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.

On July 18, 2017, the House Subcommittee on Capital Markets, Securities and Investments held a hearing and heard testimony regarding the regulatory burdens facing public companies in the United States that may result in diminishing the appeal for privately held companies of undertaking an IPO.  The testimony focused principally on the requirements arising from the Sarbanes-Oxley Act, including auditor attestation, and the requirements arising from the Dodd-Frank Act.  Given that many private companies are less focused on disclosure burdens, it is a shame that almost all of the dialogue regarding the decline in the number of IPOs and the decline in the number of public companies in the United States has been limited to the same few themes.  Many private companies are more focused on other considerations, such as the availability of research coverage, liquidity in their stocks should they choose to become listed companies, short-termism and the pressures arising from the need to focus on each successive earnings announcement, litigation exposure, and a variety of issues that are broader than those considered by the witnesses.

Here is a link to the key takeaways:  https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=402173.

On June 8, 2017, the U.S. House of Representatives, by a vote mostly along party lines, approved a bill that would repeal many of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) requirements and significantly reduce the regulatory burden for financial institutions. If enacted in its current form, the Financial CHOICE Act of 2017 (the “CHOICE Act”) would also alter the regulatory landscape for business development companies (“BDCs”), investment companies and investment advisers. Among other things, the CHOICE Act would:

  • Loosen some restrictions on BDCs concerning leverage, preferred stock, proxy procedures and investments;
  • Tighten the burden of proof for plaintiffs suing investment advisers for breach of fiduciary duty;
  • Broaden the exemption from the definition of an “investment company” available to venture capital funds; and
  • Streamline the process for investment companies and investment advisers to obtain exemptive orders.

The CHOICE Act, which passed 233-186, was sent to the Senate for consideration on June 12, 2017. Here is a summary of key provisions of the CHOICE Act that affect BDCs, investment companies and investment advisers.

Read our client alert.

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.

On April 3, 2017, the District Court for the District of Columbia (the “District Court”) entered a final judgment (the “Final Judgment”) in the case of National Association of Manufacturers, et al., v. SEC. The Final Judgment affirms the prior holding of the U.S. Court of Appeals for the District of Columbia in National Association of Manufacturers that Exchange Act Section 13(p)(1) and Rule 13p-1 (together, the “Conflict Minerals Rule”) violate the First Amendment to the extent the Conflict Minerals Rule requires regulated entities to report to the SEC and to state on their websites that any of their products have “not been found to be DRC conflict free.” The Final Judgment solely sets aside the portion of the Conflict Minerals Rule that requires regulated entities to report to the SEC and make the website statements. The District Court remanded, in all other respects, to the SEC.

On April 7, 2017, the staff of the SEC’s Division of Corporation Finance (the “Staff”) issued guidance on the impact of the Final Judgment on the Conflict Minerals Rule (the “SEC Guidance”). The SEC Guidance seeks to reduce the uncertainty surrounding the Conflict Minerals Rule with regard to potential enforcement actions, given that the Final Judgment and the decision of the U.S. Court of Appeals in National Association of Manufacturers leaves open the question of whether the description of being “DRC conflict free” is required by statute, or instead, a product of the SEC’s rulemaking. The Staff explained that it will not recommend enforcement action to the SEC if companies (including those subject to paragraph (c) of Item 1.01 of Form SD) only file disclosure under the provisions of paragraphs (a) and (b) of Item 1.01 of Form SD. However, the Staff expressly noted that the SEC Guidance is still subject to any further action taken by the SEC and does not express any legal conclusion on the Conflict Minerals Rule itself.

The Final Judgement is available here.

The U.S. Court of Appeals for the District of Columbia in National Association of Manufacturers is available here.

The SEC Guidance is available here.

On March 28, 2017, the U.S. District Court for the District of Salt Lake City granted the SEC’s request for a preliminary injunction in SEC v. Traffic Monsoon, LLC.  The SEC’s complaint was brought in connection with Traffic Monsoon’s operation as a web traffic exchange, in which it sold several different products designed to deliver “clicks” or “visits” to the websites of its customers, which the SEC alleged violated Exchange Act Section 10(b) and Rule 10b-5.  In its argument against the SEC’s request for a preliminary injunction, Traffic Monsoon relied on Morrison v. Nat’l Australia Bank Ltd. to assert that Exchange Act Sections 10(b) and Section 17 do not authorize a U.S. district court to enjoin activity related to foreign transactions, claiming that approximately 90% of Traffic Monsoon’s customers purchased products over the internet while located outside the United States.  In Morrison, the Supreme Court replaced the longstanding “conduct and effects test” with the “transactional test,” holding that Section 10(b) and Rule 10b-5 could be applied only in connection with the purchase or sale of a security listed on an American stock exchange and the purchase or sale of any other security in the United States.

In Traffic Monsoon, the defendants claimed that notwithstanding the passage of Section 929P(b) of the Dodd-Frank Act, which reinstated the conduct and effects test that had been repudiated in Morrison, the SEC lacked jurisdiction in Traffic Monsoon in accordance with Morrison’s transactional test.  Section 929P(b) clarified, among other things, that U.S. district courts have jurisdiction over Exchange Act Section 10(b) and Section 17(a) actions brought by the SEC if the conduct and effects test has been satisfied.  However, the Traffic Monsoon court disagreed with the defendants’ claim, holding that the legal context in which Section 929P(b) was drafted, legislative history and express purpose of Section 929P(b) all point to a congressional intent that Section 10(b) and Section 17(a) should be applied to extraterritorial transactions to the extent that the conduct and effects test can be satisfied.  Using the conducts and effects test, the Traffic Monsoon court found that the SEC had jurisdiction to bring an injunction against the defendants, given that Traffic Monsoon was conceived and created in the United States, along with the promotion of its products.  This decision is notable because it represents the first time that a U.S. district court has affirmatively held that Section 929P(b) supersedes Morrison.  More importantly, it functions as a warning to issuers that their foreign activities may nevertheless be subject to liability under U.S. securities laws, even if other U.S. district courts have continued to use Morrison’s transactional test.

A copy of the Traffic Monsoon decision is available at:  http://static.reuters.com/resources/media/editorial/20170404/secvtrafficmonsoon–opinion.pdf.

On February 14, 2017, President Trump approved Congress’ joint resolution to repeal the SEC’s resource extraction disclosure rule. That action effectively brings to a conclusion the SEC’s efforts to implement a resource extraction disclosure rule mandated more than six years ago by the Dodd-Frank Act.

Read our client alert here:  https://www.mofo.com/resources/publications/170222-repeal-of-resource-extraction-disclosure-rule.html

On February 3, 2017, President Donald Trump signed an executive order to roll back certain parts of the Dodd-Frank Act.  We will continue to monitor news relating to the executive order and report developments on this blog.

UPDATE:  The White House released the official text of the Presidential Executive Order on Core Principles for Regulating the United States Financial System later in the afternoon on February 3.  See the executive order here: https://www.whitehouse.gov/the-press-office/2017/02/03/presidential-executive-order-core-principles-regulating-united-states.

Likely, this is only the beginning. Senator Inhofe and Representative Huizenga filed Congressional Review Act Resolution relating to the Securities and Exchange Commission’s final rule regarding the disclosure of certain payments made by resource extraction issuers. The rule was required by Section 1504 of the Dodd-Frank Act. In the statement regarding the CRA, Senator Inhofe claimed that the rule “would put [U.S.] companies at a disadvantage by forcing them to disclose confidential business information to their private and international competitors.”

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.”