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SEC Announces Order for Tick Size Pilot Plan

Posted in SEC News

On June 25, 2014, the Securities and Exchange Commission (the “SEC”) announced that it had ordered the national securities exchanges and the Financial Industry Regulatory Authority, Inc. (“FINRA”) to act jointly to develop and file with the SEC a national market system plan to implement a targeted 12 month pilot program that will widen minimum quoting and trading increments (“tick sizes”) for certain smaller capitalization stocks. The SEC indicated that it plans to use the pilot program to assess whether these tick size changes would enhance market quality to the benefit of U.S. investors, issuers and other market participants. More specifically, the pilot program should facilitate studies of the effect of tick size on liquidity, execution quality for investors, volatility, market maker profitability, competition, transparency and institutional ownership. The SEC order requires the national securities exchanges and FINRA to submit a national market system plan detailing the pilot program by August 25, 2014.

The pilot program, which will be designed so as to not cause excessive disruption to the market and to limit increases in transaction costs, will last for one year and include stocks with: (1) a market capitalization of $5 billion or less; (2) an average daily trading volume of one million shares or less; and (3) a share price of $2 per share or more. The pilot program will consist of one control group and three test groups with 300 securities in each test group selected by stratified sampling. Pilot securities in the control group will be quoted at the current tick size increment of $0.01 per share, and trade at the increments currently permitted. Pilot securities in the first test group will be quoted in $0.05 minimum increments. Pilot securities in the second test group will be quoted in $0.05 minimum increments, and traded in $0.05 minimum increments subject to certain exceptions. Pilot securities in the third test group will be subject to the same minimum quoting and trading increments (and the same exceptions) as the second test group, but would also be subject to a “trade-at” requirement.

For more information, see Press Release, “SEC Announces Order for Tick Size Pilot Plan – Pilot to Assess Impact of Tick Size on Market Quality for Small Cap Companies” (June 25, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542172819#.U62K7ovD-9I, and SEC Release No. 34-72460 (June 24, 2014), available at http://www.sec.gov/rules/other/2014/34-72460.pdf

SIFMA Guidance on Investor Verification

Posted in Rule 506 Rulemaking

SIFMA has issued a Memorandum intended to provide broker-dealers and advisers with guidance regarding procedures for investor verification in connection with offerings made pursuant to Rule 506(c).

Morrison & Foerster has signed on to support the procedures, which are useful examples of possible approaches to verification.  The white paper and forms may be viewed here.

Other market participants may find these examples helpful as well.

Investor Advisory Committee

Posted in SEC News

On July 10, the Investment Advisory Committee will be meeting to consider various topics, including the definition of the term “accredited investor.”  The Committee had previously discussed amendments to the natural persons prong of the definition to better account for the financial sophistication of purchasers.  Meetings are webcast.

Read the meeting notice here.

Read the meeting agenda here.

SEC Orders Tick Size Pilot Program

Posted in Decimalization, IPO On-Ramp, JOBS Act News, SEC News

The SEC has announced that it ordered the national securities exchanges and the FINRA to develop and file a plan to implement a targeted 12 month pilot program that will widen tick sizes for specified small-cap stocks. The plan is due to the SEC by August 25, 2014. The SEC will use the pilot program to assess whether the changes to tick sizes would enhance market quality to the benefit of U.S. investors, issuers, and other market participants.

The pilot will include stocks with: (1) a market capitalization of $5 billion or less; (2) an average daily trading volume of one million shares or less; and (3) a share price of $2 per share or more.  The pilot will consist of one control group and three test groups, with 300 securities in each test group selected by stratified sampling.

Under the SEC’s order, the exchanges and FINRA will collect data for the SEC and make that data available to the public. After the pilot ends, the exchanges and FINRA will assess the results and submit that assessment to the SEC.

Title I of the JOBS Act mandated that a study be conducted on the impact of decimalization on the markets, particularly with respect to small-cap stocks. The SEC delivered this study to Congress in July 2012. The SEC subsequently held a roundtable on decimalization in February 2013. More recently, legislation to address tick sizes has been proposed, but nothing has yet been adopted.

The SEC’s announcement is available at: http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542172819#.U6wBAtfD-HQ

 

 

 

Future of Regulation A+ Uncertain

Posted in Regulation A+

Earlier this month a group of Congressmen wrote to SEC Chair White (see letter here:  http://www.sec.gov/comments/s7-11-13/s71113-114.pdf) regarding state preemption for Regulation A+ offerings.  The letter suggests that, at the time that the JOBS Act was being debated and considered, Congress was concerned about sales of securities in Reg A+ offerings to retail investors.  However, the letter does not contain any discussion whatsoever of the many investor protection measures contained in the SEC’s Regulation A+ proposal, such as the investment limit, the requirements for robust issuer disclosures in the offering circular, the fact that the SEC would review the offering circulars, the post-sale reporting requirements for Tier 2 Regulation A+ issuers, or any of the other measures incorporated in the proposal.  The letter simply notes that Reg A+ offerings will be “smaller, regional offerings,” which is unlikely to be the case for Tier 2 offerings of up to $50 million.  At the same time, a bill has advanced in the House Financial Services Committee that would make clear that Congress intended to preempt state review for Tier 2 Regulation A+ offerings.  In the absence of state preemption, issuers are unlikely to proceed with Tier 2 Regulation A+ offerings and, instead, will rely on Rule 506 offerings.  Securities sold pursuant to Rule 506 are considered “covered securities” and, therefore, these offerings are not subject to state review.  The offerings also are not subject to any particular disclosure requirements.

The Return of Smaller IPOs

Posted in IPO On-Ramp

IPO market activity has recently returned to levels not seen since before the financial crisis. With 70 IPOs in the first quarter and 114 IPOs year-to-date, 2014 is off to the fastest start since 2000 and is on pace to finish with nearly 300 IPOs, which would be the highest annual total in 14 years. An important trend is that the average offering size has decreased in recent years. Thus far in 2014, the average IPO size is approximately $181.7 million, which is the lowest average in the past seven years. Contrast this to an average IPO size of approximately $542 million in 2008, approximately $388 million in 2009, approximately $310 million in 2012 ($197.7 million without the Facebook IPO) and approximately $237 million in 2013.

Thus far in 2014, only three IPOs have exceeded $1 billion in aggregate proceeds and only eight IPOs have exceeded $500 million in aggregate proceeds (compared to 25 IPOs in 2013). In addition, thus far in 2014, nearly 40% of IPOs have fallen within the $50 million to $100 million range, which is an increase from 2013 when approximately 29% of IPOs fell within the $50 million to $100 million range (approximately 32.1% of IPOs in 2013 fell within the $100 million to $250 million range). On the low end of the scale, thus far in 2014, approximately 17.5% of IPOs (20 IPOs) raised between $10 million and $50 million in aggregate proceeds, compared to 12% (29 IPOs) in 2013 (five IPOs in 2013 raised $10 million or less in aggregate proceeds, but no IPOs have fallen within that range thus far in 2014). (Source: IPO Vital Signs, May 27, 2014)

JOBS Act 2.0 Bills to Be Considered

Posted in JOBS Act News

On June 10th, the House Financial Services Committee will mark up and consider a number of JOBS Act and capital formation related bills.  The original mark-up session was to have been held on May 29th.  The bills to be considered include legislation that would modify the definition of a well known seasoned issuer, or WKSI, to lower the threshold for such status, and a bill that would revise the framework applicable to crowdfunded offerings.

Remarks of Sebastian Gomez Abero, Chief of the SEC’s Office of Small Business Policy, in an ALI Webcast Titled “Crowdfunding and Reg A+: New Routes for Raising Capital”

Posted in Crowdfunding, Events, Regulation A+

On May 22, 2014, Sebastian Gomez Abero, Chief of the Office of Small Business Policy of the Division of Corporation Finance of the SEC, spoke about the SEC’s crowdfunding and Regulation A+ proposals. Mr. Gomez commented generally on a number of comments and questions raised by commenters to the proposals. Mr. Gomez also noted that the crowdfunding proposals are not yet final and the SEC will have to adopt final rules and that finalizing the Regulation A+ proposals is a priority for the SEC in 2014.

With respect to the SEC’s crowdfunding proposals, Mr. Gomez discussed the offering size limitation, integration with other offerings and the role of intermediaries. Mr. Gomez noted a tendency, while the SEC is deliberating on final rules, to fit crowdfunding under other exemptions from registration, such as Securities Act Rule 506(c) or current Regulation A. Mr. Gomez mentioned that some commenters thought the $1 million offering size limitation should be raised and asked for clarification on whether crowdfunding offerings would be integrated with offerings under other exemptions (e.g., offerings to accredited investors under Securities Act Rule 506(c)). Mr. Gomez said that the SEC is still considering the integration question, but noted that the question is closely tied to the offering size limitation. Mr. Gomez also mentioned guidance in the adopting release for the Securities Act Rule 506 amendments which indicates that a registered offering does not prohibit a Securities Act Rule 506(b) offering, so long as investors in the Rule 506(b) offering are not generally solicited and have a pre-existing relationship with the issuer, and then posed the question whether a crowdfunding offering should be treated as a registered offering in this context. Mr. Gomez also discussed the provisions covering intermediaries (which must register with the SEC and will be subject to FINRA regulation) and emphasized that intermediaries function as “gatekeepers” given that investors in crowdfunding offerings may not be very sophisticated. Another concern expressed by commenters was with liability attaching to intermediaries, although intermediaries are prohibited from providing investment advice in crowdfunding offerings, since the definition of “issuer” under the rule proposals also covers intermediaries. Mr. Gomez went on to discuss the issue of “curating” and noted the safe harbor list of activities provided in the rule proposals, but mentioned that the SEC does not want funding portals to promote types of offerings although funding portals could specialize in certain types of companies (e.g., companies in a particular state or companies in a particular industry). Mr. Gomez noted that the SEC also received comments regarding the information that crowdfunding issuers need to disclose, particularly the financial statement requirements, and that a large number of commenters requested that the threshold for audited financial statements be raised because audited financial statements impose a significant cost for start-up companies and the usefulness of such financial statements for start-up companies is questionable. Mr. Gomez finally mentioned that the SEC is still considering the proposed offering and ongoing reporting requirements for crowdfunding issuers.

With respect to the SEC’s Regulation A+ proposals, Mr. Gomez discussed the preemption of state blue sky laws, which he noted raised the largest number of comments. Mr. Gomez mentioned the coordinated review program approved by the members of the North American Securities Administrators Association (the “NASAA”), which was established to address concerns raised in a GAO report to Congress regarding multi-state review for Regulation A offerings. Mr. Gomez noted that the SEC staff has met with the NASAA to discuss the coordinated review program, although some commenters have noted that there may still be some redundancies even with a coordinated state review process. Mr. Gomez then mentioned that in contrast Securities Act Section 4(a)(6) clearly preempts state blue sky laws but indicated that some states have their established their own rules to exempt crowdfunding offerings. Mr. Gomez also noted that the SEC’s two new compliance and disclosure interpretations (“C&DIs”) regarding crowdfunding and Securities Act Rule 147 (which provides a safe harbor for intrastate offerings conducted pursuant to Securities Act Section 3(a)(11)) are examples of the SEC’s efforts to clarify that use of the internet is not incompatible with Rule 147 and state blue sky laws (for more information regarding these two new CD&Is, see our blog post, “SEC Issues New and Revised Guidance on Intrastate Crowdfunding,” available here.

Committee Passes JOBS Act Related Bills

Posted in JOBS Act News

The House Financial Services Committee passed several bills designed to promote capital formation, including:

HR 4200, the Small Business Investment Companies (SBICs) Advisers Relief Act, introduced by Rep. Blaine Luetkemeyer (R-MO). The bill was approved 56-0.

H.R. 4200 amends the Investment Advisers Act of 1940 to reduce unnecessary regulatory costs and eliminate duplicative regulation of advisers to SBICs. Eliminating duplicative regulation will allow the private equity fund money that currently goes to pay for regulatory compliance and fees to flow directly to job-creating small businesses.

H.R. 4554, the Restricted Securities Relief Act, introduced by Rep. Mick Mulvaney (R-SC). The bill was approved 29-28.  H.R. 4554 would streamline the process for reselling restricted securities to the public under a Securities and Exchange Commission (SEC) rule in order to increase liquidity in the private securities markets and the availability of capital for small companies and to reduce its cost. By reducing the regulatory burdens surrounding the offering and resale of private securities offerings by small issuers, this bill will help enhance the liquidity in this space, making it easier for issuers to access capital.

H.R. 4568 would simplify the SEC registration form for new securities offerings.  Simplifying this disclosure regime will lower compliance costs associated with filing redundant paperwork, allowing eligible companies to direct more resources to growing their business.

H.R. 4571, the Encouraging Employee Ownership Act of 2014, introduced by Rep. Randy Hultgren (R-IL). The bill was approved 36-23.  H.R. 4571 modernizes SEC Rule 701, which was last updated in 1996. Updating this rule gives private companies more flexibility to reward employees with a company’s securities and thereby retain valuable employees without having to use other methods to compensate them, such as borrowing money or selling securities.

H.R. 4569, the Disclosure Modernization and Simplification Act, introduced by Rep. Scott Garrett (R-NJ). The bill was approved 59-0.  H.R. 4569 would direct the SEC to simplify its disclosure regime for issuers and help investors more easily navigate very lengthy and cumbersome public company disclosures. Permitting issuers to submit a summary page would enable companies to concisely disclose pertinent information to investors without exposing them to liability.  This summary page would also enable investors to more easily access the most relevant information about a company.

H.R. 4570, the Private Placement Improvement Act, introduced by Rep. Garrett. The bill was approved 31-28.

H.R. 4570 would amend the Federal securities laws to ensure that small businesses do not face complicated and unnecessary regulatory burdens when attempting to raise capital through private securities offerings issued under SEC Regulation D.

H.R. 4565, the Startup Capital Modernization Act of 2014, introduced by Rep. Patrick McHenry (R-NC). The bill was approved 31-28.  H.R. 4565 would make it easier for issuers to take advantage of registration exemptions under SEC Regulation A to increase capital formation to grow the economy and create jobs.

And we thought things were going well…

Posted in IPO On-Ramp

Recently, the Committee on Capital Markets Regulation published information regarding the competitiveness of our US capital markets. See the Committee’s site (http://capmktsreg.org/2014/05/continuing-competitive-weakness-in-u-s-capital-markets-4/) for detailed statistics that seem to focus principally on whether foreign issuers are looking to the United States for their IPOs. The report notes that “While the overall U.S. IPO market did see renewed signs of strength in the first quarter, increasing 41% in volume over the first quarter of 2013 ($11 billion versus $7.8 billion), foreign issuers accounted for relatively little of that activity. In fact, a number of key measures of market competitiveness showed dramatic declines over previous years, including: U.S. share of global IPOs by foreign companies decreased to 5.4%, the lowest level since 2008 and a substantial decline from the 11.4% recorded in 2012. This measure remains far below the historical average of 26.8% (1996-2007).”