January 2013

As greater attention is devoted to the role of decimalization and other market structure changes in the decline of smaller company IPOs, we wanted to share this white paper authored by Leslie Seff, http://www.mofo.com/files/Uploads/Images/121124-IPOs-Decimalization-Need-for-Better-Regulation.pdf.  The paper puts into perspective the various regulations that had an effect on market making activity, and recommends a more nuanced approach, including the introduction of a pilot program, compared to those approaches discussed to date that would begin to address some of these market structure issues.

Today the Securities & Exchange Commission announced the agenda for the February 1st meeting of the Advisory Committee (see:  http://www.sec.gov/news/press/2013/2013-11.htm), which is open to the public, and also available afterward for webcast viewing.  The group will discuss tick sizes, the creation of a sophisticated-investor only exchange for emerging companies, and scaled disclosures.

FINRA recently posted two updates to its Private Placement Filing Requirements FAQs. http://www.finra.org/Industry/Compliance/RegulatoryFilings/PrivatePlacements/FAQ/index.htm?utm_source=MM&utm_medium=email&utm_campaign=Weekly_Update_012313_FINAL#1-4.

In the first update, FINRA clarified that the Rule 5123 filing obligation applies to private placements to any individual accredited investor, which includes officers, directors and general partners of the issuer (Rule 510(a)(4)) and entities in which all the equity owners are individual accredited investors  (Rule 501(a)(8)).

In the other update, it stated that private placements sold solely to accredited investors that satisfy the Regulation D four categories of accredited investors that are not natural persons (Rule 501(a)(1), (2), (3) and (7) are exempt from the Rule 5123 filing requirements.  Those categories include the following:

  • a bank, insurance company, registered investment company, employee benefit plan or small business investment company;
  • a private business development company;
  • a charitable organization, corporation or partnership with assets exceeding $5 million; or
  • a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.

In advance of its February meeting, the Committee released its draft recommendations, available here:  http://www.sec.gov/info/smallbus/acsec/draft-committee-recommendations-statement-020113.pdf.  The Committee recommends that the SEC adopt rules to increase tick sizes for smaller exchange-listed companies and permit issuers to choose their own tick sizes within certain SEC-specified ranges.  The Committee also recommends that the SEC facilitate and encourage the creation of a separate U.S. equity market for small and emerging companies open to sophisticated investors.  Many may be aware of the BX Venture Market, but that has not been approved as a “national securities exchange” and being considered a national securities exchange would be essential for the listed securities to be considered “covered securities” for blue sky purposes.  State securities law preemption is the most significant consideration from a capital-raising perspective and would need to be addressed were any new market to be created.

The Committee also addresses the fact that the disclosure requirements applicable to smaller reporting companies may need to be reviewed and revised so that smaller reporting companies benefit from certain of the accommodations provided to EGCs by the JOBS Act.  Finally, the Committee suggests a modified threshold for the “smaller reporting company” definition.

On January 18, 2013, the Investor Advisory Committee held its first meeting of the new year.  SEC Chair Walters provided some opening remarks (seehttp://www.sec.gov/news/speech/2013/spch011813ebw.htm) in which she emphasized the Commission’s intentions of moving forward efficiently with the rulemaking required by Dodd-Frank and by the JOBS Act.  She commented on the pace of change in the capital markets, remarking that “the JOBS Act brought another seismic shift in the way companies, particularly small and emerging ones, raise capital and how individual investors participate in that process.”  She noted that the SEC will remain focused on investor protection and on the retail investor.  She emphasized that the Committee represents the interests of retail investors, and commended the Committee for its work on recommendations relating to the proposed Rule 506 rulemaking.  We commented on the Committee’s recommendations in our prior post—see http://www.mofojumpstarter.com/2012/10/19/secs-investment-advisory-committee-recommends-filing-of-general-solicitation-material/.

Commissioner Aguilar, also addressing the Committee (see Aguilar’s comments at http://www.sec.gov/news/speech/2013/spch011813laa.htm), thanked the Committee for the recommendations on the proposed Rule 506 rulemaking.  He noted that pursuant to Section 911 of the Dodd-Frank Act, the Commission is ‘required to “review the findings and recommendations of the Committee.’ In particular, the statute specifies that, “each time the Committee submits a finding or recommendation to the Commission,” the Commission is required to  ‘… promptly issue a public statement –(A) assessing the finding or recommendation of the Committee; and (B) disclosing the action, if any, the Commission intends to take with respect to the finding or recommendation.”  Commissioner Aguilar noted that he expects that the Commission will issue the response required by the Dodd-Frank Act to the Committee’s recommendations on general solicitation.

During the Committee’s meeting session, the members noted their intention to focus on, among other things, implementation of the JOBS Act, and mentioned their ongoing work to produce recommendations related to crowdfunding.

The webcast for the Committee’s meeting is available here: http://www.sec.gov/news/otherwebcasts/2013/iac011813.shtml.

Many banks have taken advantage of the provisions of the JOBS Act regarding the holder-of-record threshold to deregister and terminate their registration.  Banks may want to consider their capital-raising alternatives going forward.  A community or small bank that is no longer subject to Exchange Act filing requirements may consider a Rule 506 offering.  A Rule 506 offering to accredited investors will be an attractive alternative for many banks.  However, capital-raising always has been a challenge for community banks.  Some institutional investors may be reluctant to invest in “restricted securities” if these investors are subject to caps or limitations on the amount of restricted securities that they may hold in their portfolios.  Some banks may want to focus on issuances at the bank level (not the holding company level) and rely on the Section 3(a)(2) exemption available to banks.  Section 3(a)(2) of the Securities Act exempts from registration any security issued or guaranteed by a national bank, or any banking institution organized under the law of any state, territory, or the District of Columbia, the business of which is substantially confined to banking and is supervised by the state or territorial banking commission or similar official.  To qualify for the exemption under Section 3(a)(2), the institution must meet two requirements: (i) it must be a national bank or any institution supervised by a state banking commission or similar authority and (ii) its business must be substantially confined to banking.  Securities issued by bank holding companies are not exempt from registration under Section 3(a)(2).  Securities issued pursuant to this exemption will not be considered “restricted securities” and, as a result, there may be more investor interest.

Banks would benefit from a specific exemption under Section 3(b)(2).  The Commission has an opportunity in connection with its 3(b)(2) rulemaking (required by Title IV of the JOBS Act) to consider a streamlined approach for banks to offer securities publicly (relying on a framework similar to that provided by existing Regulation A), which will not be “restricted securities.”  Under existing Regulation A, an issuer must prepare an offering statement.  Banks, however, are already subject to significant regulatory oversight and make available financial and other information to their regulators (and bank call reports are accessible to investors).  It would make good sense to consider a tailored 3(b)(2) exemption for banks, with reduced information requirements, especially given that many banks will have availed themselves of the modified holder-of-record provisions to terminate their filing obligations, but still need access to capital.

The Investor Advisory Committee will hold a meeting Friday, January 18, 2013, which will begin at 10:00 a.m. (EDT).  The meeting is open to the public and will be webcast on the SEC’s site.  The agenda for the meeting includes introductory remarks from Chairman Walter and Commissioners; introductory remarks from Committee officers; discussion of administrative matters; and reports from the four Investor Advisory Committee subcommittees (the Investor as Owner subcommittee, the Investor as Purchaser subcommittee, the Investor Education subcommittee, and the Market Structure subcommittee).  The meeting notice is available at http://www.sec.gov/news/openmeetings/2013/ssamtg011813.htm, and the agenda is available at http://www.sec.gov/news/otherwebcasts/2013/iac011813-agenda.htm.

The SEC recently announced that the Advisory Committee will hold its next public meeting on Friday, February 1, 2013, at 9:30 a.m. (EDT).  Meetings are open to the public and also webcast on the SEC site.  The agenda for the meeting includes consideration of recommendations and other matters relating to rules and regulations affecting small and emerging companies under the federal securities laws.  See http://www.sec.gov/news/openmeetings/2013/ssamtg020113.htm.

As we noted, last month FINRA’s Board of Governors authorized FINRA to issue an interim form to seek essential information from prospective funding portals intending to apply for membership with FINRA pursuant to the JOBS Act.  FINRA has now announced the availability of the Interim Form for Funding Portals (“IFFP”), which is an online form for prospective intermediaries that intend to apply for membership with FINRA as funding portals.  FINRA is inviting prospective funding portals to complete the IFFP voluntarily until FINRA and the SEC adopt final rules implementing Title III of the JOBS Act and establishing the registration procedures for funding portals.

Until the SEC and FINRA rules are adopted, FINRA will use the information collected with the IFFP to become more familiar with the proposed business models, activities and operations of funding portals.  Once the final crowdfunding rules are adopted, additional information will be required of funding portals seeking to actually register with FINRA and the SEC.  The information now requested in the IFFP includes:

  • contact and general information about the funding portal;
  • ownership and funding information about the prospective funding portal;
  • information about the prospective funding portal’s management; and
  • information about the funding portal’s business relationships, business model and compensation.

FINRA will treat information submitted using the IFFP as confidential.

The IFFP is available at: http://www.finra.org/Industry/Issues/Crowdfunding/