Practising Law Institute’s Exempt and Hybrid Securities Offerings is the first practical, accessible resource to provide you with comprehensive legal, regulatory, and procedural guidance regarding these increasingly popular offering methodologies.

Authored by Morrison & Foerster Partners Anna Pinedo and James Tanenbaum, the third edition of Exempt and Hybrid Securities Offerings gives you a useful understanding of the applicable regulations and legal framework for these transactions, as well as the implications of these regulations for structuring transactions.

The treatise provides a detailed analysis of the regulations and guidance affecting exempt and hybrid securities offerings, as well as offers market context and practical structuring advice. Packed with checklists, transactional timelines, SEC guidance, and a wealth of labor-saving sample documents, Exempt and Hybrid Securities Offerings offers the relative advantages and drawbacks of the most commonly used forms of exempt and hybrid offerings. It clearly explains:

  • conducting venture private placements;
  • traditional and structured PIPE transactions;
  • institutional (debt) private placements;
  • Rule 144A offerings;
  • Regulation S offerings;
  • Regulation A offerings and crowdfunding;
  • shelf takedowns;
  • registered direct and ATM offerings;
  • confidentially marketed public offerings; and
  • continuous issuance programs, including MTN and CP programs.

This comprehensive three-volume treatise, with useful forms, has been updated to reflect changes brought about by the Dodd-Frank Act, the JOBS Act, the FAST Act, and other recent regulatory changes.

For more information, please click here.

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.

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.

At today’s meeting of the American Bar Association, the Director of the Division of the SEC’s Corporation Finance provided some comments regarding the Division’s work and priorities.  Mr. Hinman reiterated the Division’s focus on capital formation related matters.  Mr. Hinman echoed concerns voiced by SEC Chair Clayton regarding the decline in the number of U.S. listed companies in recent years.  Mr. Hinman noted that there have been many reasons offered to explain the decline in the number of public companies and the increasing tendency of companies to remain private longer.  For example, he noted that there are many more types of investors in the private markets, private investors are being more innovative in how they provide capital, and there are new ways to provide liquidity for employees of private companies with stock-based compensation.  Mr. Hinman noted that there have been concerns expressed about valuations but that many articles, reports and studies noting the attractive private valuations (compared to IPO valuations) may fail to appropriately reflect the fact that valuations in private rounds relate to preferred stock with liquidation and other preferences, and not to common stock.  In any event, Mr. Hinman noted the Division’s interest in understanding the regulatory burdens placed on companies seeking to undertake IPOs and on public reporting companies.  He noted that a recent DERA report to Congress reiterated the difficulties associated with unwinding the effects of any particular regulatory requirement on capital raising.

Mr. Hinman discussed the Division’s policy of extending the confidential review process to non-EGCs and underscored the Division’s invitation to have companies and their counsel consult with the SEC on financial statement requirements.  He noted that the Staff would be responding very promptly to requests for waivers.

In a wide-ranging discussion, Mr. Hinman addressed a number of other topics, including the resource extraction rule.  He noted that the Congressional Review Act nullified the rule, but that the SEC still has a statutory mandate to act although there is a CRA requirement that the new rule cannot be substantially similar to the rule that was struck down.  The SEC will have to propose a new rule for comment in the near future.  Mr. Hinman also addressed other rules that had been proposed by the SEC, including proposed updates to Industry Guide 7 on mining disclosures, and amendments to the smaller reporting company definition.  While he noted that the there was a final rule under development regarding the SRC definition, there was ongoing discussion related to SOX 404 attestation requirements.  He noted that the SEC was seeking more information on the costs directly attributable to 404 attestation and was considering other tests, including revenue-based and market cap-based tests, as possible alternatives.  Mr. Hinman noted that there were very few comments submitted in response to the request for comment on Industry Guide 3 disclosures.  In response to questions, Mr. Hinman noted that the SEC expected to comply with the FAST Act-mandated timelines regarding the modernization of Regulation S-K and that the SEC’s changes to Regulation S-K are likely to be quite consistent with those discussed in the November 2016 report to Congress.  Again, in response to a question, Mr. Hinman noted that there may be some opportunity for clarifying guidance on integration issues.

On August 18, 2017, the NYSE issued a proposed amendment to Section 202.06 of the NYSE Listed Company Manual to limit the issuance of material news by a listed company during the period of time from the official closing time of the NYSE’s trading session until the earlier of the publication of the company’s official closing price or five minutes after the NYSE’s official closing time.  The NYSE noted that since there is trading after 4:00 p.m. on other exchange and non-exchange venues, if a listed company releases material news immediately after 4:00 p.m., but before the closing auction on the NYSE is completed, there can be a significant price difference in nearly contemporaneous trades on other markets and the closing price on the NYSE.  As the discrepancy between the closing price on the NYSE and trading prices on other markets can cause confusion to investors, the NYSE previously added advisory text in Section 202.06 requesting that listed companies intending to release material news after the close of trading on the NYSE wait until the earlier of the publication of their security’s official closing price or 15 minutes after the NYSE’s scheduled closing time.  Despite the inclusion of the advisory text, the NYSE noted continuing investor confusion with material news released shortly after 4:00 p.m.  The NYSE believes that the proposed amendment will mitigate the risk of market disruption and investor confusion associated with the occurrence of significant news-related price volatility on other markets during the brief period between the NYSE’s official closing time and the completion of the closing auction.  However, to avoid market disruptions when the closing auction is delayed more than five minutes, Section 202.06 will continue to include advisory text asking companies to avoid issuing material news until the earlier of publication of the official closing price or 15 minutes after the NYSE’s official closing time.

A copy of the proposed amendment is available here.

 

Tuesday, October 3, 2017
1:00 p.m. – 2:00 p.m. EDT

This session will focus on the need for already public companies, both domestic and foreign, to plan their capital-raising strategy carefully while preserving flexibility. The speakers will address:

  • Current market conditions;
  • Financing alternatives for recently public companies;
  • PIPE transactions and when to consider these;
  • Registered direct offerings;
  • At-the-Market offering programs;
  • Bought deals; and
  • Other financing alternatives.

Speakers:

PLI will provide CLE credit.

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

The IPO Task Force seems to have come together again.  The Center for Capital Markets released a letter dated August 22, 2017 addressed to the Treasury Secretary setting out a few suggestions, which are quite similar to those that had been advanced a few years ago, and that have as their objective increasing the number of public companies.  The suggestions include:

  • Extending the Title I JOBS Act on-ramp accommodations from five to ten years for EGCs and reviewing the EGC definition;
  • Making the JOBS Act accommodations available to all issuers, not just EGCs;
  • Modernizing the Sarbanes-Oxley internal control over financial reporting requirements;
  • Modernizing securities disclosure requirements;
  • Addressing the rules related to shareholder proposals and regulating proxy advisory firms;
  • Promoting equity market structure changes that enhance liquidity for EGC and small cap stocks; and
  • Incentivizing research coverage.

A bit of additional commentary on these suggestions is offered in the letter, which may be found here: http://www.centerforcapitalmarkets.com/wp-content/uploads/2017/08/Follow-Up-Letter-to-July-28-Roundtable-on-Access-to-Capital.pdf?x48633

On August 14, 2017, the SEC approved the NYSE’s proposed rule change amending Sections 204.12, 204.21, and 202.06(B) of its NYSE Listed Company Manual to require listed companies to provide notice to the NYSE at least ten minutes before making any public announcement about a dividend or stock distribution, including outside of the hours during which the NYSE’s immediate release policy is in operation.  The proposed rule change was issued on April 13, 2017 and was approved as originally proposed.  The principal effect of the change is to require listed companies to provide ten minutes advance notice to the NYSE with respect to a dividend announcement made at any time, rather than just during the hours of operation of the immediate release policy which had been the case previously.

A copy of the SEC order approving the proposed rule change is available at: https://www.sec.gov/rules/sro/nyse/2017/34-81393.pdf.

A copy of the proposed rule change is available at: https://www.nyse.com/publicdocs/nyse/markets/nyse/rule-filings/filings/2017/NYSE-2017-17.pdf.

On July 31, 2017, S&P Dow Jones Indices (“S&P”) issued a press release announcing a methodology change for multi-class shares following its consultation published on April 3, 2017.  The S&P Composite 1500 and its component indices will no longer add companies with multiple share class structures, such as Snap Inc. and Blue Apron Holdings, Inc.  The methodology change is effective immediately.  However, existing constituents of the S&P Composite 1500 will be grandfathered in and will not be affected by the methodology change, such as Alphabet Inc. and Facebook, Inc.  The S&P Global BMI Indices and S&P Total Market Index will continue to include companies with multiple share classes or with limited or no shareholder voting.  S&P noted that unlike the S&P Global BMI Indices and S&P Total Market Index, the S&P Composite 1500 (comprised of the S&P 500, S&P MidCap 400 and S&P SmallCap 600) follows more restrictive eligibility rules including a minimum float of 50% and positive earnings as measured by GAAP.  S&P also clarified that the methodologies of other S&P and Dow Jones branded indices remain unchanged.

A copy of the S&P press release is available here.

On Tuesday, July 25, 2017, SEC Chairman Jay Clayton spoke at the U.S. Chamber of Commerce Center for Capital Markets Competitiveness (CCMC). During the panel, Chairman Clayton discussed the Commission’s priorities on a variety of issues.

Bad Actors/Retail Fraud. Chair Clayton noted the substantial costs of the effects of a bad actor and the costs of restoring faith in our capital markets. He also made it clear that there would be no tolerance for retail fraud under his tenure.

Enforcement. Chair Clayton noted that the Commission has increased the use of data to determine more effective ways to target exams, taking into consideration to whom to issue an exam, how to conduct the exam and whether the Commission is being effective in these examinations.

Proxy Reports/Disclosure Effectiveness. Chairman Clayton noted that adding disclosure does not signal better disclosure. The Chairman stressed that disclosure should be written to protect the investor rather than be written in case of a court appearance.

Reduction in Number of Public Companies. The Chairman stressed that the Commission would not do anything to inhibit private capital formation. He cited a recent meeting with a number of small- and mid-cap companies where they discussed the timing of their respective IPOs. Chairman Clayton noted that having both a healthy public capital market and a private equity market provides companies with financing options, facilitates capital formation and provides healthy and necessary market competition.

Lifecycle of a Company. Chairman Clayton referenced that, in the past, the general public used to be able to participate in the growth of a company, but in our current environment, Main Street has a limited ability to participate. He noted that it is difficult to offer private investment opportunities to individual investors in a cost effective way.

Effectiveness of the U.S. Capital Markets. The Chairman noted that the U.S. capital markets are efficient for large-cap companies, but Chairman Clayton noted that there is room for improvement for mid- and small-cap companies. The Chairman outlined a number of factors affecting the effectiveness of the U.S. capital markets for smaller companies, including liquidity in the secondary trading markets and the costs of being a public company.

Costs of Compliance. Chairman Clayton acknowledged the Commission’s need to keep in mind the costs of compliance when writing rules, given that compliance can be very costly depending on how the rule is written.

Pay Ratio Rule. The Chairman noted that the Commission will be reviewing the rule but recognizes that the compliance date is coming.

Best Interest Standard. The Chairman directly stated that he would be disappointed if there were any reductions in choices for the individual investor relating to the best interest standard. The Chairman noted that, with the DOL’s Fiduciary Rule on the books, having differing standards for individual investors would not make sense. He then noted that the market would benefit from greater clarity on this issue. Chairman Clayton stressed that the Commission wants the best for the main street investor and is hopeful that common ground exists between the DOL and the Commission’s mandates.

Coordination Among Domestic Regulators. Chairman Clayton acknowledged the cooperative nature between the Commission and other domestic regulators such as FSOC and the CFTC. The Chairman stressed, however, that there should be no gaps between the various regulatory rules, no duplication and that regulators should not be asking for the same information in different ways. He noted that his colleagues at the other regulators share this view. Specifically, the Chairman confirmed that the Commission is engaged with the CFTC on this issue, given that these two entities oversight sometimes overlaps.

Cyber Security. The Chairman stressed that coordination among regulators is very important when it comes to cyber security and that regulators should be developing standards in order to effectively respond to these incidents. He acknowledged that fellow regulators are very open to cooperation and indeed see the need for this cooperation. The Chairman also addressed the issue of punishing victims of a cyber attack. He noted that if a company was acting responsibly in terms of protections and disclosures, regulators should not be punishing them for being victims.

International Harmonization. Chairman Clayton noted that it is part of the Commission’s mission to handle international coordination of regulation as more U.S.-based companies become global companies and participants. The Chairman specifically acknowledged the Commission’s preparation for the implementation of MiFIID II and for any issues that might arise from the rule.

Materiality. Chairman Clayton also touched on the issue of materiality during the Q&A portion. The Chairman noted that having a flexible materiality standard is useful given that, when a court is determining materiality, the determination is reflective of the substantial difference between certain projects.  In this instance, the Chairman was referencing the municipal bond space when discussing materiality.

In closing, the Chairman thanked former Chairman of the Commission Mary Joe White and Commissioner Michael Piwowar for their service.