On June 19, 2017, the NYSE withdrew its proposed rule, originally issued on March 13, 2017, to modify the provisions regarding the qualification of companies listing on the NYSE to allow for a listing without an IPO.  Section 102.01B of the NYSE Listed Company Manual currently recognizes that some companies that have not previously registered their common equity securities under the Exchange Act, but which have sold common equity securities in a private placement, may wish to list those common equity securities on the NYSE at the time of effectiveness of a resale registration statement filed solely for the resale of the securities held by selling stockholders.  The proposed rule change was published for comment in the Federal Register on March 31, 2017, and the SEC received no comments on the proposed rule.

For more information regarding the proposed rule, see our prior blog post available at: http://www.mofojumpstarter.com/2017/04/25/nyse-issues-proposed-rule-allowing-listing-without-an-ipo/.

The notice of withdrawal for the proposed rule is available at: https://www.sec.gov/rules/sro/nyse/2017/34-81000.pdf.

The Committee devoted the morning’s session to a discussion of the decline in the number of U.S. IPOs.  Chair Clayton addressed the Committee and noted that the decline in the number of U.S. IPOs and in the number of listed companies was concern.  The Chair noted that the Director of the Division of Corporation Finance is “actively exploring ways in which we can improve the attractiveness of listing on our public markets, while maintaining important investor protections.”  The panel heard from academics (see, for example, this article), as well as bankers about the changes in market dynamics that may be at the root of the decline in the number of IPOs.  Slides from one of the presentations are available here.

The SEC’s Investor Advisory Committee has announced the agenda for its June 22 meeting.  The committee will discuss issues relating to capital formation for smaller companies, including the decline in IPOs. The committee will also review certain provisions of the Financial CHOICE Act, as they relate to the SEC.

The meeting is open to the public and will be webcast live from the SEC’s website.

On June 1, 2017, the Public Accounting Oversight Board (PCAOB) adopted Auditing Standard No. 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, which the PCAOB believes will increase the relevance and utility of auditors’ reports by including additional information regarding the audit process, and other disclosures. Most significantly, the new standard requires inclusion in the audit report of a discussion of critical audit matters (CAMs) identified in the course of the audit. The new standard also contains an auditor tenure disclosure requirement and standardizes the format of the report, among other changes. The new standard retains the pass/fail opinion of the existing auditor’s report.

The new standard and other changes are subject to Securities and Exchange Commission (SEC) approval. Assuming that approval is obtained, the PCAOB expects the provisions, other than those related to CAMs, to take effect for audits for fiscal years ending on or after December 15, 2017. Provisions related to CAMs will take effect for (1) large accelerated filers, in connection with audits for fiscal years ending on or after June 30, 2019, and (2) all other filers, in connection with audits for fiscal years ending on or after December 15, 2020.

Read our client alert.

On June 8, 2017, the House passed H.R. 10, the Financial “CHOICE” Act with a vote of 233 to 186.  Introduced on April 27, 2017, the Financial CHOICE Act proposes to amend the Dodd-Frank Act to repeal the Volcker Rule, eliminate the FDIC’s orderly liquidation authority, and repeal certain limitations imposed by the Durbin Amendment.  The bill would also remove FSOC’s authority to designate non-bank financial institutions and financial market utilities as “systemically important” (also known as “too big to fail”).

Furthermore, in addition to the numerous amendments to the Consumer Financial Protection Act of 2010, the bill intends to (1) modify provisions related to the SEC’s managerial structure and enforcement authority; (2) eliminate the Office of Financial Research within the Department of the Treasury; and (3) revise provisions related to capital formation, insurance regulation, civil penalties for securities laws violations, and community financial institutions.

The bill would also repeal the Department of Labor’s fiduciary rule which, when fully implemented, significantly expands the categories of persons considered fiduciaries.  The DOL would be prohibited from adopting any similar rule until after the U.S. Securities and Exchange Commission (“SEC”) adopts a fiduciary standard for broker-dealers.

Chairman of the House Financial Services Committee, Jeb Hensarling, said in a statement after the passing of the bill: “We will make sure there is needed regulatory relief for our small banks and credit unions, because it’s our small banks and credit unions that lend to our small businesses that are the jobs engine of our economy and make sure the American dream is not a pipe dream.”

For a summary of current pending legislation relating to capital formation, click here.

On June 1, 2017, the Public Company Accounting Oversight Board (PCAOB) adopted a new standard for auditor’s reports that requires a description of “critical audit matters,” for purposes of providing investors with information regarding the most challenging, subjective or complex aspects of the audit. Under the new standard, critical audit matters are defined as any matter arising from the current period’s audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective or complex auditor judgment. If no critical audit matters arose from the audit, the auditor’s report must state that there were no critical audit matters. The communication of each critical audit matter in the auditor’s report must include: (a) the identification of the critical audit matter; (b) a description of the principal considerations that led the auditor to determine that the matter was a critical audit matter; (c) a description of how the critical audit matter was addressed in the audit; and (d) a reference to the relevant financial statement accounts or disclosures. Additional changes to the auditor’s report under the new standard include items that are intended to clarify the auditor’s role and responsibilities, provide additional information about the auditor and make the auditor’s report easier to read for investors. Under the new standard, the auditor’s report will still retain the pass/fail opinion of the existing auditor’s report.

The new standard will apply to audits conducted under PCAOB standards, but communication of critical audit matters will not be required for audits of: (1) broker-dealers reporting under Exchange Act Rule 17a-5; (2) investment companies other than business development companies (BDCs); (3) employee stock purchase, savings and similar plans; and (4) emerging growth companies (EGCs) as defined under Exchange Act Section 3(a)(80). The new standard is still subject to approval by the SEC. If approved, all provisions other than those related to critical audit matters will take effect for audits for fiscal years ending on or after December 15, 2017. The provisions related to critical audit matters will take effect for audits for fiscal years ending on or after June 30, 2019 for large accelerated filers and for fiscal years ending on or after December 15, 2020 for all other companies subject to such provisions.

A copy of the PCAOB’s fact sheet on the new standard is available at: https://pcaobus.org/News/Releases/Pages/fact-sheet-auditors-report-standard-adoption-6-1-17.aspx.

A copy of the PCAOB’s release on the new standard is available at: https://pcaobus.org/Rulemaking/Docket034/2017-001-auditors-report-final-rule.pdf.

Earlier this month Rick A. Fleming, Investor Advocate at the Securities and Exchange Commission, gave a speech in which he discussed the impact that shrinking public markets have on investor participation.  Mr. Fleming noted that over the past 20 years, the volume of initial public offerings (IPOs) has been decreasing and companies are waiting longer to go public, limiting the ability for individual retail investors to participate in capital growth and preserving capital gains for wealthy investors in the private markets.  He also noted that there has been a significant shift away from retail investing towards institutional investing.  Mr. Fleming explored whether there is a link between the shift to institutional investing and the decrease in IPO activity, specifically with regard to small company IPOs.  Based on discussions with asset managers, Mr. Fleming discovered that, in general, institutional investors who engage in active management have little interest in investing in small-cap public companies because of concerns regarding trade liquidity and regulatory barriers.   In his speech, Mr. Fleming identified some macro trends on individual investor participation:

  • The number of individual investors who invest directly in stocks has decreased in recent years:
    • In 2001, 21% of families had direct investments in stocks compared to 13% today.
    • Today, only 11.4% of families with net worth between the 50th and 75th percentile of all U.S. households invest directly in stocks.
  • Individual investors are shifting from investing in stocks to investing in funds, causing the assets under management (AUM) of institutional investors to grow:
    • In 1976, individual investors directly owned 50% of U.S. stocks compared to 21.5% in 2016.
    • In 1976, institutional investors owned less than 20% of U.S. stocks; today institutional investors own the majority.
    • Today, nearly 45% of U.S. households invest in registered funds.
    • AUM of institutional investors has increased from $6 trillion in 1998 to $19 trillion today.
  • Mutual fund investments in small IPOs have declined:
    • In 1990, 10.6% of funds disclosed an investment in small IPO issuers compared to only 0.7$% in 2010.
    • Institutional ownership of small-cap companies has fallen 8% between 2014 and 2016, with institutions shifting their investment focus to mid- and large-cap companies.

Based on the macro trend data and the results of his conversations with asset managers, Mr. Fleming believes that, in order to reinvigorate the IPO market, regulators need to consider reforms that will make institutional investors more interested in smaller public companies. In addition, Mr. Fleming believes regulators will be much more successful if they focus on demand-side reforms directed towards attracting more investors to the public markets rather than on supply-side reforms of decreasing disclosure requirements or shareholder rights to attract more companies to the public markets.  The full text of Mr. Fleming’s speech is available at: https://www.sec.gov/news/speech/fleming-enhancing-demand-ipos-050917

On May 8, 2017, the NYSE MKT issued a proposed rule change to harmonize its periodic reporting requirements with those of the NYSE. Currently, the NYSE MKT provides companies that are late in making required filings with a compliance plan under its general provisions for companies that are non-compliant with NYSE rules, as set forth in Section 1009 of the NYSE MKT Company Guide. Section 1009 gives the NYSE MKT the discretion to grant companies up to 18 months to cure events of noncompliance and does not provide specific guidance with respect to how compliance periods should be administered for companies late in submitting their filings. In contrast, Section 802.01E of the NYSE Listed Company Manual limits companies to a maximum cure period of 12 months to submit all delayed filings and includes specific provisions for determining how much time companies should be given to cure within the context of that maximum 12 months and what is required to be eligible for that additional time. The proposed rule change also harmonizes NYSE MKT requirements with respect to semi-annual reporting by foreign private issuers with that of the NYSE. The NYSE MKT noted that a consistent approach among the two sister exchanges will avoid confusion among investors and companies and their service providers about the applicable rules.

A copy of the proposed rule change is available at: https://www.sec.gov/rules/sro/nysemkt/2017/34-80619.pdf.

On April 19, 2017, the staff of the SEC’s Division of Corporation Finance issued a new compliance and disclosure interpretation (“C&DI”) addressing intrastate offerings pursuant to new Securities Act Rule 147A. The C&DI clarified that under new Rule 147A(g)(1), offers and sales made in reliance on new Rule 147A will not be integrated with prior offers and sales of securities, including offers and sales made in reliance on amended Securities Act Rule 147. The C&DI also noted that an issuer must still comply with all applicable state securities law requirements. Amended Rule 147 facilitates offerings relying upon recently adopted intrastate crowdfunding exemptions under state securities laws, while new Rule 147A further accommodates offers accessible to out-of-state residents and companies that are incorporated or organized out-of-state.

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

On March 13, 2017, the NYSE issued a proposed rule to modify the provisions regarding the qualification of companies listing on the NYSE to allow for a listing without an IPO. Section 102.01B of the NYSE Listed Company Manual currently recognizes that some companies that have not previously registered their common equity securities under the Exchange Act, but which have sold common equity securities in a private placement, may wish to list those common equity securities on the NYSE at the time of effectiveness of a resale registration statement filed solely for the resale of the securities held by selling stockholders. Footnote (E) of Section 102.01B currently provides that the NYSE will exercise its discretion to list these companies by determining that a company has met the $100 million aggregate market value of publicly-held shares requirement based on a combination of both (1) an independent third-party valuation of the company (the “Valuation”) and (ii) the most recent trading price for the company’s common stock in a trading system for unregistered securities operated by a national securities exchange or a registered broker-dealer (a “Private Placement Market”). The NYSE then attributes a market value of publicly-held shares to the company equal to the lesser of (1) the value calculable based on the Valuation and (2) the value calculable based on the most recent trading price in a Private Placement Market.

Although Footnote (E) provides for a company NYSE listing upon effectiveness of a resale registration statement, it currently does not provide for a company listing in connection with the effectiveness of an Exchange Act registration statement in the absence of an IPO or other Securities Act registration. However, a company can become an Exchange Act registrant without a concurrent public offering by filing with the SEC a Form 10 or an annual report (such as a Form 10-K or Form 20-F).

The proposed rule would amend Footnote (E) to explicitly provide that it applies to companies listing (1) upon effectiveness of an Exchange Act registration statement without a concurrent Securities Act registration and (2) upon effectiveness of a resale registration statement. The proposed rule would also amend Footnote (E) to provide an exception to the Private Placement Market trading requirement for companies with a recent Valuation available indicating at least $250 million in market value of publicly-held shares. The valuation used for this purpose would need to be provided by an entity that has significant experience and demonstrable competence in the provision of these valuations.

This approach could be of significant interest for issuers that have completed 144A equity offerings, which are still popular among REITs, for issuers that have completed numerous private placements and have VC or PE investors that need liquidity, and for issuers, including foreign issuers, that are well-funded and do not need a capital raise through an IPO, but would still like to have their securities listed or quoted on a securities exchange.

The proposed rule is available at: https://www.sec.gov/rules/sro/nyse/2017/34-80313.pdf.