the reason why they are deferring IPOs, and empower U.S. shareholders to adopt a mandatory system of individual arbitration instead of costly securities class actions. The report is available here: http://www.capmktsreg.org/wp-content/uploads/2017/04/US_Public_Equity_Markets_are_Stagnating.pdf.

In March 2017, the Public Company Accounting Oversight Board, or PCAOB, released a white paper detailing certain characteristics and trends of emerging growth companies, or EGCs, based on its review of available data through November 15, 2016.  The White Paper highlights the following notable trends:

  • A Sizeable Number of Companies Identified Themselves as an EGC. There were 1,951 companies that identified themselves as EGCs in at least one SEC filing since 2012. This number excludes companies that were EGCs and since have transitioned and become large accelerated filers. As of November 15, 2016, the 742 exchange-listed EGC filers had $350 billion in market capitalization. EGC filers represent:
    • 15% of the 4,797 total companies listed on a U.S. national securities exchange; and
    • approximately 1% of total market capitalization of all exchange-listed companies.

Growth in Number of EGCs

Market Cap EGC

  • Characteristics of EGCs. The assets reported by EGC filers ranged from zero to approximately $19.4 billion. The average assets were approximately $245.9 million, while half of EGC filers reported assets of less than $5.9 million.  The annual revenue reported by EGC filers ranged from zero to approximately $978.5 million. The average revenue was approximately $56.6 million, while half of EGC filers reported revenue of less than $140,000.
  • Going Concern. Approximately 51% of EGC filers included a going concern paragraph in their financial statements.
  • The Majority of EGC Filers Provided a Management Report on Internal Control Over Financial Reporting. Approximately 65% of EGC filers (or 1,262 of 1,951) provided a management report on internal control over financial reporting in their most recent annual filing. Almost half (approximately 47%) of those EGC filers reported material weaknesses.

A copy of the White Paper is available here: http://business.cch.com/srd/PCAOBWhitePaperEGCs.pdf

In researching and updating our treatise, Exempt and Hybrid Securities Laws, we regularly review recent literature regarding capital markets developments.  The principal underlying thesis of the treatise has been that exempt and hybrid offerings were becoming significantly more important as capital-raising tools.  While that was true although not necessarily obvious when we first published the treatise, it seems to be a trend that has become even more pronounced in recent years, even affecting the number of IPOs.  Each week, we’ll be posting our “favorite” articles on these topics.  Herewith, the first installment:

Unicorns, Guardians, and the Concentration of the U.S. Equity Markets, Amy Deen Westbrook and David A. Westbrook.  This article discusses the more concentrated ownership of both private and public companies in recent years, including the closely held nature of most unicorns.  Given the concentration of ownership in successful privately held companies and in most public companies today, the article addresses the governance and stewardship issues that this ownership concentration poses.

The Twilight of Equity Liquidity, Jeff Schwartz, 34 Cardozo L. Rev. 531.  This article discusses a new approach to regulating companies, with the cornerstone being a new market for newly public companies (a “venture exchange”), which should be designed to encourage companies to pursue IPOs and revive the IPO market, as well as a more extensive “on-ramp” or phasing in of regulatory requirements as companies mature.

Regulating Unicorns:  Disclosure and the New Private Economy, Jennifer Fan, 57 B.C. L. Rev. 583.  This article discusses the unicorn phenomenon and the need to re-think regulation to address the growth of privately held companies with robust valuations and dispersed ownership.

On April 12, 2017, FINRA released three regulatory notices for comment that propose amendments to various FINRA rules affecting capital formation. In connection with its release of the notices, FINRA President and CEO Robert Cook noted FINRA’s continuing commitment to assessing its regulations and their role in facilitating capital formation. This initiative is part of the comprehensive self-evaluation and improvement initiative that FINRA announced several months ago called the FINRA 360 initiative. The initiative, FINRA’s recent request for comment on its engagement efforts, and these regulatory notices certainly reflect a new tone. In all three notices, as discussed further below, FINRA specifically requests that commenters address the economic impacts of the rules, including costs and benefits, and the specific effects on the capital formation process.

Read our client alert.

The fast growing fintech industry continues to command the attention of investors across the globe.  A recent CB Insights report summarized the global financing trends for fintech companies in 2016.  There were 836 venture capital-backed financings, which raised $12.7 billion for fintech startups in 2016.  While this was a $2 billion drop from 2015 figures, it is a significant increase from 2012’s 451 deals, which raised $2.5 billion.  U.S. fintech issuers represented over half of the total number of fintech financings with 422 deals, raising $5.5 billion.

Within the fintech space, funding for blockchain and bitcoin companies accounted for 8% of total deals in 2016, raising $431 million. Companies in the payments tech field, which provide solutions to facilitate payment processing, raised $1.6 billion in 2016 across 150 financings.  Insurance tech companies also warrant mention with 109 deals, raising $1.6 billion in 2016.

As privately held companies opt to remain private longer and defer going public, there has been an emergence of “unicorns,” or companies that have a valuation of over $1 billion. CB Insights reports that there are now 190 unicorns with a cumulative valuation of $660 billion.  There are 22 fintech unicorns, including 11 U.S.-based fintech unicorns.  With increased access to capital, more privately held companies go through numerous rounds of financings, referred to as late-stage financings.  Fintech companies ended 2016 with a median late-stage deal size of $26.5 million, accounting for 29% of their total deal share.

On April 3, 2017, the District Court for the District of Columbia (the “District Court”) entered a final judgment (the “Final Judgment”) in the case of National Association of Manufacturers, et al., v. SEC. The Final Judgment affirms the prior holding of the U.S. Court of Appeals for the District of Columbia in National Association of Manufacturers that Exchange Act Section 13(p)(1) and Rule 13p-1 (together, the “Conflict Minerals Rule”) violate the First Amendment to the extent the Conflict Minerals Rule requires regulated entities to report to the SEC and to state on their websites that any of their products have “not been found to be DRC conflict free.” The Final Judgment solely sets aside the portion of the Conflict Minerals Rule that requires regulated entities to report to the SEC and make the website statements. The District Court remanded, in all other respects, to the SEC.

On April 7, 2017, the staff of the SEC’s Division of Corporation Finance (the “Staff”) issued guidance on the impact of the Final Judgment on the Conflict Minerals Rule (the “SEC Guidance”). The SEC Guidance seeks to reduce the uncertainty surrounding the Conflict Minerals Rule with regard to potential enforcement actions, given that the Final Judgment and the decision of the U.S. Court of Appeals in National Association of Manufacturers leaves open the question of whether the description of being “DRC conflict free” is required by statute, or instead, a product of the SEC’s rulemaking. The Staff explained that it will not recommend enforcement action to the SEC if companies (including those subject to paragraph (c) of Item 1.01 of Form SD) only file disclosure under the provisions of paragraphs (a) and (b) of Item 1.01 of Form SD. However, the Staff expressly noted that the SEC Guidance is still subject to any further action taken by the SEC and does not express any legal conclusion on the Conflict Minerals Rule itself.

The Final Judgement is available here.

The U.S. Court of Appeals for the District of Columbia in National Association of Manufacturers is available here.

The SEC Guidance is available here.

Today, FINRA issued three Regulatory Notices requesting comments on proposed changes to various rules relating to financing transactions.

Regulatory Notice 17-14 requests comment on all of FINRA’s existing rules, operations and administrative processes that address the capital-raising activities of its member firms, including recent additions regarding capital acquisition brokers and funding portals.

Regulatory Notice 17-15 requests comment on proposed amendments to modernize, simplify and clarify FINRA Rule 5110, the Corporate Financing Rule, which affects all public offerings.

Regulatory Notice 17-16 clarifies the application of FINRA’s research rules to desk commentary by sales and trading and principal trading personnel and solicits comments on a proposal to create a limited safe harbor for eligible desk commentary that may rise to the level of a research report.

Comments on the Notices are requested by May 30, 2017.  See:  http://www.finra.org/newsroom/2017/finra-requests-comment-rules-impacting-capital-formation