On May 24, 2018, President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”).While much of the Act was designed to provide smaller financial institutions and community banks with relief from regulations implemented under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), Title V of the Act includes provisions designed to encourage capital formation.  Specifically, the Act directs the Securities and Exchange Commission (the “SEC”) to reform Rule 701 and Regulation A under the Securities Act of 1933 (the “1933 Act”). In addition, the Act expands the scope of the blue sky registration exemption by amending Section 18 of the 1933 Act. Finally, the Act expands the exception under Section 3(c)(1) of the Investment Company Act of 1940 (the “1940 Act”) for “qualifying venture capital funds,” directs the SEC to streamline the offering process for closed-end funds, and expands investor protection to mutual funds domiciled in U.S. territories.

Read our client alert.

There was a significant increase in the number of completed initial public offerings (“IPOs”) in 2017 compared to 2016 and 2015.  However, the number of completed IPOs was still down compared to 2014, which saw the highest number of completed IPOs post-financial crisis.  Some commentators have attributed the rise in the number of IPOs in 2017 to improving U.S. economic fundamentals and consumer sentiment.  However, the trend since the financial crisis of successful companies remaining private longer and continuing to benefit from attractive valuations in private financing rounds without facing the burdens associated with becoming Securities and Exchange Commission (“SEC”)-reporting companies has continued. 

In this year’s survey, we consider the characteristics of the emerging growth companies (“EGCs”) that completed IPOs and the corporate governance, compensation and other practices adopted by them.  Specifically, we examined the filings of (i) the approximately 853 EGCs (on an aggregated basis) that completed their IPOs in the period from January 1, 2013, through December 31, 2017, and (ii) the 172 EGCs (on a standalone basis) that completed their IPOs during the year ended December 31, 2017.  The survey focuses on EGCs that have availed themselves of the provisions of Title I of the Jumpstart Our Business Startups Act (“JOBS Act”).  This year is anticipated to be a more active year for IPOs.  Our objective is to provide data that will be useful to you in assessing whether your company’s current or proposed corporate governance practices are consistent with EGC market practice. 

Read the survey.

On Wednesday, April 4, 2018, the Securities and Exchange Commission (“SEC”) published new Compliance and Disclosure Interpretations (“New C&DIs”) on the use of non-GAAP financial measures. The New C&DIs supplement and clarify the Staff’s existing guidance with respect to non-GAAP financial measures for business combination transactions.  Please see Morrison & Foerster’s client alert on the New C&DIs.

Morrison & Foerster’s Marty Dunn will be speaking on a panel as part of PLI’s Global Capital Markets & the U.S. Securities Laws 2018 program held in New York, NY on April 18, 2018. His panel will focus on hot topics in global capital markets including: disclosure developments; latest developments with Rule 144A and Regulation S offerings; impact of the JOBS Act; and global offering techniques.  PLI will provide CLE credit. Please visit the PLI event page for more information.

We had previously reported on a Securities and Exchange Commission open meeting that had been scheduled for today.  The open meeting was cancelled.  The Commission approved the issuance of an interpretive release to provide guidance to public companies when preparing disclosures about cybersecurity risks and incidents.  The release (available here: https://goo.gl/QVhwSG) discusses the Commission’s views regarding the importance of maintaining robust policies and procedures relating to cybersecurity risks and incidents.  The guidance in the release updates and reinforces the guidance provided in 2011 by the Commission’s Division of Corporation Finance.

In a speech given early in the week at Stanford University’s Rock Center for Corporate Governance, titled, “Mutualism: Reimagining the Role of Shareholders in Modern Corporate Governance,” Commissioner Stein addressed a broad range of topics, including cybersecurity issues and shareholder engagement.  Commissioner Stein also commented on dual class capital structures.  Commissioner Stein, not speaking on behalf of the Commission, noted that in her view, dual class capital structures were not democratic and created a disconnect between the interests of shareholders and control parties.

Later in the week, Commissioner Jackson, speaking at Berkeley and making his first public remarks since joining the Commission, commented on perpetual dual class structures.  Commissioner Jackson cited statistics showing that the trend was on the rise, noting that 14% of the 133 companies that listed on U.S. exchanges in 2015 had dual class voting structures, compared to 12% in the prior year.  Commissioner Jackson outlined some of the benefits of dual class structures that have been noted in academic literature, as well as some of the disadvantages, and focused his comments on companies that adopt dual class structures and provide for these in perpetuity, as opposed to allowing for some sunset provisions.  The Commissioner cited research from a review of 157 dual-class IPOs that were undertaken in the last 15 years and noted significant differences in performance between those companies that had sunset provisions and those that did not.  Included in the remarks are additional data points and analyses.  While solely voicing his own views, Commissioner Jackson seemed to favor seeing modified listing standards from the national securities exchanges that would address the inclusion of sunset provisions.

Here are the links to the two speeches: https://goo.gl/zTccUU (Commr. Jackson); and https://goo.gl/TuCRMe (Commr. Stein).

Yesterday, the Securities and Exchange Commission announced that it will hold an open meeting on February 21st at 10 a.m. to consider various matters, including whether to approve the issuance of an interpretive release to provide guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents.  The details may be found here.

A bill, H.R. 3978, that includes various disparate measures passed in the House of Representatives by a vote of 271 to 145.  Among the measures included in H.R. 3978 are the Fostering Innovation Act of 2017, about which we have previously written, which amends Sarbanes-Oxley Section 404(b) attestation requirements extending the exemption available to EGCs for a longer period—until the earlier of ten years after the EGC went public, the end of the fiscal year in which the EGC’s average gross revenues exceed $50 million, or when the EGC qualifies with the SEC as a large accelerated filer.  In addition, H.R. 3978 includes the National Securities Exchange Regulatory Parity Act, which modernizes Section 18 of the Securities Act.

In late January 2018, MSCI reopened a consultation with the investment community on the treatment of unequal voting structures. Under the MSCI’s proposal, the weights of shares with unequal voting rights in the MSCI Equity Indexes would be adjusted to reflect company level listed voting power in addition to free float. MSCI also released a discussion paper examining the theoretical and practical issues of the application of the “one share, one vote” principle. MSCI’s proposal follows the recent decisions of stock exchanges in Hong Kong and Singapore to allow dual-class voting structures in the face of increasing competition among exchanges to list companies. In contrast, in July and August 2017, S&P Dow Jones Indices and FTSE Russell excluded from some of their indices companies that have multiple voting classes.

Feedback on the MSCI’s proposal may be submitted on or before May 31, 2018 and MSCI will announce the results of the consultation on or before June 21, 2018. In the meantime, MSCI will continue to apply the temporary treatment of unequal voting structures until further notice, which does not affect any current index constituents (for more information on the temporary treatment, see our prior blog post available here).

A copy of the discussion paper is available here.