Renaissance Capital reported several record lows in their 2016 Annual Review of the U.S. IPO Market.  A total of 105 IPOs were completed in 2016, raising $18.8 billion in proceeds—the lowest activity level since 2009 and the lowest proceeds level since 2003, respectively.  The median deal size for 2016 IPOs was $95 million, which is attributed to the number of smaller biotech offerings in 2016.  Only four IPOs raised more than $1 billion this year.  Additionally, 2016 had the lowest number of IPO filings since 2009 with just 120 companies filing for an IPO, an almost 50% decrease from 2015.

Sector updates.  The tech sector accounted for 20% of all U.S. IPOs in 2016, with only 21 offerings, raising $3 billion in proceeds.  The lack of tech sector participation in the IPO market is attributed to the public-private disconnect on valuation.  Renaissance reports that venture capital-backed tech companies chose to avoid public-market valuations and decided to remain private.  Mergers and acquisitions provided quick exits for tech companies that had filed for IPOs.  The healthcare sector remained dominant, accounting for 40% of all U.S. IPOs.  Another year of elevated biotech activity contributed significantly to this year’s 42 healthcare IPOs, which raised $3.4 billion in proceeds.  The financial services sector raised the most proceeds in 2016.  The 15 financial services IPOs raised $4.3 billion in proceeds.

Private equity-backed IPOs.  The number of, and the proceeds raised in, private equity-backed IPOs in 2016 are the lowest since 2009.  However, PE-backed IPOs continue to perform better than the overall IPO market.  The 30 PE-backed IPOs raised $8.8 billion in proceeds, with only five of the 30 finishing the year below the IPO issuance price.

Venture capital-backed IPOs.  Venture capital-backed IPOs in 2016 also represent the lowest level of activity and proceeds since 2009.  42 VC-backed IPOs raised $3.5 billion in proceeds. 50% of these deals were biotech and only 10 deals raised over $100 million.  The tech sector (historically comprised of VC-backed companies) contributed to the 56% decrease in VC-backed IPOs.  As discussed above, the notable public-private valuation disconnect contributed to the lower IPO numbers.

As 2016 comes to a close, we will continue to monitor the U.S. IPO market and provide updates on this blog.

On December 7, 2016, the SEC released a white paper on Regulation A+ offerings titled “Regulation A+: What Do We Know So Far?”  The white paper analyzes Regulation A+ offerings conducted from the effective date of Regulation A+ (June 19, 2015) through October 31, 2016.  The white paper notes that during this observation period the rate of Regulation A+ activity outpaced the rate of prior Regulation A activity.  Despite a relatively small sample size and a short observation period, the white paper makes, among others, the following observations:

  • Prospective issuers filed with the SEC offering statements for 147 Regulation A+ offerings, covering approximately $2.6 billion of securities.  Of those offering statements filed with the SEC, approximately 81, covering approximately $1.5 billion of securities, have been qualified by the SEC.
  • $190 million was reported as raised in qualified offerings.
  • With respect to qualified offerings, there were 10 issuers seeking quotation on the OTC Markets, 17 issuers indicating that they would seek quotation on the OTC Markets in the future and one issuer seeking an NYSE listing (no issuers indicated they were seeking a Nasdaq listing).
  • Issuers are availing themselves of both Tier 1 and Tier 2 offerings, but Tier 2 offerings were on the margin more common among qualified offerings, accounting for 60% of qualified offerings.
  • The offering amount varied with issuer’s size, with the average issuer seeking up to approximately $18 million.
  • Issuers mainly offered equity securities, which accounted for over 85% of all Regulation A+ offerings.
  • The majority of Regulation A+ offerings were conducted on a best-efforts, self-underwritten basis.
  • Most of the issuers have previously engaged in private offerings, consistent with the use of Regulation A+ as an IPO on-ramp.

The white paper is available at: https://www.sec.gov/dera/staff-papers/white-papers/Knyazeva_RegulationA-.pdf.

As year-end approaches, many companies will be focused on preparing their annual reports.  Recent comments from various representatives of the Securities and Exchange Commission accounting staff emphasized the importance of maintaining strong and effective internal control over financial reporting (“ICFR”).  At the American Institute of Certified Public Accountants Conference in Washington, D.C., SEC Chief Accountant Wesley R. Bricker and SEC Deputy Chief Accountant Marc Panucci both addressed ICFR.  Mr. Panucci stated that ICFR remains a significant area of focus for the SEC, including through the coordinated efforts of the SEC’s Office of the Chief Accountant, the Division of Corporation Finance and the Division of Enforcement.  Mr. Panucci also noted that earlier this year, the SEC brought and settled a case against an issuer, members of its management, the audit partner and the issuer’s third-party consultant involving the inadequate evaluation of an identified control deficiency.  Additional takeaways from their remarks include the following:

  • Management, audit committees and auditors should engage in regular dialogue on ICFR assessments, as timely and effective communication among these parties is important for accurate assessments of ICFR and reliable financial reporting that benefits investors.
  • Management has the responsibility to carefully evaluate the severity of identified control deficiencies and to report, on a timely basis, all identified material weaknesses in ICFR. Any required disclosure should allow investors to understand the cause of the control deficiency and to assess the potential impact of the identified material weakness.
  • It is important to maintain competent and adequate accounting staff to accurately reflect the company’s transactions and to augment internal resources with qualified external resources, as necessary.
  • Management has to take responsibility for its assessment of ICFR, and that responsibility cannot be outsourced to third-party consultants. At the same time, third party-consultants can play an important and critical role when assisting management in its evaluation of ICFR.

Mr. Bricker’s speech is available at: https://www.sec.gov/news/speech/keynote-address-2016-aicpa-conference-working-together.html.  Mr. Panucci’s speech is available at: https://www.sec.gov/news/speech/panucci-2016-aicpa.html.

On December 7, 2016, the North American Securities Administrators Association (“NASAA”) proposed a model rule, a model statutory amendment and a Solicitation of Interest Form permitting testing the waters in Tier 1 Regulation A offerings under the NASAA’s coordinated review program.  States are currently preempted from requiring registration for Tier 2 Regulation A offerings, including those using testing the waters, but are not preempted from requiring such registration for Tier 1 Regulation A offerings.  The proposed model rule allows an issuer that intends to register a Tier 1 Regulation A offering to solicit indications of interest from prospective investors if the following conditions are satisfied:

  • the issuer is organized under the laws of a state or territory of the United States, the District of Columbia or a province of Canada;
  • the issuer files a solicitation of interest form and any advertising materials with the administrator at least 15 calendar days prior to the initial solicitation of interest;
  • neither the issuer nor any person acting on its behalf may solicit or accept any money or subscriptions;
  • neither the issuer nor any person acting on its behalf may make any sales until at least seven calendar days after delivering a final offering circular; and
  • certain legends must appear in any solicitation of interest materials.

Certain offerings are disqualified under the proposed model rule, including those involving bad actors, development stage companies, blank check companies, companies involved in petroleum or other mining or extractive industries and pooled investment vehicles.  The proposed Solicitation of Interest Form, which contains basic information about the issuer and the offering, would be required to be filed with regulators prior to testing the waters and also must be provided to prospective investors.  Comments on the NASAA’s proposal are due by January 6, 2017.

The NASAA’s proposal is available at: http://nasaa.cdn.s3.amazonaws.com/wp-content/uploads/2016/12/Testing-the-Waters-Request-for-Public-Comment-December-2016.pdf.

On November 2, 2016, FINRA terminated the FINRA registration for UFP, LLC (“UFP”), making UFP the first crowdfunding portal to be expelled from FINRA.   UFP ran an online funding portal, uFundingPortal.com, where it acted as an intermediary in debt and equity crowdfunding offerings conducted in reliance on SEC Regulation Crowdfunding rules.  FINRA’s investigation into UFP alleged that from May through September 2016, UFP violated various SEC Regulation Crowdfunding rules and FINRA Funding Portal Rules. As a result of FINRA’s investigation, UFP pulled its website and submitted a Letter of Acceptance, Waiver and Consent (the “AWC”) in order to settle these alleged rule violations with FINRA.  The AWC is available at: http://disciplinaryactions.finra.org/Search/ViewDocument/67004.

FINRA alleged that UFP violated Rule 301(a) and Rule 301(c)(2) under SEC Regulation Crowdfunding.  Rule 301(a) requires funding-portal intermediaries like UFP to have a reasonable basis for believing that issuers using its crowdfunding portal comply with applicable regulatory requirements, and Rule 301(c)(2) requires that access to funding portals be denied to issuers that present the potential for fraud or otherwise raise investor protection concerns. FINRA found UFP to be in violation of Rule 301(a) because 16 of the issuers on UFP’s portal had failed to file certain requisite disclosures with the SEC and, in each case, UFP had reviewed these issuers’ SEC filings and therefore had reason to know that these filings were incomplete.  In addition, FINRA found UFP to be in violation of Rule 301(c)(2) by failing to deny access to its portal when it had a reasonable basis to believe these issuers and/or their offerings presented the potential for fraud. For example, FINRA found that these 16 issuers all had impracticable business models and oversimplified and unrealistic financial forecasts; 13 of these issuers disclosed identical amounts for their funding targets, maximum funding requests, price per share of stock, number of shares to be sold, total number of shares and equity valuation; three of these issuers had identical language in the “Risk Factors” sections of their websites; and two issuers listed identical officers and directors even though they had vastly different business plans.  Additionally, UFP had reason to know that four of these issuers either had officers or directors who owed back taxes or had not filed an annual tax return for 2015.   FINRA also alleged that UFP violated Funding Portal Rule 200(c)(3), which prohibits funding portals from including any issuer communication on its website that it knows or has reason to know contains any untrue statement of material fact or is otherwise false or misleading.

On December 10, the Senate passed H.R. 3784, the SEC Small Business Advocate Act, without amendment and by unanimous consent. The measure, which was passed by the House in February 2016, is now cleared for the President to sign into law. We will continue to monitor the status of this and additional pending legislation on this blog.

On December 8, 2016, the Securities and Exchange Commission’s (“SEC”) Division of Corporation Finance (the “Staff”) released several new compliance and disclosure interpretations (“C&DIs”) clarifying the definition of “foreign private issuer” (an “FPI”) under Rule 405 (“Rule 405”) under the Securities Act of 1933, as amended (the “Securities Act”), and Rule 3b-4(c) (“Rule 3b-4(c)”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). On the same day, the Staff issued additional C&DIs, which provide explanations on the permitted use of an F-Series registration statement and Form 20-F by an FPI (and its subsidiaries) in certain contexts. This alert provides a brief summary of these C&DIs.

Read our client alert.

On December 8, 2016, the staff of the Division of Corporation Finance provided additional guidance in the form of Compliance and Disclosure Interpretations (“C&DIs”) related to the types of securities that may be counted toward the Rule 144A $100 million threshold.  For example, the C&DIs confirm that securities purchased and held on margin may be counted as “owned” for purposes of calculating whether the entity meets the $100 million threshold, provided that the securities are not subject to a repurchase agreement.  (Question 138.05).  Similarly, an entity may count securities that have been loaned to borrowers.  (Question 138.06)   However, the entity cannot count securities that it has borrowed, since these securities are not “owned.”  (Question 138.07)  An entity also cannot count short positions in securities for the same reason—these do not represent an ownership interest.  (Question 138.08)

The Staff guidance also addressed aggregation with respect to fund families in the context of determining whether these entities are QIBs.  The Staff has clarified that, when assessing QIB status for a family of funds, the investments held by funds that are not registered investment companies cannot be aggregated with the investments held by registered investment companies in the fund family.  (Question 138.09)

Finally, the Staff addressed assessing equity ownership of limited partnerships for purposes of Rule 144(a)(1)(v).  In this context, the Staff notes that the limited partners are the equity owners of a limited partnership.  The general partner, unless that person is also a limited partner, need not be considered in determining whether a limited partnership is a QIB.  (Question 138.10)

The C&DIs are accessible here:

https://media2.mofo.com/documents/12g.pdf

https://media2.mofo.com/documents/144a.pdf

https://media2.mofo.com/documents/f-forms.pdf

https://media2.mofo.com/documents/fpi.pdf

https://media2.mofo.com/documents/reg-s.pdf

On December 5, 2016, SEC Chief Accountant Wesley R. Bricker, speaking at the American Institute of Certified Public Accountants Conference in Washington, D.C., emphasized the importance of high quality financial reporting to the U.S. capital markets.  In the area of non-GAAP reporting, Mr. Bricker noted that since the release of the new Compliance and Disclosure Interpretations on Non-GAAP Financial Measures (the “C&DIs”), the staff of both the SEC’s Division of Corporation Finance and the Office of the Chief Accountant (the “Staffs”) have engaged with registrants and their advisors on the topic and have noted substantial progress being made in addressing a number of problematic practices.  However, the Staffs have observed that more needs to be done, particularly in the area of evaluating the appropriateness of the use of non-GAAP financial measures and their prominence, as well as the effectiveness of disclosure controls and procedures.

Mr. Bricker focused particularly on the important “critical gatekeeper” role audit committee members play in ensuring credible, reliable financial reporting, as well as compliance with the C&DIs.  Highlights include the following:

  • Good reporting practices place a premium on audit committee member understanding of the company’s non-GAAP policies, procedures, and controls.
  • Audit committee members should seek to understand management’s judgments in the design, preparation and presentation of non-GAAP measures and how those measures might differ from approaches followed by other companies. These discussions will require an understanding of the company’s business model and how it is managed.
  • It is important to keep in mind that businesses operate in uncertain environments. If non-GAAP adjustments replace that business reality with smooth earnings over time, accelerate unearned revenues, or defer incurred expenses, those adjustments and disclosures should be evaluated closely under the C&DIs.
  • The oversight of management’s activities is crucial for investor protection, and it is important for both auditors and audit committees to keep and maintain the direct relationship they share. The following questions from audit committee members to their external auditor may be helpful in generating a dialogue:
    • If you as the auditor were in management’s shoes and solely responsible for preparation of the company’s financial statements, would they have in any way been prepared differently?
    • If you as the auditor were in an investor’s shoes, would you believe that you have received the information essential to understanding the company’s financial position and performance?
    • Is the company following the same internal control over financial reporting and internal audit procedures that would be followed if you were in the CEO’s shoes?
    • Are there any recommendations that you as the auditor have made and management has not followed?
  • Audit committees should not underestimate the importance of their role overseeing the external auditor as auditors are accountable to the board of directors through the audit committee and not to management.

Mr. Bricker’s speech is available at: https://www.sec.gov/news/speech/keynote-address-2016-aicpa-conference-working-together.html.