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).

Our recently updated Quick Guide to REIT IPOs provides an overview of the path to an initial public offering for a REIT. The guide also addresses regulatory, tax and accounting considerations relevant to sponsors considering forming a REIT.

To download a copy of the guide, click here.

Bill Hinman, Director of the Securities and Exchange Commission’s Division of Corporation Finance delivered the keynote address at the Practising Law Institute’s annual Securities Regulation in Europe program.  During his speech, Mr. Hinman touched on various topics, including the types of measures that may be undertaken in order to make the capital markets and the public company alternative more attractive.  He discussed the accommodations available to foreign private issuers (FPIs), as well as the Division’s policy changes extending the confidential submission process to companies other than emerging growth companies (EGCs).  Mr. Hinman noted that since adoption of the new policy in the summer of 2017, the Commission has received draft submissions for more than 20 IPOs of companies that exceed $1 billion in revenue or otherwise do not qualify to submit as EGCs, and from over 35 companies engaged in follow-on offerings.  Mr. Hinman also reiterated the willingness of the Division staff to review and consider requests made under Regulation S-X Rule 3-13 for accommodations relating to financial statement presentation.

Addressing future areas of focus, Mr. Hinman noted that the Staff is discussing ways in which internal processes, such as filing reviews and the consideration of no-action letter requests, as well as possible updates to the Financial Reporting Manual and the Compliance and Disclosure Interpretations in order to make these more user-friendly.  Turning to disclosure, Mr. Hinman noted that the Staff is considering whether additional guidance would be helpful regarding cybersecurity disclosure.  Mr. Hinman also provided some insight on future rulemaking.  He noted that the Staff is:

  • preparing recommendations for a proposal to implement the resource extraction issuer disclosure provision of the Dodd-Frank Act;
  • considering rulemaking to raise the threshold companies for smaller reporting company eligibility;
  • recommending final rules to update and simplify disclosure requirements that are outdated, or are overlapping or duplicative with other Commission rules or U.S. GAAP;
  • preparing recommendations for proposals to amend the rules for financial information required for acquired entities (Regulation S-X Rule 3-05), as well as Regulation S-X Rule 3-10 for disclosures by guarantors and issuers of guaranteed securities; and
  • developing recommendations for updating Industry Guide 3 to modernize the disclosure requirements for financial institutions.

The full text of Mr. Hinman’s remarks are available here:  https://www.sec.gov/news/speech/speech-hinman-020118.

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

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.

PwC recently released its 2017 Annual US Capital Markets Watch report.   The report notes a 77% increase from 2016 in the number of IPOs, with 181 IPOs completed in 2017, raising $44.2 billion in proceeds.  The average size of IPOs in 2017 was $244 million.

The pharmaceuticals and life sciences sector was the most active sector for IPOs in 2017 with 42 deals, raising $4.0 billion.  The special purpose acquisition company (SPAC) sector completed 33 IPOs, raising almost $9 billion.  While the technology, media and telecommunications (TMT) sector accounted for fewer IPOs than the previously mentioned sectors, the 33 IPOs raised $12.3 billion in 2017.

To read PwC’s full report, visit: https://goo.gl/RVKXfu

 

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.

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:

More Views on Dual Class Structures

Bernard S. Sharfman takes a contrarian view on non-voting and dual class share structures in his paper, “A Private Ordering Defense of a Company’s Right to Use Dual Class Share Structures in IPOs.”  Mr. Sharfman notes that private ordering results in investors that have considered the potential issues associated with limited voting rights but that conclude that there are wealth maximizing aspects associated with dual class share structures.

In “Nonvoting Shares and Efficient Corporate Governance,” author Dorothy Shapiro Lund presents an interesting theory that the use of nonvoting shares lowers the cost of capital for an issuer.  Lund notes that the shareholder base of U.S. public companies is principally institutional.  Institutional investors (other than passive funds) and founders are generally more motivated investors that value their votes.  Retail investors generally do not vote.  Nonvoting shares lessen agency costs by allocating voting rights to shareholders with the most incentive to maximize the company’s value.  For this and other reasons set out in the paper, the author argues that the backlash against nonvoting shares is misguided.