The U.S. Department of the Treasury issued its second report (of four reports), titled “A Financial System that Creates Economic Opportunities, Capital Markets.”  The Report was issued in response to Presidential Order 137772 setting forth the Core Principles that should guide regulation of the U.S. financial system. The Report addresses various elements of the capital markets, from the equity and debt markets, to the U.S. Treasury securities market, and to derivatives and securitization.  The recommendations relating to the U.S. IPO market and reducing the regulatory burdens for companies seeking to undertake an IPO as well as for smaller public companies may be very familiar to readers of this blog, since many of the measures are included in the Financial CHOICE Act or otherwise addressed in proposed legislation or in rule proposals from the SEC.

See our alert, which may be accessed here.

 

 

 

 

 

 

 

 

Practising Law Institute’s Exempt and Hybrid Securities Offerings is the first practical, accessible resource to provide you with comprehensive legal, regulatory, and procedural guidance regarding these increasingly popular offering methodologies.

Authored by Morrison & Foerster Partners Anna Pinedo and James Tanenbaum, the third edition of Exempt and Hybrid Securities Offerings gives you a useful understanding of the applicable regulations and legal framework for these transactions, as well as the implications of these regulations for structuring transactions.

The treatise provides a detailed analysis of the regulations and guidance affecting exempt and hybrid securities offerings, as well as offers market context and practical structuring advice. Packed with checklists, transactional timelines, SEC guidance, and a wealth of labor-saving sample documents, Exempt and Hybrid Securities Offerings offers the relative advantages and drawbacks of the most commonly used forms of exempt and hybrid offerings. It clearly explains:

  • conducting venture private placements;
  • traditional and structured PIPE transactions;
  • institutional (debt) private placements;
  • Rule 144A offerings;
  • Regulation S offerings;
  • Regulation A offerings and crowdfunding;
  • shelf takedowns;
  • registered direct and ATM offerings;
  • confidentially marketed public offerings; and
  • continuous issuance programs, including MTN and CP programs.

This comprehensive three-volume treatise, with useful forms, has been updated to reflect changes brought about by the Dodd-Frank Act, the JOBS Act, the FAST Act, and other recent regulatory changes.

For more information, please click here.

Earlier in the week, SEC Chair Clayton provided testimony in Congress regarding the Commission’s agenda. In his testimony, Chair Clayton noted that the Commission remains focused on regulatory initiatives required by the FAST Act and the Dodd-Frank Act. Chair Clayton also noted that the new Regulatory Flexibility Act agenda will be released in a few weeks, which will reflect the Commission’s priorities. The prior agenda reflected interim Chair Piwowar’s priorities for the Commission.

Chair Clayton reiterated his concerns regarding the decline in the number of U.S. public companies. He noted that the regulatory burden needs to be reassessed so that private companies might consider IPOs. Chair Clayton observed that “A shrinking proportion of public companies, particularly smaller and medium-sized companies, has costs beyond investment choices, including that there will be less publicly available information about the operations and performance of companies that are important to our economy.” The Division of Corporation Finance is considering whether there are other areas (other than those addressed in the Division’s guidance this summer relating to extending the confidential review process and providing registrants with guidance regarding certain accounting questions in advance of a filing) in which interpretive guidance could assist companies without reducing investor protections, and whether enhancements can be made to staff processes to further benefit companies and investors. The Commission will soon also consider a rule proposal required by the FAST Act to modernize and simplify the disclosure requirements in Regulation S-K, and the Staff is considering recommendations on final rule amendments to the “smaller reporting company” definition. Chair Clayton mentioned a number of other initiatives, including changes to the rules in Regulation S-X related to requirements for financial statements for entities other than the issuer; and industry-specific disclosure requirements, such as the property disclosure requirements for mining companies and preparing recommendations for proposed rules to modernize bank holding company disclosures. The full text of the prepared testimony is available here: https://www.sec.gov/news/testimony/testimony-clayton-2017-09-26.

Last week, the Senate passed three bipartisan bills that promote access to capital for small businesses and startups.  The Senate bills, the House corollaries of which originally passed on March 9, 2017, include the following:

  • S. 444, the Supporting America’s Innovators Act (H.R. 1219).  Amends the Investment Company Act of 1940 to exempt from the definition of an “investment company,” for purposes of specified limitations applicable to such a company under the Act, a qualifying venture capital fund that has no more than 250 investors. Specifically, the bill applies to a venture capital fund that has less than $10 million in aggregate capital contributions and uncalled committed capital.
  • S. 416, the Small Business Capital Formation Enhancement Act (H.R. 1312). Amends the Small Business Investment Incentive Act of 1980 with respect to the annual government-business forum of the SEC to review the current status of problems and programs relating to small business capital formation.
  • S. 488, Encouraging Employee Ownership Act (H.R. 1343). Requires the SEC to increase, from $5 million to $10 million the threshold beyond which an issuer is required to provide investors with additional disclosures related to compensatory benefit plans.

At today’s meeting of the American Bar Association, the Director of the Division of the SEC’s Corporation Finance provided some comments regarding the Division’s work and priorities.  Mr. Hinman reiterated the Division’s focus on capital formation related matters.  Mr. Hinman echoed concerns voiced by SEC Chair Clayton regarding the decline in the number of U.S. listed companies in recent years.  Mr. Hinman noted that there have been many reasons offered to explain the decline in the number of public companies and the increasing tendency of companies to remain private longer.  For example, he noted that there are many more types of investors in the private markets, private investors are being more innovative in how they provide capital, and there are new ways to provide liquidity for employees of private companies with stock-based compensation.  Mr. Hinman noted that there have been concerns expressed about valuations but that many articles, reports and studies noting the attractive private valuations (compared to IPO valuations) may fail to appropriately reflect the fact that valuations in private rounds relate to preferred stock with liquidation and other preferences, and not to common stock.  In any event, Mr. Hinman noted the Division’s interest in understanding the regulatory burdens placed on companies seeking to undertake IPOs and on public reporting companies.  He noted that a recent DERA report to Congress reiterated the difficulties associated with unwinding the effects of any particular regulatory requirement on capital raising.

Mr. Hinman discussed the Division’s policy of extending the confidential review process to non-EGCs and underscored the Division’s invitation to have companies and their counsel consult with the SEC on financial statement requirements.  He noted that the Staff would be responding very promptly to requests for waivers.

In a wide-ranging discussion, Mr. Hinman addressed a number of other topics, including the resource extraction rule.  He noted that the Congressional Review Act nullified the rule, but that the SEC still has a statutory mandate to act although there is a CRA requirement that the new rule cannot be substantially similar to the rule that was struck down.  The SEC will have to propose a new rule for comment in the near future.  Mr. Hinman also addressed other rules that had been proposed by the SEC, including proposed updates to Industry Guide 7 on mining disclosures, and amendments to the smaller reporting company definition.  While he noted that the there was a final rule under development regarding the SRC definition, there was ongoing discussion related to SOX 404 attestation requirements.  He noted that the SEC was seeking more information on the costs directly attributable to 404 attestation and was considering other tests, including revenue-based and market cap-based tests, as possible alternatives.  Mr. Hinman noted that there were very few comments submitted in response to the request for comment on Industry Guide 3 disclosures.  In response to questions, Mr. Hinman noted that the SEC expected to comply with the FAST Act-mandated timelines regarding the modernization of Regulation S-K and that the SEC’s changes to Regulation S-K are likely to be quite consistent with those discussed in the November 2016 report to Congress.  Again, in response to a question, Mr. Hinman noted that there may be some opportunity for clarifying guidance on integration issues.

On September 5, 2017, the U.S. House of Representatives approved H.R. 2864 (Improving Access to Capital Act) by a vote of 403-3.  The bill, which was sponsored by Rep. Krysten Sinema and previously amended by the Committee on House Financial Services on September 5, 2017, directs the SEC to amend Regulation A to permit Exchange Act reporting companies who otherwise meet all of the requirements under Regulation A to issue securities under Regulation A.  Currently, Regulation A only applies to non-reporting companies.  Allowing reporting companies to use Regulation A would provide them with a cheaper and faster way to raise capital due to the shorter SEC review process, and in the case of Tier 2 offerings, exemption from state blue sky review.  The expansion of Regulation A to include reporting companies might also increase the quality of future Regulation A issuers, broaden the investor base for Regulation A offerings and ultimately enhance liquidity in the secondary market.  In addition, the ability to use Regulation A could prove useful to reporting companies that do not qualify to use Form S-3 for primary offerings.

The full text of the bill can be found here.

Since 2004, the number of companies valued at over $1 billion, known as unicorns, has grown exponentially.  Pitchbook’s recently published Unicorn Report notes that unicorns currently make up one-fifth of 2017’s total deal value. There are currently 176 U.S.-based companies that are classified as unicorns.  While the number of unicorns has increased, the number of financings and average deal size has declined.  In 2017, to date, there have been 43 financings for U.S.-based unicorns, raising $10 billion.  Last year, unicorns raised $18.2 billion in 68 deals and 2015 saw 118 deals raising $20.4 billion.

There are 17 companies that achieved unicorn status in the U.S. during 2017, to date.  On average, it took 6.7 years for these companies to reach unicorn status since their founding.  Looking at all U.S. unicorns, the companies have an average age of 8.8 years.

As more companies are electing to remain private for a number of reasons, including the costs associated with going public and remaining a public company, unicorn exits are scarce.  In 2017, to date, there have been eight exits by unicorns valued at $8.7 billion.  In 2016, there were 10 exits valued at $15.6 billion.  This year, two unicorns were acquired and five went public.

Access Pitchbook’s Unicorn Report here: https://pitchbook.com/news/reports/2017-unicorn-report.

October 19-20, 2017

PLI California Center
685 Market Street
San Francisco, CA 94105

This program will enhance your understanding of business strategies, accounting fundamentals and vocabulary used by management, investors, auditors and bankers. Practical advice and application of information to actual situations and financial reports will provide participants with opportunities to immediately implement growth and broaden capabilities.

Partner Anna Pinedo will host a session entitled “Financing Alternatives” on day one of the program. Topics will include:

  • Common financing alternatives — debt, equity and hybrids;
  • Sources of funding: public and private markets – the roles of advisors in different transactions;
  • Liquidity: Raising and deploying capital;
  • Explain the dimensions of capital management; and
  • The challenges of effective management of capital.

PLI will provide CLE credit.

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

The SEC’s Division of Economic and Risk Analysis (DERA) recently produced a Report to Congress regarding the impacts of the Dodd-Frank Act on access to capital for consumers, investors, and businesses, and market liquidity.  Although the Report is principally focused on liquidity, it does provide some interesting statistics regarding the primary issuance of equity securities.

The Report notes that total capital formation from 2010 when the Dodd-Frank Act was enacted through year-end 2016 was approximately $20.2 trillion, of which $8.8 trillion was raised through registered offerings, and $11.38 trillion was raised in exempt offerings.  The report notes the substantial increase in reliance on exempt offerings.  Regulation D offerings have more than doubled since 2009.  However, the report notes that the amount sold in reliance on Rule 506(c) represented only 3% of the amount sold in reliance on Rule 506.  The average amounts raised in initial Rule 506(c) offerings is much smaller than the average amount reported sold in  Rule 506(b) offerings.  Rule 144A issuances remain stable.

The Report also provides data regarding Regulation A and crowdfunded offerings, and may be accessed here:  https://www.sec.gov/files/access-to-capital-and-market-liquidity-study-dera-2017.pdf.

Global fintech venture capital-backed financings are on course to hit record highs, according to a recent research briefing by CB Insights. For the first half of 2017, there have been 496 VC-backed financings that raised over $8.0 billion for fintech companies around the world. U.S. fintech issuers represented almost 40% of the total number of fintech financings in the first half of the year with 198 deals raising $3.1 billion.

Financings for blockchain and bitcoin companies globally in the first half of 2017 raised $343 million over 36 deals. Wealth tech company financings, which include robo-advisors and mobile investing platforms, raised $661 million across 33 financings. Financings for insurance tech companies accounted for over 15% of financings by number of deals, raising $826 million over 76 deals.

There are now 26 fintech unicorns, companies with a valuation of over $1 billion, which include 15 U.S.-based fintech companies. This follows an ongoing trend of privately held companies choosing to remain private longer. Late-stage investments have been ever more present with companies going through multiple rounds of financings due to increased access to capital. Both global and U.S. late-stage investments in fintech companies hit five-quarter highs, with a median deal size of $34 million and $38.5 million, respectively.

To see CB Insight’s full report, click here.