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;
  • Energy;
  • 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.

The SEC has not explicitly defined the terms “general solicitation” or “general advertising” in Regulation D under the Securities Act of 1933.  However, Rule 502(c) of Regulation D lists several examples of general solicitation and general advertising, including (1) any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio and (2) any seminar or meetings whose attendees have been invited by any general solicitation or general advertising.  These are communications that are not targeted or directed to a specific individual or to a particular audience, but rather broad-based communications that may reach potential investors not known to the issuer or its financial intermediary.  Over time, the SEC Staff has provided guidance, mainly through no-action letters and more recently through Compliance and Disclosure Interpretations, regarding the types of communications that would be viewed as a “general solicitation.”  In our “Practice Pointers on Navigating the Securities Act’s Prohibition on General Solicitation and General Advertising,” we summarize the SEC Staff’s guidance in this area for issuers, broker-dealers and other third-party participants.

The practice pointers are available at: http://www.mofo.com/~/media/Files/Articles/2016/06/160600PracticePointersGeneralSolicitation.pdf

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.”

The SEC recently adopted rules implementing Title V and Title VI of the Jumpstart Our Business Startups Act (the “JOBS Act”) and Title LXXXV of the Fixing America’s Surface Transportation Act (the “FAST Act”). Title V and Title VI of the JOBS Act, in relevant part, amended Sections 12(g) and 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) to adjust the thresholds for registration, termination of registration and suspension of reporting, while Title LXXXV of the FAST Act remedied the omission from the JOBS Act of savings and loan holding companies in the revised thresholds for registration, termination of registration and suspension of reporting. The SEC’s implementing rules under the JOBS Act were originally proposed in December 2014, and the SEC received 11 comments letters that generally supported the proposals. With the adoption of these rule changes, the SEC has completed all rulemaking mandated by the JOBS Act. The amended rules reflect the new, higher registration, termination of registration and suspension of reporting thresholds. The amendments also establish a non-exclusive safe harbor for issuers when determining if securities held by persons who received them pursuant to an employee compensation plan in transactions exempted from the registration requirements of Section 5 of the Securities Act may be excluded when determining whether they are required to register under Exchange Act Section 12(g)(1).

Read our client alert.