Amongst other limitations, an issuer will cease to be considered an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act and unable to take advantage of the accommodations for such issuers set forth in the Jumpstart Our Business Startups Act if it has issued more than $1.0 billion of non-convertible debt securities over a rolling three-year period (not limited to completed calendar or fiscal years). In general, all non-convertible debt securities issued over the prior three-year period, whether outstanding or not, are required to be counted against the $1 billion debt limit. “Non-convertible debt” in this context means any non-convertible security that constitutes indebtedness, whether issued in a registered offering or not. In calculating whether an issuer exceeds this $1 billion debt limit, the SEC Staff has interpreted all non-convertible debt securities issued by an issuer and any of its consolidated subsidiaries, including any debt securities issued by such issuer’s securitization vehicles, to count against the $1 billion debt limit. As a result, asset-backed securities that are considered non-recourse debt and consolidated on a parent issuer’s financial statements for accounting purposes should be included when calculating the applicability of the $1 billion debt limit. However, the SEC Staff does not object if an issuer does not count debt securities issued in an A/B exchange offer, as these debt securities are identical to (other than the fact that they are not restricted securities) and replace those issued in a non-public offering.
Below, a continuation of our bibliography of thought-provoking articles on issues related to right-sizing regulation, staying private versus going public, and related topics:
The Economics of Primary Markets, Kathleen Weiss Hanley, March 15, 2017. The paper discusses the public offering process, including the economics of IPOs, such as whether there is underpricing in IPOs, and considers, in this regard, the costs and benefits associated with the IPO bookbuilding process. In assessing the factors associated with the decline in the number of IPOs, the paper discusses some trade-offs associated with going public versus relying on private offerings, which is very timely given the ongoing dialogue on this topic.
The JOBS Act and the Costs of Going Public, Susan Chaplinsky, Kathleen Weiss Hanley, and S. Katie Moon, January 2017. The article concludes that there is little evidence that the JOBS Act has reduced the direct costs of going public. However, there may be accommodations resulting from the JOBS Act, such as those related to reduced disclosure, deferral of certain corporate governance related requirements, the ability to make confidential submissions, and the ability to test the waters, which result in savings that are difficult to .
Patching a Hole in the JOBS Act: How and Why to Rewrite the Rules that Require Firms to Make Periodic Disclosures, Michael D. Guttentag, 88 Ind. L. J. 151, 2013. This article examines the circumstances under which, or the conditions that should trigger when, companies should be required to comply with periodic disclosure requirements.
Information Issues on Wall Street 2.0, Elizabeth Pollman, 161 U. Pa. Rev. 179 2012-2013. The article examines concerns arising from secondary private transactions as a result of lack of information, asymmetric information, and conflicts of interest, as well as concerns regarding insider trading.
“Publicness” in Contemporary Securities Regulation After the JOBS Act, Donald C. Langevoort and Robert B. Thompson, 101 Geo. L.J. 337, 2012-2013. This paper considers whether the number of record holders is the right measure to use in determining “publicness,” or whether a different measure ought to be used, and how we should think about distinguishing between private and public companies.
Mutual Fund Investments in Private Firms, Sungjoung Kwon, Michelle Lowry, and Yiming Qian, April 2017. Institutional investors hold a significant percentage of public equity. The underlying premise of the paper is that mutual funds tend to invest in private companies backed by high quality venture capitalists.
On May 10, 2017, the SEC’s Division of Economic and Risk Analysis and New York University’s Stern School of Business held a dialogue aimed at assessing the economic factors causing the recent downturn in initial public offerings (“IPOs”) in the U.S. market. Former Acting Chair and current SEC Commissioner Michael Piwowar began the dialogue, reiterating the importance of making public capital markets available to businesses. Commissioner Piwowar emphasized that a robust IPO market fosters innovation, creates jobs and provides opportunities for investors to increase wealth and mitigate risk.
Throughout the discussion, academics, regulators and industry practitioners opined on economic trends that have led to a severe decrease in IPO activity over the past fifteen years. The overall IPO activity is presently less than 1/3 of where it stood in the 1990s and 40% of current-day IPOs are undergone by large companies. Panelists agreed that regulation, including restrictions and disclosures required by Sarbanes Oxley and the JOBS Act, has had at most a minimal impact on the decline of the IPO market. Rather, through venture capital, private equity, hedge funds and mutual funds, emerging companies today enjoy a variety of options to privately grow their businesses and gain needed liquidity. Even firms desiring “exit options” can opt to pursue for strategic sales rather than entering the public market. While some industry professionals expect an uptick in IPOs as soon as this year, the time allocation, cost and risk of going public will likely continue to limit IPO activity, particularly among smaller issuers.
Commissioner Piwowar’s opening remarks at the SEC-NYU Dialogue on Securities Market Regulation: Reviving the U.S. IPO Market are available at: https://www.sec.gov/news/speech/opening-remarks-sec-nyu-dialogue-securities-market-regulation-reviving-us-ipo-market
The fast growing fintech industry continues to command the attention of investors across the globe. A recent CB Insights report summarized the global financing trends for fintech companies in 2016. There were 836 venture capital-backed financings, which raised $12.7 billion for fintech startups in 2016. While this was a $2 billion drop from 2015 figures, it is a significant increase from 2012’s 451 deals, which raised $2.5 billion. U.S. fintech issuers represented over half of the total number of fintech financings with 422 deals, raising $5.5 billion.
Within the fintech space, funding for blockchain and bitcoin companies accounted for 8% of total deals in 2016, raising $431 million. Companies in the payments tech field, which provide solutions to facilitate payment processing, raised $1.6 billion in 2016 across 150 financings. Insurance tech companies also warrant mention with 109 deals, raising $1.6 billion in 2016.
As privately held companies opt to remain private longer and defer going public, there has been an emergence of “unicorns,” or companies that have a valuation of over $1 billion. CB Insights reports that there are now 190 unicorns with a cumulative valuation of $660 billion. There are 22 fintech unicorns, including 11 U.S.-based fintech unicorns. With increased access to capital, more privately held companies go through numerous rounds of financings, referred to as late-stage financings. Fintech companies ended 2016 with a median late-stage deal size of $26.5 million, accounting for 29% of their total deal share.
The Securities and Exchange Commission (the “SEC”) adopted technical amendments to conform several rules and forms to amendments made to the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”) by Title I of the Jumpstart Our Business Startups (“JOBS”) Act. For example, under the definition of the term “emerging growth company” the JOBS Act required inflation indexing the annual gross revenue amount. As well, the final rules address various provisions of the Securities Act and the Exchange Act, as well as Exchange Act periodic and current reports, Regulation S-K and Regulation S-X that did not currently reflect JOBS Act provisions. Sections 4(a)(6) and 4A of the Securities Act set forth dollar amounts used in connection with the crowdfunding exemption, and Section 4A(h)(1) states that such dollar amounts shall be adjusted by the SEC not less frequently than once every five years to reflect CPI changes.
See the final rule: https://www.sec.gov/rules/final/2017/33-10332.pdf.
See the SEC press release: https://www.sec.gov/news/press-release/2017-78.
On Wednesday, March 22, 2017 at 2 p.m. ET, the House Financial Services Committee’s Subcommittee on Capital Markets, Securities, and Investment will hold a hearing entitled “The JOBS Act at Five: Examining Its Impact and Ensuring the Competitiveness of the U.S. Capital Markets”.
The Subcommittee aims to examine the impact of the JOBS Act on the U.S. capital markets, on capital formation, job creation, and economic growth. Additionally, the Subcommittee plans to identify issues and propose solutions to issues that are currently impeding the competitiveness of the U.S. capital markets.
The hearing will include testimony from the following witnesses:
- Raymond Keating, Chief Economist, Small Business & Entrepreneurship Council;
- Brian Hahn, Chief Financial Officer, GlycoMimetics, Inc.;
- Andy Green, Managing Director of Economic Policy, Center for American Progress;
- Edward Knight, Executive Vice President and General Council, NASDAQ OMS; and
- Thomas Quaadman, Vice President, U.S. Chamber of Commerce.
The hearing will be streamed live on the House Financial Services Committee’s website.
On September 12, 2016, the United States Chamber of Commerce’s Center for Capital Markets Competitiveness hosted a webinar to discuss the policy recommendations outlined in its report titled “A Plan to Reform America’s Capital Markets” (the “Report”). The Report provides policy recommendations for the next administration and Congress to reform the capital markets in order to address current inefficiencies and inadequacies in the regulation and government oversight of the capital markets. The Report includes a number of recommendations relating to financial services regulation, which are not the subject of this blog post. With respect to capital formation, the Report addresses the following:
Financial reporting, corporate governance, and disclosure effectiveness: The Report recommends establishing consistent definitions of “materiality” and rules of procedure for the SEC, the Financial Accounting Standards Board (FASB), and the Public Company Accounting Oversight Board (PCAOB), and developing a disclosure framework to more clearly present pertinent information to investors. The Report asks that the SEC initiate changes to Exchange Act Rule 14a-8 and modernize shareholder resubmission thresholds. The Report also advocates the repeal of rules unrelated to the SEC’s mission, including the SEC’s conflict minerals rule, resource extraction rule, and pay ratio disclosure rule, and recommends the re-proposal of the SEC’s pay-for-performance rule and clawback rule. In addition, the Report calls for the creation of a Financial Reporting Forum, composed of SEC, FASB, and PCAOB representatives, as well as investors and businesses, tasked with identifying and addressing emerging financial reporting issues.
Capital formation and FinTech: The Report discusses the success of the JOBS Act in enabling more efficient investment for smaller companies and emerging growth companies (EGCs) and recommends passing “JOBS Act 2.0” and related bills that promote capital formation and help increase access to capital for small businesses. The Report also advocates the creation of a congressional bi-cameral committee, comprised of members of the House Committee on Financial Services and the Senate Committee on Banking, Housing and Urban Affairs, to study the current FinTech landscape and provide policy and legislative recommendations to both Houses of Congress.
A copy of the Report is available here.
During the ABA Business Law Section Annual Meeting, at the Dialogue with the Director of the Division of Corporation Finance, hosted by the Federal Regulation of Securities Committee, Keith Higgins offered a comprehensive overview of developments. Mr. Higgins provided a brief update of the proxy season. He noted that the Staff is pretty far along in its thinking regarding recommendations for disclosures regarding diversity on public boards, consistent with statements made by Chair White (see our prior posts on this link). Mr. Higgins observed that the comment period had closed for the Regulation S-K Concept Release and noted that a significant number of the comments received focused on ESG issues with commenters advocating more disclosures on sustainability and related matters. Significant comments were received as well on MD&A disclosures, generally favoring the consolidation in a single place of all MD&A related guidance and supporting the continued use of an executive summary. Also, most commenters expressed concerns about limiting the number of risk factors, as well as concerns about any requirement to have issuers address their responses to risks. Mr. Higgins noted that consistent with the mandates in the FAST Act, the Commission recently requested comment on the 400 series (see our post). Mr. Higgins also commented on the recent hyperlink release.
On the JOBS Act, Mr. Higgins provided an update through end of August. There were 92 Regulation CF filings with issuers from diverse sectors, including biotech, brewery, and real estate. Ten companies have filed Forms CU having raised an aggregate of $4 million. There have been 128 Regulation A offering statements filed, and 60 qualified, with an almost even split between Tier 1 and Tier 2 offerings.
Mr. Higgins noted that the Staff is finalizing its recommendations to the Commission on the amendments to Rule 147 and Rule 504. Also, the Staff is working on the disclosure report mandated by the FAST Act to be delivered to Congress by late November.
Monday, September 12, 2016
3:00 p.m. – 7:00 p.m. EDT
Thomson Reuters Building
3 Times Square, 30th Floor
New York, NY 10036
On Monday, September 12, 2016, Partner Anna Pinedo will speak on a panel of senior ECM professionals at the 2016 IFR US ECM Roundtable. The Roundtable will focus on the challenges and opportunities facing the market and will provide an outlook for the year ahead and beyond.
Topics of discussion will include:
- The overall state of the market;
- Private equity;
- Venture capital/Tech IPOs;
- Risk/block trades and accelerated book builds; and
- The JOBS Act.
For more information, or to register, please click here.
As privately held companies choose to remain private longer and defer their initial public offerings (IPOs), these companies are increasingly reliant on raising capital in successive private placements. For companies in the life sciences sector, for instance, a late-stage private (or mezzanine) placement made to known and well-regarded life science investors may serve to validate the company’s technology. We have compiled data on late-stage private placements in the life sciences sector.
Read our Life Sciences Sector Survey of Late-Stage Private Placements for more information.