On October 26, 2016, the SEC adopted final rules (1) amending Rule 147 and Rule 504 under the Securities Act of 1933, as amended (the “Securities Act”), (2) establishing a new Securities Act exemption designated Rule 147A, and (3) repealing Rule 505 under the Securities Act.  Amended Rule 147 and new Rule 147A will take effect on April 20, 2017, amended Rule 504 will take effect on January 20, 2017, and the repeal of Rule 505 will take effect on May 20, 2017.  Amended Rule 147 facilitates offerings relying upon recently adopted intrastate crowdfunding exemptions under state securities laws, new Rule 147A further accommodates offers accessible to out-of-state residents and companies that are incorporated or organized out-of-state, and amended Rule 504 increases the aggregate amount of securities that may be offered and sold in any twelve-month period from $1 million to $5 million and disqualifies certain bad actors from participating in Rule 504 offerings.

For more information regarding amended Rule 147, new Rule 147A and amended Rule 504, read our client alert.

At the American Bar Association’s Fall Meeting, Keith Higgins, Director of the SEC’s Division of Corporation Finance (the “Division”), gave his last “Dialogue with the Director” given the upcoming change in administration.  Mr. Higgins presented his views on a broad range of areas, including the following:

  • Amended Rule 147 and Rule 504 and new Rule 147A.  The Federal Register should be publishing soon the final rules adopting amended Rule 147 and Rule 504 and new Rule 147A so that the effective dates will be early in 2017.  We have commented on these rules in our client alert, available here.
  • The FAST Act.  All of the required rulemakings related to the Fixing America’s Surface Transportation (FAST) Act have been completed.  The SEC must deliver on November 28, 2016 its report to Congress on recommendations to simplify the Regulation S-K disclosure rules.  These recommendations are likely to take into account comments received with respect to the “400 Series” of Regulation S-K.
  • Diversity Disclosures.  The Division completed its disclosure recommendations relating to disclosures regarding board of director diversity.  However, SEC Chair Mary Jo White has noted she does not expect the SEC to act on the recommendations before January 2017.
  • At-the-Market Offerings.  Mr. Higgins noted the Division’s review relating to disclosures available to investors in connection with at-the-market (“ATM”) sales by issuers.  Mr. Higgins indicated that there has been continuing discussion with market participants regarding disclosure practices for plan of distribution sections of ATM prospectuses, including disclosures regarding “negotiated” sales and periodic sales.  Mr. Higgins noted that there may be SEC Staff guidance forthcoming on these types of disclosures.
  • Rule 701 and Form S-8.  Given that companies are staying private longer, the SEC Staff has been receiving more questions on Securities Act Rule 701 and the use of registration statements on Form S-8, and the SEC Staff has issued C&DIs in response.  For more information, see our blog post, available here.
  • Looking into the Future.  Mr. Higgins commented on the provisions of the proposed Financial CHOICE Act (the “CHOICE Act”), which may receive renewed interest and support by the new administration next year.  For a summary of the securities law related provisions of the CHOICE Act, see our client alert, available here.
  • Integration C&DI.  The SEC Staff issued new guidance on Rule 506(b) and Rule 506(c) of Regulation D that treats Rule 506(c) offerings as “public offerings” for purposes of analogizing to Securities Act Rule 152.
  • Shareholder Proposals.  Mr. Higgins also addressed a number of shareholder proposal matters and pay ratio guidance.

On November 14, 2016, the SEC hosted a panel discussion entitled the “Impact of Recent Innovation in Capital Formation,” as part of its public forum on financial technology (Fintech) innovation held in Washington, D.C., and webcast over the SEC’s website.  Mr. Sebastian Gomez Abero, Head of the Office of Small Business Policy of the SEC’s Division of Corporation Finance, moderated the panel.

Panelists discussed the relationship between financial innovation and capital formation, the dynamic between Fintech and investor protection, and the risks, challenges and opportunities facing borrowers, lenders, intermediaries and regulators engaged in the online marketplace lending and crowdfunding spaces.  The panelists said that, overall, they see the recent growth in peer-to-peer online lending and crowdfunding technologies as positive developments, particularly in expanding the availability of and access to affordable credit and capital to traditionally underserved markets, including small business owners and entrepreneurs.  Another common theme identified by the panel is the need for greater clarity, standardization and consolidation in the regulatory structure.  A panelist commented that, at the moment, there were about 25 federal agencies involved in consumer finance and much more at the state level, with overlapping jurisdictions.  Oftentimes, borrowers who wish to tap into the online marketplace lending and crowdfunding spaces are confronted with the daunting task of navigating through a complex and overlapping regulatory landscape, with multiple regulators to deal with.  Notwithstanding these challenges, the panel expressed confidence that online marketplace lending and crowdfunding are poised to grow and develop in the coming years.  The SEC has also reported that in less than six months since the regulations became effective, more than 140 companies have started an offering using the new Regulation Crowdfunding.

Earlier today at an open meeting, the SEC adopted final rules regarding intrastate and regional offerings, which closely follow the SEC’s proposed rules issued on October 30, 2015.  The final rules amend Securities Act Rule 147 to facilitate offerings relying upon recently adopted intrastate crowdfunding exemptions under state securities laws.  Rule 147 provides a safe harbor for intrastate offerings exempt from registration pursuant to Securities Act Section 3(a)(11), which exempts any security offered and sold only to persons resident within a single state or territory by an issuer residing or incorporated in and doing business within such state or territory.  As amended, Rule 147 will continue to function as a safe harbor under Section 3(a)(11), though Section 3(a)(11) will still be available as a potential statutory exemption in and of itself.  The final rules also establish a new Securities Act exemption, designated Rule 147A, that further accommodates offers accessible to out-of-state residents and companies that are incorporated or organized out-of-state.  The final rules also amend Rule 504 of Regulation D to (1) increase the aggregate amount of securities that may be offering and sold in any twelve-month period from $1 million to $5 million and (2) disqualify certain bad actors from participating in Rule 504 offerings.  In addition, the final rules repeal Rule 505 of Regulation D, which had provided a safe harbor from registration for securities offered and sold in any twelve-month period from $1 million to $5 million.  The amendments to Rule 147 and Rule 504 are part of the SEC’s broader effort to assist smaller companies with capital formation consistent with other public policy goals, including investor protection.

For more information, read our client alert.

On Wednesday, October 26, 2016, beginning at 10:00 a.m., the Securities and Exchange Commission will hold an open meeting at which the Commission will consider the adoption of final rule amendments relating to Securities Act Rule 147 and Rule 505, which would facilitate intrastate and regional securities offerings.  The proposed amendments were well-received by market participants and generated only modest comments.  The open meeting notice also states that the Commission will consider whether to repeal Rule 505.  Rule 505 provides an exemption for sales of up to $5 million of securities in a 12-month period, without the use of general solicitation, to accredited investors and, subject to information requirements, to non-accredited investors.  Presumably, the amendments to Rule 504 would render Rule 505 superfluous.

“Direct-to-consumer” offerings enable companies to raise capital directly from their customers, with or without the use of underwriters or other financial intermediaries. Direct-to-consumer offerings have garnered attention recently given the ability to conduct offerings using a “crowdfunded” approach; however, companies have conducted direct-to-consumer offerings for years. With the amendments to Regulation A (commonly referred to as “Regulation A+”) and the adoption of Regulation Crowdfunding by the Securities and Exchange Commission (the “SEC”), companies have now become more acutely focused on broadening their investor base by soliciting interest in offerings of their securities from their customers. In this alert, we discuss the history of direct-to-consumer offerings, current approaches, the applicable SEC requirements, and considerations for companies undertaking such offerings.

Read our client alert.

2015 saw the transformation of marketplace lending from a FinTech fad to a bona fide change in the way consumers and small businesses access credit. As the industry continues to mature and evolve, more changes are on the horizon, including new business practices and regulatory challenges. Crowdfinance has also developed and diversified.

At this year’s PLI Marketplace Lending and Crowdfunding seminar on September 9, 2016, Partner James R. Tanenbaum will speak on a panel entitled “Legal Issues for Equity Crowdfunding Platforms.” Topics will include:

  • Crowdfunding under Title II – Solicitation vs. Non-Solicitation;
  • “Reasonable Steps to Verify”;
  • The preexisting relationship and CitizenVC: Myth vs. Facts;
  • Working with broker-dealers and other intermediaries; and
  • Liquidity and secondary markets including the new FAST Act and Section 4(a)(7).

To register for this conference, or for more information, please click here.

PLI’s Private Placements and Hybrid Securities Offerings 2016 conference on August 1-2, 2016, presents an expert faculty of leading practitioners and regulators as they discuss and analyze the changing regulatory framework and market for private offerings. The faculty will address the changes to private and exempt offerings brought about by the JOBS Act, including matchmaking platforms, “accredited investor” crowdfunding, offerings using general solicitation, Rule 144A offerings, and the practical implications of these changes for issuers, broker-dealers and investment advisers. In addition, they will address the basics of private placements, sales of restricted securities, Rule 144 and Section 4(a)(1-1/2) transactions and block trades. The panelists will discuss the considerations that have led many companies to remain private longer and defer IPOs, while creating liquidity opportunities for holders through private secondary trading markets. Panelists will address the basics of traditional private placements, PIPE transactions, and Rule 144A transactions, as well as recent developments affecting each of these capital raising alternatives.

Morrison & Foerster Partner Anna Pinedo will serve as chairperson for this event and will speak on the “Welcome and Introduction to Private Placements and Hybrid Financings” panel on Day One of the conference and on the “Welcome and Introduction to Conducting Hybrid Offerings” panel on Day Two. Morrison & Foerster Partner James Tanenbaum will speak on a panel entitled “Regulation A+” on Day One. The conference will be held at the PLI New York Center in New York, NY and is scheduled to begin at 9:00 a.m. EDT.

To register for this conference, or for more information, please click here.

On July 21-22, 2016, Practising Law Institute will host its “Understanding the Securities Laws 2016” seminar. This program will provide an overview and discussion of the basic aspects of the U.S. federal securities laws by leading in-house and law firm practitioners as well as SEC staff. Emphasis will be placed on the interplay among the Securities Act of 1933, the Securities Exchange Act of 1934, the Sarbanes-Oxley Act, the Dodd-Frank Act, the JOBS Act, the securities related provisions of the FAST Act and related SEC regulations, and on how securities lawyers can solve practical problems that arise in the context of public and private offerings, SEC reporting, mergers and acquisitions and other common corporate transactions.

Morrison & Foerster Partner Anna T. Pinedo will lead a session entitled “Securities Act Exemptions” on Day One of the program. Topics will include:

  • Exempt securities versus exempt transactions;
  • Private placements;
  • Regulation D offerings;
  • Regulation A+ offerings;
  • Intrastate offerings;
  • Crowdfunding;
  • Employee equity awards;
  • Rule 144A high yield and other offerings;
  • Regulation S offerings to “non-U.S. persons”; and
  • Resales of restricted and controlled securities: Rule 144, Section 4(a)(7) and 4(a)(1½).

PLI will provide CLE credit.

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

The House Financial Services Committee held a markup session on June 15, 2016 to discuss a number of bills, including many relating to capital formation and the lessening of regulatory burdens for smaller reporting companies.  On June 16, the Committee reconvened and approved twelve bills, including:

  • H.R. 4850, Micro Offering Safe Harbor Act. This bill amends the Securities Act of 1933 to exempt certain micro-offerings from the Act’s registration requirements.  To qualify for the exemption (1) each purchaser has a substantive pre-existing relationship with an owner; (2) there are 35 or fewer purchasers; and (3) the amount does not exceed $500,000.  H.R. 4850 passed the committee 34-25.
  • H.R. 4852, Private Placement Improvement Act of 2016.  This bill directs the SEC to revise the filing requirements of Regulation D (which provides exemptions from securities registration requirements) 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.  H.R. 4852 passed the committee 33-26.
  • H.R. 4854, Supporting America’s Innovators Act of 2016.  The Investment Company Act limits the number of investors in an investment company fund to 100 for the fund to be exempt from registration with the SEC.  This bill raises the limit on the number of individuals, from 100 to 250, who can invest in certain “qualified venture capital funds” before those funds must register as “investment companies” under the Investment Company Act of 1940.  H.R. 4854 passed the committee 57-2.
  • H.R. 4855, Fix Crowdfunding Act.  This bill would allow small businesses to benefit from Title III of the JOBS Act, which allows for equity crowdfunding. It proposes to increase financial thresholds in the Federal securities laws so as not to dissuade small businesses from using crowdfunding as a way to raise capital, and allows single purpose funds to utilize crowdfunding.  H.R. 4855 passed the committee 57-2.

In a statement, Financial Services Committee Chairman Jeb Hensarling asserted the committee “…will remove duplicative burdens, reduce costs and support smart regulation that protects investors and maintains orderly and efficient markets – because this is key to economic growth.”