Since the Jumpstart Our Business Startups (JOBS) Act was enacted in 2012, emerging growth companies (EGCs) have benefited from the opportunity to test the waters with investors and gauge interest in a potential offering. Title I of the JOBS Act amended Section 5 of the Securities Act of 1933 (the Securities Act) in order to provide that certain communications made by EGCs or persons acting on their behalf with institutional accredited investors and qualified institutional buyers (QIBs), either prior to or following the filing of a registration statement, would not constitute “gun jumping.”

Now, the US Securities and Exchange Commission (Commission) has proposed a new rule under the Securities Act that would extend the ability to test the waters to all issuers. This has been highly anticipated.

For more, read our Legal Update.

There are a number of legislative proposals making their way through the House and the Senate that would affect public reporting companies and are gathering some momentum, so they bear watching.  Here are a few highlights:

  • Diversity Disclosure Requirements:  H.R. 970, which has been reintroduced in the House of Representatives, titled the “Improving Corporate Governance Through Diversity Act,” would amend Section 13 of the Exchange Act in order to require each issuer that is required to file an annual report to disclose data on the racial, ethnic and gender composition of the board of directors and the C-level executives of the issuer.  C-level executives would include the most senior executive officer, information officer, technology officer, financial officer, compliance officer, or security officer of the issuer.
  • Rule 10b5-1 Plans:  We have previously blogged about this one, which has been in the news recently.  House Financial Services Committee Chair Waters and Congressman McHenry reintroduced legislation, “The Promoting Transparent Standards for Corporate Insiders,” H.R. 624, which would require the SEC to review Rule 10b5-1 and to study gaps in coverage, consider whether to limit trading to issuer-adopted trading windows, curb the use of multiple trading plans, mandate a delay between adoption of a plan and the first trade pursuant to the plan, restrict an insider’s ability to modify or cancel a plan, require companies and insiders to make certain filings with the SEC, and mandate that boards adopt policies to monitor compliance with trading plans. The SEC would be required to issue a report on its study one year following enactment of the measure and promptly undertake necessary rulemaking.  The Council of Institutional Investors has written to Waters and McHenry supporting H.R. 624.
  • Stock Buyback Bill(s)?  Senator Sanders has indicated he plans to introduce legislation that would limit stock buybacks unless companies provide more extensive benefits to workers, such as an increased minimum wage and paid sick leave as well as satisfy certain pay ratios.  The text of the legislation would appear to track bills introduced in prior sessions of Congress (see, for example, S. 3640 introduced in November 2018 in the Senate and a companion bill, H.R. 7145, introduced in the House also in November 2018) although it has not been made available.  There was a recent op-ed piece in The New York Times, co-authored by Senators Schumer and Sanders (see: https://www.nytimes.com/2019/02/03/opinion/chuck-schumer-bernie-sanders.html) relating to their views.  In the meantime, Senator Rubio has outlined plans on share buybacks as part of a more comprehensive paper published by the US Senate Committee on Small Business and Entrepreneurship.
  • Corporate Political Disclosures:  Representative Carbajal has introduced legislation, titled the Corporate Political Disclosure Act 2019 (H.R. 1053), which would mandate disclosure of a company’s political activities during the prior year in its annual report and on its Internet website, which must be accessible to shareholders and to the public.

The Securities and Exchange Commission took the long-awaited step of proposing rules for comment that would extend the ability to test the waters beyond emerging growth companies, or EGCs.  This topic, of extending the test the waters communications, had been the subject of proposed legislation in the last session of Congress and had made its way into the package of legislative reforms that were referred to as “JOBS Act 3.0.”

As proposed, test the waters would be available to all prospective issuers, not just EGCs. Proposed Securities Act Rule 163B would permit any issuer, or any person authorized to act on its behalf, to engage in oral or written communications with potential investors that are, or are reasonably believed to be, QIBs or IAIs, either prior to or following the filing of a registration statement, to determine whether such investors might have an interest in a contemplated registered securities offering. The proposed rule would be non-exclusive and an issuer could rely on other Securities Act communications rules or exemptions when determining how, when, and what to communicate related to a contemplated securities offering.  Under the proposed rule there would be no filing or legending requirements; test-the-waters communications may not conflict with material information in the related registration statement; and issuers subject to Regulation FD would need to consider whether any information in a test the waters communication would trigger disclosure obligations under Regulation FD or whether an exemption under Regulation FD would apply.

The proposal will have a 60-day public comment period following its publication in the Federal Register.  A Mayer Brown Legal Update will follow shortly.

US reporting companies that are planning or have completed a significant acquisition of a business may need to file separate target financial statements and related pro forma financial statements under Rule 3-05 and Article 11 of Regulation S-X.  The specific SEC rules and financial reporting obligations triggered by a significant acquisition can be quite complex and challenging, requiring careful evaluation by an acquiring company.  These rules may also impact the ability of registrants to access the capital markets in a timely fashion, affecting their ability to register or offer securities, including conducting a securities offering, the proceeds of which would be used to fund a significant acquisition or registering securities to be used as consideration for the acquisition.

This note discusses the SEC’s financial reporting and disclosure requirements triggered by a company’s significant business acquisition.  We outline key concepts and practice pointers to determine if and at what level an acquisition is significant, what and how many years of historical financial statements of the target are required to be included in the registrant’s SEC filing or offering document, what related pro forma financial information is required, when and how these target and pro forma financial statements are to be filed or updated, and relevant market practice considerations.

Read our On point.

Thursday, March 7, 2019
1:00 p.m. – 2:00 p.m. ET

During this webcast, we will review the overall areas of focus identified by the SEC Staff for public companies, the disclosure issues that members of the SEC Staff have highlighted as important for upcoming annual reports on Form 10-K and Form 20-F, and discuss the particular hot button issues for life sciences companies.

During our session, partners Anna Pinedo and David Bakst, and Polia Nair (Ernst & Young) will focus on:

  • SEC comments letter trends;
  • Brexit, Libor and cyber disclosures;
  • Recent accounting pronouncements;
  • Milestones and collaboration and license agreement related disclosures;
  • Revenue recognition and contingent consideration;
  • Other MD&A disclosures.

To register, please click here.

 

On February 6, 2019, the staff of the US Securities and Exchange Commission issued two identical Regulation S-K compliance and disclosure interpretations (C&DIs), which address the extent to which a director’s self-identified diversity characteristics need to be disclosed as director background or in connection with the discussion of a company’s policy with regard to the consideration of diversity in identifying director nominees. This Legal Update discusses the text of these C&DIs, along with related practical considerations.

To learn more, read our Legal Update.

In a recently published white paper Andrew Kroculick and Julia Brezing of Nasdaq Private Market provide an overview of the auction processes supported by the Nasdaq Private Market.  Auctions may be a useful alternative to the more traditional private tender offer.  Particularly given concerns related to information asymmetries, an auction or an auction-based component to a tender may offer some advantages.

Access the white paper here.

CBInsights recently held a webcast that offered a recap of 2018 events affecting the fintech sector. Global fintech investment reached a record at $39 billion in 2018. Venture-backed fintech deals declined in the fourth quarter of 2018 but remain high compared to historic levels. Early stage fintech deal share declined compared to 2017. There are now 39 fintech unicorns globally, valued in aggregate $147.37 billion. There were 16 fintech companies that joined the unicorn ranks in 2018. There were 52 fintech financing rounds that each raised in excess of $100 million. Only three fintech unicorns undertook IPOs in 2018. CBInsights identified ten fintech trends to watch in 2019. Outside of the United States, fintech startups are applying for bank charters. Fintech companies are continuing to strengthen their regulatory compliance efforts as regulatory scrutiny has increased. Fintech startups are providing access to new asset classes and fintech companies are becoming more entrenched in the real estate and mortgage markets. CBInsights predicts that mega-rounds will delay IPOs.

In a recent paper titled “Damage Control: Changes in Disclosure Tone After Financial Misconduct,” authors Rebecca L. Files, Alex Holcomb, Gerald S. Martin, and Paul Mason assess how companies change the tone of their required disclosures in order to mitigate the effect of financial misconduct. In evaluating tone, the study focuses on the percentage of negative, litigious, and uncertain words in corporate disclosures of 232 companies that were sanctioned by the US Securities and Exchange Commission or the Department of Justice. Following a review of disclosures, the authors found a substantial increase in the use of additional negative words in the periods during which the companies were facing regulatory inquiries or investigations and in the period following the announcement of an enforcement action. The authors also found that companies ultimately subject to an SEC or DOJ order generally used more negative words in their disclosures during the investigative phase. The authors posit that drafters of disclosure modify disclosure preemptively ahead of bad news in part as damage control. The paper also finds some evidence that increasing the use of negative language in disclosures mitigates lost reputation during the enforcement process.