On October 23, 2018, the Heritage Foundation hosted a discussion entitled, “Problems with the JOBS Act and How They Can Be Fixed” that featured University of Kentucky College of Law Professor Rutherford B. Campbell. The discussion centered on the impact of the 2012 Jumpstart Our Business Startups Act (the “JOBS Act”), its benefits, its shortcomings, and recommendations on how to address those shortcomings related to Titles II, III and IV.

The JOBS Act was enacted to reduce the regulatory burden on small businesses seeking to raise capital to launch or grow their business. Campbell praised Title II’s elimination of the prohibition against general solicitation and general advertising under Rule 506(c). However, he lamented that Rule 506(c) was still limited to sales to accredited investors. Campbell discussed Title III and argued that small businesses are simply not utilizing Regulation Crowdfunding. Campbell noted the mere $49 million in funds that was raised through Regulation Crowdfunding in 2017. He asserted that the limitations and concerns regarding integration “make no sense at all.” As an alternative, Campbell recommends a two-way regulatory integration safe harbor that allows for crowdfunding and permits traditional advertising while conducting a campaign. Additionally, Campbell recommends rethinking the periodic reporting requirement under Regulation Crowdfunding. By doing so, Campbell believes more small businesses will utilize Regulation Crowdfunding. Campbell then examined Regulation A+ under Title IV, noting there are still compliance, accounting and legal hindrances. As a solution, Campbell proposes federal preemption for Tier 1 offerings. Overall, Campbell advocates for the implementation of these recommendations to enhance the current regulatory framework for small business capital formation.

On October 31, 2018, the NYSE filed a proposed amendment to the Listed Company Manual to modify the price requirements for purposes of determining whether shareholder approval is required for certain issuances of securities.  These proposed amendments mirror the recent Nasdaq changes.  The new NYSE rule would replace the “market value” test with a new definition known as “Minimum Price.” The Minimum Price would be defined as the lower of (i) the closing price of the issuer’s common stock immediately before the execution of the transaction agreement and (ii) the average closing price of the issuer’s common stock during the five days immediately preceding the transaction agreement.  Under the proposal, shareholder approval would be required for transactions that are priced below the Minimum Price.  The NYSE proposal eliminates the requirement for shareholder approval of issuances at a price less than book value but greater than market value.  The proposed change aligns with Nasdaq’s recent amendment that eliminates “book value” in the determination of whether shareholder approval is needed.  A copy of the proposed NYSE rule can be found here.

November 19–20, 2018

Location
PLI New York Center
1177 Avenue of the Americas (2nd Floor)
New York, NY 10036

Partner Anna T. Pinedo will serve as co-chair for this program and will participate in a panel discussion titled, “Investment Banking Basics: Fundamentals of Capital Structures” on Day One of the conference. Topics will include:

  • Common financing alternatives — debt, equity and hybrids;
  • Sources of funding — public and private markets;
  • Liquidity — raising and deploying capital;
  • Finding the Optimal Capital Structure; and
  • Current marketplace developments.

PLI will provide CLE credit. For more information, or to register, please visit the event website.

On November 6, 2018, the NYSE proposed a rule change that conforms the definition of smaller reporting company (“SRC”) to the recent amendments made by the Securities and Exchange Commission (“SEC”) earlier this year. Under the SEC’s amendments a company with a public float of less than $250 million now qualifies as a SRC. Additionally, a company with no public float or with a public float of less than $700 million will qualify as an SRC if it had annual revenues of less than $100 million during its most recently completed fiscal year. The NYSE’s proposed rule change relates to the exemption from the compensation committee requirements applicable to SRCs. Under current NYSE rules, SRCs benefit from certain exemptions and are not required to comply with various compensation committee requirements. However, the current NYSE rule references the outdated SEC definition of SRC. The NYSE’s proposed rule aligns the amended definition of SRC by eliminating the $75 million threshold in the NYSE rule and follows the SEC’s recently amended definition. A copy of the proposed rule can be found here.

On October 30, 2018, the Financial Industry Regulatory Authority, Inc. (“FINRA”) filed a proposed rule change to amend FINRA Rule 5110 (Corporate Financing Rule – Underwriting Terms and Arrangements) (the “Rule”), which is the main FINRA rule regarding compensation in securities offerings, with the Securities and Exchange Commission (“SEC”).

The proposed Rule includes the following changes:

  • Decreases the number of documents required to be filed and increases the amount of time in which to file them;
  • Codifies the existing exemption for seasoned issuers and streamlines the filing requirement for shelf offerings;
  • Clarifies the exemption for corporate issuers and expands the list of exempt offerings;
  • Simplifies the underwriting compensation disclosure requirements;
  • Consolidates the various provisions relating to underwriting compensation into a single definition and provides for various review periods depending on the type of offering;
  • Expands the scope of the existing venture capital exceptions and creates a new exception for co-investments with certain regulated entities;
  • Clarifies the treatment of non-convertible or non-exchangeable debt securities and derivatives;
  • Provides for exceptions from the lock-up restrictions;
  • Clarifies and amends the list of prohibited and unreasonable underwriting terms and arrangements; and
  • Consolidates and clarifies the definitions related to the Rule.

The proposed Rule is currently under review by the SEC, and FINRA will announce the implementation date of the proposed rule change in a Regulatory Notice to be filed no later than 90 days following SEC approval. The implementation date will be no later than 180 days following the publication of such Regulatory Notice. To read our Legal Update on the proposed Rule, click here.

Wednesday, November 14, 2018
1:00 PM – 2:00 PM Eastern

During this webinar, we will explore the proposed Regulation Best Interest rule and related developments. Topics include:

  • Overview of the proposed regulation;
  • Principal areas of comment;
  • What we can anticipate in terms of timeline and process and what firms can do now;
  • FINRA’s proposed amendments to quantitative suitability; and
  • State fiduciary rules.

Wolters Kluwer will provide CLE credit. For more information, or to register for this session, please visit the event website.

At the Practising Law Institute’s Annual Institute on Securities Regulation, a number of updates were provided by the Staff regarding ongoing initiatives within the Office of Small Business.  The Staff reviewed the recently adopted amendments to the definition of “smaller reporting company” (SRC) and directed practitioners to its Small Entity Compliance Guide.  The Staff also noted that a number of Compliance & Disclosure Interpretations were recently updated to address changes brought about by the SRC amendments.  The C&DIs also were recently reorganized and are now grouped by category, making these much easier to navigate.  Below, we highlight a few of the C&DIs relating to SRC status:

Question 104.13
Question: An issuer files its 2019 Form 10-K using the disclosure permitted for smaller reporting companies under Regulation S-K. The cover page of the Form 10-K indicates that the issuer will no longer qualify to use the smaller reporting company disclosure for 2020 because its public float exceeded $250 million at the end of its second fiscal quarter in 2019. The issuer proposes to rely on General Instruction G(3) to incorporate by reference executive compensation and other disclosure required by Part III of Form 10-K into the 2019 Form 10-K from its definitive proxy statement to be filed not later than 120 days after its 2019 fiscal year end. May the issuer use smaller reporting company disclosure in this proxy statement, even though it does not qualify to use smaller reporting company disclosure for 2020?

Answer: Yes, because the issuer could have used the smaller reporting company disclosure for Part III of its 2019 Form 10-K if it had not used General Instruction G(3) to incorporate that information by reference from the definitive proxy statement. [November 7, 2018]

Question 102.01
Question: Could a company with a fiscal year ended December 31, 2018 be both a “smaller reporting company,” as defined in Item 10(f), and an “accelerated filer,” as defined in Rule 12b-2 under the Exchange Act, for filings due in 2019, if it was an accelerated filer with respect to filings due in 2018 and had a public float of $80 million on the last business day of its second fiscal quarter of 2018?

Answer: Yes. A company must look to the definitions of “smaller reporting company” and “accelerated filer” to determine if it qualifies as a smaller reporting company and non-accelerated filer for each year. This company will qualify as a smaller reporting company for filings due in 2019 because on the last business day of its second fiscal quarter of 2018 it had a public float below $250 million. However, because the company was an accelerated filer with respect to filings due in 2018, it is required to have less than $50 million in public float on the last business day of its second fiscal quarter in 2018 to exit accelerated filer status for filings due in 2019, as provided in paragraph (3)(ii) of the definition of “accelerated filer” in Rule 12b-2. This company had a public float of $80 million on the last business day of its second fiscal quarter of 2018, and therefore is unable to transition to non-accelerated filer status. As this example illustrates, a company can be both an accelerated filer and a smaller reporting company at the same time. Such a company may use the scaled disclosure rules for smaller reporting companies in its annual report on Form 10-K, but the report is due 75 days after the end of its fiscal year and must include the Sarbanes-Oxley Section 404 auditor attestation report described in Item 308(b) of Regulation S-K. [November 7, 2018]

Question 102.02
Question: Will a company that does not qualify as a smaller reporting company for filings due in a particular year be able to qualify as a smaller reporting company if its public float or annual revenues later decrease?

Answer: Once a reporting company determines that it does not qualify as a smaller reporting company, it will remain unqualified unless when making a subsequent annual determination either:

  • It determines that its public float is less than $200 million; or
  • It determines that:
    • for any threshold that it previously exceeded, it is below the subsequent annual determination threshold (public float of less than $560 million and annual revenues of less than $80 million); and
    • for any threshold that it previously met, it remains below the initial determination threshold (public float of less than $700 million or no public float and annual revenues of less than $100 million). See Amendments to the Smaller Reporting Company Definition – Compliance Guide for more information.

Example: A company has a December 31 fiscal year end. Its public float as of June 28, 2019 was $710 million and its annual revenues for the fiscal year ended December 31, 2018 were $90 million. It therefore does not qualify as a smaller reporting company. At the next determination date, June 30, 2020, it will remain unqualified unless it determines that its public float as of June 30, 2020 was less than $560 million and its annual revenues for the fiscal year ended December 31, 2019 remained less than $100 million. [November 7, 2018]

The Staff also provided some insights regarding reliance on exempt offering alternatives.  For the twelve months ended June 30, 2018, approximately $1.2 trillion was raised in Rule 506 offerings, of which nearly 97% was raised in reliance on Rule 506(b) offerings.  Most of this was attributable to offerings by funds, although operating company offerings accounted for approximately $175 billion.  The Staff has noted a slow but steady increase in the number of Rule 506(c) transactions.  Regulation A offering activity also has been robust.  For the three years from effectiveness of the amendments to Regulation A through September 30, 2018, there were 257 offerings qualified and nearly $1.3 billion raised in Regulation A offerings.  Real estate and REIT offerings account for the largest percentage of these transactions.  The Staff noted it is currently working on recommendations in order to implement the rulemaking mandate to make Regulation A available to reporting companies.  Finally, the Staff also is working on a review of exempt offering alternatives that would, among other things, seek to harmonize the requirements for various offering exemptions.

 

Tuesday, November 13, 2018
1:00 p.m. – 2:00 p.m. EDT

Please join Partner Jerry R. Marlatt and RBC Capital Markets’ Laura Drumm for this webinar as they discuss the covered bond market in the U.S., recent developments for Canadian covered bond issuers and the globalization of the asset class. Topics including:

  • Brief overview of covered bonds
  • Recent issuance activity in the US
  • Recent EU legislative initiatives related to covered bonds and the impact on non-EU issuers
  • Covered bonds vs. TLAC funding for Canadian banks
  • Where is US legislation?

PLI will provide CLE credit. For more information, or to register, please visit the event website.

The recently published PwC and CB Insights’ MoneyTree Report provides insights on financing trends through the third quarter of 2018.  In Q3 2018, U.S. companies raised $28 billion in venture financing despite a drop in number of deals in the most recent quarter.  The dollars raised in Q3 2018 reached in a two-year high, which is attributable to large financing for unicorns, including Peleton, WeWork and Uber.  The Internet and Healthcare sectors were the most active sectors.  Much of the Healthcare sector activity related to digital health fundraising, including transactions for Peleton as noted above, as well as transactions for Oscar Health, 23andMe, Essence Group Holdings and One Medical Group.  Among the largest deals completed in the quarter were transactions for autotech companies, Lucid Motors and Zoox. During the quarter, sixteen companies achieved Unicorn status, bringing the number of unicorns to 119.

On October 31, 2018, the US Securities and Exchange Commission issued a final rule to modernize required property disclosures for mining registrants. The requirements are currently set out in Item 102 of Regulation S-K and Industry Guide 7. This Legal Update discusses key points of the Final Rule as well as its practical implications.

Read our Legal Update here.