On May 10, 2016, the U.S. Department of the Treasury (“Treasury”) issued a white paper, entitled “Opportunities and Challenges in Online Marketplace Lending” (“White Paper”). The White Paper describes Treasury’s review of online marketplace lending and provides Treasury’s recommendations to the private sector and the federal government on how to encourage “safe growth” in the industry. The White Paper also summarizes the approximately 100 responses to Treasury’s July 20, 2015 request for information on the marketplace lending industry.
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On May 5, 2016, SEC Deputy Chief Accountant Wesley Bricker and the SEC Division of Corporation Finance’s Chief Accountant Mark Kronforst spoke at the 2016 Baruch College Financial Reporting Conference. Deputy Chief Accountant Bricker identified several specific concerns with non-GAAP reporting practices. First, the use of individually tailored accounting principles to calculate non-GAAP earnings fails to help the investor understand and analyze core operating results. Second, companies that opt to provide per-share data for non-GAAP performance measures that look like liquidity measures are frequently higher than per-share GAAP earnings and do not necessarily represent accurate measures of what could be distributed to investors. Third, recent company practices regarding the use of non-GAAP tax expense have caused concern. Fourth, recent company practices related to operating metrics also have caused concern. Chief Accountant Kronforst, echoing comments made at a Northwestern University legal conference on April 28, 2016, also critiqued companies’ calculation of the tax impact from non-GAAP financial measures.
Deputy Chief Accountant Bricker also made a few recommendations. First, issuers should consider how their disclosure controls and procedures apply to the disclosure of non-GAAP financial measures. Second, investors are encouraged to refer back to a company’s financial statements to place non-GAAP figures in the proper context. Third, audit committees should review the use of non-GAAP financial measures and the required related disclosures in order to consider the appropriateness and reliability of such non-GAAP financial measures. Deputy Chief Accountant Bricker also noted that the SEC will be sharing its observations on non-GAAP financial measures in various forums and might consider recommendations for rulemaking in this area, but companies should seize this opportunity to review their practices and make any necessary changes.
Deputy Chief Accountant Bricker’s “Remarks before the 2016 Baruch College Financial Reporting Conference” on May 5, 2016 are available at: https://www.sec.gov/news/speech/speech-bricker-05-05-16.html
The SEC has announced the agenda for its May 18 meeting of the Advisory Committee on Small and Emerging Companies. The meeting will focus on the definition of “accredited investor”, where the recent SEC staff report will be discussed. The Committee is then set to discuss unregistered securities offerings under Regulation D.
The meeting will begin at 9:30am ET and is open to the public. For more information, please see the SEC’s press release.
On May 3, 2016, the CATO Institute published a policy paper titled, “A Walk Through the JOBS Act of 2012: Deregulation in the Wake of Financial Crisis,” which assesses the JOBS Act and offers certain policy recommendations. In connection with Title I, or the IPO on-ramp provisions, the paper recommends that the SEC require, for all public issuers, only those disclosures that provide valuable information to investors. The CATO Institute suggests that the SEC review the current disclosure regime at least once, but ideally on a regular basis, and commit to repeal any requirements that are not shown to be effective.
With respect to the relaxation of the ban on general solicitation pursuant to Title II, the paper indicates that it remains unclear how effective Title II will be for private placements. To improve the effectiveness of Title II, the paper argues that the current definition of “accredited investor” is too limited and there should no longer be an accredited/non-accredited investor distinction. Alternatively, the paper suggests that the standard should be revised to ensure that it reflects an investor’s actual ability to evaluate an investment, based on industry knowledge.
With respect to the Title III crowdfunding exemption, the paper argues that the $1 million cap could discourage the use of the exemption. While a higher cap would attract more companies to rely on the exemption, raising the cap may make the exemption too similar to Regulation D and Regulation A and, therefore, unnecessary.
With respect to the changes to Regulation A pursuant to Title IV, the paper suggests that the SEC extend federal preemption to all Regulation A offerings, rather than just Tier 2 offerings, and provide explicit federal preemption of blue sky laws for registered broker-dealers trading in securities originally issued under Regulation A. Removing state law restrictions on broker-dealers would increase liquidity in the secondary market for securities issued under Regulation A.
Finally, the paper argues that the registration threshold changes under Titles V and VI of the JOBS Act will allow companies to remain privately held longer or potentially to remain private indefinitely. As a result, the paper recommends the repeal of the Section 12(g) Exchange Act threshold so that companies can decide for themselves whether to become reporting entities.
A copy of the paper is available at: http://www.cato.org/publications/policy-analysis/walk-through-jobs-act-2012-deregulation-wake-financial-crisis
The SEC approved amendments to revise the rules related to the thresholds for registration, termination of registration, and suspension of reporting under Section 12(g) of the Securities Exchange Act. These amendments implement provisions of the Jumpstart Our Business Startups Act (JOBS Act) and the Fixing America’s Surface Transportation Act (FAST Act).
To implement the JOBS Act, the SEC proposed amendments to Exchange Act Rules 12g-1 through 4 and 12h-3 to reflect the new Section 12(g) thresholds. The SEC also proposed to establish thresholds for savings and loan holding companies consistent with those for bank holding companies. Additionally, the Commission proposed to revise the definition of “held of record” in Exchange Act Rule 12g5-1. Subsequent to the SEC’s proposed amendments, the FAST Act revised the thresholds for savings and loan holding companies and the statutory changes were effective upon enactment of the Act.
The Commission approved final rules to implement the JOBS Act and FAST Act by:
- Amending Exchange Act Rules 12g-1 through 12g-4 and 12h-3, which govern the procedures relating to registration and termination of registration under Section 12(g), and suspension of reporting obligations under Section 15(d), to reflect the new thresholds established by the JOBS Act and the FAST Act.
- Applying the definition of “accredited investor” in Securities Act Rule 501(a) to determinations as to which record holders are accredited investors for purposes of Exchange Act Section 12(g)(1). An issuer will make the accredited investor determination as of the last day of its fiscal year.
- Amending the definition of “held of record” to provide that, when determining whether an issuer is required to register a class of equity securities with the Commission under Exchange Act Section 12(g)(1), an issuer may exclude securities held by persons who received them under an employee compensation plan in transactions exempt from, or not subject to, the registration requirements of Section 5 of the Securities Act and in certain circumstances, held by persons who received them in exchange for securities received under an employee compensation plan.
The Commission also established a non-exclusive safe harbor for determining holders of record which provides that:
- An issuer may deem a person to have received the securities under an employee compensation plan if the plan and the person who received the securities under the plan met conditions of Securities Act Rule 701(c)
- An issuer may, solely for the purposes of Section 12(g), deem the securities to have been issued in a transaction exempt from, or not subject to, the registration requirements of Section 5 of the Securities Act if the issuer had a reasonable belief at the time of the issuance that the securities were issued in such a transaction.
On April 27, 2016, the House of Representatives passed the Helping Angels Lead Our Startups Act (H.R. 4498) (the “HALOS Act”), which was first introduced on April 16, 2015. The HALOS Act directs the SEC to amend Regulation D under the Securities Act to make the prohibition against general solicitation or general advertising inapplicable to events with specified sponsors (including angel investor groups not connected to broker-dealers or investment advisers) where:
- presentations or communications are made by or on behalf of an issuer;
- the advertising does not refer to any specific offering of securities by the issuer;
- the sponsor does not engage in certain activities (such as offering investment recommendations or advice to attendees); and
- no specific information regarding a securities offering is communicated (other than that the issuer is in the process of offering or planning to offer securities, including the type and amount of securities being offered).
In addition, the HALOS Act (1) limits the types of fees ‘‘demo day’’ sponsors can collect (cannot receive any compensation for making introductions between investors attending the event and issuers, or for investment negotiations between such parties), (2) limits attendance at “demo days” to only individuals with financial sophistication (members of an angel investor group or accredited investors), and (3) requires that an issuer not be in bankruptcy or receivership, an investment company, or a blank check, blind pool or shell company. H.R. 4498 is available at: https://www.congress.gov/114/bills/hr4498/BILLS-114hr4498rh.pdf
The HALOS Act would incorporate into regulation issues as to which the SEC Staff already has provided guidance either in the form of no-action letter guidance (on demo days, for example) or in Compliance and Disclosure Interpretations.
On April 21, 2016, the Fair Access to Investment Research Act of 2016 (H.R. 5019) (the “Fair Access to Investment Research Act”) was introduced in the House of Representative. The Fair Access to Investment Research Act directs the SEC to amend Rule 139 under the Securities Act to provide that a covered investment fund research report that is published or distributed by a broker-dealer will be deemed, for purposes of Sections 2(a)(10) and 5(c) of the Securities Act, not to constitute an offer for sale or an offer to sell a security that is the subject of an offering pursuant to a registration statement that is effective (even if the broker-dealer is participating or will participate in the registered offering of the covered investment fund’s securities). H.R. 5019 is available at: https://www.congress.gov/114/bills/hr5019/BILLS-114hr5019ih.pdf
On April 20, 2016, FINRA proposed delaying further the implementation date of its new debt research rule (Rule 2422) until July 16, 2016. Rule 2422 was set to take effect on April 22, 2016, after the implementation date was extended from the initial February 22, 2016 deadline. We will continue to monitor developments relating to the implementation date of Rule 2422 on this blog.
The proposed FINRA rule change is available at: http://www.finra.org/sites/default/files/rule_filing_file/SR-FINRA-2016-013.pdf.
While the JOBS Act helped spur larger, venture capital- and private equity-backed companies to consider IPOs, it has not served to revive the smaller IPO market. Perhaps the IPO market downturn will cause market participants to consider the merits of a Regulation A+ offering with an exchange listing. To read this CFO magazine guest article by partner Anna Pinedo, click here: http://ww2.cfo.com/capital-markets/2016/04/will-reg-a-offerings-flourish-in-the-ipo-downturn/.
Even before the JOBS Act had been proposed, policymakers focused on the downturn in the number of initial public offerings (IPOs) speculated that the burdensome disclosure requirements applicable to public companies were deterring private companies from undertaking public offerings. A number of market participants, including even a few then-Commissioners of the Securities and Exchange Commission (the “Commission”), noted that the disclosures contained in IPO prospectuses, as well as those contained in Securities Exchange Act (“Exchange Act”) filings, had consistently become longer in recent years. Then-Commissioner Paredes noted that disclosure overload brought with it the possibility that investors might no longer be able to identify the information that was material to an investment decision amidst pages of generic or repetitive text. In an effort to jumpstart the IPO market and reduce the regulatory burdens for IPO candidates, Title I of the JOBS Act (the “IPO on ramp” provisions) required that the Commission produce a report to Congress examining the requirements of Regulation S-K with a view to modernizing and simplifying the registration process for emerging growth companies (EGCs). The SEC Staff’s 2013 report identified a number of guiding principles that should inform a review of the effectiveness of disclosure requirements. Paramount among these is the notion of promoting investor confidence in the reliability of public filings through enhanced transparency, while encouraging capital formation. These and other objectives have been at the center of the Commission’s “Disclosure Effectiveness” initiative, which has been underway since 2013. Last week, the Commission took another step toward furthering its review of Regulation S-K requirements by voting to issue a Concept Release requesting comment on the business and financial disclosures that public companies provide in their Exchange Act filings. The release specifically does not comment on the other disclosure requirements of Regulation S-K, such as corporate governance or compensation-related items, or the required disclosures for foreign private issuers, business development companies or other types of registrants.
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On Thursday, April 14th, the House Financial Services Subcommittee on Capital Markets and GSEs held a hearing at 10 am titled, The JOBS Act at Four: Examining its Impact and Proposals to Further Enhance Capital Formation. The hearing considered the following four proposed bills, about which we previously have reported:
- H.R. 4850, the “Micro Offering Safe Harbor Act;”
- H.R. 4852, the “Private Placement Improvement Act of 2016;”
- H.R. 4854, the “Supporting America’s Innovators Act of 2016;” and
- H.R. 4855, the “Fix Crowdfunding Act.
The witnesses included Paul Atkins of Patomak Global Partners; William Beatty, Washington Securities Division Director, on behalf of the North American Securities Administrators Association; Nelson Griggs, Executive Vice President-Global Listing Services, NASDAQ OMX; Raymond Keating, Chief Economist, Small Business & Entrepreneurship Council; and Kevin Laws, Chief Operating Officer, AngelList. Their prepared remarks and other hearing details may be accessed at: http://financialservices.house.gov/calendar/eventsingle.aspx?EventID=400536.