The Securities and Exchange Commission recently announced that the fees that registrants pay to register their securities with the SEC will increase from $147.60 per million dollars to $153.10 per million dollars, effective October 1. The new fee rate will be applicable to the registration of securities under Section 6(b) of the Securities Act of 1933, the repurchase of securities under Section 13(e) of the Securities Exchange Act of 1934, and proxy solicitations and specified tender offers under Section 14(g) of the Securities Exchange Act of 1934. See the Fee Rate Advisory.

On August 14, 2024, FINRA published an update (the “Update”) on its ongoing efforts to engage with its members related to crypto asset activities. The Update describes “crypto assets” as assets that are issued or transferred using distributed ledger or blockchain technology. They include, but are not limited to, so-called virtual currencies, coins, and tokens. A particular crypto asset may or may not meet the definition of a “security” under the federal securities laws.

As noted by FINRA, member firms’ crypto asset-related activities raise “challenges with various FINRA rules,” resulting in a host of potential rule violations. The following summarizes the Update.

For several years, FINRA has engaged with member firms in an effort to understand the extent to which they and their associated persons as well as their affiliates are involved in crypto asset-related activities. This includes the issuance of Regulatory Notices, repeatedly encouraging member firms to inform FINRA if they or their associated persons, or their affiliates, engage in, or intend to engage in, activities related to crypto assets (seeFINRA Regulatory Notices 18-20, 19-24, 20-23, and 21-25). FINRA’s most recent effort was the issuance in 2023 of a crypto asset questionnaire to approximately 600 member firms.

According to FINRA, among the member firms with crypto asset activities and touch points, more than one third are involved in retail brokerage (36%). The next largest groupings are member firms involved in trading and execution (21%), followed by capital markets (20%). The following activities are performed by member firms: acting as placement agents, wholesalers, or distributors of private placements of crypto assets or companies involved in crypto asset activities; operating alternative trading systems to facilitate trading in crypto asset securities; facilitating customer crypto asset trading and custody services through affiliates or third parties; engaging in distributed ledger technology initiatives or test cases to enable transactions executed or executed and settled on permissioned blockchains; and introducing institutional customers to third-party crypto asset custodians as well as crypto asset-related investment banking and advisory services for companies in crypto asset-related activities.

FINRA also identified member firms (or their parent companies or affiliates) with strategic partnerships or arrangements with companies engaged in crypto asset-related activities, including with respect to providing access to crypto asset trading and custodial services, creating training and educational materials, and utilizing distributed ledger technology for certain types of transactions (e.g., repurchase and reverse repurchase transactions). Parent or affiliate companies of member firms are engaged in a broad variety of activities across multiple disciplines as outlined in the Update.

FINRA provided a non-exhaustive list of certain potential violations involving crypto asset-related activities that FINRA has observed in its regulatory programs, including the following examples:

  • Misrepresentations of the extent to which the federal securities laws or FINRA rules apply to crypto asset-related activities (FINRA Rule 2210);
  • Failures to complete reasonable due diligence on crypto asset private placements and failures to engage in effective supervision designed to monitor crypto asset activities (FINRA Rule 3110);
  • Failures related to the disclosure of crypto asset outside business activities (“OBAs”) and the approval and supervision of private securities transactions (“PSTs”) (FINRA Rules 3270, 3280 and 3110);
  • Failures to establish AML programs reasonably designed to detect and cause the reporting of suspicious transactions in crypto assets conducted or attempted by, at or through the broker-dealer (FINRA Rule 3310);
  • Failures by associated persons to provide records on crypto asset-related OBAs and PSTs (FINRA Rule 8210); and
  • Findings of FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade) violations related to, for example, a member firm and associated person negligently causing the dissemination of promotional materials that the member firm or associated person should have known contained material misstatements and omitting material facts related to the member firm’s crypto asset business.

With respect to market surveillance, FINRA has identified potential situations in which individuals seek to take advantage of investor interest in crypto assets and blockchain technology to perpetrate pump-and-dump schemes and other forms of market abuse in the equity markets. FINRA has also noted potential market abuse involving crypto asset securities traded on registered ATSs.

Additional compliance risks and considerations were identified by FINRA in the Crypto Asset Developments section of the 2024 FINRA Annual Regulatory Oversight Report.

FINRA member firms should monitor and assess the extent of their (and their associated persons’ and affiliates’) crypto asset activities, and review the reasonableness of their compliance policies and supervisory procedures in relevant areas. Firms also should expect continued scrutiny and updates from FINRA in response to developments related to crypto assets.

Earlier this month, the Southern District of New York issued its final ruling and remedies order in Securities and Exchange Commission v. Ripple Labs, Inc. Judge Analisa Torres found that the SEC failed to show that any investor was harmed by Ripple’s sales of the crypto asset XRP, rejecting the SEC’s disgorgement theory.

The court assessed a civil monetary penalty of approximately $125 million against Ripple, which the court calculated by applying a transaction-by-transaction approach, resulting in a penalty that is significantly lower than the SEC’s approximate $876 million fine.

The court issued an injunction barring Ripple from future violations of Section 5 of the Securities Act. The SEC had alleged that Ripple’s sales of XRP constituted the unlawful offer and sale of securities in violation of Section 5. The SEC also alleged that certain Ripple executives aided and abetted Ripple’s Section 5 violations. This part of the judgment relates to the institutional sales of XRP to hedge funds and other institutional buyers (as opposed to Ripple’s sales of XRP on digital asset exchanges, which were not found to be “investment contracts” and therefore also not “securities”). As a result, this prohibition applies to Ripple’s institutional sales unless such offers and sales are made pursuant to a valid exemption or are registered pursuant to the Securities Act. The retail sales on secondary markets were determined not to constitute securities transactions.

The court also rejected Ripple’s request to waive the “bad actor disqualification,” which prevents Ripple from relying on the Regulation D exemption for its securities offerings for a period of five years.

We expect the ruling to be appealed, maybe before the U.S. Court of Appeals for the Second Circuit.

The Securities and Exchange Commission adopted Rule 3c-7, which adjusts for inflation the dollar threshold used in defining a “qualifying venture capital fund” under the Investment Company Act, as required pursuant to Section 504 of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (“EGRRCPA”).  The final rule allows the SEC to adjust the threshold for inflation by order every five years and sets out how to determine these adjustments.

Section 3(a) of the Investment Company Act defines the term “investment company” for purposes of the Investment Company Act.  Section 3(c)(1) provides certain exclusions from that definition.  Section 504 of the EGRRCPA amended Section 3(c)(1) by excluding qualifying venture capital funds from the investment company definition and adds Section 3(c)(1)(C) defining a “qualifying venture capital fund,” as a “venture capital fund that has not more than $10,000,000 in aggregate capital contributions and uncalled committed capital.”  The statutory definition requires this dollar threshold to be indexed for inflation once every five years by the SEC beginning from a measurement made by the SEC on a date selected by the SEC.  In February 2024, the SEC proposed a new rule to implement these requirements and adjust the threshold.

The final rule uses December 2023 as the current measurement date, adjusts the dollar threshold to $12 million or, following November 2029 (five years from the rule’s effective date), the dollar amount specified in the most recent order issued by the SEC in accordance with the final rule.  The SEC will use the Personal Consumption Expenditures Chain-Type Price Index, or PCE Index, as the indicator of inflation going forward.  The final rule will become effective 30 days after publication in the Federal Register.

See the press release, and the final rule.

September 4, 2024
9:00am – 5:00pm ET

Practising Law Insitutue (PLI) will host the 10th Annual Alternative Finance Summit: Fintech, Blockchain, and Crowdfunding program.

Mayer Brown partner Anna Pinedo will participate in a discussion on the “Securities Offering and Private Placement Developments” panel.  

See the event webpage for information on the program and the session.

On July 31, 2024, the Securities and Exchange Commission (“SEC”) announced that it agreed to settle allegations that a California-based broker-dealer sold in excess of $13 million in “L bonds,” a speculative, unrated debt security, to retail customers with lower risk profiles.  The settlement of this case is notable because it was the SEC’s first enforcement action claiming violations by a broker-dealer of Regulation Best Interest (“Reg BI”).  In a motion for entry of final judgments by consent (the “Motion”), the SEC said that the broker-dealer and five of its registered representatives (collectively, “Defendants”) agreed to pay over $327,000 to settle the case, which is pending court approval to be finalized.  The Motion can be accessed here.

The SEC first sued the Defendants in June 2022, alleging that over a period from July 2020 through April 2021, the Defendants recommended and sold an aggregate of $13.3 million in L bonds to retail customers with “moderate risk tolerances” despite the marketing material for the bonds stating that the securities were “high-risk” and suitable only for customers with substantial financial resources.

In its complaint, the SEC alleged that the Defendants failed to comply with Reg BI’s “care obligation,” which provides that broker-dealers and their associated persons must exercise reasonable diligence, care, and skill in recommending any securities transaction or investment strategy involving securities to retail customers.  Additionally, the SEC alleged the Defendant broker-dealer failed to comply with Reg BI’s “compliance obligation” because it did not sufficiently establish, maintain and enforce written policies and procedures reasonably designed to achieve compliance with Reg BI.  The full allegations set forth in the SEC’s complaint can be found here.

In a separate action brought by the Financial Industry Regulatory Authority, Inc. (“FINRA”), the Defendant broker-dealer agreed to pay over $1.5 million to settle allegations that it failed to adequately monitor potentially excessive trading in approximately 100 accounts.  Details of the FINRA settlement can be accessed here.

Broker-dealers should continue to monitor carefully developments relating to Reg BI and ensure that they have policies and procedures reasonably designed to comply with Reg BI’s requirements.  Compliance with Reg BI has been an enforcement priority of both the SEC and FINRA since the regulation became effective in June 2020, and both regulators will continue to bring enforcement actions in connection with violations of Reg BI.

The Director of the SEC’s Division of Corporation Finance (the “Division”), Erik Gerding, shared his views on the state of public company disclosures during 2023 and the SEC Staff’s review priorities for 2024.  The statements were made in April 2024 at the Practicing Law Institute’s 2024 The SEC Speaks Conference and were recently published in full on the SEC’s website.  The Director noted that in 2023, the emerging areas of focus for the Division Staff included market disruptions in the banking industry, cybersecurity risks, the impact of inflation, and disclosures related to newly adopted rules, such as pay versus performance.  In 2024, Director Gerding anticipates that the Division Staff will continue to closely monitor disclosures by companies based in the People’s Republic of China (“China-Based Companies”) in addition to new disclosure priorities such as artificial intelligence (“AI”) and potential exposure due to changes in the commercial real estate (“CRE”) market. 

The Division conducts an annual report review program to monitor and enhance compliance with disclosure rules and accounting requirements filed by public companies. Consistent with prior years, some of the top areas of comment for 2023 included financial reporting topics, especially relating to areas that involve judgment or as to which the Financial Accounting Standards Board or the International Accounting Standards Board have recently issued accounting standards.  These areas included segment reporting, including compliance with new U.S. GAAP disclosures effective in annual periods beginning after December 15, 2023; compliance with rules related to the use of non-GAAP financial measures; critical accounting estimates disclosures in MD&A; and disclosures related to supplier finance programs in the notes to the financial statements and any related information related to these arrangements included in MD&A.

The Director anticipates that many of the disclosure priorities from 2023 will continue through 2024 and the following year.  For example, the Division expects to continue its focus on China-Based Companies and seek to elicit disclosure from companies regarding any material risks they face in connection with the PRC government intervening in, or exercising control over, their operations in the PRC.  The Director warned that, while inflation concerns may be diminishing, it is not the time to revert to boilerplate disclosures.  The Director reminded the audience that any material ongoing impacts should be disclosed, and that the Division asks companies not just to note high level trends but also to discuss the more particularized risks and impacts on the specific company.  Finally, given the market disruptions in the banking industry stemming from the collapse of Silicon Valley Bank, the Director noted that the Division will continue to take a careful look at updated disclosures related to interest rate risk and liquidity risk for financial institutions.

Emerging areas of focus for the Division Staff include disclosures related to AI and potential exposure due to changes in the CRE market.  As companies increasingly incorporate AI into their operations, the SEC will be focusing on how companies define and tailor their disclosures commensurate to the risks and impacts of utilizing AI technology on the company’s operations, as opposed to utilizing boilerplate or “generic buzz” disclosures. Similarly, the Division Staff encourages companies with CRE exposure to provide more granular information where possible to improve investors’ understanding of the material risks inherent in the company’s CRE or other loan portfolios and any mitigating steps they are taking to address those risks. The SEC Staff is also tracking how companies are navigating the disclosure requirements resulting from newly adopted rules including those relating to clawbacks, SPACs, and cybersecurity.  Read Director Gerding’s full remarks.

Based on data in Carta’s recently published State of the Markets report, the venture markets have experienced a slight uptick in number of deals and in dollars raised quarter-over-quarter.  Companies on Carta’s platform completed 4% more deals and raised 12% more capital during the second quarter of 2024 compared to the first quarter.  During the first half of 2024, venture capital funds invested a total of $39.6 billion in 2,525 deals.  Compared to the second half of 2023, investments increased by 5%, but deal volume declined 18%.  While those numbers may not sound remarkable, they may signal positive direction for the venture market.

Down-rounds fell to a six-quarter low, with down-rounds accounting for 17.4%, compared to 24.2% in the first quarter of 2024.  The number of seed stage deals declined by 2%, Series A deal count increased 16% and Series B deal count increased 5% quarter-over-quarter.  The number of Series C deals declined by 7%, while later-stage Series D deals increased notably, by 35%.  Early-stage rounds accounted for 29% of capital raised, Series B and C rounds accounted for 46% of funding, and late-stage deals accounted for 25% of capital raised.

Data source: Carta

Carta reports that overtly investor-friendly terms in financing rounds have become less prevalent since 2020 for both primary rounds and bridge rounds.  For example, deals with participating preferred stock have declined from 8.6% to 5.1%.  Deals that incorporate cumulative dividends have declined from 8.2% and 3.3%.  The terms of preferred stock in recent transactions also have experienced some change—with the incidence of transactions incorporating a liquidation preference of over 1x declining, with approximately 6% of deals including these terms at the beginning of 2023 and now only 3.7% of deals incorporating such terms.  Bridge rounds tell a similar story as far as participating preferred stock and cumulative dividend terms.  With these modest moves back toward what many founders consider “normal” terms, it is likely that additional founders and companies will seek venture funding from traditional venture funds, leading to an uptick in market activity.

Source: Carta

The decline in median pre-money valuations has slowed since the beginning of 2022 compared to the decline in total deal volume, particularly in early-stage rounds. In the second quarter of 2024, seed valuations surpassed levels in the first quarter of 2022, increasing by 2%.  Valuations at post-seed stages are generally moving up but have yet to reach their 2022 levels.

Whether your interest in the venture market stems from investing or innovative companies, a robust market is welcome and creates additional opportunities.  When the economy slows or other uncertainties affect decisions (think inflation, war, elections), many players in the market just slow down to wait for issues to become clear.  This is normal risk-avoidance behavior, but it tends to take the “venture” out of the venture capital world and slow everything down.  We welcome the signs of an upswing.

September 18, 2024
8:30 a.m. – 9:30 a.m. EDT
Mayer Brown LLP 14th Floor, 1221 Avenue of the Americas, New York, NY 10020

Join us for this in-person CLE on September 18, 2024.

We will discuss the following, among other issues:

  • An overview of Reg M, specifically, Rules 101 and 102
  • An overview of the SEC’s Reg M amendments, including new exceptions
  • Reg M’s new record-keeping obligations under the Exchange Act
  • Reg M reporting obligations under FINRA Rule 5190 and when these are triggered
  • Related market developments

This is an in-person presentation, with CLE credit, intended to encourage discussion. There will be no recording, and no zoom or hybrid option available.

Breakfast will be served.

Please email ckaplan@mayerbrown.com to register.

Fintech Capital Raising Trends in 2024

Global capital raising in the fintech sector rose 19% quarter over quarter, while deal volume declined 16%, signaling that investors remain cautious, according to CB Insights’ State of Fintech quarterly report.  U.S. fintech deals raised $4.8 billion in 324 deals.  CB Insights’ report discusses financing, exit, and other trends in the fintech sector.  Below we highlight notable trends.

Late-stage deals

Despite this overall investor caution, investors showed more confidence in late-stage companies than they had in the prior two years.  Late-stage deals accounted for 20% of global deal share in Q2 2024, up from 18% in 2023.  Late-stage rounds make up 27% and 35% of the payments and lending subsectors, respectively, of deals year to date (YTD).  In the United States, late-stage deals accounted for 7% of overall deals.

Mega rounds and unicorns

Two late-stage fintech “mega-rounds,” Stripe’s $684 million Series I and AlphaSense’s $650 million Series F, accounted for 15% of overall global funding in Q2 2024.  U.S. deals represented $2.4 billion of mega-round funding.  There have been 27 mega-rounds in 2024, which raised $4.2 billion.  There are now 329 fintech unicorns globally, with nine new unicorn “births” in 2024.  Of the 329 fintech unicorns, 171 are U.S.-based.

Exits

With the IPO market still on a recovery trajectory, fintech companies have completed 12 IPOs and two SPAC mergers globally in 2024.  The U.S. market accounts for only three of these IPOs and no SPAC merger.  The top two IPOs of Q2 2024 include Ibotta’s $2.7 billion U.S. IPO and the $973 million Saudi IPO by Rasan. Global M&A activity has increased slightly, with 312 transactions completed in 2024, including 112 M&A transactions in the United States.

Fintech Subsector Funding

Payments companies raised $3.4 billion in 178 deals in 2024, with an average deal size of $15.8 million.  As noted above, Stripe raised $684 million in a Series I round.  The next largest payments company rounds include Ramp’s $150 million Series D round and Guesty’s $130 million Series F round—both U.S. companies.  Globally, there have been two IPOs, one SPAC merger, and 25 M&A transactions completed by payments companies.

Digital lending companies have raised $1.5 billion in 138 deals in 2024, with an average deal size of $11.7 million. The largest Q2 2024 digital lending deals were all undertaken by non-U.S. companies and include India-based Fibe’s $66 million Series E round, UK-based Colendi’s $65 million Series B round, and Canada-based Brim’s $63 million Series C round. Digital lending companies have completed 12 M&A transactions and one SPAC merger in 2024.

Insurtech companies have raised $2.1 billion across 195 deals in 2024, with an average deal size of $13.2 million. U.S.-based Sidecar Health raised $165 million in its Series D, making it the top equity insurtech deal in Q2 2024. Two IPOs and 20 M&A transactions have been completed by insurtech companies.