During the first quarter of 2020, venture funding levels in the global healthcare and life sciences sector has increased 4% by dollars raised, quarter-over-quarter, despite the turbulent COVID-19 environment. According to a recent CB Insights report, healthcare companies raised $14.6 billion this past quarter in 1,156 deals. Deal volume decreased 6% quarter-over-quarter. The inverse relationship between funding size and deal volume can likely be attributed to companies choosing to stay private longer and shifting to larger later-stage deals.

Source: CB Insights

Healthcare companies in North America raised $10.3 billion in venture funding, which included 25 “mega-rounds,” deals raising over $100 million, out of the United States, according to CB Insights data. A total of 664 private venture deals closed in the United States during the first quarter of 2020. Home to various innovative startups, Israel saw a total of 69 deals close in 2019 (excluding cross-border deals), with deal volume keeping steady in 2020 with 14 deals.

Within the healthcare and life sciences sector, telehealth and mental health startups provide critical services, as in-person health services are limited as a result of COVID-19 restrictions. According to CB Insights data, news mentions relating to telehealth startups have doubled from the last quarter in 2019 as companies broaden the list of services offered to include mental, behavioral, and physical health services during the pandemic. In the first quarter of 2020, a total of 103 deals by telehealth companies, raising $1.6 billion.  Mental health startups closed 44 deals, raising $576 million.

On May 20, 2020, the U.S. Senate unanimously approved  bipartisan legislation (the “bill”) that would amend Section 104 of the Sarbanes-Oxley Act of 2002.  The bill would require that Chinese companies that have a class of securities listed or quoted on stock exchanges in the United States could be delisted by such exchanges for, among other things, a failure to comply with the audit requirements of the Public Company Accounting Oversight Board (“PCAOB”) for three consecutive years and a failure to certify that these companies are not owned or controlled by a foreign government.

Although the bill could be applied to any non-U.S. company seeking to raise money from U.S. investors, lawmakers have been vocal that their initiative to strengthen disclosure requirements based on U.S. securities laws is aimed principally at Chinese entities, given the concerns raised by the Securities and Exchange Commission (“SEC”) and the PCAOB regarding access to and oversight of auditors and the quality of financial reporting.  We recently blogged about a joint statement to this effect made by SEC Chair Clayton and the SEC’s Chief Accountant, which echoed a consistent theme raised by US regulators.

The bill was passed amidst escalating tensions between the United States and China over trade tariffs, handling of the COVID-19 outbreak, cross-border investments and a perceived disregard of U.S. financial disclosure standards.

In order to move forward, legislation would still need to pass the U.S. House of Representatives.  In prior posts, we have blogged about bipartisan legislation that was introduced with substantially the same intent.

Not deterred by the pandemic, the Securities and Exchange Commission seems to be continuing its work tackling the items on the regulatory agenda.  Today, the SEC announced that adopted amendments to its requirements related to disclosures for acquisitions and dispositions.  We had previously blogged and written about these proposals.

The amendments affect Regulation S-X, including Rules 3-05, 3-14, 8-04, 8-05, 8-06, and Article 11, as well as other related rules and forms.  In its fact sheet, the SEC highlights a number of the most important elements of the amendments, which we will address in more detail in a forthcoming legal update.  Among the key elements of the amendments:

  • Changes to the significance tests in the “significant subsidiary” definition in Rule 1-02(w), Securities Act Rule 405, and Exchange Act Rule 12b-2 to improve their application and to assist registrants in making more meaningful determinations of whether a subsidiary or an acquired or disposed business is significant;
  • Changes to Article 11 of Regulation S-X, which relates to pro forma financial statement requirements;
  • Conforming, to the extent applicable, the significance threshold and tests for disposed businesses to those used for acquired businesses;
  • Modifying and enhancing the required disclosure for the aggregate effect of acquisitions for which financial statements are not required or are not yet required by eliminating historical financial statements for insignificant businesses and expanding the pro forma financial information to depict the aggregate effect in all material respects;
  • Requiring the financial statements of the acquired business to cover no more than the two most recent fiscal years;
  • Permitting disclosure of financial statements that omit certain expenses for certain acquisitions of a component of an entity; and
  • No longer requiring separate acquired business financial statements once the business has been included in the registrant’s post-acquisition financial statements for nine months or a complete fiscal year, depending on significance.

The amendments will be effective on January 1, 2021, but voluntary compliance will be permitted in advance of the effective date.  See the press release and fact sheet here.  The adopting release is available here.

The Securities and Exchange Commission will host the 39th annual Government-Business Forum on Small Business Capital Formation virtually on June 18, 2020.  The Forum will be live streamed.  It will focus on the challenges faced by small businesses in the current environment.  Sessions also will address women-owned, minority-owned, and rural businesses and their investors and potential paths for the next generation of publicly-owned companies.  The Forum will be hosted by the Office of the Advocate for Small Business Capital Formation and will take place over a half-day, beginning at noon ET.  The Forum will begin with a session highlighting perspectives and insights from thought leaders across the capital formation marketplace, followed by two consecutive sessions where participants will formulate capital formation policy recommendations for Congress and the SEC.

Additional information regarding the event and registration may be accessed here.

This Lexis Practice Advisor: First Analysis article discusses the final rule amendments adapted by the U.S. Securities and Exchange Commission (SEC) that modernize the offering related provisions of the Securities Act of 1933, as amended (the Securities Act), and the communications safe harbors available to business development companies (BDCs) and closed-end funds (CEFs), including interval funds but excluding open-end funds, exchange-traded funds and unit investment trusts. This article also discusses accompanying amendments to Form N-2. The SEC was required to undertake rulemaking with respect to BDC’s by the Small Business Credit Availability Act, and to undertake rulemaking with respect to CEFs by the Economic Growth, Regulatory Relief and Consumer Protection Act. The new rules will allow BDCs and CEFs to use the securities offering and communication rules that are already available to operating companies.

Read the full article here.

Tech companies at all growth stages are facing capital raising and operating challenges brought about by the global COVID-19 pandemic.  A recent CB Insights client briefing explored these novel business pressures.

To add some perspective, an analysis of earnings calls provided by CB Insights showed that the mentions of “layoffs,” “furloughs” and “hiring freezes” in earning transcripts are over twice as frequent as compared to earnings transcripts from the 2008 financial crisis. The word “unprecedented” has approximately 2,100 mentions in 2020 earnings reports, compared to about 1,000 in 2008. The term “remote work” and its variations appeared for the first time ever in earnings calls with over 1,600 mentions in 2020 so far.

Global Venture Funding Environment

Global private venture funding had a slight dip in numbers, quarter-over-quarter, with 1,271 transactions completed in the first quarter of 2020, raising $26.4 billion. In 2019, a record $109.7 billion was raised in private venture funding in 6,093 deals worldwide. During the SARS outbreak in 2004, deal volume in the Asian private markets dropped 18%, bouncing back in 2005 by 38%. Similarly, during the Zika virus outbreak in 2016, Latin American funding dipped 49%, recovering 404% following the Zika virus’ containment in 2017. While the COVID-19 environment has resulted in various short-term funding pressures for startups, analysts are hopeful 2021 will bring a similar recovery in funding levels.

Source: CB Insights

Opportunities for Startups

Startups have been presented a challenging opportunity to tackle cybersecurity, supply chain, and process automation solutions during the COVID-19 pandemic. As the world has shifted to a remote working setting, phishing and ransomware attacks have increased. Given the pressure to maintain secure virtual-working environments, CB Insights data shows an active private venture deal flow in the cybersecurity sector as startups attempt to fix these vulnerabilities. $2.2 billion was raised in 113 deals in the first quarter for 2020, on par with 2019 levels, which raised $2.5 billion across 179 deals.

The surge in demand for delivered products has added strain to supply chain networks, in addition to presenting public safety and health challenges. Media coverage relating to “supply chain” in association with the virus have increased exponentially from 65 mentions in January 2020 to 1,908 in April 2020, according to CB Insights. Deal volume by these supply chain and logistics tech startups reached a total of 225 deals in the first quarter of 2020, a increase over the 152 deals from the first quarter of 2019. However, funding levels dropped significantly to $3.5 billion from $7.8 billion, quarter-over-quarter.

Startups have also worked to alleviate bottlenecks via robotic process automation (“RPA”) for a variety of industries including healthcare and for financial services—specifically companies processing a high number of loan applications relating to the recent U.S. government stimulus package. The RPA sector is a relatively new tech sub-sector, however, an RPA startup has already reached unicorn status. The startup developed “bots” to streamline the loan origination process.

On May 14, 2020, the Securities and Exchange Commission (“SEC”) approved, with immediate effectiveness, a rule filing from the New York Stock Exchange (“NYSE”) granting temporary relief from the shareholder approval requirements under Section 312.03 and 303A.08 through June 30, 2020.  The relief is made available to any NYSE-listed company that would incur a material adverse impact relating to the COVID-19 pandemic in the event it is required to delay a transaction in order to secure the required shareholder approval under the applicable NYSE rules.  As we previously blogged, in order to be afforded relief, the company needs to demonstrate that the transaction is due to circumstances related to the COVID-19 pandemic and the company undertook a process designed to ensure that the transaction represents the best terms available to the company.  The audit committee, or another committee comprised solely of independent directors, must also expressly approve the company’s reliance on the exception and determine that the transaction is in the best interest of shareholders.  The SEC also granted relief from the NYSE’s requirement to obtain shareholder approval for certain issuances to officers, directors, employees or consultants as part of a transaction when such issuances could be considered a form of equity compensation.  The issuances to such parties must be specifically required by unaffiliated investors in the transaction, individually limited to less than 5% of the transaction and collectively limited to less than 10% of the transaction.  Importantly, any such party that participates must not have participated in negotiating the terms of the transaction.

Here is a link to the SEC’s approval.

The New York Stock Exchange has filed with the SEC a proposed rule filing to provide for temporary relief through June 30, 2020 from the application of certain shareholder approval requirements under Section 312.03 and 303A.08.  The proposed rules would provide NYSE-listed companies that have been negatively impacted by COVID-19 and that would like to raise capital additional flexibility.  Section 312.03(c) requires a NYSE-listed company that engages in a transaction other than a public offering for cash or a bona fide private financing meeting certain conditions to obtain shareholder approval prior to the issuance of common stock, or of securities convertible into or exercisable for common stock, that will have upon issuance, voting power equal to or in excess of 20% of the voting power outstanding before the issuance of such stock, or the number of shares of common stock to be issued is, or will be upon issuance, equal to or in excess of 20% of the number of shares of common stock outstanding before the issuance of the common stock.

The proposed Section 312.03T would be available where the delay in securing shareholder approval would have a material adverse impact on the company’s ability to maintain operations under its pre-COVID-19 business plan, result in workplace reductions, adversely impact the company’s ability to undertake new initiatives in response to COVID-19, or seriously jeopardize the financial viability of the enterprise.  A listed company also would have to demonstrate that the need for the transaction is due to circumstances related to COVID-19, that the proceeds will not be used to fund an acquisition, and the company undertook a process designed to ensure that the proposed transaction represents the best terms available to the company.  The audit committee, or another committee comprised solely of independent, disinterested directors, would have to expressly approve the company’s reliance on the exception and determine that the transaction is in the best interest of shareholders.  A supplemental listing application would have to be submitted to the NYSE together with a certification relating to the satisfaction of the conditions for the temporary relief.  The NYSE will review any application for reliance on the exception.

The issuer relying on the relief also would be required to make a public announcement on a Form 8-K no later than two business days before the issuance of the securities relating to the transaction, and disclosing the terms, that shareholder approval would ordinarily have been required, and that the audit or another independent committee had approved of the reliance on the exception.

The NYSE would also provide relief from Section 303A.08, which requires shareholder approval for certain sales to officers, directors, employees, or consultants when such issuances could be considered a form of equity compensation.  Temporary relief would be provided for affiliate participation not exceeding certain de minimis thresholds.

The NYSE will aggregate issuances of securities in reliance on the temporary relief with subsequent issuances other than public offerings for cash at a discount to the minimum price if the definitive agreement relating to such issuances is executed within 90 days of the prior issuance.

The proposed rule filing is available here.


On May 12, 2020, Steven Peikin, the Co-Director of the Securities and Exchange Commission’s Division of Enforcement (the “Division”), remotely presented a keynote address at the Securities Enforcement Forum summarizing actions that the Division has taken in connection with the COVID-19 pandemic.  Mr. Peikin emphasized that COVID-19-related enforcement matters are a top priority for the Division.  In particular, the Division’s primary focus has been on (i) actively monitoring trading activity around announcements made by issuers in industries particularly impacted by the COVID-19 pandemic and (ii) investigating disclosures, impairments or valuations that may attempt to disguise previously undisclosed problems or weaknesses as related to the COVID-19 pandemic.  The Division has developed a systematic process to review public filings from issuers in highly-impacted industries, with a focus on identifying disclosures that appear to significantly differ from others in the same industry.  Mr. Peikin urged companies to follow their disclosure controls and procedures to protect against the improper dissemination and use of material non-public information given the increased number of corporate insiders with access to, and the potential increased value of, such information given the current volatile market conditions.  Since February 7, 2020, the Division has suspended trading in the securities of more than 30 issuers as a result of questions about the adequacy and accuracy of COVID-19-related information.  A link to the full remarks can be found here.

As many parts of the United States begin to focus on recovering from the profound impact caused by the COVID-19 outbreak, businesses are looking to minimize the pandemic’s toll on their financial performance. Given the potential magnitude, borrowers and lenders alike should carefully consider the treatment of lost revenues resulting from the coronavirus under both the related credit documentation and applicable accounting rules before adjusting for such items in connection with the calculation of consolidated net income and EBITDA.

Read our full Legal Update here.