Governor Jeremy C. Stein spoke at the Crowdfunding for Community Development Finance Conference today (see remarks at: http://www.federalreserve.gov/newsevents/speech/stein20140324a.htm). Fed Governor Stein’s remarks emphasized that perhaps all too often crowdfunding is associated only or primarily with tech companies or start-ups, but that crowdfunding may be used for other purposes. In particular, he focused attention on crowdfunding to support community development.
At the end of last week, the House Financial Services Committee approved two bills, H.R. 3623 and H.R. 4164.
H.R. 3623, titled the Improving Access to Capital for Emerging Growth Companies Act, was introduced by Stephen Fincher (R-TN). H.R. 3623 builds on the successes of Title I of the JOBS Act, which created a new class of publicly traded companies known as Emerging Growth Companies (EGCs). The bill reduces burdensome Securities and Exchange Commission (SEC) registration and disclosure requirements to help EGCs access the capital markets more efficiently, streamline the Initial Public Offering process and allow EGCs to deploy their assets to grow and create jobs. Most significantly, the bill would reduce the 21-day period (during which a confidential submission must be made public) to 15 days.
H.R. 4164, titled the Small Company Disclosure Simplification Act, was introduced by Robert Hunt (R-VA). H.R. 4164 provides a voluntary exemption for all EGCs and other issuers with annual gross revenues under $250 million from the SEC’s onerous requirements to file their financial statements in an interactive data format knows as eXtensible Business Reporting Language (XBRL). The bill also requires the SEC to conduct a cost-benefit analysis on the XBRL requirement and report to Congress within one year after enactment. H.R. 4164 allows small businesses to spend more time focusing on expanding and creating jobs rather than on redundant SEC compliance requirements.
Practical Law recently published a round-up of 2013 IPOs, which includes useful statistics on the use of various JOBS Act accommodations, industry trends, selling stockholder participation, and exchange listing.
In summary, 81.4% of issuers filed as EGCs and 69.4% submitted their registration statements confidentially. As PLC notes, only 22 or 14.8% of EGC issuers chose not to avail themselves of the confidential submission process. To view the full report, click here.
We invite you to download a free copy of the updated edition of our book, or to request free hard copies for you and your colleagues.
Foreign Banks Financing in the United States, published by IFLR, provides a timely discussion of the approaches used by foreign banks to raise capital from US investors.
Foreign banks may rely on exempt offerings, such as 4(a)(2) offerings, 144A/Reg S offerings and 3(a)(2) offerings, or registered offerings to issue securities to US investors. We discuss each of the possible offering formats, as well as the practical considerations for issuers and their intermediaries when establishing or accessing a medium-term note program, a commercial paper program, a covered bond program, or a structured products program.
As foreign banks contemplate the potential need to raise additional capital, this guide offers an overview of regulatory consideration.
To download the book, please click here.
To request hard copies, please email Alexa Powers at firstname.lastname@example.org.
An issuer that is considering or that has commenced an initial public offering (“IPO”) should take special care to familiarize itself with the communications rules applicable to offerings.
First, an issuer should keep in mind that communications may be viewed as impermissible “gun jumping” activities designed to condition the market for the issuer’s securities. Second, the issuer should bear in mind that it remains liable for oral communications, and the Commission may require that certain information included in interviews, for example, be incorporated into an issuer’s prospectus. Communications should therefore be closely controlled and vetted by counsel.
Title I of the JOBS Act expands permissible communications during a securities offering by amending the Securities Act to permit an Emerging Growth Company (“EGC”), or any person authorized to act on behalf of an EGC to “test-the-waters” by engaging in oral or written communications with potential investors that are QIBs or institutions that are accredited investors to determine whether such investors might have an interest in a contemplated securities offering.
Test the waters communications may take place before an EGC makes a confidential submission of its IPO registration statement, while the confidential submission is being reviewed, once an issuer has publicly filed, or at any other point in the offering cycle.
The objective of this provision was to enable EGCs to gauge investor interest earlier in the process, and, thereby, determine whether to move forward with their offerings. As a result, test the waters communications are not considered “offers” and would not be viewed as “gun jumping.”
An issuer and its underwriters have considerable latitude in structuring their discussions. For companies in certain sectors, like biotech, where there are complex technologies, a regulatory pathway, etc., a bank may want to set up meetings early in the process so investors can become familiar with the company’s “story.” In other sectors, it may be preferable to wait until the issuer has gone through at least one or two rounds of comments from the Commission before meetings with investors are scheduled.
What materials are used?
Depending on the stage at which discussions are held, written materials may or may not be used. If written materials are used, the issuer and its counsel and the underwriter and its counsel must review the materials and approve their use. The materials must be consistent with the registration statement disclosure and may consist of a slide deck or the draft registration statement. Written materials should not be left behind. Materials should not contain information beyond what is provided in the registration statement (i.e., no projections).
The Commission will ask whether test the waters materials were used and will request copies of the materials. The issuer is liable for statements made in such materials.
If no written materials are used, the working group should agree on a script.
Can orders be obtained?
The underwriter cannot solicit orders during such meetings. It can only gauge interest and obtain nonbinding indications of interest.
Private versus public
It is important to remember that during such meetings, an investor may manifest interest in investing in the company. If the issuer intends to complete a private offering prior to completion of the IPO or concurrently with the IPO, the issuer and financial intermediary should be clear with investors as to the type of offering in which they are being asked to participate. A number of considerations will need to be taken into account—for example, pricing of the securities sold in the private placement; class of securities; “cheap” stock type issues; etc.
Implications for dual-track transactions
In the past, when an issuer was contemplating a dual track IPO/M&A process, the applicable restrictions on communications (pre-filing, and while in registration), made it difficult for the issuer to pursue actively M&A opportunities, because the issuer had to wait until fairly late in the offering process to pursue such conversations. The additional flexibility for communications during the pre-filing and registration phase will facilitate dual-track discussions.
FINRA published Regulatory Notice 14-09 (available: https://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p449586.pdf) to solicit comments regarding a series of new rules that would be applicable to firms that perform certain limited functions. FINRA is proposing to establish a new, reduced regulatory framework for firms that advise issuers on debt and equity private placements with institutional investors or provide certain advisory services. Firms that engage in these limited services and that do not maintain customer accounts, handle customer funds or securities, accept trading orders or engage in proprietary trading or market-making activities would not be subject to broker-dealer registration.
As we recently reported, the SEC provided no-action guidance in the context of M&A brokers, and, of course, FINRA has proposed a scaled regulatory framework for crowdfunding portals. This would be another modified approach to regulating another category of financial intermediary.
At a recent program, S.E.C. Speaks, Chair White noted that the Commission continues to move forward to complete rulemakings required under the JOBS Act related to exempt offerings. She noted that while the Act makes it easier for companies to remain private longer and to rely on exempt offerings, the Commission will devote attention to disclosures required inpublic offerings. Chair White observed that the Commission “must consider how the SEC’s rules governing public offerings and public company reporting and disclosure may negatively impact liquidity in our markets and how they can be improved and streamlined, while maintaining strong investor protections.” She stated that the Division of Corporation Finance will focus on making specific recommendations for updating the rules that govern public company disclosure.
Not unexpectedly, on February 19, 2014, the North American Securities Administrators Association sent a letter to the SEC objecting to the preemption of state authority over small corporate offerings by the SEC in its Regulation A+ Proposal and requesting a meeting with Chair White and the Corporate Finance leadership. The Proposal preempts state securities law review for Tier 2 Regulation A offerings (those up to $50 million) by defining a “qualified purchaser” as any offeree or purchaser in a Tier 2 offering. In the letter, NASAA stated:
We cannot do our job – protect investors or help small businesses access capital and grow their companies – where the Commission attempts to prohibit our review as contemplated in the Regulation A+ Proposal.
The letter highlighted NASAA’s new coordinated, streamlined multi-state review program that appoints lead examiners to review Regulation A+ filings and that it believes will ease regulatory burdens for filers without sacrificing investor protection. NASAA also questioned whether the SEC’s proposal to define “qualified purchaser” to include purchasers in a Regulation A+ offering is consistent with the public interest and the protection of investors standards of the National Securities Markets Improvements Act of 1996. NASAA also said:
There is no doubt in our minds that the Commission and the states, standing together, will be much more effective in protecting our citizens and making Regulation A+ a success for small business filers than we could ever hope to be standing apart.
On February 6, 2014, the Division of Corporation Finance of the Securities and Exchange Commission (the “SEC”) updated Section 9520 of its Financial Reporting Manual regarding share-based compensation disclosures in initial public offering (“IPO”) prospectuses. The updates revise prior SEC guidance recommending that issuers, in their disclosure of pre-IPO share-based compensation, include tabular disclosure (for the twelve-month period preceding the most recent balance sheet date) regarding the number of instruments granted, the exercise price, the fair value of the underlying stock and the fair value of instruments granted, as well as narrative disclosure describing the factors that contributed to significant changes in the fair value of the underlying stock during the relevant twelve-month period. Updated Section 9520 no longer requires this level of detail. Instead, the SEC Staff will consider, in assessing the adequacy of share-based compensation disclosure, whether the following critical accounting estimate disclosures are included in the company’s IPO prospectus:
- The methods that management used to determine the fair value of the company’s shares and the nature of the material assumptions involved.
- The extent to which the estimates are considered highly complex and subjective.
The SEC Staff also will not require the disclosure of estimates to determine the fair value of new awards once the underlying shares begin trading.
Updated Section 9520 also indicates that the SEC Staff may issue comments asking companies to explain the reasons for valuations that appear unusual. These comments are intended to elicit analyses that the SEC Staff can review to assist it in confirming the appropriate accounting for the share-based compensation, not for the purpose of requesting changes to disclosure in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) or elsewhere in the company’s IPO prospectus. In addition, updated Section 9520 indicates that the SEC Staff will consider other MD&A requirements related to share-based compensation, including known trends or uncertainties including, but not limited to, the expected impact on operating results and taxes.
On December 18, 2013, the SEC proposed rules to implement the mandate of Title IV of the JOBS Act by creating a framework for Section 3(b)(2) offerings. The JOBS Act permits non-reporting companies to conduct “mini” public offerings, or Regulation A+ exempt offerings to raise up to $50 million in proceeds. A Regulation A+ offering may prove a compelling capital-raising alternative for growing companies and may be a useful stepping stone on the way to an IPO. For some companies, Regulation A+ may be a viable alternative to an IPO. We will discuss the proposed rule, as well as provide a perspective on the utility of Regulation A+ and on the Regulation A+ market.
The seminar will take place from Noon-2 PM ET at Morrison & Foerster’s Washington, D.C. office, and will also be live-streamed to the Morrison & Foerster New York office.
Please RSVP to email@example.com and indicate the office where you plan to attend.
- Zach Fallon, Securities and Exchange Commission
- Ford Ladd, Law Offices of Ford C. Ladd
- Anna Pinedo, Morrison & Foerster
- Karen Wiedemann, Securities and Exchange Commission