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to the smaller reporting company definition, finalizing certain proposed changes to Regulation S-K and S-X to remove outdated requirements, Industry Guide 3 changes for bank holding company disclosures, Regulation S-X related changes, and amendments to implement the recommendations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

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.

IFLR Webinar

With companies remaining private longer, their stockholder base often becomes more widely dispersed. More and more privately held companies are facing interesting challenges in communicating effectively with various stakeholders, without violating securities laws. Companies contemplating or undertaking an initial public offering face particularly acute issues as they try to establish effective communications approaches. Finally, public companies face Regulation FD and other regulatory requirements that may require that they map out a careful communications approach. During this session, we address the following:

  • Trends and developments in capital markets communications;
  • New modes of communication and engagement (e.g., social, digital);
  • Non-GAAP financial measures;
  • Navigating disclosure risks and requirements, including
    Regulation FD;
  • Assessing materiality and whether there is an obligation to disclose (and when);
  • Forward-looking statements, financial guidance and communicating with investment professionals, including analysts and rating agencies;
  • Competitive benchmarking and key metrics;
  • Optimizing value in an exit strategy, whether it is an IPO or an M&A exit; and
  • Best practices in public debt communications (as a private company).

Speakers:

  • Jeff Grossman
    Co-CEO, Solebury Communications Group
  • Scott Lesmes
    Partner, Morrison & Foerster LLP
  • Anna Pinedo
    Partner, Morrison & Foerster LLP

To view this complimentary webinar, please click here.

On December 4, 2017, the SEC approved the NYSE’s proposed amendment to Section 202.06 of the NYSE Listed Company Manual. The proposed amendment limits the issuance of material news by a listed company during the period of time from the official closing time of the NYSE’s trading session until the earlier of the publication of the company’s official closing price or five minutes after the NYSE’s official closing time. The NYSE originally issued the proposed amendment on August 17, 2017. For more information, see our prior blog post available here.

A copy of the SEC order approving the proposed rule change is available here.

Thursday, December 14, 2017
12:00 p.m. – 1:30 p.m. EST
5:00 p.m. – 6:30 p.m. GMT

With companies remaining private longer, their stockholder base often becomes more widely dispersed. More and more privately held companies are facing interesting challenges in communicating effectively with various stakeholders, without violating securities laws. Companies contemplating or undertaking an initial public offering face particularly acute issues as they try to establish effective communications approaches. Finally, public companies face Regulation FD and other regulatory requirements that may require that they map out a careful communications approach. During this session, we will address the following:

  • Trends and developments in capital markets communications;
  • New modes of communication and engagement (e.g., social, digital);
  • Non-GAAP financial measures;
  • Navigating disclosure risks and requirements, including Regulation FD;
  • Assessing materiality and whether there is an obligation to disclose (and when);
  • Forward-looking statements, financial guidance and communicating with investment professionals, including analysts and rating agencies;
  • Competitive benchmarking and key metrics;
  • Optimizing value in an exit strategy, whether it is an IPO or an M&A exit; and
  • Best practices in public debt communications (as a private company).

Speakers:

  • Jeff Grossman
    Co-CEO, Solebury Communications Group
  • Scott Lesmes
    Partner, Morrison & Foerster LLP
  • Anna Pinedo
    Partner, Morrison & Foerster LLP

Additional speakers to be announced.

CLE credit is pending for California and New York.

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

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 14, 2017, SEC Chief Accountant Wesley R. Bricker gave remarks before the Financial Executives International 36th Annual Current Financial Reporting Issues Conference: Effective Financial Reporting in a Period of Change. Mr. Bricker began his speech by discussing the SEC’s focus on maintaining fair capital markets and the far reaching impact of the SEC’s reporting requirements. Highlights of the speech include the following:

  • New GAAP Standards: Mr. Bricker highlighted new GAAP standards in the area of revenue, leases and financial instruments, and he indicated that the SEC Staff is available for consultation on the new standards.
    • The new revenue standard was first released in 2014 but is now in the final stage of implementation. Mr. Bricker stressed the importance of effective internal controls during this transition period. He also suggested that applications of the new standard should be supported by proper documentation.
    • The new lease standard will be effective in 2019 for calendar-year companies and will result in assets and liabilities being recorded for most leases. Both the revenue and lease standards require reasonable judgment in certain areas and Mr. Bricker noted that while not required, a best practice is for companies to commence efforts to implement the new leases standard concurrently (or partially concurrently) with the new revenue standard.
    • Finally, with respect to the credit loss standard, FASB’s goal was to improve the usefulness of financial instrument reporting for users of financial statements. To do this, FASB developed a credit loss model that results in timelier reporting of credit losses. Bricker expressed his support for the review by U.S. prudential regulators, called upon by the U.S. Treasury, with a view towards harmonizing the application of the credit loss standard with regulators’ supervisory efforts.
  • The Auditor’s Reporting Model: Mr. Bricker next discussed the SEC’s recent approval of a new PCAOB standard which will result in substantial changes to the independent auditor’s report. He explained that these changes stem from input received over the last seven years and that the changes were unanimously approved by the SEC. One such change is that beginning with auditors of fiscal years ending on or after June 30, 2019, reports on large accelerated filers will include communication about critical audit matters. This requirement will cause the auditor to provide his or her perspective on matters that were communicated with the audit committee and involve subjective or challenging cases of judgment. Mr. Bricker encouraged auditors to update their methodologies, provide training, and, at the engagement team level, use the transition period for the implementation of the new standard to engage in dialogue with audit committees so that audit committees have time to understand the types of matters that may be communicated as critical audit matters in the audit reports. Bricker also indicated that during the phased effective dates (audit reports with communication of critical audit matters will be required for large accelerated filers 18 months before being required for all others) the SEC Staff will review carefully the results of the post-implementation procedures and work with the PCAOB as it considers whether additional changes to the requirements are needed, including to the implementation date for non-large accelerated filers.

A copy of the speech is available at: https://www.sec.gov/news/speech/speech-bricker-2017-11-14.

During the recent PLI Seminar on Securities Regulation that took place in New York City on November 8-10, 2017, panelists briefly discussed the recent decisions by major index providers to change their index eligibility rules and limit the inclusion of companies with multi-class capital structures. For example, in July 2017, S&P issued a press release announcing a methodology change for multi-class shares following its consultation published on April 2017 (see our prior blog post available here). The panel noted, among other things, the concern that such actions may discourage private companies from going public and may impose costs on retail investors that can be avoided by larger investors.

On November 9, 2017, BlackRock issued a statement expressing its disagreement with index providers’ decisions to exclude certain companies from broad market indices due to governance concerns.  BlackRock noted that the benchmark indices should be as expansive and diverse as the underlying industries and economics whose performance they seek to capture.  BlackRock further noted that such exclusions may limit BlackRock’s index-based clients’ access to the investable universe of public companies and deprive them of opportunities for returns.  BlackRock, like many other critics, believe that it should be the role of regulators or stock exchanges, rather than index providers, to address the issue of unequal voting structures, including non-voting shares.  A copy of BlackRock’s statement may be found here.

A few days earlier on November 2, 2017, MSCI announced that it planned to broaden the consultation on the treatment of shares with no voting rights within the MSCI Equity Indexes, to include a discussion on the treatment of all types of unequal voting structures (the “Consultation”).  The Consultation follows an earlier consultation on a proposal to exclude non-voting shares from the MSCI Global Investable Market Indexes (GIMI) and MSCI US Equity Indexes in cases where the company level voting power is less than 25%.

MSCI also announced that it will temporarily treat any securities of companies exhibiting unequal voting structures as ineligible for addition to the MSCI ACQI IMI and MSCI US Investable Market 2500 Index.  Specifically, a security will be temporarily ineligible if it belongs to a company that has multiple classes of equity securities and that exhibits any of the following characteristics:

  • Shareholder voting rights are not proportionate to their economic interest
  • Any share class has restrictions on voting on agenda items
  • Voting rights for any share class are conditional upon certain events

The temporary treatment does not affect any current index constituents, and only applies to the potential additions of securities during regular Index Reviews as well as early inclusion of securities.  A summary of the temporary treatment may be found here.

This month, Deloitte & Touche LLP released its annual study on the Securities and Exchange’s (“SEC”) recent comment letters.  The 2017 study notes a decline in the overall number of SEC reviews with comment letters and in the number of SEC comments issued over the past several years.  In 2017, 1,491 comment letters were issued by the SEC, a 13% decline from 2016 and 54% decline over the prior five-year period.  The SEC has attributed this trend to the effectiveness and transparency of the review process and improved financial reporting by issuers.  The number of comments per review has also declined steadily over the five-year period, with 1.33 comments received on average by registrants, and only 20% of issuers receiving two or more comments in a review.

In the report, Deloitte identified the most frequently addressed areas in SEC comment letters:

  • Non-GAAP financial measures overtook MD&A as the top topic addressed in reviews with comment letters and overall comment letters issued by the SEC. 474 reviews with comment letters relating to non-GAAP measures accounted for 43% all reviews in 2017.  The number of comment letters on this topic represented a decline from the prior year, however, as registrants have revised annual disclosures to address prior SEC comments.
  • MD&A disclosures have continued to be a leading source of SEC comments (18% of all reviews in the past year), with a particular focus on uncertainties affecting results of operations, estimates in critical accounting policies, liquidity and capital resources, disclosure of contractual obligations, early-warning disclosures and income tax disclosure.
  • Additional topics heavily represented in SEC comment letters issued in 2017 include disclosures relating to fair value, segment reporting and revenue recognition.

Last, the report offered an analysis of the specific filing status and revenues of issuers who received SEC comment letters in recent years:

  • While large accelerated filers have consistently been subject to the most reviews with comment letters since 2013 (56%), large accelerated filers have only accounted for 29% of the filed 10-Ks over the same five year period.

Companies that have generated more revenue have received a disproportionately higher number of reviews with comment letters than companies generating less revenue.  Since 2013, on average, issuers generating $1 billion or more revenue accounted for 44% of the reviews with comment letters, although they only represented 21% of the filed Form 10-Ks eligible for review.