The SEC’s Investor Advisory Committee has announced the agenda for its June 22 meeting.  The committee will discuss issues relating to capital formation for smaller companies, including the decline in IPOs. The committee will also review certain provisions of the Financial CHOICE Act, as they relate to the SEC.

The meeting is open to the public and will be webcast live from the SEC’s website.

On June 8, 2017, the House passed H.R. 10, the Financial “CHOICE” Act with a vote of 233 to 186.  Introduced on April 27, 2017, the Financial CHOICE Act proposes to amend the Dodd-Frank Act to repeal the Volcker Rule, eliminate the FDIC’s orderly liquidation authority, and repeal certain limitations imposed by the Durbin Amendment.  The bill would also remove FSOC’s authority to designate non-bank financial institutions and financial market utilities as “systemically important” (also known as “too big to fail”).

Furthermore, in addition to the numerous amendments to the Consumer Financial Protection Act of 2010, the bill intends to (1) modify provisions related to the SEC’s managerial structure and enforcement authority; (2) eliminate the Office of Financial Research within the Department of the Treasury; and (3) revise provisions related to capital formation, insurance regulation, civil penalties for securities laws violations, and community financial institutions.

The bill would also repeal the Department of Labor’s fiduciary rule which, when fully implemented, significantly expands the categories of persons considered fiduciaries.  The DOL would be prohibited from adopting any similar rule until after the U.S. Securities and Exchange Commission (“SEC”) adopts a fiduciary standard for broker-dealers.

Chairman of the House Financial Services Committee, Jeb Hensarling, said in a statement after the passing of the bill: “We will make sure there is needed regulatory relief for our small banks and credit unions, because it’s our small banks and credit unions that lend to our small businesses that are the jobs engine of our economy and make sure the American dream is not a pipe dream.”

For a summary of current pending legislation relating to capital formation, click here.

Many groups have come forward in recent weeks with their lists of regulations that should be reviewed or amended, as well as their list of areas that merit close review in light of the potential burdens that may be imposed by current regulation.  As far as securities regulation is concerned, much of the focus, at least in the popular press, has been placed on measures that relate to IPOs; however, modest changes in other areas would have a positive impact on capital formation—here is our current list:

  • Adopting the proposed amendments relating to smaller reporting companies;
  • Continuing to advance the disclosure effectiveness initiative;
  • Continuing the review of the industry guides in order to modernize these requirements and eliminate outdated or repetitive requirements;
  • Revisiting the WKSI standard in order to see if similar accommodations and offering related flexibility should be made available to a broader universe of companies;
  • Reviewing existing communications safe harbors in order to modernize these and make communications safe harbors available to a broader array of companies, including business development companies;
  • Adopting the proposed amendment to Rule 163(c) that would allow underwriters or other financial intermediaries to engage in discussions on a WKSI’s behalf relating to a possible offering;
  • Assessing whether a policy rationale remains for including MLPs within the definition of “ineligible issuer” when MLPs undertake public offerings on a best efforts basis;
  • Assessing who suffers when ineligible issuers are prevented from using FWPs other than for term sheet purposes;
  • Removing the limitations that require certain issuers to conduct live only roadshows;
  • Eliminating the need for “market-maker” prospectuses;
  • Reviewing the one-third limit applicable to primary issuances off of a shelf registration statement for certain smaller companies;
  • Modernizing the filing requirements for BDCs, permitting access equals delivery for BDCs and modernizing the research safe harbors to include BDCs;
  • Adding knowledgeable employees to the definition of accredited investor;
  • Eliminating the IPO quiet period;
  • Working with the securities exchanges to review their “20% Rules” (requiring a shareholder vote for private placements completed at a discount that will result in an issuance or potential issuance of securities greater than 20% of the pre-transaction total shares outstanding);
  • Addressing the Rule 144 aggregation rules for private equity and venture capital fund related sales;
  • Shortening the Rule 144 holding period for reporting companies;
  • Including sovereign wealth funds and central banks within the definition of QIBs;
  • Shortening the 30-day period in Rule 155; and
  • Shortening the six-month integration safe harbor contained in Regulation D.

As the 115th United States Congress is currently in session, a number of bills designed to promote capital raising for companies have been introduced in both the House and the Senate. In the last two months, both the House and Senate approved a handful of these bills, further advancing potential legislative reform relating to corporate capital formation.

For a summary of the status of these various bills, see our Pending Legislation tracker.

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.