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.

In his remarks today, in addition to addressing initial coin offerings and blockchain related matters, Chair Clayton discussed the Securities and Exchange Commission’s remaining Dodd-Frank Act rulemaking mandates.  Chair Clayton identified four categories of rulemaking.  He noted that, with respect to the remaining security-based swap rules, the remaining rules are being considered holistically and harmonization with CFTC rules is under review.  The second category relates to executive compensation rules.  Chair Clayton notes that the Commission is likely to take a serial approach to completing the rest of the mandatory executive compensation rules.  The third category relates to specialized disclosure rules, and Chair Clayton focused his remarks on the resource extraction rules and the need to navigate the Congressional Review Act limitations.  The fourth category he identified relates to measures, such as clawbacks, which, Chair Clayton notes some companies already have taken steps to address.  Here is a link to the full transcript of the remarks:  https://www.sec.gov/news/speech/speech-clayton-012218.

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.









Practising Law Institute’s Exempt and Hybrid Securities Offerings is the first practical, accessible resource to provide you with comprehensive legal, regulatory, and procedural guidance regarding these increasingly popular offering methodologies.

Authored by Morrison & Foerster Partners Anna Pinedo and James Tanenbaum, the third edition of Exempt and Hybrid Securities Offerings gives you a useful understanding of the applicable regulations and legal framework for these transactions, as well as the implications of these regulations for structuring transactions.

The treatise provides a detailed analysis of the regulations and guidance affecting exempt and hybrid securities offerings, as well as offers market context and practical structuring advice. Packed with checklists, transactional timelines, SEC guidance, and a wealth of labor-saving sample documents, Exempt and Hybrid Securities Offerings offers the relative advantages and drawbacks of the most commonly used forms of exempt and hybrid offerings. It clearly explains:

  • conducting venture private placements;
  • traditional and structured PIPE transactions;
  • institutional (debt) private placements;
  • Rule 144A offerings;
  • Regulation S offerings;
  • Regulation A offerings and crowdfunding;
  • shelf takedowns;
  • registered direct and ATM offerings;
  • confidentially marketed public offerings; and
  • continuous issuance programs, including MTN and CP programs.

This comprehensive three-volume treatise, with useful forms, has been updated to reflect changes brought about by the Dodd-Frank Act, the JOBS Act, the FAST Act, and other recent regulatory changes.

For more information, please click here.

The SEC’s Division of Economic and Risk Analysis (DERA) recently produced a Report to Congress regarding the impacts of the Dodd-Frank Act on access to capital for consumers, investors, and businesses, and market liquidity.  Although the Report is principally focused on liquidity, it does provide some interesting statistics regarding the primary issuance of equity securities.

The Report notes that total capital formation from 2010 when the Dodd-Frank Act was enacted through year-end 2016 was approximately $20.2 trillion, of which $8.8 trillion was raised through registered offerings, and $11.38 trillion was raised in exempt offerings.  The report notes the substantial increase in reliance on exempt offerings.  Regulation D offerings have more than doubled since 2009.  However, the report notes that the amount sold in reliance on Rule 506(c) represented only 3% of the amount sold in reliance on Rule 506.  The average amounts raised in initial Rule 506(c) offerings is much smaller than the average amount reported sold in  Rule 506(b) offerings.  Rule 144A issuances remain stable.

The Report also provides data regarding Regulation A and crowdfunded offerings, and may be accessed here:  https://www.sec.gov/files/access-to-capital-and-market-liquidity-study-dera-2017.pdf.

On July 18, 2017, the House Subcommittee on Capital Markets, Securities and Investments held a hearing and heard testimony regarding the regulatory burdens facing public companies in the United States that may result in diminishing the appeal for privately held companies of undertaking an IPO.  The testimony focused principally on the requirements arising from the Sarbanes-Oxley Act, including auditor attestation, and the requirements arising from the Dodd-Frank Act.  Given that many private companies are less focused on disclosure burdens, it is a shame that almost all of the dialogue regarding the decline in the number of IPOs and the decline in the number of public companies in the United States has been limited to the same few themes.  Many private companies are more focused on other considerations, such as the availability of research coverage, liquidity in their stocks should they choose to become listed companies, short-termism and the pressures arising from the need to focus on each successive earnings announcement, litigation exposure, and a variety of issues that are broader than those considered by the witnesses.

Here is a link to the key takeaways:  https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=402173.

On June 8, 2017, the U.S. House of Representatives, by a vote mostly along party lines, approved a bill that would repeal many of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) requirements and significantly reduce the regulatory burden for financial institutions. If enacted in its current form, the Financial CHOICE Act of 2017 (the “CHOICE Act”) would also alter the regulatory landscape for business development companies (“BDCs”), investment companies and investment advisers. Among other things, the CHOICE Act would:

  • Loosen some restrictions on BDCs concerning leverage, preferred stock, proxy procedures and investments;
  • Tighten the burden of proof for plaintiffs suing investment advisers for breach of fiduciary duty;
  • Broaden the exemption from the definition of an “investment company” available to venture capital funds; and
  • Streamline the process for investment companies and investment advisers to obtain exemptive orders.

The CHOICE Act, which passed 233-186, was sent to the Senate for consideration on June 12, 2017. Here is a summary of key provisions of the CHOICE Act that affect BDCs, investment companies and investment advisers.

Read our client alert.

On June 8, 2017, the House passed H.R. 10, the Financial “CHOICE” Act with a vote of 233 to 186.  Introduced on April 27, 2017, the Financial CHOICE Act proposes to amend the Dodd-Frank Act to repeal the Volcker Rule, eliminate the FDIC’s orderly liquidation authority, and repeal certain limitations imposed by the Durbin Amendment.  The bill would also remove FSOC’s authority to designate non-bank financial institutions and financial market utilities as “systemically important” (also known as “too big to fail”).

Furthermore, in addition to the numerous amendments to the Consumer Financial Protection Act of 2010, the bill intends to (1) modify provisions related to the SEC’s managerial structure and enforcement authority; (2) eliminate the Office of Financial Research within the Department of the Treasury; and (3) revise provisions related to capital formation, insurance regulation, civil penalties for securities laws violations, and community financial institutions.

The bill would also repeal the Department of Labor’s fiduciary rule which, when fully implemented, significantly expands the categories of persons considered fiduciaries.  The DOL would be prohibited from adopting any similar rule until after the U.S. Securities and Exchange Commission (“SEC”) adopts a fiduciary standard for broker-dealers.

Chairman of the House Financial Services Committee, Jeb Hensarling, said in a statement after the passing of the bill: “We will make sure there is needed regulatory relief for our small banks and credit unions, because it’s our small banks and credit unions that lend to our small businesses that are the jobs engine of our economy and make sure the American dream is not a pipe dream.”

For a summary of current pending legislation relating to capital formation, click here.

On April 3, 2017, the District Court for the District of Columbia (the “District Court”) entered a final judgment (the “Final Judgment”) in the case of National Association of Manufacturers, et al., v. SEC. The Final Judgment affirms the prior holding of the U.S. Court of Appeals for the District of Columbia in National Association of Manufacturers that Exchange Act Section 13(p)(1) and Rule 13p-1 (together, the “Conflict Minerals Rule”) violate the First Amendment to the extent the Conflict Minerals Rule requires regulated entities to report to the SEC and to state on their websites that any of their products have “not been found to be DRC conflict free.” The Final Judgment solely sets aside the portion of the Conflict Minerals Rule that requires regulated entities to report to the SEC and make the website statements. The District Court remanded, in all other respects, to the SEC.

On April 7, 2017, the staff of the SEC’s Division of Corporation Finance (the “Staff”) issued guidance on the impact of the Final Judgment on the Conflict Minerals Rule (the “SEC Guidance”). The SEC Guidance seeks to reduce the uncertainty surrounding the Conflict Minerals Rule with regard to potential enforcement actions, given that the Final Judgment and the decision of the U.S. Court of Appeals in National Association of Manufacturers leaves open the question of whether the description of being “DRC conflict free” is required by statute, or instead, a product of the SEC’s rulemaking. The Staff explained that it will not recommend enforcement action to the SEC if companies (including those subject to paragraph (c) of Item 1.01 of Form SD) only file disclosure under the provisions of paragraphs (a) and (b) of Item 1.01 of Form SD. However, the Staff expressly noted that the SEC Guidance is still subject to any further action taken by the SEC and does not express any legal conclusion on the Conflict Minerals Rule itself.

The Final Judgement is available here.

The U.S. Court of Appeals for the District of Columbia in National Association of Manufacturers is available here.

The SEC Guidance is available here.

On March 28, 2017, the U.S. District Court for the District of Salt Lake City granted the SEC’s request for a preliminary injunction in SEC v. Traffic Monsoon, LLC.  The SEC’s complaint was brought in connection with Traffic Monsoon’s operation as a web traffic exchange, in which it sold several different products designed to deliver “clicks” or “visits” to the websites of its customers, which the SEC alleged violated Exchange Act Section 10(b) and Rule 10b-5.  In its argument against the SEC’s request for a preliminary injunction, Traffic Monsoon relied on Morrison v. Nat’l Australia Bank Ltd. to assert that Exchange Act Sections 10(b) and Section 17 do not authorize a U.S. district court to enjoin activity related to foreign transactions, claiming that approximately 90% of Traffic Monsoon’s customers purchased products over the internet while located outside the United States.  In Morrison, the Supreme Court replaced the longstanding “conduct and effects test” with the “transactional test,” holding that Section 10(b) and Rule 10b-5 could be applied only in connection with the purchase or sale of a security listed on an American stock exchange and the purchase or sale of any other security in the United States.

In Traffic Monsoon, the defendants claimed that notwithstanding the passage of Section 929P(b) of the Dodd-Frank Act, which reinstated the conduct and effects test that had been repudiated in Morrison, the SEC lacked jurisdiction in Traffic Monsoon in accordance with Morrison’s transactional test.  Section 929P(b) clarified, among other things, that U.S. district courts have jurisdiction over Exchange Act Section 10(b) and Section 17(a) actions brought by the SEC if the conduct and effects test has been satisfied.  However, the Traffic Monsoon court disagreed with the defendants’ claim, holding that the legal context in which Section 929P(b) was drafted, legislative history and express purpose of Section 929P(b) all point to a congressional intent that Section 10(b) and Section 17(a) should be applied to extraterritorial transactions to the extent that the conduct and effects test can be satisfied.  Using the conducts and effects test, the Traffic Monsoon court found that the SEC had jurisdiction to bring an injunction against the defendants, given that Traffic Monsoon was conceived and created in the United States, along with the promotion of its products.  This decision is notable because it represents the first time that a U.S. district court has affirmatively held that Section 929P(b) supersedes Morrison.  More importantly, it functions as a warning to issuers that their foreign activities may nevertheless be subject to liability under U.S. securities laws, even if other U.S. district courts have continued to use Morrison’s transactional test.

A copy of the Traffic Monsoon decision is available at:  http://static.reuters.com/resources/media/editorial/20170404/secvtrafficmonsoon–opinion.pdf.