2013 has proven to be a strong year for IPOs.  According to a recent PWC study, total IPO volume for 2013, as of December 17, reached 237 public company debuts, which is an increase over 2012.  The overwhelming majority of these IPOs were completed by issuers that qualified as emerging growth companies.  (The full details of the study are available here:  http://www.pwc.com/us/en/press-releases/2013/pwc-q4-2013-ipo-watch-press-release.jhtml.)  Issuers and their counsel have become progressively more comfortable with the IPO on-ramp practices.  Issuers continue to rely on the confidential submission process for at least one or two amendments.  EGCs are regularly relying on the executive compensation disclosure accommodations.

During 2013, the SEC also made substantial progress with JOBS Act implementation.  Here is a brief recap:

Title I:  The SEC recently published the report required by Section 108 regarding the disclosure requirements of Regulation S-K.  Given the dialogue on disclosure reform generally, it seems safe to say that we should expect continued focus on this in 2014.

Title II:  Title II provided additional legal certainty (beyond that which had been provided by pre-JOBS Act no-action letters) for matchmaking sites.  Even before the Rule 506 amendments were finalized, it became clear that matchmaking sites that use the internet to reach (at that point) accredited investors would play an important role in the private financing market.  During 2013, the SEC Staff provided additional guidance on these models both through the issuance of FAQs and through the issuance of no-action letters to AngelList and Funders Club.  On September 23, 2013, the amendments relaxing the prohibition against general solicitation in certain Rule 506 offerings and in Rule 144A offerings became effective, as did the bad actor rules (required by the Dodd-Frank Act, not the JOBS Act).  The SEC Staff also released guidance on various questions related to Rule 506 offerings and on bad actor issues.  However, many questions have arisen regarding the necessary steps for investor verification in Rule 506(c) offerings, and additional guidance on these would be welcome.  Relaxing the prohibition against general solicitation raises fundamental questions regarding the demarcation between “private” offerings and “public” offerings, and the integration of offerings occurring in close proximity to one another.  SEC representatives have acknowledged that these integration issues will need to be tackled in the future.  The SEC also proposed amendments to Regulation D, Form D and Rule 156.  These have proven quite controversial, and it is difficult to predict whether certain of these amendments will be adopted.

Title III:  The SEC released proposed rules establishing a framework for crowdfunded offerings.

Title IV:  Most recently, the SEC released for comment proposed rules that provide a framework for Regulation A+ offerings.  The SEC’s proposed rules would implement the JOBS Act mandate by amending and modernizing existing Regulation A; creating two tiers of offerings, Tier 1 for offerings of up to $5 million  ($1.5 million for selling stockholders) and Tier 2 for offerings of up to $50 million ($15 million for selling stockholders); setting issuer eligibility, disclosure and reporting requirements; and imposing additional disclosure and ongoing reporting requirements, as well as an investment limit, for Tier 2 offerings, and, given these investor protection measures, making Tier 2 offerings exempt from blue sky requirements.  Regulation A+ offerings may prove to be an important financing alternative for non-reporting companies seeking capital and broader market exposure.

All told, it has been a year of significant changes.  Over time, we believe these changes are likelier to have more lasting impact on exempt financings than on the IPO market.

On October 30, 2013, the Director of the SEC’s Division of Corporation Finance, Keith Higgins, testified at the Senate hearings on JOBS Act implementation (see our prior blog post on this).  His testimony can be found here:  http://www.banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=49b38b62-cdff-4e2d-b272-26c5e44d785f.

In his testimony, Mr. Higgins provided a number of updates.  He noted that the SEC Staff is working with national securities exchanges as they develop a plan to implement a pilot program permitting smaller companies to implement wider tick sizes.  Higgins also reported that the SEC Staff expects to deliver its report on disclosure requirements under Regulation S-K.  In comments relating to Title II, the testimony (footnote 18) cites statistics for offerings made in reliance on Rule 506(c) using general solicitation.  Based on Form D filings, the SEC states that 170 offerings have been made using general solicitation, and 44 offerings in process prior to the effective date of the new rules were converted to offerings relying on general solicitation.  Higgins reported that the SEC Staff is finalizing rule recommendations under Title IV (Regulation A+ or 3(b)(2)) for the Commission’s consideration.

The SEC recently approved FINRA’s rule change to permit dissemination of trade data for 144A bonds on TRACE (see: http://www.sec.gov/rules/sro/finra/2013/34-70345.pdf).  FINRA will publish a regulatory notice within 60 days of the rule approval, which was earlier this month, providing additional details.  As we previously reported in an earlier post, the relaxation of the prohibition on general solicitation mandated by the JOBS Act made the decision to disseminate trade data for 144A deals simpler.

Certain dissemination caps (applicable now to bond deals) will apply – $5 million for Investment Grade corporate bonds and $1 million for Non-Investment Grade – to Rule 144A corporate bond transactions.   As a result, the size of a Rule 144A Investment Grade corporate bond transaction in excess of $5MM would be displayed as “$5MM+” and the size of a Rule 144A Non-Investment Grade corporate bond transaction in excess of $1MM would be displayed “$1MM+.”

The SEC has scheduled a meeting for July 10, 2013 to consider the “bad actor” provisions that will be applicable for Rule 506 offerings (required by the Dodd-Frank Act), and the relaxation of the prohibition against general solicitation required under Title II of the JOBS Act.

This teleconference on July 11th provided an overview of the SEC’s actions.

Speakers:

  • David M. Lynn
  • Anna T. Pinedo
  • Jay G. Baris

To download a copy of the presentation materials, please visit: http://www.mofo.com/files/Uploads/Images/130711-SEC-Implements-Title-II-of-the-JOBS-Act.pdf.

To listen to a recording of the call, please visit: http://www.mofo.com/Rule-506-Rulemaking-AUDIO-07-11-2013/

This week, the SEC approved long-awaited amendments relaxing the prohibition against general solicitation, as required under Title II of the JOBS Act.  These amendments will liberalize the ability of broker-dealers to advertise and market private placements by removing the prohibition against general solicitation in offerings conducted pursuant to new Rule 506(c).  However, following the effective date, broker-dealers looking to avail themselves of the new general solicitation rules should be mindful of existing FINRA rules that govern offering-related communications.

FINRA Rule 5123 establishes filing requirements for offering documents used in private placements. Under Rule 5123, FINRA members selling securities issued by non-members in a private placement must file the private placement memorandum, term sheet or other offering documents with FINRA within 15 days of the date of the first sale of securities, or indicate that no such offering documents were used. For more information on FINRA Rule 5123, see our related client alert.

FINRA Rule 2210 (FINRA’s communications rules) establishes pre-approval, filing, content and record retention requirements with respect to communications with retail investors, including certain accredited investors.  As such, materials relating to private placements that are distributed or made available to 25 or more retail investors in any 30 calendar-day period will be deemed retail communications that must comply with Rule 2210.  In particular:

  • Retail communications must be pre-approved by a registered principal.
  • The content of retail communications must be accurate, fair and balanced.  In FINRA’s view, robust risk factor disclosure is often required. (And, in addition, of course, these documents should meet a Rule 10b-5 standard.)

For more information on FINRA Rule 2210, see our related client alert.

Note that FINRA personnel will be able to obtain and review a variety of private placement marketing materials, both as a result of the filings described above, and through FINRA’s periodic inspection process.  Accordingly, FINRA will have the ability to comment on, and take any other actions within its powers, as to those offering materials which it finds are not “fair and balanced.”

The SEC proposed to require private funds making Rule 506(c) offerings to file written general solicitation materials with the SEC on a temporary basis. The filings would be required to apply for a period of two years, and would not be available to the public. The SEC also proposed to amend Rule 156 under the Securities Act of 1933, the anti-fraud rule that applies to sales literature of registered investment companies. The rule amendments would apply the guidance to sales literature of private funds making general solicitations under Rule 506.

Rule 156 prevents registered investment companies from using sales literature that is materially misleading in connection with the offer and sale of securities. The rule provides that sales literature is considered misleading if it (i) contains an untrue statement of a material fact; or (ii) it omits to state a material fact necessary in order to make a statement, in light of the circumstances of its use, not misleading.

Rule 156 provides specific examples of regarding the types of statements in sales literature that the SEC would consider to be misleading. Generally, whether a statement involving a material fact would be misleading depends on the context in which it is made, in light of all pertinent factors, including:

  • Other statements being made in connection with the offer or sale of the securities in question;
  • The absence of explanations, qualifications limitations or other statements necessary or appropriate to make the statement not misleading; or
  • General economic or financial conditions or circumstances.

Rule 156 provides a non-exclusive list of factors concerning representations of past or future investment performance that could be misleading. It also contains examples of when statements about possible benefits connected with or resulting from the services to be provided that do not give equal prominence to discussion of any associated risks.

Rule 156 broadly defines “sales literature,” which generally means any communication (whether in writing, by radio or by television) used to sell or induce the sale of securities of any investment company.  Communications between issuers, underwriters and dealers are included in this definition of sales literature if the communication (or the information it contains) can be “reasonably expected” to be communicated to prospective investors in the offer or sale of securities, or are designed to be employed either in written or oral form in the offer or sale of securities, such as in sales scripts.  The definition likely would apply to communications contained in social media.

The SEC is proposing rules for comment that will impose a number of investor protection measures in connection with Rule 506(c) offerings. These include the following: A proposed amendment to Rule 503 in order to implement additional compliance requirements relating to the filing of a Form D. In connection with a Rule 506(c) offering, an issuer will be required to file a Form D not later than 15 calendar days from the commencement of general solicitation efforts. In addition, in order to provide the SEC with more information regarding these types of offerings, the issuer will be required to file a final amendment to the Form D within 30 days after the completion of such an offering. Along the same lines, in order to make additional information available to the SEC, the proposal would revise Form D in order to request additional information in the context of Rule 506(c) offerings. For example, the amended Form would require additional information about the issuer, the offered securities, the use of proceeds of the offering, the types of general solicitation that were used, and the methods used to verify investor status. The Staff also proposes an amendment to Rule 507 in order to promote compliance with the Form D filing requirement by implementing certain disqualification provisions to the extent that the issuer and its affiliates failed to comply with Form D filing requirements. The SEC would have the authority to grant waivers upon a showing of good cause by the issuer. The proposal also would include the introduction of a new Rule 509. Proposed Rule 509 would require an issuer engaging in a Rule 506(c) offering to include certain legends on any written general solicitation materials. The required legends would alert potential investors of the type of offering, that the offering is available only to certain investors, and that the offering may involve certain risks. The proposal also would require that for a temporary period of two years, issuers be required to file with the SEC any written solicitation materials. These materials would not be available to the public. This is intended to permit the SEC to review the types of materials that are being used. The proposal also solicits comment on the definition of “accredited investor” and requests comment on whether there should be additional requirements relating to the communications used in general solicitation.

For some time now, FINRA has been considering amending its rules in order to make Rule 144A transactions, which are reportable on TRACE, subject to dissemination under FINRA rules in order to promote more transparency.  Historically, 144A transaction data has not been disseminated due to concerns regarding the historic prohibition on general solicitation.  FINRA has now filed with the SEC a proposed change to its rules to permit dissemination of Rule 144A transaction data and notes that the concerns regarding general solicitation have fallen away given the JOBS Act mandate to relax the prohibition against general solicitation.  The rule filing is available here: http://www.finra.org/Industry/Regulation/RuleFilings/2013/P297241.  If approved, it will be interesting to see how this change will affect the choice of financing alternative as between a 144A offering and a 3(a)(2) offering, for example.

Today, Commissioner Elise Walter testified before the House Subcommittee on Oversight and Investigations of the Committee on Financial Services regarding the SEC’s implementation of Title II of the JOBS Act.  Commissioner Walter noted that finalizing the rulemaking is one of the SEC’s “top priorities.”  The Commissioner reviewed the pre-rulemaking comments that were received, as well as the comments received on the SEC’s proposed rules.  The Commissioner explained that the SEC’s proposed rule included only the rule amendments that a majority of the Commission members believed were necessary to carry out the mandate in Title II of the JOBS Act, and did not address amendments to Form D or to the definition of “accredited investor.”  She noted that following the SEC proposal over 220 comment letters were received, and the commenters were divided in their reactions.  She characterized the comments as follows:  61 commenters expressing general support; several commenters recommending that the verification process be supplemented in the final rule through the inclusion of a non-exclusive list of verification methods that could be used; and 81 commenters expressing opposition to the proposal due to concerns regarding investor protection issues.  Commissioner Walter also noted that the SEC Staff in the Division of Corporation Finance and Risk, Strategy and Financial Innovation are working on recommendations for the Commission’s consideration.  The full text of her testimony is available at:  http://www.sec.gov/news/testimony/2013/ts041713ebw.htm.

On April 11, 2013, Lona Nallengara, Acting Director of the SEC’s Division of Corporation Finance, and John Ramsay, Acting Director of the Division of Trading & Markets offered testimony before the House Subcommittee on Investigations, Oversight and Regulations of the Committee on Small Business.  Their testimony, which provides an overview of the Act and the implementation efforts to date is available here:  http://www.sec.gov/news/testimony/2013/ts041113lnjr.htm.

Commenting on Title I, Nallengara and Ramsay noted that SEC staff is consulting with the exchanges on the structure of a pilot program on modified tick sizes.  They also noted that the Staff is preparing its recommendations in connection with the mandated review of the disclosure requirements in Regulation S-K, and expects to complete the review in “the near future.”  On Title II (the Rule 506 rulemaking), they noted that the Staff is developing recommendations for the Commission’s consideration.  There was no sense given regarding the timing of proposals relating to Title III (crowdfunding) or Title IV (Regulation A+).