The SEC’s advisory committee will meet this Wednesday to discuss and address means of promoting secondary market liquidity for the securities of small and emerging companies, including addressing the Section 4(a)(1-1/2) exemption, as well as to vote on a recommendation regarding the “accredited investor” definition. The session will be webcast and available from the SEC’s website. The full agenda is available here: http://www.sec.gov/news/pressrelease/2015-41.html#.VPTlA010yFg.
On February 20, 2015, several representatives from the SEC spoke at the Practising Law Institute’s program titled “SEC Speaks in 2015,” including Chair Mary Jo White and Commissioner Louis A. Aguilar. Ms. White provided highlights from 2014, including significant rulemaking (e.g., Regulation SCI, reforms related to money market funds, over-the counter derivatives, asset-backed securities and credit rating agencies, additional Title VII requirements, rules regarding clearing agency oversight, and rules requiring hedging policy disclosure) and significant increases in enforcement proceedings and registrant examinations. Ms. White also highlighted three core initiatives for the SEC for 2015: (1) enhancing market structure; (2) strengthening asset managers; and (3) facilitating capital formation for smaller issuers. In his remarks, Mr. Aguilar also described the SEC’s priorities for 2015, which include:
- completing the remaining rulemaking required under the Dodd-Frank Act, particularly rulemaking relating to derivatives regulation and corporate governance;
- continuing the implementation of various provisions of the JOBS Act for facilitating the ability of smaller businesses to access the capital markets, particularly the adoption of final rules regarding Regulation A+ and crowdfunding and amending Regulation D to mitigate the risks posed to investors involved in general solicitations; and
- bringing more enforcement cases to send a stronger message of deterrence.
In addition, Mr. Aguilar emphasized certain macro principles with respect to the implementation of various provisions of the JOBS Act, including: (1) the nature and experience of the investor; (2) the type of information necessary to permit investors to make informed investment decisions; (3) the overall regulatory environment, particularly the role of state securities regulators; and (4) the secondary trading environment and whether investors will be able to sell securities in a fair, liquid and transparent market. Finally, Commissioner Kara M. Stein and Investor Advocate Rick A. Fleming discussed disclosure reform and making data both layered and structured in order to enhance disclosure and provide greater transparency for investors.
The speeches of the SEC representatives, including Ms. White and Mr. Aguilar, are available on the SEC’s website at http://www.sec.gov/news/speeches.
Earlier this month, the UK’s Financial Conduct Authority published a paper, “A review of the regulatory regime for crowdfunding and the promotion of non-readily realizable securities by other media” (you may access the paper here: http://www.fca.org.uk/static/documents/crowdfunding-review.pdf), which provides a post-implementation review of the market following the April 2014 effective date of regulations. For 2014, the report notes that loan-based crowdfunding grew almost three-fold from 2013 to 2014, reaching approximately GBP 1.3 billion in loans. Small business loans comprised the majority of the market. Equity crowdfunding remains smaller, though it is growing rapidly. The report notes approximately 200% growth from 2012 to 2014, with nearly GBP 84 million raised in 2014. The report comments on the FCA’s market supervision, noting the FCA’s registration process and its review of websites used by crowdfunding platforms. The website and advertising review highlights a number of recurring issues, such as a lack of balanced disclosure, insufficient or misleading information, cherry picking of information, etc. The report concludes that despite these deficiencies, the FCA does not see a need to change its regulatory approach and will continue to monitor the fast-growing market. The regulatory approach and the findings related to communications may be instructive to state regulators in the United States who have moved forward with crowdfunding regulations in their states.
The SEC recently proposed amendments to require disclosure of whether employees and directors of public companies are permitted to hedge or offset any decrease in the market value of equity securities granted to them as part of a stock-based compensation plan or that are held by them. The proposed amendments were necessary in order to implement Section 14(j) of the Exchange Act, as required by Section 955 of the Dodd-Frank Act. In its proposing release, the SEC indicates that it intends to apply the disclosure requirement to smaller reporting companies and EGCs. The release notes that consideration was given to exempting or delaying the application of the proposed amendments for EGCs.
In the analysis of costs and benefits, the proposing release notes that employees and directors of EGCs potentially face greater downside price risk than those of non-EGCs, thereby making disclosures relating to hedging activities by employees and directors more valuable to shareholders and potential investors. The analysis also estimates that the compliance costs for EGCs than for seasoned issuers (already preparing Compensation Disclosure & Analysis sections and complying with more rigorous executive compensation disclosure requirements) will be higher. For example, the release notes that EGCs may incur costs associated with formulating hedging policies for the first time and preparing required related disclosures.
The proposed rule is subject to a 60-day comment period. The final rule will detail the fiscal year in which issuers must begin to comply with the requirements of Section 14(j) of the Exchange Act.
In a recent paper titled “Analyst Research Quality and the JOBS Act: Effects of Increased Pre-IPO Communication” Michael Dambra (University of Buffalo), and Laura Field, Matthew Gufstafson, and Kevin Pisciotta (Penn State University) examine the effect of the JOBS Act on equity research. The paper concludes that the JOBS Act “increases permissible pre-IPO interactions between research analysts and investors, investment bankers, and management.” It is not clear from the paper how or why the interactions have changed. The authors conclude that in the post-JOBS Act period, research distributed by analysts affiliated with the IPO underwriters has become less accurate and more optimistic relative to their unaffiliated counterparts. Post-JOBS, affiliated reports are also accompanied by muted market reactions and larger price increases prior to the end of the quiet period when most affiliated analysts initiate coverage. The paper may be downloaded here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2530109.
Peer-to-peer, or person-to-person, lending (“P2P lending”) is a type of crowdfunding that involves the facilitation of loan originations outside of the traditional consumer banking system by connecting borrowers directly with lenders, or investors, through an Internet platform. P2P lending’s use of Internet platforms reduces costs by eliminating many operational expenses associated with traditional consumer bank loans, such as the cost of maintaining and staffing physical branches. Some cost savings are passed along to borrowers through lower interest rates than those offered by traditional banks. P2P lending platforms may be subject to certain consumer banking and related regulations, and the funding side of P2P lending platforms is subject to SEC regulation. For more information about P2P lending, how it works, current regulations and considerations, see our client alert, “P2P Lending Basics: How it Works, Current Regulations and Considerations,” available at http://www.mofo.com/~/media/Files/UserGuide/2015/150129P2PLendingBasics.pdf.
The SEC announced that its Advisory Committee on Small and Emerging Companies will hold a public meeting on February 17 in order to vote on recommendations to the SEC regarding the definition of an “accredited investor.” In prior posts, we noted that the Committee had discussed revisions to the current accredited investor definition in order to address, among other things, investor sophistication.
“Matchmaking sites,” also referred to as “matchmaking platforms,” have come to play a more significant role in capital formation in recent years. A matchmaking site generally relies on the Internet in order to “match” or introduce potential investors to companies that may be interested in raising capital. However, in order to avoid the requirement to register with the SEC as a broker-dealer, a matchmaking site generally will limit the scope of its activities. The determination as to whether an entity is acting as a “broker” is complex. The SEC closely considers many criteria and the specific facts and circumstances. Generally, though, the SEC has attributed great significance to whether the entity receives transaction-based compensation. For more information about matchmaking sites, how they work, current regulations and key considerations, see our client alert, “Matchmaking Basics: How it Works, Current Regulations and Key Considerations,” available at http://www.mofo.com/~/media/Files/UserGuide/2015/150129MatchMakingGuide.pdf.
Join Morrison & Foerster on February 5, 2015 for a teleconference on Digital Wallets, Mobile Payments and the CFPB’s Prepaid Proposal. This session, which will be led by Partner Obrea Pointdexter, and Associates Jeremy Mandell, James Nguyen and Ryan Rogers, will discuss the CFPB’s Proposed Rule and how it could apply to digital wallet products and mobile payment platforms. Speakers will provide an overview of the Proposed Rule, which will cover:
- The proposed definition of “prepaid account,” including the proposed coverage of digital wallets and P2P payment products, as well as potential carve-outs from those definitions;
- The extensive disclosure requirements detailed in the Proposed Rule, how such disclosure requirements would apply to prepaid accounts acquired through the Internet or on mobile devices, and whether E-SIGN Act requirements may apply; and
- Potential new mandates for providing consumers with access to prepaid account information and the impact such mandates could have on mobile payment product innovation and the delivery of account information.
Time: 1:00 pm – 2:00 pm EST
CLE credit is pending for New York and California.
To register, or for more information, please email Harrison Lawrence at firstname.lastname@example.org.
Today, the House voted (271-154) to pass H.R. 37, titled “Promoting Job Creation and Reducing Small Business Burdens Act.” Among other things, the bill includes a number of measures that correct issues arising in the JOBS Act, or that otherwise are intended to promote capital formation. For example, the bill:
Addresses the Exchange Act 12(g) threshold for savings and loan holding companies to align the provisions with those available to bank holding companies;
Clarifies the termination of EGC status;
Requires a study of XBRL requirements;
Provides an exception from adviser registration for advisers to SBICs and VC funds;
Permits issuers to submit a summary page on Form 10-K; and
Mandates time period during which the SEC must complete a Regulation S-K study and report intended to simplify disclosure requirements.