Ernst & Young LLP recently published a report, which contains useful data, regarding the U.S. IPO market and the factors contributing to a decline in the number of IPOs.  In particular, the study notes the contribution of increased M&A activity as a factor in the decline.  These charts show the very significant jump in acquisitions of private companies from the IPO peak in 1996 (about 1,950 acquisitions) to 2016 when more than 4,800 private companies were acquired.  We reprint below the three most relevant charts illustrating this trend.





The full report may be accessed here.

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.

On May 9, 2017, FINRA issued an interpretive letter stating that family offices may be considered investment advisers for purposes of meeting the limited exception of FINRA Rule 5131.02(b). FINRA Rule 5131 addresses abuses in the allocation and distribution of “new issue,” or IPO, shares and paragraph (b) of the rule prohibits the practice of “spinning.” Spinning occurs when an underwriter allocates new issue or IPO shares to executive officers and directors of a company as an inducement to award the underwriter with investment banking business, or as consideration for investment banking business previously awarded. FINRA Rule 5131.02(b) provides a limited exception to the spinning provision by permitting underwriters to rely upon a written representation obtained within the prior 12 months from a person authorized to represent an account that does not look through to the beneficial owners of any unaffiliated private fund invested in the account, except for beneficial owners that are control persons of the investment adviser to the private fund, if the unaffiliated private fund meets certain conditions.  The unaffiliated private fund must: (1) be managed by an investment adviser; (2) have assets greater than $50 million; (3) own less than 25% of the account and not be a fund in which a single investor has a beneficial interest of 25% or more; and (4) not be formed for the specific purpose of investing in the account.  In the interpretive letter, FINRA noted that despite their exclusion from the definition of “investment advisers” under the Investment Advisers Act of 1940, family offices may perform equivalent functions to regulated investment advisers.  FINRA also emphasized that the remaining conditions of FINRA Rule 5131.02(b) must still be satisfied.  The interpretive letter is significant because it makes it easier for family offices to purchase new issue or IPO shares.

A copy of the interpretive letter is available at:

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.

Many groups have come forward in recent weeks with their lists of regulations that should be reviewed or amended, as well as their list of areas that merit close review in light of the potential burdens that may be imposed by current regulation.  As far as securities regulation is concerned, much of the focus, at least in the popular press, has been placed on measures that relate to IPOs; however, modest changes in other areas would have a positive impact on capital formation—here is our current list:

  • Adopting the proposed amendments relating to smaller reporting companies;
  • Continuing to advance the disclosure effectiveness initiative;
  • Continuing the review of the industry guides in order to modernize these requirements and eliminate outdated or repetitive requirements;
  • Revisiting the WKSI standard in order to see if similar accommodations and offering related flexibility should be made available to a broader universe of companies;
  • Reviewing existing communications safe harbors in order to modernize these and make communications safe harbors available to a broader array of companies, including business development companies;
  • Adopting the proposed amendment to Rule 163(c) that would allow underwriters or other financial intermediaries to engage in discussions on a WKSI’s behalf relating to a possible offering;
  • Assessing whether a policy rationale remains for including MLPs within the definition of “ineligible issuer” when MLPs undertake public offerings on a best efforts basis;
  • Assessing who suffers when ineligible issuers are prevented from using FWPs other than for term sheet purposes;
  • Removing the limitations that require certain issuers to conduct live only roadshows;
  • Eliminating the need for “market-maker” prospectuses;
  • Reviewing the one-third limit applicable to primary issuances off of a shelf registration statement for certain smaller companies;
  • Modernizing the filing requirements for BDCs, permitting access equals delivery for BDCs and modernizing the research safe harbors to include BDCs;
  • Adding knowledgeable employees to the definition of accredited investor;
  • Eliminating the IPO quiet period;
  • Working with the securities exchanges to review their “20% Rules” (requiring a shareholder vote for private placements completed at a discount that will result in an issuance or potential issuance of securities greater than 20% of the pre-transaction total shares outstanding);
  • Addressing the Rule 144 aggregation rules for private equity and venture capital fund related sales;
  • Shortening the Rule 144 holding period for reporting companies;
  • Including sovereign wealth funds and central banks within the definition of QIBs;
  • Shortening the 30-day period in Rule 155; and
  • Shortening the six-month integration safe harbor contained in Regulation D.

Thursday, May 25, 2017
10:00 a.m. – 11:30 a.m. EDT

The webinar will discuss the current state of fintech services in the US, including state licensing requirements, bank partnership arrangements, and the potential for special purpose bank charters at both the state and federal levels.

The presenters will also discuss the benefits and potential difficulties of these arrangements. Finally, the discussion will touch on fintech enhancements to existing bank services, including distributed ledger technology.

Topics Will Include:

  • An update on the state of fintech services;
  • Lending and payments models;
  • Bank partnerships;
  • State licenses;
  • Bank Charters;
  • True Lender; and
  • Madden.


CLE credit is pending for California and New York.

For more information, or to register, please click here.

Earlier this month Rick A. Fleming, Investor Advocate at the Securities and Exchange Commission, gave a speech in which he discussed the impact that shrinking public markets have on investor participation.  Mr. Fleming noted that over the past 20 years, the volume of initial public offerings (IPOs) has been decreasing and companies are waiting longer to go public, limiting the ability for individual retail investors to participate in capital growth and preserving capital gains for wealthy investors in the private markets.  He also noted that there has been a significant shift away from retail investing towards institutional investing.  Mr. Fleming explored whether there is a link between the shift to institutional investing and the decrease in IPO activity, specifically with regard to small company IPOs.  Based on discussions with asset managers, Mr. Fleming discovered that, in general, institutional investors who engage in active management have little interest in investing in small-cap public companies because of concerns regarding trade liquidity and regulatory barriers.   In his speech, Mr. Fleming identified some macro trends on individual investor participation:

  • The number of individual investors who invest directly in stocks has decreased in recent years:
    • In 2001, 21% of families had direct investments in stocks compared to 13% today.
    • Today, only 11.4% of families with net worth between the 50th and 75th percentile of all U.S. households invest directly in stocks.
  • Individual investors are shifting from investing in stocks to investing in funds, causing the assets under management (AUM) of institutional investors to grow:
    • In 1976, individual investors directly owned 50% of U.S. stocks compared to 21.5% in 2016.
    • In 1976, institutional investors owned less than 20% of U.S. stocks; today institutional investors own the majority.
    • Today, nearly 45% of U.S. households invest in registered funds.
    • AUM of institutional investors has increased from $6 trillion in 1998 to $19 trillion today.
  • Mutual fund investments in small IPOs have declined:
    • In 1990, 10.6% of funds disclosed an investment in small IPO issuers compared to only 0.7$% in 2010.
    • Institutional ownership of small-cap companies has fallen 8% between 2014 and 2016, with institutions shifting their investment focus to mid- and large-cap companies.

Based on the macro trend data and the results of his conversations with asset managers, Mr. Fleming believes that, in order to reinvigorate the IPO market, regulators need to consider reforms that will make institutional investors more interested in smaller public companies. In addition, Mr. Fleming believes regulators will be much more successful if they focus on demand-side reforms directed towards attracting more investors to the public markets rather than on supply-side reforms of decreasing disclosure requirements or shareholder rights to attract more companies to the public markets.  The full text of Mr. Fleming’s speech is available at:

As the 115th United States Congress is currently in session, a number of bills designed to promote capital raising for companies have been introduced in both the House and the Senate. In the last two months, both the House and Senate approved a handful of these bills, further advancing potential legislative reform relating to corporate capital formation.

For a summary of the status of these various bills, see our Pending Legislation tracker.

In the May 10, 2017 dialogue held by the SEC’s Division of Economic and Risk Analysis and New York University’s Stern School of Business, academics and industry representatives provided recommended measures for rejuvenating the U.S.’s IPO market.  Such measures, aimed at increasing the incentive for companies of varying sizes, geographic backgrounds and industries to utilize and thrive in the public markets, included the following recommendations:

  • Exempt dividends from taxation at the corporate level for all public companies.
  • Increase regulations on private companies to align them with public companies. These regulations can include mandatory accounting standards and restrictions on ownership.
  • Exclude accredited investors from 500 shareholder thresholds for private companies under Section 12(g) of the Exchange Act to ensure that companies are able to enter the public market at the most advantageous time.
  • Require disclosure of short positions for small public companies to make smaller companies more attractive to institutional investors.
  • For public companies, base operational decisions on investment and growth of the company rather than meeting earnings guidance. Public companies should speak to investors about the long term and get independent directors involved in the company’s strategy.

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: