The Securities and Exchange Commission’s Division of Economic Risk Analysis (DERA) recently published the first Economic and Risk Outlook. The release coincided with the SEC’s December 4, 2019 conference on the State of the Securities Markets. The report addresses a number of macroeconomic indicators. The report notes elevated borrowing offset by positive economic growth, high asset values, and low interest rates, which have kept debt service burdens within normal historical ranges. The analysis of the inverted yield curve may point to an upcoming economic downturn; however, the report cites countervailing factors that may be altering the historic correlation between an inverted yield curve and a recession.

The report includes a number of statistics and observations regarding the IPO market. The report attributes increased IPO activity to elevated valuations (based on an assessment of enterprise value/EBITDA).

The increase in IPO activity in recent quarters, led by technology companies, has led to the largest single quarter (second quarter 2019) of IPO origination in the last five years.

The Securities and Exchange Commission released the report from the August 2019 Government-Business Forum on Small Business Capital Formation. The Annual Forum provides an opportunity for market participants to meet and discuss concerns regarding the regulatory framework affecting capital formation for small businesses, including smaller reporting companies and mid-cap companies. Each year, the recommendations included in the report from the Forum are considered by the SEC in its rulemaking process.

The report sets forth the recommendations by type of company. In the context of small, emerging businesses, the principal recommendations, in order of priority, were for the SEC to: revise the accredited investor definition to add a sophistication test to the natural person prong, which would be in addition to the net worth and net income thresholds, as an alternative means of qualification; clarify and simplify the exempt offering rules; review the SEC and FINRA rules relating to finders; expand access to private placements through new or alternative investment vehicles in which non-accredited investors would be able to participate; revise Regulation Crowdfunding in order to allow accredited investors to make unlimited investments and to raise the overall offering threshold. For mature and later stage private companies, the attendees recommended that the SEC: provide federal preemption for all resales of securities sold in a Tier 2 Regulation A offering provided that the issuer is current in its reporting obligations; address the rules relating to finders; provide Investment Company Act exemptions for diversified funds selling securities under Regulation Crowdfunding, Regulation A, and Regulation D; provide a new offering exemption for investments of less than $25,000 for up to 35 non-accredited investors subject to certain disclosure requirements. For small reporting companies, the attendees recommended that the SEC: reform the rules governing the proxy process; increase the disclosure requirements for holdings of public company securities by, among other things, mandating disclosure of short interests and modifying the Section 13 reporting rules; align the definition of non-accelerated filer with the definition of smaller reporting company; and require additional disclosures from promoters and modernize transfer agent regulation.

The Securities and Exchange Commission announced the agenda for the December 11, 2019 meeting of the Small Business Capital Formation Advisory Committee. The Committee will continue to focus on topics raised in the SEC’s Harmonization Concept Release, which requested comment on the current framework for exempt offerings, and will seek to develop potential recommendations to the SEC. The meeting is open to the public.

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On November 26, 2019, the New York Stock Exchange (“NYSE”) filed with the Securities and Exchange Commission (“SEC”) a proposed rule change that would allow companies to simultaneously go public through a direct listing and raise cash from public market investors as an alternative to a traditional initial public offering. The proposed change would allow a company that has not previously had its shares registered under the Securities Act to list its shares on the NYSE at the time of effectiveness of a registration statement pursuant to which the company will sell shares in the opening auction on the first day of trading on the NYSE. In the recent past, companies with sufficient capital (such as Spotify and Slack) have opted to pursue a direct listing in order to provide their existing shareholders with liquidity without issuing new shares. The NYSE’s proposed rule change seeks to incorporate an option to raise capital into the existing direct listing alternative and provide companies with a new pathway to access public markets. The proposed rule change is now subject to public comment and the SEC’s review. A copy of the proposed rule change is available here.

Date: December 10, 2019
1:00pm – 2:00pm ET

This webinar will look at corporate transaction market evolution in 2019 using data and Bloomberg Law analysis. The speakers will cover an overview of key market trends, such as increased scrutiny on national security issues, and examine some drafting trends related to current events, including #MeToo and Brexit. Attendees will also hear from expert practitioners on how these and other trends and issues can affect deal structures and agreement terms across sectors.

For additional information, or to register for the webinar, please visit the event site.

CBInsights recently published its Global Fintech Report for the third quarter of 2019. For 2019, global fintech funding totaled $24.6 billion through the third quarter of 2019, which is still a decline from 2018. Global venture-backed fintech deals rebounded during the quarter in the United States but remain at a three-year low. Globally there are 58 fintech unicorns that are in aggregate valued at $213.5 billion. Of these, 33 are in the United States. Asia fintech venture-backed equity funding totaled $1.8 billion across 152 deals in third quarter 2019. North America fintech venture-backed equity funding totaled $4.3 billion across 182 deals. There were 10 mega-round investments completed in the third quarter 2019 for a total of $1.9 billion. There were two companies that became unicorns during the quarter, an insurer, Hippo, and a working capital lender, C2FO. Europe fintech venture-backed equity funding totaled $1.7 billion across 90 deals.

In this Lexis Practice Advisor Practice Note, we discuss two releases published by the Securities and Exchange Commission (SEC) on August 21, 2019. One release contains interpretation and guidance regarding the applicability of certain rules (Proxy Voting Advice Guidance) promulgated under Section 14 of the Securities Exchange Act of 1934, as amended to proxy voting advice. The other, which technically is a “policy statement,” provides guidance on the proxy voting responsibilities of investment advisers (Investment Adviser Guidance) under the Investment Advisers Act of 1940, as amended.  As both sets of guidance will be effective upon publication in the Federal Register, both sets will apply to the 2020 proxy season.

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The Securities and Exchange Commission announced that it will host a conference on December 4, 2019 entitled “The State of Our Securities Markets.” The conference includes representatives from various government agencies, as well as private sector representatives. Areas of focus at the conference will include global macroeconomic trends—and their impacts on our capital markets; changes to the global equity and credit markets—including how today’s markets differ from those of the early 2000s and market concentration and fragmentation within certain areas of the securities markets, including relevant causes and potential risks and effects. The panel on equity and debt capital markets is slated to discuss changes to the global equity and credit markets, including how today’s markets differ from those of the early 2000s, and the dynamics, trends, and risks shaping tomorrow’s markets, including corporate debt levels and high yield debt, CLOs, the impact of economic growth slowdown in the U.S. and Europe, dynamics in China and Asia, bank risk, and relevant regulation. The program will be webcast. See details here.

In this Lexis Practice Advisor Practice Note, we discuss new Rule 163B adopted by the US Securities and Exchange Commission (SEC). On September 26, 2019, the SEC extended the ability to test the waters to all issuers by adopting the highly anticipated new Rule 163B under the Securities Act of 1933, as amended (the Securities Act). The new rule allows any issuer, or any person acting on the issuer’s behalf, to engage in test the waters communications with potential investors that are reasonably believed to be institutional accredited investors or qualified institutional buyers, either prior to or following the date of filing of a registration statement relating to the offering, without violating the Securities Act’s “gun jumping” rules. Prior to Rule 163B, the ability to test the waters was limited to emerging growth companies only.

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IPOs in 2019 have raised more capital across a smaller number of deals, as we have previously blogged. EY’s recent Trends in US IPO Registration Statements report notes that the US Securities and Exchange Commission (“SEC”) has prioritized increasing access to the public capital markets in an environment where more companies are staying private longer. EY cites an SEC Division of Economic and Risk Analysis 2018 study that reported that companies raised almost $2.6 trillion more capital through the US private markets than through registered offerings from 2010 to 2016. The SEC has worked toward this goal by, among other things, changing the definition of a smaller reporting company, extending “testing-the-waters” provisions that were formerly only available to emerging growth companies (“EGCs”) to non-EGCs, and allowing non-EGCs to submit IPO registration statements for confidential SEC review. According to the report, EGCs have accounted for almost 90% of IPOs in the first three quarters of 2019.

Created by the Jumpstarting Our Business Startups (“JOBS”) Act, an EGC may elect to make scaled disclosures in its IPO registration statement, as well as confidentially submit its registration statement. Citing the SEC’s Annual Performance Report, EY’s report notes that the SEC issued initial comments to confidentially submitted registration statements in an average of 25.5 days in 2018. In 2018, a median of 125 days elapsed from initial submission to IPO date for both EGCs and non-EGCs.

Among the scaled disclosures available to EGCs, between 2014 and 2019, 98% of EGCs opted for reduced disclosure of executive compensation, 74% opted for two years of audited financial statements (instead of three), and 28% opted for the adoption of new accounting standards using private company effective dates. The report noted that 64% of EGCs in the first nine months of 2019 elected to use private company effective dates for new accounting standards. Compared to 51% in 2018, this increase is likely attributed to EGCs wanting an additional year to adopt new accounting standards, such as new accounting standards on leases and credit losses, which become effective in 2020.

The report also mentions that 4% of companies that conducted an IPO in the first three quarters of 2019 reported one or more restatements of their financial statements in their registration statements. About 40% of companies in the first nine months of 2019 have voluntarily disclosed material weaknesses in their registration statements. The top three material weaknesses disclosed included (1) lack of personnel with appropriate experience in US GAAP or SEC reporting; (2) financial statement close process; and (3) information technology general controls.