On October 2, 2017, Congressmen Ted Budd (R-NC) and Gregory Meeks (D-NY) introduced a bipartisan bill, H.R. 3903, in the U.S. House of Representatives.  The bill proposes amendments to the Securities Act of 1933, as amended, to increase initial public offering (“IPO”) and follow-on activity. The proposed legislation extends three JOBS Act provisions currently available to emerging growth companies to all issuers: (1) submission of a draft registration statement for confidential nonpublic review by the SEC prior to the public filing of the IPO registration statement; (2) within the one-year period following an IPO, confidential submission of a draft registration statement for an offering; and (3) the ability to test-the-waters with institutional investors.  The SEC’s Division of Corporation Finance’s policy changes earlier in the year already have addressed confidential submissions for IPOs as well as follow-on offerings undertaken within twelve months of an IPO; however, the bill would ostensibly extend the confidentiality provisions contained in Securities Act Section 6(e)(2) for these draft registration statements.  Currently, those confidentiality provisions are available only for EGCs and confidential submissions made under the new SEC policy must be the subject of a Rule 83 confidential treatment request.  Also, the bill would address the ability to test the waters, which was not addressed by the Division of Corporation Finance.

The text of the bill is available here.

Wednesday, October 18, 2017

Morrison & Foerster LLP
250 West 55th Street
New York, NY 10019

Lunch and Registration:
12:00 p.m. – 12:30 p.m.

Keynote and Pitch:
12:30 p.m. – 1:30 p.m.

Closing Words and Dessert:
1:30 p.m. – 2:00 p.m.

OurCrowd and Morrison & Foerster Seminar

It’s no secret that Israel has been leading the world of innovation. VCs and financial backers from every industry flock to Israel, the Startup Nation, which has the highest number of startups per capita in the world, and ranks fourth in NASDAQ listings, just behind the U.S., China, and Canada.

Join OurCrowd, Morrison & Foerster, and the startup community for a lunch program discussing financing alternatives and opportunities for Israeli startups.

Speakers:

  • Jon Medved
    Founder & CEO, OurCrowd
  • Omer Keilaf
    CEO & Co-Founder, Innoviz
  • James Tanenbaum
    Partner, Morrison & Foerster LLP

This is an in-person only session.

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

On September 11, 2017, SEC Chief Accountant Wesley Bricker gave a speech at the AICPA National Conference on Banks & Savings Institutions titled “Advancing High-Quality Financial Reporting in Our Financial and Capital Markets.”  Mr. Bricker dedicated a portion of the speech to discussing the importance of broker-dealer compliance, as well as regulatory and financial reporting requirements, relating to initial coin offerings (ICOs), also referred to as token sales.  Mr. Bricker noted that in July 2017, the SEC issued a report on its investigation of an offering of digital tokens by The DAO, an unincorporated virtual organization.  Mr. Bricker emphasized that, as stated in the SEC’s report, the federal securities laws apply to those who offer and sell securities in the United States, regardless of whether the issuing entity is a traditional company or a decentralized autonomous organization, whether those securities are purchased using U.S. dollars or virtual currencies, or whether they are distributed in certificated form or through distributed ledger technology.  Mr. Bricker stated that an entity involved in initial coin or token offering activities must consider the necessary accounting, disclosure and reporting guidance based on the nature of its involvement, including the preparation of financial statements.  Mr. Bricker noted that issuers involved in initial coin or token offerings should consider, for example, the application of SEC guidance in addressing the following questions:

  • What are the necessary financial statement filing requirements?
  • Are there liabilities requiring recognition or disclosure?
  • Are there previously recognized assets that require de-recognition?
  • Are there revenues or expenses requiring recognition or deferral?
  • Is there a transaction with owners, resulting in debt or equity classification and possibly compensation expense?
  • Are there implications for the provision for income taxes?

Mr. Bricker also noted that holders of coins or tokens should consider, for example, the application of SEC guidance in addressing the following questions:

  • Does specialized accounting guidance (such as for investment companies) apply to the holder’s financial statement presentation?
  • What are the characteristics of the coin or token in considering whether, how, and at what value the transaction should affect the holder’s financial statements?
  • What is the nature of the holder’s involvement in considering whether the issuer’s activities should be consolidated or accounted for under the equity method?

A copy of the speech is available at: https://www.sec.gov/news/speech/speech-bricker-2017-09-011.

EY’s recently published Global IPO trends: Q3 2017 reports that 2017 is on course for the busiest IPO year in 10 years–largely due to the level of activity outside the United States. According to the report, 1,156 IPOs have been completed globally, which have raised approximately $126.9 billion. 2017’s Q3 accounts for about 29% of the year’s global IPOs, with 330 deals raising $37.6 billion in proceeds. Globally, the industrials sector leads in number with 70 deals raising $4.9 billion, followed by tech IPOs with 52 deals raising $5.9 billion and consumer products with 39 IPOs raising $2.5 billion in the third quarter. The most popular exchanges were the Hong Kong Exchange (14 IPOs), the NASDAQ (13 IPOs), the London Stock Exchange (12 IPOs), the NYSE (11 IPOs), and the Australian Stock Exchange (also 11 IPOs).

The EY report notes that the U.S. markets have experienced a 35% year-over-year increase in volume, with 111 IPOs for the first nine months of 2017, raising $26.5 billion. 27 IPOs were completed in Q3 2017, raising $3.5 billion‎. 10 of these were in the healthcare sector, which was the most active sector in the third quarter, raising $0.9 billion. Year to date, the median IPO size is $116.7 million and the median post-IPO market cap is $490.5 million.

Earlier in the week, SEC Chair Clayton provided testimony in Congress regarding the Commission’s agenda. In his testimony, Chair Clayton noted that the Commission remains focused on regulatory initiatives required by the FAST Act and the Dodd-Frank Act. Chair Clayton also noted that the new Regulatory Flexibility Act agenda will be released in a few weeks, which will reflect the Commission’s priorities. The prior agenda reflected interim Chair Piwowar’s priorities for the Commission.

Chair Clayton reiterated his concerns regarding the decline in the number of U.S. public companies. He noted that the regulatory burden needs to be reassessed so that private companies might consider IPOs. Chair Clayton observed that “A shrinking proportion of public companies, particularly smaller and medium-sized companies, has costs beyond investment choices, including that there will be less publicly available information about the operations and performance of companies that are important to our economy.” The Division of Corporation Finance is considering whether there are other areas (other than those addressed in the Division’s guidance this summer relating to extending the confidential review process and providing registrants with guidance regarding certain accounting questions in advance of a filing) in which interpretive guidance could assist companies without reducing investor protections, and whether enhancements can be made to staff processes to further benefit companies and investors. The Commission will soon also consider a rule proposal required by the FAST Act to modernize and simplify the disclosure requirements in Regulation S-K, and the Staff is considering recommendations on final rule amendments to the “smaller reporting company” definition. Chair Clayton mentioned a number of other initiatives, including changes to the rules in Regulation S-X related to requirements for financial statements for entities other than the issuer; and industry-specific disclosure requirements, such as the property disclosure requirements for mining companies and preparing recommendations for proposed rules to modernize bank holding company disclosures. The full text of the prepared testimony is available here: https://www.sec.gov/news/testimony/testimony-clayton-2017-09-26.

A pre-funded warrant is a type of warrant that allows its holder to purchase a specified number of a company’s securities at a nominal exercise price, typically as low as $0.01 per share.  The term “pre-funded” refers to the structural feature that allows the company to receive, as part of the pre-funded warrant’s purchase price, the exercise price that would be due for a traditional (not pre-funded) warrant, except for the nominal exercise price, at the time of the warrant’s issuance instead of at the time of the warrant’s eventual exercise.  Pre-funded warrants are generally issued as part of a larger financing transaction, such as a venture capital investment, minority equity investment, or mezzanine financing.  A pre-funded warrant provides a holder with the flexibility to avoid exceeding the designated ownership threshold prior to the warrant’s exercise while still maintaining the ability to immediately acquire the underlying securities at a nominal exercise price when the investor is ready to do so.  Pre-funded warrants allow the company to receive almost all of the cash proceeds immediately upon the warrant’s issue at a time when the company’s underlying valuation is likely difficult to obtain or uncertain, instead of waiting until the warrant is exercised.  In our “Practice Pointers on Pre-funded Warrants,” we describe the features of pre-funded warrants, discuss why they are used, how they are structured and 20% rule considerations, and provide sample pre-funded warrant language.

The practice pointers are available here.

On September 21, 2017, the Securities and Exchange Commission (the “SEC”) published interpretive guidance (the “SEC Guidance”) to assist public companies in their preparation of the pay ratio disclosure required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of [2010] (the “Act”). The staff of the SEC’s Division of Corporation Finance (the “Staff”) separately published interpretive guidance (the “Staff Guidance) relating to the use of sampling and other reasonable methodologies. This Staff guidance is intended to assist registrants in determining how to use statistical sampling methodologies and other reasonable methods in complying with the pay ratio disclosure obligation. The Staff has further supplemented its guidance with new and revised Compliance and Disclosure Interpretations.

Read our client alert.

On September 20, 2017, the staff of the SEC’s Division of Corporation Finance issued revised compliance and disclosure interpretations (“C&DIs”) for purposes reflecting updates for prior amendments to Securities Act Rules 147 and 504, the repeal of Securities Act Rule 505 and non-substantive changes throughout the Rule 147 and Regulation D C&DIs based on the SEC’s current rules.  Highlights of the C&DIs (Questions 257.08, 258.03, 258.05, 258.06 and 541.03) include, among other things, the following guidance:

  • A Securities Act Rule 506 offering will not lose “covered security” status under Securities Act Section 18 if an issuer fails to file a Form D with the SEC.
  • Rule 504 is available to a private fund excluded from the definition of “investment company” by Section 3(c)(1) or 3(c)(7) of the Investment Company Act so long as the offering under Rule 504 is not a “public offering.”
  • The example of the calculation of the aggregate offering price provided in the instruction to paragraph (b)(2) of Rule 504 does not contemplate integration of two or more offerings.
  • Rule 504 is not available to any issuer that is subject to disqualification under Rule 506(d) on or after January 20, 2017. On or after this date, issuers must determine if they are subject to bad actor disqualification any time they are offering or selling securities in reliance on Rule 504.
  • If a family trust that is not deemed to be a separate legal entity has two trustees, only one of which resides in a state where a Rule 147 offering is being made, the issuer may still offer and sell securities to the family trust in the Rule 147 offering.

Questions 258.04, 260.02 and 541.02 and Section 259 were removed.

The revised C&DIs are available here.

The SEC’s Investor Advisory Committee announced its next meeting on October 12, beginning at 9.30 am.  The agenda for the meeting includes remarks from Commissioners; a discussion regarding blockchain and other distributed ledger technology and implications for securities markets; an overview of law school clinic advocacy efforts on behalf of retail investors; a discussion regarding electronic delivery of information to retail investors (which may include a recommendation of the Investor as Purchaser Subcommittee); and subcommittee reports.  The meeting will be webcast on the SEC’s site.

Last week, the Senate passed three bipartisan bills that promote access to capital for small businesses and startups.  The Senate bills, the House corollaries of which originally passed on March 9, 2017, include the following:

  • S. 444, the Supporting America’s Innovators Act (H.R. 1219).  Amends the Investment Company Act of 1940 to exempt from the definition of an “investment company,” for purposes of specified limitations applicable to such a company under the Act, a qualifying venture capital fund that has no more than 250 investors. Specifically, the bill applies to a venture capital fund that has less than $10 million in aggregate capital contributions and uncalled committed capital.
  • S. 416, the Small Business Capital Formation Enhancement Act (H.R. 1312). Amends the Small Business Investment Incentive Act of 1980 with respect to the annual government-business forum of the SEC to review the current status of problems and programs relating to small business capital formation.
  • S. 488, Encouraging Employee Ownership Act (H.R. 1343). Requires the SEC to increase, from $5 million to $10 million the threshold beyond which an issuer is required to provide investors with additional disclosures related to compensatory benefit plans.