Today, the two-year tick size pilot program, which was proposed by the national securities exchanges and FINRA in June 2014 and approved by the SEC in May 2015, officially commenced.  The pilot program is a data-driven test to evaluate whether or not widening the minimum quoting and trading increments (“tick sizes”) for stocks of smaller capitalization companies would impact the trading, liquidity and market quality of those stocks.  The SEC modified several provisions of the pilot program initially proposed by the national securities exchanges and FINRA.  A variety of data generated during the tick size pilot will be released publicly on an aggregated basis to assist in analyzing the impact of wider tick sizes on smaller capitalization stocks.  In addition, the national securities exchanges and FINRA must submit their initial assessments of the pilot program’s impact by April 1, 2018 based on data generated during the first 12 months of the pilot program’s operation.

The pilot program includes stocks of companies with $3 billion or less in market capitalization, an average daily trading volume of one million shares or less, and a volume weighted average price of at least $2.00 for every trading day.  The pilot program consists of a control group of approximately 1,400 securities and three test groups with 400 securities each, selected through stratified sampling.  For the duration of the pilot program: (i) the control group will be quoted at the current tick size increment of $0.01 per share and will trade at the currently permitted increments; (ii) the first test group will be quoted in $0.05 minimum increments but will continue to trade at any price increment that is currently permitted; (iii) the second test group will be quoted in $0.05 minimum increments and will trade at $0.05 minimum increments subject to a midpoint exception, a retail investor exception, and a negotiated trade exception; and (iv) the third test group will be subject to the same terms as the second test group and also will be subject to the “trade-at” requirement to prevent price matching by a person not displaying at a price of a trading center’s best “protected” bid or offer, unless an enumerated exception applies.  In addition to the exceptions provided under the second test group, an exception for block size orders and exceptions similar to those under Rule 611 of Regulation NMS will apply.

In June 2014, the SEC ordered the national securities exchanges and FINRA to develop and file a proposal for a tick size pilot program.  On August 26, 2014, the SEC announced that the national securities exchanges and FINRA had filed a proposal to establish a national market system plan to implement a targeted 12-month pilot program that will widen minimum quoting and trading increments (tick sizes) for certain stocks with smaller capitalization.  The SEC indicated that it plans to use the pilot program to “assess whether such changes would enhance market quality for smaller capitalization stocks for the benefit of investors and issuers.”  The proposed plan is subject to SEC approval following a 21-day public comment period.

As proposed, the pilot program will include stocks with a market capitalization of $5 billion or less, an average daily trading volume of one million shares or less, and a closing share price of at least $2 per share.  The pilot will consist of one control group and three test groups, with 400 securities in each test group selected by stratified sampling.

  • Pilot securities in the control group will be quoted at the current tick size increment of $0.01 per share, and trade at the increments currently permitted. The control group would represent a baseline for analysis during the pilot period.
  • Pilot securities in the first test group will be quoted in $0.05 minimum increments.  Trading would continue to occur at any price increment that is permitted today.
  • Pilot securities in the second test group will be quoted in $0.05 minimum increments, and traded in $0.05 minimum increments subject to certain exceptions.
  • Pilot securities in the third test group will be subject to the same minimum quoting and trading increments (and the same exceptions) as the second test group, but in addition would be subject to a “trade-at” requirement, which prevents price matching by a trading center that is not displaying the best bid or offer.

The pilot also directs the exchanges and FINRA to collect and transmit data to the Commission and make the data available to the public in an agreed-upon format.  After the end of the pilot period, the exchanges and FINRA will complete an assessment of the impact of the pilot and submit the assessment to the SEC.

The SEC has announced that it ordered the national securities exchanges and the FINRA to develop and file a plan to implement a targeted 12 month pilot program that will widen tick sizes for specified small-cap stocks. The plan is due to the SEC by August 25, 2014. The SEC will use the pilot program to assess whether the changes to tick sizes would enhance market quality to the benefit of U.S. investors, issuers, and other market participants.

The pilot will include stocks with: (1) a market capitalization of $5 billion or less; (2) an average daily trading volume of one million shares or less; and (3) a share price of $2 per share or more.  The pilot will consist of one control group and three test groups, with 300 securities in each test group selected by stratified sampling.

Under the SEC’s order, the exchanges and FINRA will collect data for the SEC and make that data available to the public. After the pilot ends, the exchanges and FINRA will assess the results and submit that assessment to the SEC.

Title I of the JOBS Act mandated that a study be conducted on the impact of decimalization on the markets, particularly with respect to small-cap stocks. The SEC delivered this study to Congress in July 2012. The SEC subsequently held a roundtable on decimalization in February 2013. More recently, legislation to address tick sizes has been proposed, but nothing has yet been adopted.

The SEC’s announcement is available at:




A bill was introduced today in the House of Representatives (HR 1952) by Rep. Schweikert that  proposes to amend the Securities Exchange Act of 1934 to require the Securities and Exchange Commission to allow publicly traded companies with a certain sized public float to change their stocks’ tick sizes to increase liquidity by incentivizing capital commitment, research coverage, and brokerage support, thereby increasing the stocks’ liquidity and investor interest, and for other purposes.  The bill was referred to the Committee on Financial Services.

Any milestone, such as an anniversary, provides an opportunity for reflection and evaluation.  At the one-year anniversary of the JOBS Act, preliminary experience gives reason for some optimism.  The centerpiece of the JOBS Act, the “IPO on-ramp” provisions contained in Title I, have proven quite useful.  The SEC Staff’s guidance in the form of Frequently Asked Questions (or FAQs) promptly filled the gaps in the legislation and helped facilitate prompt reliance on these new provisions.  It would be too soon to draw conclusions regarding the impact of the on ramp on IPOs in general, and smaller IPOs in particular.  The provisions relating to the Exchange Act threshold, which also were immediately effective, have already been relied upon by many smaller banks to suspend their ongoing reporting.  Most of the other provisions of the JOBS Act await further SEC rulemaking.  Below we provide a very brief “cheat sheet” of the status of the various provisions.  We believe that it is fair to say though that the JOBS Act has already had a profound effect on capital formation by restarting an important dialogue on SEC disclosure requirements and permissible communications that seemed to come to an end just after the Securities Offering Reform in 2005, when attention turned to executive compensation disclosures, corporate governance concerns, and ultimately the financial crisis.  The JOBS Act also has served to bring greater general awareness of the important changes that have taken place in the last decade in the way that promising companies choose to finance their growth.  Finally, even for the non-securities lawyers among us, the JOBS Act has focused attention on the divide between public and private offerings—challenging all of us to think more closely about the appropriateness of certain existing regulations that seem more and more “artificial” in the face of social media and other developments.

Title I (the IPO on-ramp)

  • This Title was immediately effective, so no SEC rules were required for this title to take effect.
  • The “IPO on-ramp” provisions generally have proven helpful for companies undertaking IPOs:
    • The SEC Staff immediately put out guidance in the form of FAQs.
    • Market participants have been cautious in relying on some of the accommodations available to EGCs; however, over time, market practice may shift.
    • Most EGCs are still presenting three years of financial information (instead of the permissible two years).
    • Most EGCs are taking advantage of the ability to present abbreviated executive compensation disclosures.
    • Most EGCs are taking advantage of the ability to submit their IPO registration statements for confidential review by the SEC, and relying on the confidential process for at least one or two rounds of SEC comments, before the first public filing.
    • EGCs also are benefiting from the delayed phase-in of other costly compliance requirements, like the Sarbanes 404 attestation requirement.
    • Now, at the one-year anniversary, a fair number (just over 100) of EGC IPOs have been completed.
    • Statistics indicate an increase in smaller IPOs, which, in part, was one of the desired outcomes of the JOBS Act.
  • In addition to providing a new approach for EGC IPOs, Title I also addresses analyst research issues, and requires that the SEC undertake several studies.
  • Research
    • Even after the JOBS Act, the unlevel playing field remains as to research, as a result of the Attorney General Settlement, the terms of which have not been modified.
    • FINRA modified its rules in accordance with the JOBS Act.
    • Most investment banks now have settled (informally) on a 25-day post IPO quiet period before publishing research following completion of an IPO.
    • There is no evidence that investment banks are interested in releasing pre-deal research reports for EGCs.
    • Additional regulatory changes would be needed in order to promote additional research coverage for EGCs.
  • Studies
    • The SEC published the required decimalization study and held a decimalization roundtable; a consensus has formed that a pilot program should be initiated for larger tick sizes.
    • The required study on Regulation S-K has not been delivered.

Title II (Private placements)

  • The SEC proposed rules in August 2012 to carry out the JOBS Act mandate to relax the ban on general solicitation
    • The comment period closed in October 2012; however, the rules have not been finalized.
    • There was vigorous comment on the SEC’s proposed rules, with some commenters advocating the adoption of a safe harbor relating to the measures that would be deemed “reasonable” to verify the status of investors; the adoption of content restrictions or guidelines for materials used in general solicitation; and a reexamination of the “accredited investor” threshold.
    • We anticipate that the SEC will seek to finalize the rules in the spring, and seek to finalize the “bad actor” provisions (required to be adopted for Rule 506 offerings by the Dodd-Frank Act) contemporaneously
  • Matchmaking sites
    • There were no rules needed in respect of the broker-dealer registration exemption for matchmaking sites
    • The SEC Staff put out guidance in the form of FAQs addressing various matters relating to the types of entities that might engage in these activities without subjecting themselves to broker-dealer registration.
    • The SEC Staff issued two no-action letters addressing the applicability of the exemption in the context of VC platforms.

Title III (crowdfunding)

  • No SEC rule proposal as yet (SEC missed deadline)
    • The SEC Staff published FAQs regarding the crowdfunding exemption.
    • FINRA has provided a form for collecting information about funding portals.
    • Concerns remain about the extent to which the crowdfunding exemption as contemplated by the JOBS Act could be used by ventures to raise small amounts of capital in a cost-efficient manner.

Title IV (Regulation A+ or Section 3(b)(2))

  • No SEC rule proposal as yet.
  • Now, pending legislation would mandate that the SEC take action by a date certain.

Titles V & VI (Exchange Act threshold)

  • These provisions relating to the Exchange Act threshold were immediately effective; SEC rulemaking was not required.
  • Many banks (over 100, according to published reports) have taken advantage of these provisions to suspend their SEC filings.
  • The SEC is expected to provide guidance regarding various “holder of record” issues.

What should you expect in the coming months?  We anticipate that the SEC will move ahead with finalizing the rules required under Title II to address general solicitation in certain Rule 506 and Rule 144A offerings.  We expect that this will be accompanied by the final “bad actor” rules required under the Dodd-Frank Act.  The discussion about general solicitation is likely to cause the SEC to revisit the “accredited investor” definition—perhaps resurrecting parts of the SEC’s 2007 “larger accredited investor” standard.  Given the complexities to be addressed by the SEC and FINRA in connection with creating a framework for crowdfunded offerings and funding portals, we anticipate that a proposal relating to crowdfunding may not be released until the second half of 2013.  As we have already seen from meetings of various advisory committees, more attention likely will continue to be focused on rationalizing the disclosure requirements and the communications rules applicable to smaller public companies and companies that might have qualified for EGC status (but for the date of their initial offering of equity securities).  Given the higher registration thresholds under the Exchange Act, we may continue to see the development of a trend toward staying private longer, and the growth of markets designed to provide liquidity to investors in those companies.  Given the press of other business under both the JOBS Act and the Dodd-Frank Act, we may not see a proposal for exempt public offerings under Title IV in 2013.  Lastly, we would hope that the momentum toward encouraging capital formation that was created by the JOBS Act will not be lost in its second year of existence, and we will instead see continued dialogue—coupled with regulatory and market action—that is oriented toward creating opportunities to put capital to work companies of all sizes.

The SEC has posted the webcasts from its decimalization roundtable.  These are available at:  The participants generally supported the implementation of a pilot program, and cited the need for additional empirical data regarding the effect of decimalization as well as order handling and other market structure changes on the securities of smaller and mid-cap companies.

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,  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.

In advance of its February meeting, the Committee released its draft recommendations, available here:  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.

Title I of the JOBS Act mandated that a study be conducted on the impact of decimalization.  This study was delivered earlier in the year, and the SEC announced that it would call for a roundtable to discuss the impact of decimalization and consider alternatives.  The roundtable will be held at the SEC on February 5, and will consist of three panels.  The first panel will consider the impact of tick sizes on small and mid-sized companies, the economic consequences of increasing or decreasing minimum tick sizes, and whether other policy alternatives might better address concerns raised by the JOBS Act.  The second panel will address the impact of tick sizes on the securities market generally.  The third panel will address potential methods for analysis of the issues, including a pilot study.  Electronic or paper submissions may be submitted to the SEC.