Today the SEC announced it will host a public forum to discuss financial technology (Fintech) innovation in the financial services industry. The press release notes that the forum is designed to foster greater collaboration and understanding among regulators, entrepreneurs and industry experts into Fintech innovation and evaluate how the current regulatory environment can most effectively address these new technologies. The panels will discuss issues such as blockchain technology, automated investment advice or robo-advisors, online marketplace lending and crowdfunding, and how they may impact investors. The forum will be on November 14, 2016. See: https://www.sec.gov/news/pressrelease/2016-195.html
This summer, the House Financial Services Committee passed the Main Street Growth Act, which calls for legislative changes to promote the formation of venture exchanges. The idea that securities exchanges specially designed for trading smaller and younger firms might be a useful addition to U.S. equity markets has been on people’s minds at the SEC and Congress since the SEC Advisory Committee on Small and Emerging Companies proposed it in March 2013.
Both the committee recommendation and the bill, however, are skeletal in nature. Neither do much to address the liquidity and investor-protection concerns that give some lawmakers and regulators pause. In a forthcoming essay, I set out a template for venture-exchange regulation that deals directly with these issues.
Contrary to some commentators, I argue that the best way to support liquidity is not by regulating tick sizes. Rather, I propose market microstructure rules that mandate fully transparent call-auction trading and limit trading to the listing exchange. The primary virtue of this structure is that it would concentrate liquidity on certain venues and at certain times.
Some also propose limiting venture exchanges to accredited investors. Because this would compromise liquidity, however, I contend that a better approach would be to require that the exchanges provide a warning that investing in venture-exchange companies is very risky, only suitable for sophisticated investors, and could result in total losses.
I argue that the most efficient and effective way to protect investors who participate despite these warnings would be to deemphasize ex ante regulation, in particular, mandated disclosure, much of which venture-exchange investors would likely ignore, and instead emphasize ex post regulation, in particular, SEC enforcement of the rules against securities fraud, market manipulation, and insider trading. Finally, rules could mandate venture-exchange listing standards that eliminate the smallest and youngest firms, and require that platforms engage in a substantive review of each company that seeks to list before allowing them to do so. These steps would mitigate the risks, yet leave these markets open to everyone.
The essay is forthcoming as a chapter in the Handbook on Law and Entrepreneurship (Gordon Smith & Christine Hurt eds., Cambridge Univ. Press 2017).
Jeff Schwartz is a professor in the S.J. Quinney College of Law at the University of Utah.
Thursday, September 29, 2016
5:00 p.m. – 5:45 p.m. EDT
Join us for one of our upcoming monthly telephone briefings led by members of our Fintech team.
Topic: Madden and True Lender/CashCall
This call will be an operator-assisted call of approximately 45 minutes in duration, and will be followed by a brief Q&A opportunity. We also invite you to submit questions before the start of the call. A replay will be available upon request.
In order to RSVP for the September call, and to submit questions, please click here.
On September 13, 2016, the House Financial Services Committee of the United States House of Representatives (the “FSC”) formally released H.R. 5983, the “Financial CHOICE Act” (the “CHOICE Act”). While the CHOICE Act has largely been viewed through a financial regulatory lens, as the first major concerted effort to provide an alternative to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) as a way to end “Too Big to Fail,” the CHOICE Act, as currently drafted, would also repeal a number of the specialized disclosure provisions that were contained in the Dodd-Frank Act and subsume “JOBS Act 2.0” capital formation measures that have largely been presented to date as standalone bills.
This alert provides an overview of the sections of the CHOICE Act that would impact U.S. securities laws, which are contained in Title IV and Title X of the CHOICE Act.
Read our client alert.
Click here to view our chart entitled “Capital Formation Bills Reflected in the CHOICE Act.”
On September 12, 2016, the United States Chamber of Commerce’s Center for Capital Markets Competitiveness hosted a webinar to discuss the policy recommendations outlined in its report titled “A Plan to Reform America’s Capital Markets” (the “Report”). The Report provides policy recommendations for the next administration and Congress to reform the capital markets in order to address current inefficiencies and inadequacies in the regulation and government oversight of the capital markets. The Report includes a number of recommendations relating to financial services regulation, which are not the subject of this blog post. With respect to capital formation, the Report addresses the following:
Financial reporting, corporate governance, and disclosure effectiveness: The Report recommends establishing consistent definitions of “materiality” and rules of procedure for the SEC, the Financial Accounting Standards Board (FASB), and the Public Company Accounting Oversight Board (PCAOB), and developing a disclosure framework to more clearly present pertinent information to investors. The Report asks that the SEC initiate changes to Exchange Act Rule 14a-8 and modernize shareholder resubmission thresholds. The Report also advocates the repeal of rules unrelated to the SEC’s mission, including the SEC’s conflict minerals rule, resource extraction rule, and pay ratio disclosure rule, and recommends the re-proposal of the SEC’s pay-for-performance rule and clawback rule. In addition, the Report calls for the creation of a Financial Reporting Forum, composed of SEC, FASB, and PCAOB representatives, as well as investors and businesses, tasked with identifying and addressing emerging financial reporting issues.
Capital formation and FinTech: The Report discusses the success of the JOBS Act in enabling more efficient investment for smaller companies and emerging growth companies (EGCs) and recommends passing “JOBS Act 2.0” and related bills that promote capital formation and help increase access to capital for small businesses. The Report also advocates the creation of a congressional bi-cameral committee, comprised of members of the House Committee on Financial Services and the Senate Committee on Banking, Housing and Urban Affairs, to study the current FinTech landscape and provide policy and legislative recommendations to both Houses of Congress.
A copy of the Report is available here.
Wednesday, September 21, 2016
12:00 p.m. – 1:00 p.m. EDT
Morrison & Foerster Partners Anna Pinedo and James Tanenbaum will be joined by David A. Donohoe, Jr. (President, Donohoe Advisory Associates LLC) in hosting a teleconference entitled “Securities Exchanges, Shareholder Vote Requirements and the 20% Rule.” Whether you are contemplating a financing to fund an acquisition, engaged in an opportunistic financing, contemplating a “private” placement or PIPE, your transaction will be affected by the requirements of the securities exchanges to seek shareholder approval in certain circumstances. Speakers will address:
- Change of control issues;
- Stock sales to related parties;
- Private placements and PIPEs;
- Acquisitions; and
- Related issues.
CLE credit is pending for California and New York.
To register for this session, or for more information, please click here.
During the ABA Business Law Section Annual Meeting, at the Dialogue with the Director of the Division of Corporation Finance, hosted by the Federal Regulation of Securities Committee, Keith Higgins offered a comprehensive overview of developments. Mr. Higgins provided a brief update of the proxy season. He noted that the Staff is pretty far along in its thinking regarding recommendations for disclosures regarding diversity on public boards, consistent with statements made by Chair White (see our prior posts on this link). Mr. Higgins observed that the comment period had closed for the Regulation S-K Concept Release and noted that a significant number of the comments received focused on ESG issues with commenters advocating more disclosures on sustainability and related matters. Significant comments were received as well on MD&A disclosures, generally favoring the consolidation in a single place of all MD&A related guidance and supporting the continued use of an executive summary. Also, most commenters expressed concerns about limiting the number of risk factors, as well as concerns about any requirement to have issuers address their responses to risks. Mr. Higgins noted that consistent with the mandates in the FAST Act, the Commission recently requested comment on the 400 series (see our post). Mr. Higgins also commented on the recent hyperlink release.
On the JOBS Act, Mr. Higgins provided an update through end of August. There were 92 Regulation CF filings with issuers from diverse sectors, including biotech, brewery, and real estate. Ten companies have filed Forms CU having raised an aggregate of $4 million. There have been 128 Regulation A offering statements filed, and 60 qualified, with an almost even split between Tier 1 and Tier 2 offerings.
Mr. Higgins noted that the Staff is finalizing its recommendations to the Commission on the amendments to Rule 147 and Rule 504. Also, the Staff is working on the disclosure report mandated by the FAST Act to be delivered to Congress by late November.
On July 12, 2016, the Empowering Employees through Stock Ownership (EESO) Act (S. 3152) was introduced to the U.S. Senate by Sens. Mark R. Warner (D-VA) and Dean Heller (R-NV). The Act is intended to make it easier for startups and private companies to give their employees an ownership stake by awarding stock options or restricted stock units (RSUs). Under current law, employees are often required to pay taxes on their stock options or RSUs long before they are able to sell and realize the economic value of such stock options or RSUs. This is due to the fact that private company employees do not have the ability to sell their stock because there is no public market (or liquid secondary market) for the stock. As a result, many private company employees cannot cover the cost of taxes at the time of the exercise of stock options or the settlement of RSUs through the sale of stock, but rather must pay those costs out of pocket. The Act, however, promotes broad-based employee ownership in private companies by extending the time period in which employees are required to pay tax upon the exercise of stock options or the settlement of RSUs that are settled for stock up to seven years. In order to be eligible for the tax deferral, stock options or RSUs must be extended to 80% of the workforce, and 1% owners, the chief executive officer and the chief financial officer, and the four highest compensated officers will not be eligible for the tax deferral. Employers must provide employees with information, through a written notice, on the tax consequences of the tax deferral, and the failure to provide such notice will result in a penalty. Employers also must report the future tax liability on the employee’s Form W-2. In addition, if the stock of the company becomes readily tradable on an established market, or the employee sells, exchanges or transfers his or her stock before the seven-year period ends, the tax deferral is no longer permitted.
The complete text of the Act is available at: https://www.congress.gov/bill/114th-congress/senate-bill/3152/text
H.R. 2357, the Accelerating Access to Capital Act, was passed by the House on Thursday, September 8, 2016 by a vote of 236-178. The bill contains three important pieces of legislation designed to facilitate the access to capital for small and emerging companies.
H.R. 2357 proposes to direct the Securities and Exchange Commission to revise Form S-3 so as to permit securities to be registered pursuant to General Instruction I.B.1. of the form if either: (1) the aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant is $75 million or more, or (2) the registrant has at least one class of common equity securities listed and registered on a national securities exchange.
The two bills incorporated into H.R. 2357 are H.R. 4850, the Micro Offering Safe Harbor Act, which proposes to amend the Securities Act of 1933 to exempt certain micro-offerings from the Act’s registration requirements, and H.R. 4852, the Private Placement Improvement Act of 2016, which proposes to direct the SEC to revise the filing requirements of Regulation D to require an issuer that offers or sells securities in reliance upon a certain exemption from registration to file, no earlier than the date of first sale of such securities, a single notice of sales containing the information required by Form D for each new offering of securities.
House Financial Services Committee Chairman Jeb Hensarling commended the work of the House and noted in a press release that “[w]e must have capital formation if we’re going to have a healthy economy”.
Monday, September 12, 2016
3:00 p.m. – 7:00 p.m. EDT
Thomson Reuters Building
3 Times Square, 30th Floor
New York, NY 10036
On Monday, September 12, 2016, Partner Anna Pinedo will speak on a panel of senior ECM professionals at the 2016 IFR US ECM Roundtable. The Roundtable will focus on the challenges and opportunities facing the market and will provide an outlook for the year ahead and beyond.
Topics of discussion will include:
- The overall state of the market;
- Private equity;
- Venture capital/Tech IPOs;
- Risk/block trades and accelerated book builds; and
- The JOBS Act.
For more information, or to register, please click here.