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Complimentary San Francisco and Palo Alto Seminars: Late Stage Financings

Posted in Events, IPO On-Ramp, Late Stage Investments, Private Placements, Venture Capital

Successful privately held companies considering their liquidity opportunities or eyeing an IPO often turn to late stage private placements. Late stage private placements with institutional investors, cross-over investors and strategic investors raise a number of considerations that are distinct from those arising in earlier stage and venture transactions. Also, for some companies, the late stage private is a prelude to a strategic transaction or an IPO.


  • Timing and process;
  • How are the terms of late stage private placements different;
  • Diligence, projections and information sharing;
  • Providing liquidity to early investors and founders through a secondary component;
  • IPO and acquisition ratchets;
  • Governance issues;
  • Valuation issues;
  • The placement agent’s role; and
  • Planning for a sale or an IPO in your negotiations.


  • Anand Subramanian, Qatalyst Partners
  • Barb Izzo, former Managing Director at a Fortune 100 public company, advisor to several successful Silicon Valley tech companies.
  • Jeff Thomas, NASDAQ Private Market
  • Anna Pinedo, Morrison & Foerster LLP
  • Susan Mac Cormac, Morrison & Foerster LLP


TuesdayApril 26, 2016
Registration/Breakfast: 8:00 AM – 8:30 AM
Session: 8:30 AM – 11:00 AM

Morrison & Foerster LLP
425 Market Street
San Francisco, CA 94105

To register for the San Francisco session on April 26, simply email tstarer@mofo.com.

CLE credit is pending for California and New York.


Wednesday, April 27, 2016
Registration/Lunch: 11:30 a.m.
Session: 12:00 p.m. – 2:30 p.m.

Morrison & Foerster LLP
755 Page Mill Road
Palo Alto, CA 94304

To register for the Palo Alto session on April 27, simply email tstarer@mofo.com.

CLE credit is pending for California and New York.

Late Stage Financings

Posted in Late Stage Investments

As privately held companies choose to remain private longer and defer their initial public offerings or other liquidity opportunities, these companies are focused on raising capital in private placements made principally to institutional investors, cross-over funds and strategic investors. Late-stage private placements have almost become a prerequisite to an IPO, or perhaps they are the new IPOs.  See our infographic below.

Late Stage Financings

IRRCi Publishes Follow-Up Study on Controlled Companies

Posted in Emerging Growth Companies, IPO On-Ramp

Recently, the Investor Responsibility Research Center Institute (IRRCi) published a follow-up to its initial 2012 study on “controlled” companies, entitled “Controlled Companies in the Standard & Poor’s 1500: A Follow-up Review of Performance & Risk.”  A “controlled” company is one in which more than 50% of the voting power for the election of directors is held by an individual, a group or another company (Nasdaq Equity Rule 5615(c)(1) and NYSE Listed Company Manual §303A.00).  The follow-up study analyzes the long-term performance and risk profiles of controlled companies in the S&P 1500 Composite Index as of July 31, 2015.  Some key findings include:

  • The number of controlled companies in the S&P 1500 decreased by 8% between 2012 and 2015.
  • Nearly 70% of controlled companies operated in one of three sectors: Consumer Discretionary (40%), Industrials (16.2%) and Consumer Staples (12.4%).
  • From 2005 to 2015, the average market cap of controlled companies increased from $8.3 billion to $20.6 billion.
  • Controlled companies with multiple classes of stock underperformed compared to non-controlled companies with respect to total shareholder returns, revenue growth, return on equity and dividend payout rations.  However, controlled companies outperformed non-controlled companies with respect to return on assets.
  • Director tenures at controlled companies were longer than at non-controlled companies.  The proportion of controlled companies where board members averaged at least 15 years of board service was more than 17% higher than at non-controlled companies.  Almost 80% of controlled companies also had no new nominees on their boards – roughly 10% higher than at non-controlled companies.
  • Women and minority directors were less common at controlled companies compared to non-controlled companies.
  • A lower proportion of board members had financial expertise at controlled companies compared with non-controlled companies.
  • Average CEO pay at controlled companies with a multi-class capital structure was three times higher (by approximately $7.2 million) than at single-class controlled companies and was more than 40% higher (by approximately $3.3 million) than at non-controlled companies.

The follow-up study references our recent survey of 580 emerging growth companies (“EGCs”) that completed IPOs between 2013 and 2015, entitled “Getting the Measure of EGC Corporate Governance Practices: A Survey and Related Resources.”  The follow-up study found that IPOs of companies with multiple classes of voting stock has increased in absolute numbers but declined in percentage terms over the study period (2012-2015) and that the size of these offerings has soared and, as such, investors’ market exposure to their potential risks appears to be rising.  In contrast, our EGC survey found that the percentage of EGC IPOs involving controlled companies declined slightly in 2015 (16.9%) compared to the period between 2013 and 2014 (17.1%) and the percentage of EGC IPOs involving multi-class capital structures increased in 2015 (18.1%) compared to the period between 2013 and 2014 (13.8%).  In addition, the existence of a multi-class capital structure does not necessarily mean by itself that a company is controlled.  There are other trends among EGCs (including controlled and non-controlled companies) that are generally beneficial for shareholders, such as a decrease in “super majority” shareholder voting provisions (71% in 2015 compared to 75% in 2013-2014), a decrease in provisions permitting shareholder action by written consent (25% in 2015 compared to 51% in 2013-2104), and an increase in separation of the CEO and Chairman positions (67% in 2015 compared to 60% in 2013-2104).

The IRRCi follow-up study is available at: http://irrcinstitute.org/wp-content/uploads/2016/03/Controlled-Companies-IRRCI-2015-FINAL-3-16-16.pdf.

Our EGC survey is available at: http://media.mofo.com/docs/pdf/150507-EGC-Survey/#?page=0.

NASAA Request for Comment on Statements of Policy

Posted in Regulation A+

For offerings that require state securities registration and review, clients often are concerned about the merit regulation standards. Certain of NASAA’s Statements of Policy, for example, may pose significant issues. From time to time, commentators have requested that a review be undertaken of the following six policies: the Statement of Policy Regarding Promoter’s Equity Investment, the Promotional Shares Statement of Policy (a/k/a the “cheap stock” rule), the Statement of Policy Regarding Options and Warrants, the Statement of Policy Regarding Unequal Voting Rights, the Statement of Policy Regarding Specificity in Use of Proceeds, and the Statement of Policy Regarding Loans and Other Material Transactions.

Recently, in connection with the NASAA Coordinated Review approach for Regulation A offerings, the Corporation Finance Section has published a request for comment on four of these statements of policy. The comment period closes quickly on May 1, 2016.

The proposed revisions to the statements of policy may be found here: http://business.cch.com/srd/SOP-Revisions-Request-for-Public-Coments.pdf.

OTC Markets Group Inc. on Rule 15c2-11, the “Piggyback” Exception and Secondary Trading Markets

Posted in JOBS Act News, Regulation A+, SEC News

OTC Markets Group Inc. (“OTC Markets Group”) operates the OTCQX® Best, OTCQB® Venture and Pink® Open markets for 10,000 securities.  Our wholly-owned subsidiary, OTC Link LLC, operates OTC Link® ATS, an SEC regulated alternative trading system that directly links a diverse network of broker-dealers providing liquidity and execution services.

We appreciate Morrison & Foerster raising the topic of Exchange Act Rule 15c2-11 in the context of changes to the regulatory framework that governs capital raising under the JOBS Act, such as the recent SEC amendments to Regulation A.  This post clarifies some of the points raised in Morrison & Foerster’s earlier commentary, and provides our additional insight and commentary as the operator of the primary markets for OTC equity securities.

How Rule 15c2-11 Works

The prior Morrison & Foerster post described the regulatory obligations of a broker-dealer under Rule 15c2-11.  Here’s how it works in practice:

In a Regulation A offering, for example, after the SEC approves a company’s offering statement and investors are able to buy the issued shares, Rule 15c2-11 plays a vital role in providing those investors access to the public trading markets.  As Morrison & Foerster noted, in connection with the amendments to Regulation A, Rule 15c2-11 was amended to specifically state that an issuer’s disclosure under Regulation A is sufficient to meet the requirements of the Rule.  However, in order for the shares held by the Regulation A investors to be publicly quoted on a market such as ours, a broker-dealer must file a Form 211 with FINRA under FINRA Rule 6432, indicating that the broker has the required Regulation A information.  Rule 6432 only requires that brokers provide three days notice to FINRA prior to quoting the security.  However, in practice FINRA conducts a review of the Form 211, which often takes longer than three days and as much as several weeks or more.  During FINRA’s review, they may request more information from the broker, and based on all of the information provided will ultimately determine whether to “clear” the Form 211 and allow the security to be publicly quoted.  FINRA’s regulatory oversight in this area is already far greater than was contemplated by its own rules.

For 30 days after the Form 211 has been cleared, only the broker-dealer that filed the Form 211 may publicly quote the security. [1]  After 30 days, the piggyback exception may allow additional broker-dealers to enter quotes, thereby creating a larger public market for the securities.  Exchange Act Rule 15c2-11 and FINRA Rule 6432 can be time-consuming and require significant broker-dealer resources.  However, in providing broker-dealers with a mechanism by which to quote OTC securities, these rules help give effect to the Congressional intent of the JOBS Act to promote capital formation for the innovative, entrepreneurial companies that fuel the American economy.

A Few Clarifications

First, the prior post makes reference to earlier evaluations of Rule 15c2-11, specifically SEC proposals in 1991, 1998 and 1999, but does not provide the full story.  In each of these evaluative periods, industry commenters overwhelmingly noted several flaws with the concept of 15c2-11 reform, and in particular with proposals calling for the elimination of the piggyback exception.  A 1999 comment letter by the Securities Industry Association (SIA) [2] detailed the many relevant issues, and we updated the discussion in a 2014 comment letter to FINRA.

Second, the prior post uses the term “Pink Sheets” in reference to our markets.  That term only refers to the old, paper-based books printed on pink paper that included broker-dealer quotes in OTC securities and were physically mailed to broker-dealers.  Much has changed in the past 20 years.  Our markets are fully electronic, and we provide real-time quote information for free to the public on our website at www.otcmarkets.com.  The evolution of our markets is just one example of the power of technology to provide better, faster and more transparent information to a vast group of market participants.

We again thank Morrison & Foerster for bringing Rule 15c2-11 to the forefront, and for giving us an opportunity to contribute to the discussion.

About OTC Markets Group Inc.

OTC Markets Group Inc. (OTCQX: OTCM) operates Open, Transparent and Connected financial markets for 10,000 U.S. and global securities.  Through our OTC Link® ATS, we directly link a diverse network of broker-dealers that provide liquidity and execution services for a wide spectrum of securities.  We organize these securities into markets to inform investors of opportunities and risks: the OTCQX® Best Market; the OTCQB® Venture Market; and the Pink® Open Market.  Our data-driven platform enables investors to easily trade through the broker of their choice at the best possible price and empowers a broad range of companies to improve the quality and availability of information for their investors.  To learn more about how we create better informed and more efficient financial markets, visit www.otcmarkets.com.

OTC Link ATS is operated by OTC Link LLC, member FINRA/SIPC and SEC regulated ATS.

Daniel Zinn is General Counsel of OTC Markets Group Inc. 

[1] Subject to certain exemptions as described in the Morrison & Foerster post.
[2] SIA is a predecessor to what is known today as SIFMA, or the Securities Industry and Financial Markets Association.

The “Piggyback” Exception of Rule 15c2-11 and Secondary Trading Markets

Posted in SEC News

Speaking in the context of the secondary market for the securities of privately held companies, Luis Aguilar, former Commissioner of the SEC, recently voiced concern that the “piggyback” exception of Exchange Act Rule 15c2-11 may compromise the integrity of market quotations and hinder the creation of a fair and efficient secondary market by allowing broker-dealers to rely on potentially stale issuer information.  Pursuant to this exception, if an OTC security has been quoted during the past 30 calendar days, and during those 30 days the OTC security was quoted on at least 12 days without more than four consecutive business days without quotations, then a subsequent broker-dealer may “piggyback” off of this previous quotation and does not need to meet the requirements of Rule 15c2-11.  Rule 15c2-11 sets forth procedures for the submission and publication of quotations by broker-dealers for certain OTC securities.  For more information, see our client alert available at:  http://www.mofo.com/~/media/Files/ClientAlert/2016/04/160405PrivateSecondaryMarkets.pdf

Developments in FinTech

Posted in FinTech

We invite you to read our latest alerts relating to FinTech:

OCC Announces Preliminary Framework on FinTech and Responsible Innovation. On March 31, 2016, the OCC released a white paper on financial technology innovation, which lays out a preliminary framework for “responsible innovation.” The White Paper articulates principles the OCC will follow when evaluating innovative products, services, and processes that require regulatory approval and identifying potential risks associated with them. The White Paper also represents the OCC’s commitment to improving its own understanding of new technology and to improving collaboration with the Consumer Financial Protection Bureau and other banking regulators to develop a consistent supervisory approach in this space. Click here to read our client alert.

Demystifying Blockchain and Distributed Ledger Technology – Hype or Hero? Move over Bitcoin. It’s the “blockchain”, the innovation that powers Bitcoin, that’s now grabbing all of the headlines. Supporters have been evangelising about the potential transformative power of distributed ledger technologies for some time. Indeed, many claim that distributed ledgers will be the most significant technology to disrupt business since the Internet. A whole host of major financial companies have publicised their interest and investment in this breakthrough technology, and governments and international bodies are increasingly discussing the potential implications of distributed ledgers on business, governments and the economy. Click here to read our client alert.

Complimentary Seminar – Calling an Audible: Financing Alternatives in Rapidly Changing Markets

Posted in Events, IPO On-Ramp, Late Stage Investments, Private Placements, Public Companies

Volatile capital markets and the rapidly changing financial landscape make it important for issuers to recognize changes quickly and adjust their financing strategies accordingly. For example, for an issuer that contemplated an IPO or is in the IPO queue, it is important to become familiar with other financing alternatives, such as venture debt or late-stage or mezzanine debt, as well as institutional equity private placements. Each of these markets is quite different. Familiarity with investor expectations and documentation requirements is essential in order to put your company in the best position to make crisp decisions. The same can be said for already public companies considering their next capital raise.

On Thursday, April 21, 2016, Morrison & Foerster Partners Geoffrey Peck, Anna Pinedo and James Tanenbaum will host a one hour session which will cover:

  • Current market conditions;
  • Financing alternatives for pre-IPO companies;
  • The market for venture debt;
  • The late-stage private placement market;
  • Options to consider on the way to an IPO; and
  • Financing alternatives for recently public companies.

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

Event details:
Registration:  8:45 a.m.
Seminar:  9:00 a.m. – 10:00 a.m.

Location:  Morrison & Foerster’s New York Office
250 West 55th Street, New York, NY 10019

CLE credit is pending.


Impact Investing

Posted in Impact Investing

Until a few years ago, Impact Investing was viewed primarily as an extension of philanthropy, embraced by “mission first” investors and companies.  Now the “impact” umbrella has expanded to include all types of investors and companies who operate and finance with mainstream capital.  Many companies and funders today wish to drive for both traditional ROI and impact ROI.  Our new site offers insight into the tools that are available to all types of clients who wish to have impact –which tools include the myriad of corporate forms, hybrid structures and financing vehicles. Click here to visit our new webpage.

FinCEN Proposes to Amend Definition of Broker-Dealer in Securities to Include Funding Portals

Posted in Broker-Dealer Registration, JOBS Act News, SEC News

The Financial Crimes Enforcement Network (FinCEN) proposed to amend the Bank Secrecy Act’s (BSA) definition of “Broker or Dealer in Securities” to include funding portals  in order to ensure that funding portals implement policies and procedures reasonably designed to achieve compliance with the BSA requirements, including the filing of suspicious activity reports, currently applicable to brokers or dealers in securities.

The BSA regulatory definitions of broker or dealer in securities do not include funding portals. The current BSA regulations define broker-dealers in securities as being those persons “registered, or required to be registered, as a broker or dealer with the SEC under the 1934 Act.”  The JOBS Act also exempted certain funding portals from the 1934 Act’s registration requirements, thus excluding them from the BSA’s definition of brokers or dealers in securities. After consulting the SEC, FinCEN is proposing to amend the relevant BSA definitions to include funding portals, and therefore retain access to the important reports and records that these businesses may provide to combat money laundering and terrorist finance.

The proposed amendments are available here:  https://www.fincen.gov/statutes_regs/frn/pdf/2016-07345.pdf.