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 the recently released Congressional Budget Justification, the Securities and Exchange Commission highlights a number of priorities. In discussing the Division of Corporation Finance’s activities, the request notes that the Division remains focused on measures designed to promote capital formation. Among these, the report notes that the Division will consider and propose amendments to modernize disclosure requirements under Regulation S-K as part of the Disclosure Effectiveness Initiative and will implement recommendations resulting from the FAST Act-mandated Regulation S-K study. The budget request also references the Commission’s intent to “propose amendments to further facilitate capital formation through exempt and registered offerings.” The request also refers to proposed amendments to modernize industry-specific disclosures applicable to real estate companies, including REITs. While changes to Industry Guide 7 (mining) and Industry Guide 3 (financial institutions) have been underway, this is the first reference to changes to the REIT industry guide. Reference is also made to the Commission’s efforts to establish the Office of the Advocate for Small Business Capital Formation.
See the request here: https://www.sec.gov/files/secfy19congbudgjust.pdf.
Citibank’s recently released year-end report on depositary receipts (DR) reported that in 2017, $15.6 billion of DR capital was raised across 65 deals, which was a 126% year-over-year change in total capital raised versus 2016 and a 91% year-over-year change in number of capital raisings. The European, Middle East and Africa region saw a total of 28 deals, raising $4.4 billion; the Asia-Pacific region raised $7.0 billion across 29 deals; and the Latin America region raised $4.2 billion across 8 deals.
The report also notes that DR IPOs raised $9.4 billion in 2017, which was a 145% change from 2016. 24 issuers were able to take advantage of JOBS Act accommodations to complete their IPOs. There was also $6.2 billion of DR follow-on activity in 2017, which was a 101% change from 2016. $12.8 billion was raised in American depositary receipts (ADR) and $2.8 billion was raised in global depositary receipts (GDR).
The energy, software and services and the financial services sectors were the top three sectors for DR IPOs in 2017 raising $1.57 billion, $1.54 billion and $1.48 billion respectively. For follow-on offerings, the top three sectors included financial services, raising $1.87 billion, pharmaceuticals/biotech, raising $1.43 billion, and software and services, raising $681 million.
For additional 2017 DR trends, see Citi’s annual report: https://depositaryreceipts.citi.com/adr/common/file.aspx?idf=4354
Many successful privately held companies are able to raise funds from institutional investors at attractive valuations and defer their IPOs. Almost $49 billion was raised in late stage private placements (also referred to as “mezzanine” private placements or “pre-IPO” private placements) in 2017, an 18% year-over-year increase. As in prior years, tech companies benefited most from this trend and accounted for 42% of dollars raised in these transactions. It is difficult to predict whether this year will mark a turning point in which we see some unicorns undertake IPOs. Our infographic provides a snapshot of the market for these transactions in the United States.
Below, a continuation of our bibliography of thought-provoking articles on issues related to right-sizing regulation, staying private versus going public, and related topics:
The Unicorn Governance Trap
In her paper, “The Unicorn Governance Trap,” Renee Jones discusses how changes in the start-up and private financing markets have resulted in privately held companies deferring the adoption of more sophisticated corporate governance policies. Whereas, in years past, venture capital may have been the predominant source of capital for these companies, and VCs may have taken an active interest in governance policies, particularly in preparation for IPOs, the rubric has changed. Many companies defer their IPOs for longer than their predecessors. New sources of private capital have emerged and these investors are not interested in taking a role in governance. Jones considers a number of possible approaches to addressing the unicorn governance structures.
February 1-2, 2018
JW Marriott Marquis Miami
255 Biscayne Boulevard Way
Miami, FL 33131
The 36th Annual Federal Securities Institute is the premier conference for corporate, securities and M&A practitioners, in-house counsel, executives, and advisors who focus on the middle-market. Senior members of the SEC Staff, the Delaware judiciary and leading Wall Street firms will share their practical knowledge for structuring acquisitions and capital raising transactions, handling litigation and regulatory enforcement issues, and addressing corporate governance.
Morrison & Foerster Partner Anna Pinedo will speak on a panel entitled “Capital Raising Alternatives” on Day 1 of the program.
For more information, or to register, please click here.
In June 2017, the SEC’s Division of Corporation Finance (“Corp Fin”) announced a new policy effective July 2017 that essentially extends the confidential submission process to all issuers while keeping the EGC process unchanged. The new policy also permits an issuer to submit for confidential review a registration statement filed to register a class of securities under the Exchange Act, such as a registration statement on Form 10 for a U.S. issuer or a Form 20-F for an FPI. An issuer must publicly file an Exchange Act registration statement at least 15 days prior to seeking its effectiveness. For certain large, privately held companies that have undertaken various rounds of private financings and may not have an immediate need to raise additional capital, a “direct listing” may be an attractive alternative to a traditional IPO.
Historically, there have not been many issuers that have undertaken a “Form 10 IPO” or “backdoor IPO,” but market dynamics have changed. However, for a unicorn, which has been able to raise capital in the private markets at attractive valuations, a direct listing may be a good alternative. A listing on a national securities exchange will provide much-needed liquidity for employees, early investors, and even venture capital and private equity sponsors. A unicorn, advised by financial intermediaries acting as financial advisers (not underwriters), likely will be able to attract the attention of additional or new institutional investors that might purchase its securities in the secondary market. These same financial intermediaries, or others familiar with the company, might provide research coverage following the listing of its stock on a securities exchange.
To learn more about direct listings, listen to our ThinkingCapMarkets podcast.
NASDAQ Private Markets and Morrison & Foerster recently discussed trends in private company capital raising. In this video blog, Anna Pinedo discusses market trends, including the trend toward remaining private longer and deferring IPOs and other exits; the increased reliance on private placements over registered offerings; the investors active in late-stage private placements; and the late-stage private placement market.
To watch this video, visit the NASDAQ Private Markets Resource Center.
Today, FINRA announced that its Board of Governors had approved publication of a Regulatory Notice seeking comment on rule amendments that would remove certain impediments to capital formation that are unnecessary to protect investors. Specifically, the proposal would amend Rules 5130 (Restrictions on the Purchase and Sale of Initial Equity Public Offerings) and 5131 (New Issue Allocations and Distributions) to exempt additional persons and types of transactions from the scope of the rules, modify current exemptions to enhance regulatory consistency, and address unintended operational issues. The statement does not refer to the proposed amendments to FINRA’s Corporate Financing Rule that were released earlier in the year however. See the notice here.
The SEC’s recently released rulemaking agenda (see: https://goo.gl/psRmG5) includes a number of matters that will affect capital formation. For example, the agenda references as priorities modernization of disclosures for mining registrants, amendments to the smaller reporting company definition, finalizing certain proposed changes to Regulation S-K and S-X to remove outdated requirements, Industry Guide 3 changes for bank holding company disclosures, Regulation S-X related changes, and amendments to implement the recommendations in the FAST Act study.
A few items of interest to readers of this blog were moved to the long-term action items. These include amendments to the accredited investor definition, extending the ability to test-the-waters to companies that are not EGCs, and the broader disclosure effectiveness related amendments to Regulation S-K.