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 December 18, 2013, the SEC proposed rules to implement the mandate of Title IV of the JOBS Act by creating a framework for Section 3(b)(2) offerings. The JOBS Act permits non-reporting companies to conduct “mini” public offerings, or Regulation A+ exempt offerings to raise up to $50 million in proceeds. A Regulation A+ offering may prove a compelling capital-raising alternative for growing companies and may be a useful stepping stone on the way to an IPO. For some companies, Regulation A+ may be a viable alternative to an IPO. We will discuss the proposed rule, as well as provide a perspective on the utility of Regulation A+ and on the Regulation A+ market.

Topics will include:

  • Basics of the proposed rule;
  • The offering process;
  • Disclosure requirements;
  • State securities law considerations;
  • Combining Regulation A+ offerings with other exempt offering alternatives;
  • Regulation A as a precursor to an IPO;
  • Regulation A as an alternative to an IPO; and
  • Secondary trading.

To register for our teleconference, which is scheduled for January 6 from 10:00 – 11:00 am EST, click here.

In this alert, titled “A+ Indeed” http://www.mofo.com/files/Uploads/Images/131219-Reg-A.pdf, we provide an overview of the SEC’s proposed amendments to Reg A.  As we note in the alert, the SEC’s proposed rules move the United States one step closer to realizing the potential of the JOBS Act.  We expect that over time, amended Regulation A has the potential to become an important capital raising alternative for growing companies in the United States for which the IPO “on ramp” may be too steep a climb, or too costly an alternative.

Recently, I filed Advance Comments with the Securities and Exchange Commission to share a tech company’s perspective on how Reg A+ could be drafted to help growth companies like Fallbrook Technologies.  As Chairman and CEO of Fallbrook Technologies, I spend a substantial portion of my time evaluating options for capital, so I am well aware of the issues.  If the SEC’s Reg A+ rules are user-friendly and provide a national platform for raising capital, high-growth companies like Fallbrook can use Reg A+ to help boost the economy by creating new American jobs, expanding R&D efforts, and driving innovation faster.

We are grateful that the SEC created the opportunity for Advance Comments on various JOBS Act provisions.  In my comments, I suggested that the SEC focus on the following four factors as it crafts Reg A+ rules to raise the “mini-IPO” cap from $5 million to $50 million as required by Title IV of the JOBS Act:

First, the SEC should strive to make Reg A+ rules simple and user-friendly, eliminating the need for growing companies to expend undue resources on decoding complex and cumbersome regulatory changes.

Second, because the Internet and social media allow a growing company’s message to rapidly spread across the U.S., the SEC should preempt state securities laws.  For a growing company, numerous multi-state filings are extremely difficult to navigate and execute correctly, further siphoning away scarce resources needed to advance innovation and create jobs.

Third, because the increased Reg A+ cap provides better scalability options for companies that are growing beyond their earliest stages, Reg A+ rules should continue to be a top priority for the SEC.

Finally, reporting requirements should insist on reasonable detail and transparency, but should not be so frequent or complex as to be burdensome.

Fallbrook Technologies strongly supports the ideals the President and Congress expressed in passing the bipartisan JOBS Act.  We are ready to make those promises a reality.

Click here for more details on this post.

William G. Klehm is the Chairman and CEO of Fallbrook Technologies. Fallbrook Technologies is an emerging manufacturing and technology development company dedicated to improving the flexibility of power transmission within a wide variety of mechanical devices. Based in Cedar Park, Texas, near Austin, Fallbrook’s award-winning NuVinci® continuously variable planetary (CVP) transmission system is a standard component on more than 60 major bicycle brands throughout Europe, and is potentially applicable to improving the performance and efficiency of virtually any product that uses a transmission, such as light electric vehicles, outdoor power equipment, agricultural equipment, automobiles, and wind turbines.

In two programs focusing on the JOBS Act, Anna Pinedo and David Lynn of Morrison & Foerster share their expertise to help course attendees gain a greater understanding of the JOBS Act and its implications for different types of companies.

JOBS Act Program 1 – Title I

Topics include:

  • IPO on-ramp
  • IPO process for an emerging growth company (“EGC”)
  • Application of Title I concepts to other transactions, including exchange offers, tenders, acquisitions and spin-offs
  • Research for an EGC
  • Other capital formation discussions

Preview a 2-minute video of JOBS Act Program 1.  The program is available in its entirety here.

JOBS Act Program 2 – Private Placements & Other Exempt Offerings

Topics include:

  • Title II and the elimination of the ban on general solicitation
  • Crowdfunding
  • Regulation A+
  • Titles V and VI
  • Other discussions relating to the JOBS Act

Preview a 2-minute video of JOBS Act Program 2.  The program is available in its entirety here.

Today, the House of Representatives by a vote of 416-6 approved H.R. 701, a bipartisan bill that directs the SEC to finalize rules by Oct. 31 to implement Title IV of the JOBS Act.  Rep. Patrick McHenry (R-NC), who serves as Chairman of the Subcommittee on Oversight and Investigations, sponsored the legislation along with Reps. Anna Eshoo (D-CA), David Scott (D-GA), David Schweikert (R-AZ) and Scott Garrett (R-NJ).  Rep. McHenry stated that, “To cultivate a stronger economy, we have to build a more vibrant marketplace for our startups and entrepreneurs, which is what this legislation is all about.  It’s critical that the SEC finally start to implement the JOBS Act – a bipartisan bill that was signed into law more than a year ago.  Small businesses and entrepreneurs are starving for capital, and this legislation simply sets a firm deadline for the SEC to get its job done.”

Following the House Financial Services Committee mark-up session, HR 701 and HR 801 were both approved by voice vote. Yesterday, a bill was introduced in the Senate by Senator Toomey, S.872, to amend the Securities Exchange Act of 1934, to make the shareholder threshold for registration of savings and loan holding companies the same as for bank holding companies.

Today, May 7, 2013, the House Committee on Financial Services will mark up two JOBS Act related bills, HR 701 and HR 801.  HR 701 would require that the SEC take action to implement rules under Title IV of the JOBS Act (the provisions related to Section 3(b)(2) or “Regulation A+”) by October 31, 2013.  HR 801 would address an omission in the JOBS Act and make clear that Title VI of the JOBS Act is to raise the Exchange Act threshold for savings and loan companies from 500 shareholders of record to 2,000 shareholders of record (with no limitation on the number of non-accredited investors) and to raise the threshold for a savings and loan company to terminate its SEC registration from 300 shareholders of record to 1,200 shareholders of record.  See the memo here: http://financialservices.house.gov/calendar/eventsingle.aspx?EventID=332411

Any milestone, such as an anniversary, provides an opportunity for reflection and evaluation.  At the one-year anniversary of the JOBS Act, preliminary experience gives reason for some optimism.  The centerpiece of the JOBS Act, the “IPO on-ramp” provisions contained in Title I, have proven quite useful.  The SEC Staff’s guidance in the form of Frequently Asked Questions (or FAQs) promptly filled the gaps in the legislation and helped facilitate prompt reliance on these new provisions.  It would be too soon to draw conclusions regarding the impact of the on ramp on IPOs in general, and smaller IPOs in particular.  The provisions relating to the Exchange Act threshold, which also were immediately effective, have already been relied upon by many smaller banks to suspend their ongoing reporting.  Most of the other provisions of the JOBS Act await further SEC rulemaking.  Below we provide a very brief “cheat sheet” of the status of the various provisions.  We believe that it is fair to say though that the JOBS Act has already had a profound effect on capital formation by restarting an important dialogue on SEC disclosure requirements and permissible communications that seemed to come to an end just after the Securities Offering Reform in 2005, when attention turned to executive compensation disclosures, corporate governance concerns, and ultimately the financial crisis.  The JOBS Act also has served to bring greater general awareness of the important changes that have taken place in the last decade in the way that promising companies choose to finance their growth.  Finally, even for the non-securities lawyers among us, the JOBS Act has focused attention on the divide between public and private offerings—challenging all of us to think more closely about the appropriateness of certain existing regulations that seem more and more “artificial” in the face of social media and other developments.

Title I (the IPO on-ramp)

  • This Title was immediately effective, so no SEC rules were required for this title to take effect.
  • The “IPO on-ramp” provisions generally have proven helpful for companies undertaking IPOs:
    • The SEC Staff immediately put out guidance in the form of FAQs.
    • Market participants have been cautious in relying on some of the accommodations available to EGCs; however, over time, market practice may shift.
    • Most EGCs are still presenting three years of financial information (instead of the permissible two years).
    • Most EGCs are taking advantage of the ability to present abbreviated executive compensation disclosures.
    • Most EGCs are taking advantage of the ability to submit their IPO registration statements for confidential review by the SEC, and relying on the confidential process for at least one or two rounds of SEC comments, before the first public filing.
    • EGCs also are benefiting from the delayed phase-in of other costly compliance requirements, like the Sarbanes 404 attestation requirement.
    • Now, at the one-year anniversary, a fair number (just over 100) of EGC IPOs have been completed.
    • Statistics indicate an increase in smaller IPOs, which, in part, was one of the desired outcomes of the JOBS Act.
  • In addition to providing a new approach for EGC IPOs, Title I also addresses analyst research issues, and requires that the SEC undertake several studies.
  • Research
    • Even after the JOBS Act, the unlevel playing field remains as to research, as a result of the Attorney General Settlement, the terms of which have not been modified.
    • FINRA modified its rules in accordance with the JOBS Act.
    • Most investment banks now have settled (informally) on a 25-day post IPO quiet period before publishing research following completion of an IPO.
    • There is no evidence that investment banks are interested in releasing pre-deal research reports for EGCs.
    • Additional regulatory changes would be needed in order to promote additional research coverage for EGCs.
  • Studies
    • The SEC published the required decimalization study and held a decimalization roundtable; a consensus has formed that a pilot program should be initiated for larger tick sizes.
    • The required study on Regulation S-K has not been delivered.

Title II (Private placements)

  • The SEC proposed rules in August 2012 to carry out the JOBS Act mandate to relax the ban on general solicitation
    • The comment period closed in October 2012; however, the rules have not been finalized.
    • There was vigorous comment on the SEC’s proposed rules, with some commenters advocating the adoption of a safe harbor relating to the measures that would be deemed “reasonable” to verify the status of investors; the adoption of content restrictions or guidelines for materials used in general solicitation; and a reexamination of the “accredited investor” threshold.
    • We anticipate that the SEC will seek to finalize the rules in the spring, and seek to finalize the “bad actor” provisions (required to be adopted for Rule 506 offerings by the Dodd-Frank Act) contemporaneously
  • Matchmaking sites
    • There were no rules needed in respect of the broker-dealer registration exemption for matchmaking sites
    • The SEC Staff put out guidance in the form of FAQs addressing various matters relating to the types of entities that might engage in these activities without subjecting themselves to broker-dealer registration.
    • The SEC Staff issued two no-action letters addressing the applicability of the exemption in the context of VC platforms.

Title III (crowdfunding)

  • No SEC rule proposal as yet (SEC missed deadline)
    • The SEC Staff published FAQs regarding the crowdfunding exemption.
    • FINRA has provided a form for collecting information about funding portals.
    • Concerns remain about the extent to which the crowdfunding exemption as contemplated by the JOBS Act could be used by ventures to raise small amounts of capital in a cost-efficient manner.

Title IV (Regulation A+ or Section 3(b)(2))

  • No SEC rule proposal as yet.
  • Now, pending legislation would mandate that the SEC take action by a date certain.

Titles V & VI (Exchange Act threshold)

  • These provisions relating to the Exchange Act threshold were immediately effective; SEC rulemaking was not required.
  • Many banks (over 100, according to published reports) have taken advantage of these provisions to suspend their SEC filings.
  • The SEC is expected to provide guidance regarding various “holder of record” issues.

What should you expect in the coming months?  We anticipate that the SEC will move ahead with finalizing the rules required under Title II to address general solicitation in certain Rule 506 and Rule 144A offerings.  We expect that this will be accompanied by the final “bad actor” rules required under the Dodd-Frank Act.  The discussion about general solicitation is likely to cause the SEC to revisit the “accredited investor” definition—perhaps resurrecting parts of the SEC’s 2007 “larger accredited investor” standard.  Given the complexities to be addressed by the SEC and FINRA in connection with creating a framework for crowdfunded offerings and funding portals, we anticipate that a proposal relating to crowdfunding may not be released until the second half of 2013.  As we have already seen from meetings of various advisory committees, more attention likely will continue to be focused on rationalizing the disclosure requirements and the communications rules applicable to smaller public companies and companies that might have qualified for EGC status (but for the date of their initial offering of equity securities).  Given the higher registration thresholds under the Exchange Act, we may continue to see the development of a trend toward staying private longer, and the growth of markets designed to provide liquidity to investors in those companies.  Given the press of other business under both the JOBS Act and the Dodd-Frank Act, we may not see a proposal for exempt public offerings under Title IV in 2013.  Lastly, we would hope that the momentum toward encouraging capital formation that was created by the JOBS Act will not be lost in its second year of existence, and we will instead see continued dialogue—coupled with regulatory and market action—that is oriented toward creating opportunities to put capital to work companies of all sizes.

Many banks have taken advantage of the provisions of the JOBS Act regarding the holder-of-record threshold to deregister and terminate their registration.  Banks may want to consider their capital-raising alternatives going forward.  A community or small bank that is no longer subject to Exchange Act filing requirements may consider a Rule 506 offering.  A Rule 506 offering to accredited investors will be an attractive alternative for many banks.  However, capital-raising always has been a challenge for community banks.  Some institutional investors may be reluctant to invest in “restricted securities” if these investors are subject to caps or limitations on the amount of restricted securities that they may hold in their portfolios.  Some banks may want to focus on issuances at the bank level (not the holding company level) and rely on the Section 3(a)(2) exemption available to banks.  Section 3(a)(2) of the Securities Act exempts from registration any security issued or guaranteed by a national bank, or any banking institution organized under the law of any state, territory, or the District of Columbia, the business of which is substantially confined to banking and is supervised by the state or territorial banking commission or similar official.  To qualify for the exemption under Section 3(a)(2), the institution must meet two requirements: (i) it must be a national bank or any institution supervised by a state banking commission or similar authority and (ii) its business must be substantially confined to banking.  Securities issued by bank holding companies are not exempt from registration under Section 3(a)(2).  Securities issued pursuant to this exemption will not be considered “restricted securities” and, as a result, there may be more investor interest.

Banks would benefit from a specific exemption under Section 3(b)(2).  The Commission has an opportunity in connection with its 3(b)(2) rulemaking (required by Title IV of the JOBS Act) to consider a streamlined approach for banks to offer securities publicly (relying on a framework similar to that provided by existing Regulation A), which will not be “restricted securities.”  Under existing Regulation A, an issuer must prepare an offering statement.  Banks, however, are already subject to significant regulatory oversight and make available financial and other information to their regulators (and bank call reports are accessible to investors).  It would make good sense to consider a tailored 3(b)(2) exemption for banks, with reduced information requirements, especially given that many banks will have availed themselves of the modified holder-of-record provisions to terminate their filing obligations, but still need access to capital.