Corporate governance has changed dramatically in the nearly 13 years since passage of the Sarbanes-Oxley Act of 2002 and in the nearly five years since enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Likewise, the level of shareholder engagement and institutional investor expectations regarding governance practices have also changed significantly. The passage of the Jumpstart Our Business Startups Act in April 2012, which helped spur a dynamic initial public offering market, raised concerns among certain groups that new initial public offering (“IPO”) candidates would view certain of the accommodations available under the Act as a rationale to relax certain governance practices and to rely on phase-in periods. However, emerging growth companies, or EGCs, availing themselves of the JOBS Act’s Title I “IPO on-ramp” provisions, generally have adopted rigorous governance policies and procedures.
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Today, the Subcommittee on Capital Markets and Government Sponsored Enterprises of the House Financial Services Committee has scheduled a hearing entitled “Legislative Proposals to Enhance Capital Formation and Reduce Regulatory Burdens.” At the hearing, various bills that are intended to promote capital formation. The memorandum with the full list of bills to be considered may be accessed here: http://financialservices.house.gov/calendar/eventsingle.aspx?EventID=398911. Among the measures under consideration are: a bill to address the treatment of savings and loan holding companies under the JOBS Act to harmonize their treatment with that for bank holding companies for purposes of the Exchange Act 12(g) threshold; various disclosure modernization measures, including a bill that would permit forward incorporation of information in registration statements on Form S-1 by smaller public companies; and a bill to modernize the Rule 701 exemption.
Reg A (pron.: reg•gae) has the potential to become an important capital-raising alternative for emerging companies. With the final rules becoming effective on June 19th, turn to Morrison & Foerster for timely advice whether you are contemplating an offering or simply planning ahead.
The SEC is continuing to tie up some loose ends left over from the adoption of the Rule 506(d) bad actor disqualification rules. Certainty regarding these open items will be beneficial for issuers and placement agents of structured products to be issued under Rule 506 under the Securities Act.
A beneficial owner of 20% or more of an issuer’s voting equity securities is a covered person under Rule 506(d)(1), and could potentially be a bad actor subject to the disqualification provisions of that rule. In the adopting release for the Rule 506 bad actor disqualification rules, the SEC declined to adopt a bright line definition of the term “voting equity securities.” Rather, they stated that the term turned on “whether securityholders have or share the ability, either currently or on a contingent basis, to control or significantly influence the management and policies of the issuer through the exercise of a voting right.” See Release 33-9414 (July 10, 2013) at n.62 and accompanying text.
Acknowledging that their initial interpretation may have been overbroad and that a “bright line” test would be more workable, the SEC, in the recent Amendments to Regulation A Adopting Release, created a bright line standard consistent with the definition of “voting securities” in Rule 405 of the Securities Act. “Voting equity securities,” for purposes of Rule 506(d)(1), Rule 505 and Rule 262(a) of the Securities Act, include only those voting equity securities which, by their terms, currently entitle the holders to vote for the election of directors. The right to vote must be presently exercisable. See Release 33-9741 (March 25, 2015) at n.763 and accompanying text. To clarify any confusion over the extinct “control or significantly influence” standard, the SEC stated that “’voting equity securities’ should be interpreted based on the present right to vote for the election of directors, irrespective of the existence of control or significant influence.” Release 33-7941 at page 204.
In another resolution of an outstanding item from the Rule 506 bad actor adopting release, on March 13, 2015, the SEC issued a policy statement in which it articulated standards for granting waivers from disqualification under Rules 262(a), 505 and 506 upon a showing of good cause that it is not necessary under the circumstances that the exemption be denied. The policy statement can be found at: http://www.sec.gov/divisions/corpfin/guidance/disqualification-waivers.shtml. The SEC stated previously that they would consider articulating standards for waivers in the future. See Release No. 33-9414 at page 71.
Chair White, addressing the Investor Advisory Committee, provided an update on SEC rulemaking. Chair White identified the following initiatives:
- the disclosure effectiveness initiative;
- the review of the “accredited investor” definition;
- action on the tick size pilot; and
- the adoption of final crowdfunding rules.
Chair White also noted that the Commission must complete its required rulemakings under Dodd-Frank, including the Title VII and the executive compensation related rulemakings. See her remarks here: http://www.sec.gov/news/statement/opening-remarks-to-the-investor-advisory-committee.html.
On April 14, 2015, at 1:00 pm EST, Morrison & Foerster Partners Marty Dunn, David Lynn and Anna Pinedo will lead a teleconference on structuring Regulation A+ offerings. Now that the Securities and Exchange Commission has adopted final rules amending Regulation A, issuers, venture and private equity investors and financial intermediaries may want to consider a Regulation A offering as a capital-raising or as a liquidity opportunity. Although its availability is not limited to any particular industry sector, life sciences and biotech companies, community banks, and real estate businesses may find this alternative especially attractive. During our briefing session, we will provide an overview of the new rules and focus on Tier 2 offerings, permitting an issuer to raise up to $50 million in proceeds. Speakers will address:
- Eligibility requirements;
- Preparation of disclosure materials;
- Testing-the-waters and other communications issues;
- Integration of offerings in close proximity;
- Regulation A as a precursor to an IPO;
- Use by selling stockholders; and
- Obtaining a concurrent stock exchange listing.
CLE credit is pending.
To register for this session, or for more information, please click here.
The SEC Investor Advisory Committee will hold its next meeting on Thursday, April 9, 2015, beginning at 9.30am. The meeting will be webcast on the SEC’s website. The agenda includes a discussion of the recommendations of the SEC Advisory Committee on Small and Emerging Companies. The full agenda may be found here: https://www.sec.gov/spotlight/investor-advisory-committee-2012/iac040915-agenda.htm.
On May 5th, 2015, in Tel Aviv, Israel, Morrison & Foerster will present a complimentary seminar titled “Choreographing Your Financings”. For intellectual property-based companies, like technology and life science companies, planning your financing strategy is essential. Timing your financings in light of upcoming product announcements or design wins, milestones, or trial results may often be the difference between success and failure. In this series of sessions, Morrison & Foerster Partners Anna Pinedo and James Tanenbaum, along with a few guest speakers, will focus on the special disclosure considerations and financing approaches that are most significant whether you are planning an IPO or are already a public company. Topics will include:
Preparing for an IPO for the IP-Based Issuer
- Discussion of IP risks;
- Disclosure relating to potential IP litigation arising around time of IPO; and
- IP opinions.
Ongoing Disclosure Issues for IP Based Companies
- Milestones, royalties and your MD&A disclosure;
- Frequently Issued SEC comments; and
- Obtaining confidential treatment.
Financing Trends for Tech and Biotech Companies
- The Pre-IPO private placement;
- Equity Lines, PIPEs and Confidentially Marketed Public Offerings; and
- Sequencing Financings in Conjunction with Clinical and Related Announcements.
For more information, or to register, please click here.
On April 6, 2015, at 1:00 pm EST, Morrison & Foerster Partners Anna Pinedo and David Lynn, and Zachary O. Fallon, Special Counsel, Division of Corporation Finance, U.S. Securities and Exchange Commission (invited), will participate in a PLI Webinar on capital-raising using Regulation A+. On March 25, 2015, the U.S. Securities and Exchange Commission unanimously adopted final rules, which will be effective this summer, that amend Regulation A. Regulation A+ will provide an important capital-raising alternative for private companies in the United States and Canada. A Regulation A+ offering may be used in connection with a primary offering of newly issued shares by a company or to resell securities held by existing stockholders. Whether you are contemplating a Regulation A+ offering as a precursor to an IPO, as a liquidity opportunity for existing holders or as an alternative to a traditional IPO, you will need to understand the requirements of the final rule. In this webinar, speakers will discuss:
- Tier 1 and Tier 2 offerings;
- Eligible issuers and eligible securities;
- Availability for selling securityholders;
- Communications rules and testing the waters;
- Disclosure, financial statement and other filing requirements;
- Ongoing reporting requirements for Tier 2 issuers; and
- Concurrent Regulation A+ and Exchange listings.
PLI will provide CLE credit.
To register for this session, or for more information, please click here.