Many groups have come forward in recent weeks with their lists of regulations that should be reviewed or amended, as well as their list of areas that merit close review in light of the potential burdens that may be imposed by current regulation.  As far as securities regulation is concerned, much of the focus, at least in the popular press, has been placed on measures that relate to IPOs; however, modest changes in other areas would have a positive impact on capital formation—here is our current list:

  • Adopting the proposed amendments relating to smaller reporting companies;
  • Continuing to advance the disclosure effectiveness initiative;
  • Continuing the review of the industry guides in order to modernize these requirements and eliminate outdated or repetitive requirements;
  • Revisiting the WKSI standard in order to see if similar accommodations and offering related flexibility should be made available to a broader universe of companies;
  • Reviewing existing communications safe harbors in order to modernize these and make communications safe harbors available to a broader array of companies, including business development companies;
  • Adopting the proposed amendment to Rule 163(c) that would allow underwriters or other financial intermediaries to engage in discussions on a WKSI’s behalf relating to a possible offering;
  • Assessing whether a policy rationale remains for including MLPs within the definition of “ineligible issuer” when MLPs undertake public offerings on a best efforts basis;
  • Assessing who suffers when ineligible issuers are prevented from using FWPs other than for term sheet purposes;
  • Removing the limitations that require certain issuers to conduct live only roadshows;
  • Eliminating the need for “market-maker” prospectuses;
  • Reviewing the one-third limit applicable to primary issuances off of a shelf registration statement for certain smaller companies;
  • Modernizing the filing requirements for BDCs, permitting access equals delivery for BDCs and modernizing the research safe harbors to include BDCs;
  • Adding knowledgeable employees to the definition of accredited investor;
  • Eliminating the IPO quiet period;
  • Working with the securities exchanges to review their “20% Rules” (requiring a shareholder vote for private placements completed at a discount that will result in an issuance or potential issuance of securities greater than 20% of the pre-transaction total shares outstanding);
  • Addressing the Rule 144 aggregation rules for private equity and venture capital fund related sales;
  • Shortening the Rule 144 holding period for reporting companies;
  • Including sovereign wealth funds and central banks within the definition of QIBs;
  • Shortening the 30-day period in Rule 155; and
  • Shortening the six-month integration safe harbor contained in Regulation D.

May 22 – 23, 2017

PLI New York Center
1177 Avenue of the Americas
(2nd Floor)
New York, NY 10036

PLI’s Private Placements and Hybrid Securities Offerings 2017 conference is designed for corporate and securities attorneys, compliance professionals, control room personnel, bankers and allied professionals who deal with private placements and other exempt and hybrid offerings. The faculty will address the changes to private and exempt offerings brought about by the JOBS Act, including matchmaking platforms, “accredited investor” crowdfunding, offerings using general solicitation, Rule 144A offerings, and the practical implications of these changes for issuers, broker-dealers and investment advisers. In addition, the faculty will address the basics of private placements, sales of restricted securities, Rule 144 and Section 4(a)(1-1/2) transactions and block trades. The panelists will discuss the considerations that have led many companies to remain private longer and defer IPOs, while creating liquidity opportunities for holders through private secondary trading markets. Panelists will address the basics of traditional private placements, PIPE transactions, and Rule 144A transactions, as well as recent developments affecting each of these capital raising alternatives.

Partner Anna Pinedo will serve as chairperson for this event and will speak on the “Welcome and Introduction to Private Placements and Hybrid Financings” panel on Day One of the conference and on the “Welcome and Introduction to Conducting Hybrid Offerings” panel on Day Two. Senior Of Counsel Marty Dunn will speak on the “Overview of 4(a)(2) and Regulation D” panel on Day One.

To register for this conference, or for more information, please click here.

The Committee on Capital Markets Regulation released a report setting forth certain recommendations that are intended to revive the public equity markets. The report cites certain statistics regarding equity capital markets activity, noting the decline in the volume of equity capital raised in IPOs and a decline in the number of U.S. IPOs, as well as a decline in the number of public companies in the United States. By contrast, the report notes that more capital is being raised through Regulation D offerings than through registered offerings and notes the rise in privately held companies valued over a $1 billion. The study attributes the decision to defer IPOs to excessive regulation, increased costs of being a U.S. public company, short-term investor focus, increased litigation risk, and the increasing value of securities related settlements. The Committee recommends that the Securities and Exchange Commission meet with private companies to understand the reason why they are deferring IPOs, and empower U.S. shareholders to adopt a mandatory system of individual arbitration instead of costly securities class actions. The report is available here: http://www.capmktsreg.org/wp-content/uploads/2017/04/US_Public_Equity_Markets_are_Stagnating.pdf.

On February 28, 2017, the SEC released a white paper analyzing crowdfunded offerings during the first six months following the effective date of Regulation Crowdfunding (May 16, 2016). The white paper noted that crowdfunding has thus far been attracting issuers that have not extensively utilized Regulation D.  Despite a relatively small sample size and a short observation period, the white paper makes, among others, the following observations:

  • There were 163 separate offerings by 156 issuers, seeking a total of approximately $18 million, excluding withdrawn offerings. The median offering amount was $53,000 and the average offering amount was approximately $110,000. However, almost all of the offerings accepted oversubscriptions up to a higher amount (typically close to $1 million) for a total amount of approximately $101 million.
  • As of January 15, 2017, approximately $10 million in proceeds was raised in 33 offerings by issuers filing a Form C-U. The median amount raised in these offerings was $171,000 and the average amount raised was approximately $303,000.
  • For offerings initiated in 2016, 24 were withdrawn by issuers or associated with an intermediary whose FINRA membership was terminated and funding portal registration withdrawn. These offerings sought a total of approximately $2.3 million (approximately $19.5 million if oversubscriptions are included).
  • Most of the offerings solicited in all states.
  • The most popular type of security was equity, followed by “simple agreements for future equity” and debt.
  • The most popular state of incorporation for issuers was Delaware and the most popular principal place of business for issuers was California.
  • The median issuer had under $50,000 in assets, under $5,000 in cash, $10,000 in debt, no revenues, and three employees. Approximately 40% of the issuers reported positive revenue and approximately 9% of the issuers reported a net profit in the most recent fiscal year. Among the issuers that reported non-zero assets in the prior fiscal year, the median growth rate was approximately 15%.
  • 21 intermediaries, including 13 funding portals and 8 broker-dealers, were involved in the offerings. As of December 31, 2016, 21 funding portals have registered with the SEC and FINRA and one funding portal had its FINRA membership terminated and withdrew its SEC registration. The median intermediary percentage fee was 5%, and intermediaries took a financial interest in the issuer in approximately 16% of the offerings.

A copy of the white paper is available at: https://www.sec.gov/dera/staff-papers/white-papers/RegCF_WhitePaper.pdf

At today’s Practising Law Institute SEC Speaks annual program, Acting Chair Piwowar made opening remarks.  During his wide-ranging discussion, Acting Chair Piwowar, inspired by William Graham Sumner’s the “forgotten man” referred throughout to the Securities and Exchange Commission’s investor protection mission and the objective of keeping in mind the interests of the “forgotten investor.”  Piwowar commented on the Commission’s focus on effective disclosure requirements and the need to be guided by the concept of materiality in formulating disclosure requirements.  He pointed to various specialized disclosure requirements introduced by the Dodd-Frank Act, including the resource extraction, conflict minerals and related matters.  Piwowar noted the importance of avoiding disclosure overload.  Piwowar also commented on Regulation D and questioned the utility of applying the “accredited investor” standard as a means of identifying individual investors that do not require the protection of the disclosures associated with registered offerings.

Providing a glimpse into upcoming actions, Piwowar noted that the Commission will consider whether to propose a request to comment on the requirements of Industry Guide 3 for offerings by financial services companies, consideration of a final rule requiring registrants that file registration statements and periodic and current reports that are subject to the exhibit requirements under Item 601 of Regulation S-K, or that file on Forms F-10 or 20-F, to include a hyperlink to each exhibit listed in the exhibit index of these filings and in order to enable the inclusion of such hyperlinks, to require that registrants submit all such filings in HTML format (see the proposed rule:  https://www.sec.gov/rules/proposed/2016/33-10201.pdf), a proposed rule relating to the use of inline XBRL data in filings, and amendments to Rule 15c2-12 relating to muni disclosures.

On October 26, 2016, the SEC adopted final rules (1) amending Rule 147 and Rule 504 under the Securities Act of 1933, as amended (the “Securities Act”), (2) establishing a new Securities Act exemption designated Rule 147A, and (3) repealing Rule 505 under the Securities Act.  Amended Rule 147 and new Rule 147A will take effect on April 20, 2017, amended Rule 504 will take effect on January 20, 2017, and the repeal of Rule 505 will take effect on May 20, 2017.  Amended Rule 147 facilitates offerings relying upon recently adopted intrastate crowdfunding exemptions under state securities laws, new Rule 147A further accommodates offers accessible to out-of-state residents and companies that are incorporated or organized out-of-state, and amended Rule 504 increases the aggregate amount of securities that may be offered and sold in any twelve-month period from $1 million to $5 million and disqualifies certain bad actors from participating in Rule 504 offerings.

For more information regarding amended Rule 147, new Rule 147A and amended Rule 504, read our client alert.

On November 17, 2016, the staff of the SEC’s Division of Corporation Finance (the “Staff”) issued four new compliance and disclosure interpretations (“C&DIs”) addressing aspects of offerings under Regulation A and Regulation D.  Highlights of the C&DIs include, among other things, the following guidance:

  • An issuer that seeks to qualify an additional class of securities by a post-qualification amendment to a previously qualified offering statement under Regulation A must satisfy the requirements of Item 4 to Part I of Form 1-A by providing responses that relate only to the additional class of securities.
  • A change of 20% or less in the aggregate offering price, which is permitted under the Note to Rule 253(b) of Regulation A without a post-qualification amendment, may be measured from either the high end (in the case of an increase in the offering price) or the low end (in the case of a decrease in the offering price) of that range.  However, a change of 20% or less is not permitted where the maximum aggregate offering price would result in the offering exceeding the relevant offering limit ($20 million for Tier 1 offerings and $50 million for Tier 2 offerings) or if the change would result in a Tier 1 offering becoming a Tier 2 offering.
  • Consistent with the treatment of EGCs under Section 71003 of the FAST Act, a company filing or confidentially submitting an offering statement under Regulation A may omit financial information for historical periods otherwise required by Part F/S of the Form 1-A, including financial information of other entities required to be included in Part F/S.  However, the company must reasonably believe that the omitted information will not be required to be included in the offering statement at the time of qualification.
  • Offers and sales of securities made in reliance on Rule 506(b) prior to the use of general solicitation in a subsequent Rule 506(c) offering will not be integrated with the offers and sales of securities made in reliance on Rule 506(c).

A copy of the C&DIs is available at: https://media2.mofo.com/documents/161118-question-182-12.pdf

At the American Bar Association’s Fall Meeting, Keith Higgins, Director of the SEC’s Division of Corporation Finance (the “Division”), gave his last “Dialogue with the Director” given the upcoming change in administration.  Mr. Higgins presented his views on a broad range of areas, including the following:

  • Amended Rule 147 and Rule 504 and new Rule 147A.  The Federal Register should be publishing soon the final rules adopting amended Rule 147 and Rule 504 and new Rule 147A so that the effective dates will be early in 2017.  We have commented on these rules in our client alert, available here.
  • The FAST Act.  All of the required rulemakings related to the Fixing America’s Surface Transportation (FAST) Act have been completed.  The SEC must deliver on November 28, 2016 its report to Congress on recommendations to simplify the Regulation S-K disclosure rules.  These recommendations are likely to take into account comments received with respect to the “400 Series” of Regulation S-K.
  • Diversity Disclosures.  The Division completed its disclosure recommendations relating to disclosures regarding board of director diversity.  However, SEC Chair Mary Jo White has noted she does not expect the SEC to act on the recommendations before January 2017.
  • At-the-Market Offerings.  Mr. Higgins noted the Division’s review relating to disclosures available to investors in connection with at-the-market (“ATM”) sales by issuers.  Mr. Higgins indicated that there has been continuing discussion with market participants regarding disclosure practices for plan of distribution sections of ATM prospectuses, including disclosures regarding “negotiated” sales and periodic sales.  Mr. Higgins noted that there may be SEC Staff guidance forthcoming on these types of disclosures.
  • Rule 701 and Form S-8.  Given that companies are staying private longer, the SEC Staff has been receiving more questions on Securities Act Rule 701 and the use of registration statements on Form S-8, and the SEC Staff has issued C&DIs in response.  For more information, see our blog post, available here.
  • Looking into the Future.  Mr. Higgins commented on the provisions of the proposed Financial CHOICE Act (the “CHOICE Act”), which may receive renewed interest and support by the new administration next year.  For a summary of the securities law related provisions of the CHOICE Act, see our client alert, available here.
  • Integration C&DI.  The SEC Staff issued new guidance on Rule 506(b) and Rule 506(c) of Regulation D that treats Rule 506(c) offerings as “public offerings” for purposes of analogizing to Securities Act Rule 152.
  • Shareholder Proposals.  Mr. Higgins also addressed a number of shareholder proposal matters and pay ratio guidance.

Earlier today at an open meeting, the SEC adopted final rules regarding intrastate and regional offerings, which closely follow the SEC’s proposed rules issued on October 30, 2015.  The final rules amend Securities Act Rule 147 to facilitate offerings relying upon recently adopted intrastate crowdfunding exemptions under state securities laws.  Rule 147 provides a safe harbor for intrastate offerings exempt from registration pursuant to Securities Act Section 3(a)(11), which exempts any security offered and sold only to persons resident within a single state or territory by an issuer residing or incorporated in and doing business within such state or territory.  As amended, Rule 147 will continue to function as a safe harbor under Section 3(a)(11), though Section 3(a)(11) will still be available as a potential statutory exemption in and of itself.  The final rules also establish a new Securities Act exemption, designated Rule 147A, that further accommodates offers accessible to out-of-state residents and companies that are incorporated or organized out-of-state.  The final rules also amend Rule 504 of Regulation D to (1) increase the aggregate amount of securities that may be offering and sold in any twelve-month period from $1 million to $5 million and (2) disqualify certain bad actors from participating in Rule 504 offerings.  In addition, the final rules repeal Rule 505 of Regulation D, which had provided a safe harbor from registration for securities offered and sold in any twelve-month period from $1 million to $5 million.  The amendments to Rule 147 and Rule 504 are part of the SEC’s broader effort to assist smaller companies with capital formation consistent with other public policy goals, including investor protection.

For more information, read our client alert.

On Wednesday, October 26, 2016, beginning at 10:00 a.m., the Securities and Exchange Commission will hold an open meeting at which the Commission will consider the adoption of final rule amendments relating to Securities Act Rule 147 and Rule 505, which would facilitate intrastate and regional securities offerings.  The proposed amendments were well-received by market participants and generated only modest comments.  The open meeting notice also states that the Commission will consider whether to repeal Rule 505.  Rule 505 provides an exemption for sales of up to $5 million of securities in a 12-month period, without the use of general solicitation, to accredited investors and, subject to information requirements, to non-accredited investors.  Presumably, the amendments to Rule 504 would render Rule 505 superfluous.