On January 12, 2016, the Securities and Exchange Commission’s Division of Corporation Finance (the “Division”) granted no-action relief to the College Savings Plan Network (“CSPN”), an affiliate of the National Association of State Treasurers that represents eleven International Revenue Code §529-qualified prepaid tuition programs (the “§529 Programs”), in connection with its request for the §529 Programs to qualify as “qualified institutional buyers” (“QIBs”) pursuant to Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and “accredited investors” pursuant to Rule 501(a)(3) of Regulation D under the Securities Act.
In its letter to the Division, CSPN argued that the §529 Programs should qualify as both QIBs and accredited investors because the §529 Programs: (1) are business trusts or corporations that engage in business activities typically associated with QIBs and accredited investors; (2) should be treated as favorably as §529 prepaid tuition plans created especially for private universities; (3) are maintained by unique entities; and (4) do not need the protection of registration under the Securities Act.
In concluding that the §529 Programs are eligible for both QIB and accredited investor status, the Division emphasized the fact that the §529 Programs parallel the structure of trusts and corporations and do not need the protections associated with Securities Act registration.
A copy of the no-action letter is available at https://www.sec.gov/divisions/corpfin/cf-noaction/2016/cspn-011216-501a.htm.
PitchBook’s 2015 Annual U.S. Venture Industry Report reported a total of 73 venture capital-backed IPOs were conducted in 2015, the lowest number since 2013. The number of VC-backed IPOs had been climbing since 2009, from 10 IPOs in 2009 to 122 IPOs in 2014. 2015 VC-backed IPOs raised approximately $8 billion, the lowest proceeds collected in three years.
The median IPO size for VC-backed IPOs has remained consistent over the years, fluctuating no more than $11 million since 2009. In 2015, the median IPO size was $77 million. The median valuation of VC-backed IPOs has been declining since 2011, with the median valuation in 2011 reported at $424 million down to $252 million in 2014. In 2015, the median valuation of a VC-backed IPO was $301 million, a number higher than 2014, but still lower than 2011-2013 figures. Due to lower ambitions on IPO valuations, PitchBook reports that compensatory provisions will have to be included more frequently in order for investors to recommit in late stage financing rounds.
On January 13, 2016, the Securities and Exchange Commission (the “SEC”) adopted interim final rules to implement Sections 71003 and 84001 of the Fixing America’s Surface Transportation Act (the “FAST Act”). The interim final rules implement revisions to Form S-1 and Form F-1 that permit an emerging growth company to omit financial information from a registration statement for certain periods, provided that all of the required information is included in the registration statement prior to distributing a preliminary prospectus, and revisions to Form S-1 and Item 512 of Regulation S-K that permit a smaller reporting company to incorporate by reference into a Form S-1 any reports or materials filed with the SEC subsequent to the effective date of the registration statement.
The interim final rules are effective upon publication in the Federal Register. The SEC deadline for comments on the interim final rules is 30 days following publication in the Federal Register.
Read our client alert.
Readers of this blog are familiar with the recent regulatory changes that have created new possibilities for non-registered capital raises in the U.S.: general solicitations in Regulation D offerings, Regulation A+, crowdfunding, and to a lesser extent, new Section 4(a)(7) under the 1933 Act.
Many applaud the additional flexibility provided by these changes. At the same time, U.S. regulators are interested in determining whether these offerings will be properly offered and sold.
Each of FINRA’s and OCIE’s annual priorities letters notes that these regulators will be looking at private placements in the coming year.
FINRA’s letter states:
“FINRA’s focus on private placements in 2016 will address concerns with respect to suitability, disclosure and due diligence. [footnote omitted] These concerns are relevant regardless of the underlying industry of the issuer or the type of investment (e.g., notes offerings, preinitial public offering investment funds, real estate programs, EB-5 investment funds or start-up companies). FINRA’s focus will reflect recent regulatory developments, including the ability to conduct general solicitations under SEC Rule 506(c) of Regulation D and the crowdfunding rules which will become effective in 2016. FINRA notes that some communications used by firms concerning private placements have not reflected the significant risks of loss of principal and lack of liquidity associated with these investments. Where a communication addresses a specific investment benefit associated with a private placement offering, a firm must ensure that the key risks associated with such benefit are disclosed. FINRA will continue to evaluate firms’ compliance with respect to their communications, including general solicitation advertisements and materials posted on the Internet.”
The OCIE letter notes:
“We will review private placements, including offerings involving Regulation D of the Securities Act of 1933 or the Immigrant Investor Program (“EB-5 Program”) [footnote omitted] to evaluate whether legal requirements are being met in the areas of due diligence, disclosure, and suitability.”
In a nutshell, in addition to conforming their documents and procedures to the “black letter law” of the new rules, broker-dealers will want to ensure that their practices are appropriate from a suitability perspective, as well as for purposes of FINRA’s communication rules.
The Commission announced that it approved interim final rules implementing two provisions of the FAST Act, adopted in December, that revise financial reporting forms for emerging growth companies and smaller reporting companies.
The Congressionally mandated rules revise Forms S-1 and F-1 to provide that as long as emerging growth companies’ registration statements include all required financial information at the time of the offering, they will be allowed to omit certain historical period financial information prior to the offering. In addition, the rules revise Form S-1 to allow smaller reporting companies to use incorporation by reference for future filings the companies make under the federal securities laws after the registration statement becomes effective. The interim final rules also include a request for comment on whether the rules should be expanded to include other registrants or forms. The rules will become effective when published in the Federal Register and the public comment period will remain open for 30 days following their publication.
Link to press release: https://www.sec.gov/news/pressrelease/2016-6.html
Link to interim rules: https://www.sec.gov/rules/interim/2016/33-10003.pdf
The 2016 proxy season occurs in an environment of heightened shareholder activism and an ever-increasing focus on compensation and corporate governance disclosures. This Proxy Season Field Guide, which was prepared by Morrison & Foerster’s Corporate Finance Practice, provides you with an overview of recent legislative, regulatory and shareholder developments, and provides guidance on how these developments will impact you in the 2016 proxy season.
To download the guide, click here. If you would like a hard copy, please e-mail email@example.com
On Thursday, March 10, Friday, March 11, and Saturday, March 12, 2016, Morrison & Foerster Partner Marty Dunn will speak at the American Law Institute’s “Regulation D Offerings and Private Placements…Plus New Options for Exempt Offerings” conference in Scottsdale, Arizona. Mr. Dunn will participate in several panels, including:
- “Conceptual, Statutory, and Regulatory Background and Structure;”
- “Regulation D: Update on Continuing Concerns: Manner of Sale (506(b) v. 506(c)); Defining and Verifying Accredited Investors; Bad Person Disqualifications; Section 12(g) Mechanics; Finders;”
- “Regulatory Menu: Regulation A+;” and
- “Resales of Restricted Securities: Rules 144 and 144A; Secondary Trading; Resales and Markets for Crowdfunded and Regulation A+ Securities; Section 4(1½).”
ALI CLE will provide CLE credit.
For more information, please click here.
According to Renaissance Capital’s 2015 Annual Review of the Global IPO Market, a total of 310 IPOs were completed in 2015 raising $156.5 billion in proceeds. This is a 35% decrease from 2014’s figures, yet remains higher than activity in 2011, 2012 and 2013. The Asia-Pacific region dominated the market share, making up 44.7% of total proceeds and raising $70 billion. Europe came in second making up 35.3% and raising $55.3 billion, followed by North America which made up 17.5% and raised $27.3 billion.
As we have previously reported, the healthcare industry has dominated the U.S. IPO market, accounting for 46% of all U.S. IPOs. On the global markets, however, healthcare only made up 6.3% of total IPO proceeds. The financial sector continues to be the leader in global IPOs, and made up 35.5% of total proceeds in 2015 raising $55.6 billion.
The highest performing exchange in 2015 was the Hong Kong Exchange which accounted for 18.3% of all IPO proceeds, its highest numbers since 2010. The NYSE raised $16.6 billion, 10.6% of all proceeds and the NASDAQ raised $8.7 billion, 5.6% of all proceeds. As previously reported, U.S. IPOs on U.S. exchanges experienced a six year low in 2015.
Global IPOs produced a 33.2% average return this year although Renaissance notes that this figure is closer to 9.5% when excluding high performing A-share IPOs. The best performing IPOs came from the consumer and healthcare sectors, when excluding these A-share IPOs. Five U.S. IPOs made the list of the ten worst performing IPOs of the year.
The NYSE Listed Company Manual contains a number of rules requiring a listed company to obtain shareholder approval for certain issuances of securities, which rules are often referred to as the “20% rule” or “shareholder approval requirements.” On December 31, 2015, the SEC approved a proposed change by the NYSE to Section 312.03(b) of the NYSE Listed Company Manual to permit “early stage companies” listed on the NYSE to issue shares of common stock (or exchangeable or convertible securities) without shareholder approval to a related party, a subsidiary, affiliate or other closely-related person of a related party or any company or entity in which a related party has a substantial direct or indirect interest. An “early stage company” is defined as a company that has not reported revenues in excess of $20 million in any two consecutive fiscal years since its incorporation; and a “related party” is defined as a director, officer or holder of 5% or more of the company’s common stock. In order to take advantage of the exemption, the audit committee (or a comparable committee comprised solely of independent directors) of the early stage company is required to review and approve the proposed transaction prior to completion. Once a company reports revenues greater than $20 million in each of two consecutive fiscal years, it will lose its designation as an early stage company and become subject to all the shareholder approval requirements of Section 312.03(b), which requires a company to obtain shareholder approval, with certain exceptions, before it issues shares exceeding either 1% of the number of shares of common stock or 1% of the voting power outstanding before the issuance to related parties, affiliates of related parties or entities in which a related party has a substantial interest. A company’s annual financial statements before listing will be considered when determining if the company should lose its early stage company designation. In addition, the exemption for early stage companies is only available for sales for cash and is not available for issuances in connection with an acquisition. The amendments took effect immediately following the SEC’s approval.
This modest change will be beneficial to shareholders because the shareholder approval requirements often deter companies from raising much-needed capital. The change should also be viewed in the broader context of the securities exchanges’ recent efforts to review the shareholder approval requirements which have been considered outmoded. For example, on November 18, 2015, Nasdaq solicited comments on its 20% rule, specifically (1) whether it is too restrictive, (2) whether the percentage should be higher, (3) whether there are other shareholder provisions that are sufficient and (4) whether the insider interest in acquired assets test is still needed.
FINRA has filed with the SEC a proposed rule which would reduce the regulatory burden for broker-dealers that limit their activities to M&A and certain corporate financing transactions. The proposed rule would create a new category of broker-dealers called “Capital Acquisition Brokers” or “CABs”. The proposed rule was published in the Federal Register on December 23, 2015 and will become effective after SEC approval, which normally occurs within 45 days after the date of publication.
Click here to read our full post on our BD/IA Regulator blog.