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FINRA Research Rule Guidance: The New Stages of Grief

Posted in FINRA, IPO On-Ramp, Research

Many market participants were left in a quandary following FINRA enforcement actions in connection with member firm research analyst “participation” in meetings with prospective issuers.  Recently, FINRA published a handful of Frequently Asked Questions relating to its research rules (see:  http://www.finra.org/industry/faq-research-rules-frequently-asked-questions-faq).  The FAQs outline three stages of an IPO a pre-IPO period, a solicitation period, and a post-mandate period.  Each such stage is described in the FAQs and FINRA also describes the attendant risks associated with a research analyst’s activities during these various stages.  Of course, during the pre-IPO stage, the attendant risks are attenuated and FINRA believe that these attenuated risks can be addressed adequately through properly designed policies and procedures.  However, FINRA cautions that member firms ought to be sensitive to any communications that would suggest the issuer already had determined to proceed with an IPO.  The guidance also provides FINRA’s view regarding when the “solicitation period” would be deemed to begin, although this would seem, in real life, to be a highly fact-specific matter.  In the post-mandate period, again, the risks are attenuated, in FINRA’s view, and may be effectively addressed by member firms through their policies and procedures.  The guidance is particularly strident with respect to valuation analyses.  For example, the FAQs note that a member firm that is competing for an IPO role must repudiate any communication that would seemingly indicate that a valuation reflects the analyst’s views and expressly note that the firm cannot make any representations about the analyst’s views on valuation.

SEC Advisory Committee Agenda Published

Posted in Advisory Committee on Smaller and Emerging Companies, Crowdfunding, Public Companies, SEC News

The SEC announced that the next meeting held on June 3rd of its Advisory Committee on Small and Emerging Companies will focus on public company disclosure effectiveness, intrastate crowdfunding, venture exchanges, and treatment of “finders.”  The Committee also will vote on a recommendation to the Commission regarding the “Section 4(a)(1½) exemption” sometimes used by shareholders to resell privately issued securities.  This topic was initially discussed at the committee’s March 4 meeting.  The exemption is the subject of proposed legislation, titled the RAISE Act, and sponsored by Congressman McHenry.  See the SEC’s notice here:  http://www.sec.gov/news/pressrelease/2015-101.html

SEC Approves Tick-Size Pilot

Posted in SEC News

The SEC recently approved a proposal by the national securities exchanges and FINRA for a two-year pilot program to widen tick sizes for prices of certain smaller company common stock.  The SEC adopted the tick size pilot following its study of tick sizes pursuant to Section 106 of the JOBS Act.  In June 2014, the SEC ordered the national securities exchanges and FINRA to develop and file a proposal for a tick size pilot program.  On August 26, 2014, the SEC announced that the national securities exchanges and FINRA had filed a proposal to establish a national market system plan to implement a targeted tick-size pilot program.  The two-year tick size pilot that the SEC approved, which included a number of changes from the proposed pilot submitted to the SEC,  will begin by May 6, 2016.

The tick size pilot will include stocks of companies with $3 billion or less in market capitalization, an average daily trading volume of one million shares or less, and a volume weighted average price of at least $2.00 for every trading day. The pilot will consist of a control group of approximately 1,400 securities and three test groups with 400 securities in each, which will be selected by a stratified sampling.  During the pilot: (i) the control group will be quoted at the current tick size increment of $0.01 per share and will trade at the currently permitted increments; (ii) the first test group will be quoted in $0.05 minimum increments but will continue to trade at any price increment that is currently permitted; (iii) the second test group will be quoted in $0.05 minimum increments and will trade at $0.05 minimum increments subject to a midpoint exception, a retail investor exception, and a negotiated trade exception; and (iv) the third test group will be subject to the same terms as the second test group and also will be subject to the “trade-at” requirement to prevent price matching by a person not displaying at a price of a trading center’s best “protected” bid or offer, unless an enumerated exception applies. In addition to the exceptions provided under the second test group, an exception for block size orders and exceptions similar to those under Rule 611 of Regulation NMS will apply.

According to the SEC, the exchanges and FINRA will submit their initial assessments on the tick size pilot’s impact 18 months after the pilot begins, based on data generated during the first 12 months of its operation.

Massachusetts Challenges Regulation A+

Posted in Regulation A+

On May 22, 2015, William F. Galvin, the Secretary of the Commonwealth of Massachusetts, filed a petition for review in the U.S. Court of Appeals for the District of Columbia Circuit seeking court review of the portion of SEC’s Regulation A+ rules which relate to preempting state law.  Galvin requests that the Court hold that the SEC’s rule is arbitrary, capricious and otherwise not in accordance with the Administrative Procedures Act, the Securities Act of 1933 and other law.  The petitioner also requests vacatur of the rule and its requirements, issuance of a permanent injunction prohibiting the Commission from implementing and enforcing the rule, and other relief that the Court deems appropriate.

The final Regulation A+ rules provide that Tier 2 offerings will not be subject to state review if the securities are sold to “qualified purchasers” or listed on a national securities exchange.  The final rule defines the term “qualified purchaser” in a Regulation A offering to include all offerees and purchasers in a Tier 2 offering.  The final Regulation A+ rules are scheduled to go into effect on June 19, 2015.


House Financial Services Committee Mark-Up of JOBS Act Bills

Posted in JOBS Act News

On May 20th, the Committee will be meeting beginning at 10am in an open session to mark up eleven bills that relate to various capital formation and JOBS Act measures.  We have reported on a number of these bills in prior posts.  The Committee memo, available here: http://financialservices.house.gov/uploadedfiles/052015_fc_memo.pdf, provides a summary of the bills under consideration.

Americans Stand On the Cusp of a Money Revolution

Posted in JOBS Act News, Regulation A+

Americans are standing on the cusp of a revolution in how we access and use money, a revolution that could make our economic lives more secure and our economy more robust. Just as e-commerce freed merchants and customers from geographic boundaries in the delivery of goods, advances in financial technology promise to make it easier for businesses, investors, and consumers to raise capital, make investments, and transfer money to anyone, anywhere. This technological revolution brings the promise of greater opportunity, particularly for those who live outside the wealthiest parts of the country.

Unfortunately, our outdated regulatory structure, made up of a patchwork of state regulations, could stifle this revolution before it starts. A minefield of inconsistent requirements could make it impossible for innovative companies, especially small businesses, to establish a foothold. Fortunately, Congress has the power to protect both innovators and consumers from this regulatory morass and to create a fair and uniform playing field for all participants, if they have the courage to use it.

There should be no question that Congress has the power to do so. The Founders understood the danger that too many overlapping state rules posed to the development of a national economy. The Commerce Clause was intended to prevent this by granting Congress the power to regulate interstate commerce and shield it from the burden of excessive state regulation. As technology changes the fundamental nature of financial transactions that were once intrastate but that now regularly reach beyond state lines, it is essential that the regulations governing those transactions are fair and uniform. Frequently the only way to ensure this is for the federal government to make the rules.

A recent example of the need for congressional action is the debate surrounding the Security and Exchange Commission’s (SEC) changes to Regulation A, an exemption to the requirement that companies “fully” register with the SEC prior to seeking investment via the sale of securities. Regulation A was intended to help smaller companies access capital by allowing an abbreviated registration process while allowing regular investors to buy stock in companies that still had early growth potential, provided they sought no more than $5 million in investment. But, only one qualified Regulation A offering was conducted in 2011, compared to more than 8,000 Regulation D offerings that same year.

Why? A major reason was that Regulation A not only required companies to undergo a significant vetting and disclosure process from the SEC, but also to comply with the varying and often onerous registration requirements of each and every state in which they sought investment. So, unsurprisingly, companies overwhelmingly chose Regulation D, which, unfortunately for smaller investors is effectively limited to wealthy people and institutions.

The JOBS Act was supposed to fix this, but Congress failed to preempt the states and instead simply increased the amount of money a company could raise under Regulation A (apparently to make the hassle worthwhile, but only for companies seeking a very large amount of money). The SEC, using some regulatory jujitsu, found a way to preempt the states for certain offerings, but at the cost of expensive ongoing disclosure obligations. The rules force companies to choose between dealing with the states or gaining preemption and having to face expensive ongoing and burdensome disclosures. Understandably this has not pleased the states, who feel their authority was unjustly stripped by the SEC. Some small business advocates are also disappointed at the compromise, fearing that instead of one unusable Regulation A, we now have two.

The SEC isn’t to blame; it has done what it can to make this work under significant political pressure. Rather, Congress should have acknowledged that while private and quasi-private securities offerings may have once been primarily local affairs, thanks to the internet, investing in a company on the other side of the country can be almost as easy as buying clothes on Amazon, rendering state borders moot. To be viable, any policy that seeks to expand access to capital will need to take this into account, and apply a uniform standard. Congress is the appropriate body to make that decision.

Securities are by no means the only industry where technology is transforming local transactions to national ones. Lending, money transmittal, and a host of other financial activities are being profoundly changed by the ease with which technology allows people to interact over distance. While this shift has great promise to make finance more accessible and inclusive the uncertainty of having to navigate over fifty separate legal regimes will stifle innovation. To prevent this, Congress must be willing to both reevaluate where preexisting divisions of authority are now obsolete and be willing to provide innovative industries clear, exclusive, and limited rules for entrepreneurs to follow. The scope of interstate commerce is much broader now than it once was, and Congress should take the lead to ensure an economy where innovation and prosperity can cross state lines.

Brian Knight is the Associate Director for Financial Policy at the Milken Institute’s Center for Financial Markets.

This post was originally featured on Real Clear Markets, available at http://www.realclearmarkets.com/articles/2015/05/19/americans_stand_on_the_cusp_of_a_money_revolution_101673.html

House Small Business Committee Hearing on P2P

Posted in P2P Lending

Last week, the House Small Business Committee held a hearing to discuss the rise of peer-to-peer lending and the availability of capital for small businesses.  The testimony from leaders in the P2P sector provides an overview of the state of the industry and their recommendations regarding additional measures that should be considered to promote continued growth of P2P lending.  You can access the hearing materials and a webcast here:  http://smallbusiness.house.gov/calendar/eventsingle.aspx?EventID=398060.

CFTC Reauthorization Bill Includes JOBS Act Fix

Posted in CFTC, CFTC News

The House Agricultural Committee passed the CFTC authorization bill late last week, HR 2289.  HR 2289 incorporates in Section 312 a provision that was part of a bill introduced by Congressman Fincher to harmonize the treatment of funds that use general solicitation.  If the bill is passed, the section would have the effect of codifying the ability of funds that are commodity pools relying on either the de minimis exception from registration or on certain provisions available to registered investment advisers to use general solicitation in Rule 506 offerings.  In prior posts, we had discussed the limited relief provided by the CFTC to certain funds that use general solicitation subject to compliance with certain conditions.

You can see the full text of the bill here:  http://agriculture.house.gov/sites/republicans.agriculture.house.gov/files/pdf/hearings/CONAWA_006