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to the smaller reporting company definition, finalizing certain proposed changes to Regulation S-K and S-X to remove outdated requirements, Industry Guide 3 changes for bank holding company disclosures, Regulation S-X related changes, and amendments to implement the recommendations in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.

On November 15, the House Financial Services Committee approved 23 bills, which included various bills that facilitate capital formation and reduce certain regulatory requirements.‎  Chairman of the Committee, Jeb Hensarling, stated that these bills “…will provide smaller businesses with greater access to the capital markets so those businesses can grow and create jobs.”  The following were included among the approved bills:

  • H.R. 4263‎, the Regulation A+ Improvement Act, which proposes to increase ‎the amount that companies can offer and sell under SEC Regulation A, Tier II, from $50 million to $75 million. The bill passed 37-23.
  • H.R. 4015, the Corporate Governance Reform and Transparency Act of 2017, which provides for the registration of proxy advisory firms with the SEC, disclosure of proxy firms’ potential conflicts of interest and codes of ethics, and the disclosure of proxy firms’ methodologies for formulating proxy recommendations and analyses.  The bill passed 40-20.
  • H.R. 4248, which proposes to repeal Section 1502 of the Dodd-Frank Act, and would require public companies to disclose in annual reports filed with the SEC whether the company sources “conflict minerals” from the Democratic Republic of Congo and its nine neighboring countries. The bill passed 32-27.
  • H.R. 4267, the Small Business Credit Availability Act, which proposes to amend the Investment Company Act of 1940 in order to require the SEC to streamline the offering, filing, and registration processes for BDCs.  The bill also increases a BDCs’ ability to deploy capital to businesses by reducing its asset coverage ratio—or required ratio of assets to debt—from 200% to 150% if certain requirements are met. The bill passed 58-2.
  • H.R. 4279, the ‎Expanding Investment Opportunities Act, which directs the SEC to amend its rules to enable closed-end funds that meet certain requirements to be considered “well-known seasoned issuers” (WKSIs) and to conform the filing and offering regulations for closed-end funds to those of traditional operating companies. The bill passed 58-2.
  • H.R. 4281, the Expanding Access to Capital for Rural Job Creators Act, which proposes to amend the Securities Exchange Act of 1934 to have the SEC’s Advocate for Small Business Capital Formation identify any unique challenges to rural area small businesses when identifying problems that small businesses have with securing access to capital. H.R. 4281 also requires that the annual report made by the SEC’s Small Business Advocate include a summary of any unique issues encountered by rural area small businesses. The bill passed 60-0.

For many years, most successful companies followed a relatively predictable capital-raising path. A lot has changed. The companies that tend to pursue IPOs in recent years are more mature, better capitalized, and often seek to pursue IPOs for different reasons than did their predecessors. In our updated Short Field Guide to IPOs, we detail the path to an IPO, discuss some of the important steps along the way and highlight some of the detours or forks in the road.

Download a copy of the guide.

On November 9, 2017, the House of Representatives passed H.R. 2201, the Micro Offering Safe Harbor Act, by a vote of 232-188.  The bill proposes to amend the Securities Act of 1933 to exempt certain micro offerings from state regulation of securities offerings and federal limitations relating to interstate solicitation.  In order to qualify for the exemption, a micro offering must have a purchaser that has a substantive preexisting relationship with the issuer; no more than 35 purchasers relying on the exemption during the 12-month period preceding the transaction; and the amount of all securities sold by the issuer does not exceed $500,000, during the 12-month period preceding the transaction.  House Financial Services Committee Chairman Jeb Hensarling noted that this “…bill will help unlock seed capital for small businesses and startup companies.”

Today, to mark the opening of the Practising Law Institute’s 49th Annual Institute, SEC Chair Clayton gave a keynote address focused on governance and  transparency, which was a surprising direction since the program focuses heavily on capital formation.  In his remarks, Chair Clayton discussed the SEC’s rulemaking agenda.  He noted that the SEC’s near-term agenda will be more limited than in prior years.  In outlining key areas of attention, Chair Clayton discussed the proxy process and shareholder engagement.  He discussed the need to ensure that the voice of retail investors is heard.  This is unusual in that so many academic studies and popular press articles have discussed the extent to which there has been a significant decline in the percentage of public company stocks in pure retail hands.  To the extent that there is retail ownership it is disintermediated since ownership is indirect through ETFs or other managed investments.  In any event, Chair Clayton questioned whether the voting decisions made by funds are maximizing value for shareholders.  Chair Clayton also discussed enforcement initiatives and again focused on risks to retail investors–highlighting particular areas of concern such as fee disclosures, penny stock related fraud, and transaction processing issues (such as those that might facilitate microcap fraud).  Chair Clayton also touched briefly on ICOs offerings.  Here is a link to the full text of the remarks:
https://www.sec.gov/news/speech/speech-clayton-2017-11-08.

HR 1585, sponsored by Rep. Schweikart, titled The Fair Investment Opportunities for Professional Experts Act, passed the House by a voice vote.  This bill would amend the “accredited investor” definition to add persons, regardless of the net worth/net income test, holding certain financial services licenses as well as persons determined by the SEC to be financially sophisticated by virtue of education or job experience.

The House also passed the Meeks bill, HR 3903, Encouraging Public Offerings Act, about which we previously blogged, which would extend JOBS Act IPO-related accommodations, including the ability to test the waters, to all issuers.  HR 3903 passed 419-0.

November 8-10, 2017

The Roosevelt Hotel
45 East 45th Street
New York, NY 10017

PLI’s 49th Annual Institute on Securities Regulation will be composed of seasoned individuals from private practice, investment banking, accounting firms, corporations, and government agencies. These experts will put the developments of the past year into proper perspective, and prepare you for 2018 and beyond.

Partner Anna Pinedo will participate in a panel discussion entitled “Private Offerings and Public Offerings by Smaller Reporting Companies” on day one of the program. Topics will include:

  • General solicitation and private offerings under Rule 506;
  • Integration of private to private and private to public offerings – what will it take to fix the uncertainty?;
  • Regulation A and Crowdfunding – are they working and where do they work the best?; and
  • Public capital raising by smaller reporting companies – what’s on the reform agenda?

Senior Of Counsel Marty Dunn will participate in a panel discussion entitled “Securities Law Grab Bag: Your Frequent Questions Answered” on day two of the program. Topics will include:

  • Our answers and analysis for important securities and compliance questions;
  • Avoiding the pitfalls in the offering process;
  • Making the right disclosure decisions under common (and not so common) scenarios;
  • Approaching the compliance function: our best practice answers;
  • Frequent governance considerations and the best ways to handle them; and
  • Do we have to close the trading window?

PLI will provide CLE credit.

For more information, or to register, please click here.

In a departure from prior practice, this year’s SEC Government-Business Forum, an annual event typically held at the SEC’s offices in Washington, DC, will be held in partnership with the Herb Kelleher Center for Entrepreneurship, Growth, and Renewal at the McCombs School of Business at The University of Texas at Austin.  The Forum generally provides an opportunity for an engaged discussion on capital formation and other issues for smaller reporting companies.  See the release:  https://www.sec.gov/news/press-release/2017-197.