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 final report from the forum held in November 2016 was recently published.  The recommendations of the forum often provide the Securities and Exchange Commission with insights regarding measures that could promote capital formation.  The report identifies as its three highest priority recommendations the following:

  • Maintaining the monetary thresholds that are part of the accredited investor definition but expanding the categories of qualifications for accredited investor status along the lines discussed in the Commission’s report on the accredited investor standard;
  • Moving forward with the Commission’s proposed amendments to the definition of smaller reporting company; and
  • Leading a joint effort with FINRA and NASAA to implement the principles advanced by the American Bar Association’s Task Force on Private Placement Brokers for a framework for finders and limited intermediary registration.

The full report can be accessed here:  https://www.sec.gov/info/smallbus/gbfor35.pdf

On March 9, 2017, a number of bipartisan bills designed to promote capital raising for companies were approved by the House Financial Services Committee and the Senate Committee on Banking, Housing and Urban Affairs.  Chairman of the Senate Committee on Banking, Housing and Urban Affairs Mike Crapo noted that the bills “will improve economic growth and investor protections.” The approved bills include:

  • H.R. 910/S. 327, “Fair Access to Investment Research Act of 2017”
    Directs the SEC to provide a safe harbor related to certain investment fund research reports
  • H.R. 1219/S. 444, “Supporting America’s Innovators Act of 2017”
    Amends the Investment Company Act of 1940 to expand the investor limitation for qualifying venture capital funds under an exemption from the definition of an investment company.
  • H.R. 1257/S. 462, “Securities and Exchange Commission Overpayment Credit Act”
    Amends the Securities Exchange Act of 1934 to require the SEC to refund or credit excess payments made to the Commission.
  • H.R. 1366/S. 484, “U.S. Territories Investor Protection Act of 2017”
    Amends the Investment Company Act of 1940 to terminate an exemption for companies located in Puerto Rico, the Virgin Islands, and any other possession of the United States.
  • H.R. 1343/S. 488, “Encouraging Employee Ownership Act”
    Directs the SEC to revise its rules so as to increase the threshold amount for requiring issuers to provide certain disclosures relating to compensatory benefit plans.
  • H.R. 1312, the “Small Business Capital Formation Enhancement Act”
    Amends the Small Business Investment Incentive Act of 1980 to require an annual review by the SEC of the annual government-business forum on capital formation that is held pursuant to such Act.

February 7-8, 2017

Four Seasons Hotel Miami
1435 Brickell Avenue
Miami, FL 33131

The 35th Annual Federal Securities Institute is the Southeast’s premier educational forum on new Delaware corporate law developments and anticipated deals that can significantly impact corporate transactions in the current calendar year. Attendees will hear directly from top experts and authorities throughout the country, including regulators, judges, corporate counsel, plaintiff and defense litigators.

Morrison & Foerster Partner Anna Pinedo will speak on a panel entitled “Capital Raising Opportunities and Challenges in 2017: Being Public without Going Public” on Day 1 of the program.

For more information, or to register, please click here.

In this piece, which was included in a recent compendium published by Practising Law Institute (PLI) titled “Looking Ahead:  The Impact of the 2016 Election on Key Legal Issues,” we offer our thoughts on the likely areas of focus for the Securities and Exchange Commission.

Access here:  https://media2.mofo.com/documents/170100-securities-law-crystal-ball.pdf.

 

The Securities and Exchange Commission has published the agenda for the October 5 meeting of the Advisory Committee on Small and Emerging Companies.

The Advisory Committee plans to discuss and cover Regulation S-K disclosure requirements, research on corporate board diversity and outreach relating to capital raising for smaller companies.

In addition, the Division of Trading and Markets will provide updates on equity capital market structure initiatives, a tick-size pilot, and the treatment of “finders”.

The meeting begins at 9:30am and will be live streamed via the SEC’s website.

On September 13, 2016, the House Financial Services Committee of the United States House of Representatives (the “FSC”) formally released H.R. 5983, the “Financial CHOICE Act” (the “CHOICE Act”). While the CHOICE Act has largely been viewed through a financial regulatory lens, as the first major concerted effort to provide an alternative to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) as a way to end “Too Big to Fail,” the CHOICE Act, as currently drafted, would also repeal a number of the specialized disclosure provisions that were contained in the Dodd-Frank Act and subsume “JOBS Act 2.0” capital formation measures that have largely been presented to date as standalone bills.

This alert provides an overview of the sections of the CHOICE Act that would impact U.S. securities laws, which are contained in Title IV and Title X of the CHOICE Act.

Read our client alert.

Click here to view our chart entitled “Capital Formation Bills Reflected in the CHOICE Act.”

On September 12, 2016, the United States Chamber of Commerce’s Center for Capital Markets Competitiveness hosted a webinar to discuss the policy recommendations outlined in its report titled “A Plan to Reform America’s Capital Markets” (the “Report”).  The Report provides policy recommendations for the next administration and Congress to reform the capital markets in order to address current inefficiencies and inadequacies in the regulation and government oversight of the capital markets.  The Report includes a number of recommendations relating to financial services regulation, which are not the subject of this blog post.  With respect to capital formation, the Report addresses the following:

Financial reporting, corporate governance, and disclosure effectiveness:  The Report recommends establishing consistent definitions of “materiality” and rules of procedure for the SEC, the Financial Accounting Standards Board (FASB), and the Public Company Accounting Oversight Board (PCAOB), and developing a disclosure framework to more clearly present pertinent information to investors.  The Report asks that the SEC initiate changes to Exchange Act Rule 14a-8 and modernize shareholder resubmission thresholds.  The Report also advocates the repeal of rules unrelated to the SEC’s mission, including the SEC’s conflict minerals rule, resource extraction rule, and pay ratio disclosure rule, and recommends the re-proposal of the SEC’s pay-for-performance rule and clawback rule.  In addition, the Report calls for the creation of a Financial Reporting Forum, composed of SEC, FASB, and PCAOB representatives, as well as investors and businesses, tasked with identifying and addressing emerging financial reporting issues.

Capital formation and FinTech:  The Report discusses the success of the JOBS Act in enabling more efficient investment for smaller companies and emerging growth companies (EGCs) and recommends passing “JOBS Act 2.0” and related bills that promote capital formation and help increase access to capital for small businesses.  The Report also advocates the creation of a congressional bi-cameral committee, comprised of members of the House Committee on Financial Services and the Senate Committee on Banking, Housing and Urban Affairs, to study the current FinTech landscape and provide policy and legislative recommendations to both Houses of Congress.

A copy of the Report is available here.

H.R. 2357, the Accelerating Access to Capital Act, was passed by the House on Thursday, September 8, 2016 by a vote of 236-178.  The bill contains three important pieces of legislation designed to facilitate the access to capital for small and emerging companies.

H.R. 2357 proposes to direct the Securities and Exchange Commission to revise Form S-3 so as to permit securities to be registered pursuant to General Instruction I.B.1. of the form if either: (1) the aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant is $75 million or more, or (2) the registrant has at least one class of common equity securities listed and registered on a national securities exchange.

The two bills incorporated into H.R. 2357 are H.R. 4850, the Micro Offering Safe Harbor Act, which proposes to amend the Securities Act of 1933 to exempt certain micro-offerings from the Act’s registration requirements, and H.R. 4852, the Private Placement Improvement Act of 2016, which proposes to direct the SEC to revise the filing requirements of Regulation D to require an issuer that offers or sells securities in reliance upon a certain exemption from registration to file, no earlier than the date of first sale of such securities, a single notice of sales containing the information required by Form D for each new offering of securities.

House Financial Services Committee Chairman Jeb Hensarling commended the work of the House and noted in a press release that “[w]e must have capital formation if we’re going to have a healthy economy”.