Anna T. Pinedo

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Anna Pinedo is a partner in Mayer Brown’s New York office and a member of the Corporate & Securities practice. She concentrates her practice on securities and derivatives. Anna represents issuers, investment banks/financial intermediaries and investors in financing transactions, including public offerings and private placements of equity and debt securities, as well as structured notes and other hybrid and structured products.

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Congress has passed the Economic Growth, Regulatory Relief, and Consumer Protection Act, which principally addresses financial regulatory measures.  The legislation also includes a number of securities law related provisions.  For example, Section 503 requires that the SEC review the findings and recommendations of the annual SEC Government-Business Forum on capital formation and address the findings and recommendations publicly.  Section 504 expands the Section 3(c)(1) exception under the Investment Company Act to include venture capital funds that have up to 250 investors and $10 million in aggregate committed capital contributions and uncalled capital.  Section 507 raises the Section 701 threshold to $10 million and indexes the threshold to inflation going forward.  Section 508 allows reporting companies to rely on Regulation A.  Rule 509  provides closed-end funds listed on a national securities exchange and certain interval funds to benefit from the same securities offering and other provisions available to operating companies.  After the Small Business Credit Availability Act was passed modernizing the securities offering and communications related provisions for BDCs, there had been concern that closed-end funds had been forgotten.

See the firm’s Legal Update here.

 

In a recent paper, authors Onur Bayar, Thomas J. Chemmaur and Paolo Fulghieri consider whether allowing insiders with nonpublic information to disclose such information prior to selling their securities.  The paper discusses the communications prohibitions applicable prior to, and in close proximity to, securities offerings, as well as some communications safe harbors.  The authors set out a model for disclosures at different points in time prior to a securities offering.  The paper concludes that even in the absence of an agency, like the Securities and Exchange Commission, that regulates disclosures, there are incentives for companies to self-regulate resulting in conservative disclosures.  The authors further conclude that whether allowing disclosures prior to an equity offering is desirable depends on the proportion of Institutional investors who are able to verify the information (compared to retail investors that would not be able to test or verify disclosures).  Finally, the authors also consider the nexus to the rules for bringing private securities lawsuits.  Setting aside the authors’ thesis, it would seem prudent in light of the significant advances in technology since 2005 when securities offering reform last revamped the communications rules to revisit the safe harbors available to issuers.

The recently updated Securities and Exchange Commission agenda (see here and here) provides some insight on what to expect in upcoming months.  The amendments to the smaller reporting company definition, which were widely supported when proposed, remain in the “final rule stage.”  Likewise, the amendments to implement the FAST Act report and disclosure update and simplification (to eliminate outdated, redundant and otherwise repetitive requirements) remain in the final rule stage.  It will be interesting to see whether the Commission takes action on these measures before Commissioner Piwowar’s departure.  Consistent with Corporation Finance Division Director Hinman’s recent Congressional testimony about which we previously blogged, the agenda now includes in the “proposed rule stage” extending the test-the-waters provision to non-EGCs.  Also in the proposed rule stage are changes to Industry Guide 3 (disclosures for banks and other financial institutions), disclosure of payments by resource extraction issuers, and additional changes to the Regulation S-K disclosure requirements.  A new item was added that is referenced as “amendments to financial disclosures for registered debt security offerings.”  It is not clear to what this relates.  Sadly, the changes to various communications safe harbors and other Securities Act rules for business development companies are in the “long-term actions” category.  The long-term actions category also includes a number of measures that have been the subject of recommendations by the Commission’s Investor Advisory Committee, such as disclosures regarding board diversity and changes to the accredited investor definition.  Consistent with recent comments by representatives of the Commission, a measure relating to harmonizing private placement rules is added to the long-term actions list.

In recent remarks, Commissioner Peirce commented on capital formation, repeating some statistics about the decline in the number of IPOs in recent years and the relatively small number of public companies (about 4,500).  She noted that many companies are able to raise capital in private placements or exempt offerings; however, fewer investors are able to share in the growth of such companies that stay private.  She noted a few regulatory impediments that may make becoming a public company less compelling.  Among these impediments, Commissioner Peirce included the Sarbanes-Oxley Section 404(b) attestation requirement and the burden it places, especially on pre-revenue companies, Dodd-Frank Act-mandated disclosure requirements, such as those on conflict minerals, Dodd-Frank Act executive compensation requirements like the pay ratio rule, and the lack of regulation of proxy advisory firms.  The Commissioner also commented on Regulation A, noting that as of the end of 2017, 185 Regulation A offerings had raised approximately $670 million in offering proceeds, and noting that the current offering threshold for Regulation A offerings may still be too low to be a meaningful stepping stone to an IPO.  The Commissioner also raised a suggestion that has been raised by Commissioner Piwowar from time to time; that is, abandoning the accredited investor standard and allowing all investors to participate in exempt offerings.  The full text of the remarks are available here.

Recently, the Securities and Exchange Commission (the “SEC”) announced a settlement with a registrant relating to the registrant’s failure to disclose the occurrence of a cyber breach.  The breach occurred in 2014 and was disclosed in 2016.  A later discovered breach that took place in 2013 was disclosed in 2017.  The SEC noted that the company did not fully assess the impact of the breach on its business nor whether the disclosures in its public filings, which addressed potential breaches, were rendered misleading by virtue of the actual breach.  The SEC did note that it would not second-guess judgments regarding disclosures made by registrant’s acting in good faith.

The settlement, taken together with statements made by representatives of the SEC regarding the importance of assessing cyber breaches and related risks, and the recent guidance from the SEC regarding cybersecurity disclosures, serve to emphasize, among other things, the importance of disclosure controls and procedures that take into account cyber disclosures.

Recently, the Ninth Circuit held that only negligence, not scienter, is required to be shown where a violation of the tender offer provisions of Section 14(e) is alleged.  In Varjabedian v. Emulex Corp., the Ninth Circuit court remanded the case for reconsideration of the defendants’ motion to dismiss based on a negligence standard.  The District Court had previously dismissed the complaint for failure to plead a strong inference of scienter in connection with the alleged Section 14(e) violations.  The Ninth Circuit’s conclusion that only a negligence standard applies is at variance with decisions in various other circuits.  In reaching its conclusion, the Ninth Circuit relied on the legislative history of the Williams Act, which it stated is intended to be broad and address the quality of the information provided to stakeholders in a tender offer.  Perhaps the circuit split may at some point be addressed by the Supreme Court.

In a wide-ranging speech today, SEC Chief Accountant Wesley Bricker addressed recent changes and forthcoming changes to accounting standards, including the new revenue recognition standard.  He noted the need to continue to focus on the implementation of the lease accounting standard next year and the credit losses standard.  Bricker also commented on accounting for equity investments in other companies.  Bricker touched briefly on non-GAAP financial measures, reminding the audience that reporting companies must have disclosure controls and procedures that address the use of non-GAAP measures.  In this regard, he noted that audit committees have an important role to play in reviewing the presentation of non-GAAP measures, understanding the purpose and integrity of the non-GAAP measures, evaluating whether the measures are consistently prepared and presented period to period, and understanding how corrections of errors in such measures will be presented.  Bricker also noted the importance of the audit committee’s role with respect to the disclosure of market risks.  Bricker mentioned the Commission’s recently proposed rulemaking addressing the auditor independence rules.  He concluded his remarks with observations regarding the importance of independent minded audit committees as one element of a strong corporate governance structure.  The full text of his remarks may be found here.

 

A number of industry groups, including SIFMA, have joined to put forward recommendations to promote capital formation and assist more companies in going public or remaining public.  Many of the measures suggested in the report have been presented previously, whether in the U.S. Treasury Report on capital markets or in bills introduced in, or passed by, the House Financial Services Committee.  For example, the group suggests:

  • That for issuers that meet the EGC definition, extending the on-ramp provisions of Title I of the JOBS Act from five to ten years;
  • Amending Section 5 of the Securities Act in order to extend the ability to test-the-waters to non-EGC issuers;
  • Extending the Sarbanes-Oxley Section 404(b) exemption from five to ten years for lower revenue EGCs;  and
  • Simplifying or eliminating the “phase out” provisions relating to EGC status.

The report also addresses research related issues and suggests:

  • Amending the Securities Act Rule 139 safe harbor to eliminate the Form S-3 eligibility prong;
  • Allowing research and banking colleagues to attend pitch meetings and reviewing the Global Research Analyst Settlement; and
  • Studying the factors impacting the decision of most firms not to publish pre-IPO research.

Finally, the report addresses other measures, such as regulation of proxy advisory firms, short-selling, the baby shelf restrictions for smaller issuers, and financial reporting and market structure matters, not as closely tied to the IPO market.

In a recent speech, Commissioner Jackson focuses on the traditional IPO 7% spread, which he refers to as a “tax.”  From time to time, such as in the correspondence between Congressman Issa and then Securities and Exchange Chair Schapiro and in academic literature, questions have been raised regarding the IPO book building process and “IPO underpricing”; however, I don’t think an SEC Commissioner has previously taken on this topic.  The speech cites to Professor Jay Ritter’s work and notes that the Commissioner’s staff undertook an effort to look at more recent data, which included data from more than 700 middle market IPOs over a 15-year period beginning in 2001.  There is a link to the supplemental research (you may access here).  The following chart illustrates the study findings from 2001 to 2016:

Larger companies are able to use their bargaining power to negotiate lower spreads, Commissioner Jackson observes.  While this is true, it’s also important to consider that the market dynamics for larger companies going public are quite different.  Their securities tend to be purchased more broadly by institutional investors and there is more liquidity in their stocks.  Commissioner Jackson suggests that the “middle market tax” may be another deterrent for smaller and middle market companies to defer or avoid undertaking IPOs.  The Commissioner also draws a connection to the availability of private capital.  However, in practice, private capital is more readily available for the largest tech companies and not as readily available for smaller and middle market companies.  For example, more mezzanine or late-stage private placements are completed for tech companies and for larger cap companies generally (across industries) than are completed for smaller and midcap biotech and life sciences companies.  The smaller and midcap life science companies, to the extent that they can complete private placements, rely on dedicated sector investors and insiders and almost “must” go public in order to raise substantial amounts of capital.  Larger companies have many more financing choices.  Going public, I would argue, is more important to smaller and midcap companies.  While, of course, it is important to consider all of the many factors that may be at play that affect the IPO market, the underwriting spread may have the least effect on a company’s decision.  Additional disclosure regarding “underpricing” is unlikely to have an effect on the IPO dynamics.  Studying research coverage and the lack of institutional investor participation in smaller IPOs may be more directly impactful for smaller and midcap companies.

Today, Bill Hinman, Director of the Commission’s Division of Corporation Finance testified to the House Financial Services Subcommmittee.  Mr. Hinman provided an overview of the Division’s ongoing projects and its priorities.  He noted that the Commission remains focused on capital formation related initiatives designed to promote interest in having more companies undertake IPOs.   In this regard, for the first time, he mentioned that the Division is considering rules extending the ability to test-the-waters to non-emerging growth companies.  Extending the test-the-waters provisions to non-EGCs has been a measure that has been included in various proposed bills that have garnered strong bipartisan support on the House side.

Mr. Hinman also reported on measures affecting smaller companies. Mr. Hinman provided market updates on Regulation A offerings (since the amendments in 2015, 78 issuers have raised approximately $670 million in 185 offerings) and Rule 506(c) (noting $147 billion has been raised in reliance on generally solicited offerings under Rule 506).  Mr. Hinman indicated that the Staff would be conducting retrospective reviews of these new exemptions.  Mr. Hinman noted that the Division is considering recommendations that would expand the accredited investor definition.  This is interesting given that amendments to the definition had not appeared as a high priority in the Commission’s regulatory agenda.  He also signaled that the Division is considering harmonizing or rationalizing the exempt offering rules, which had been suggested by practitioners for some time now.

Addressing upcoming priorities, Mr. Hinman again mentioned the proposed changes to the smaller reporting company definition, the disclosure effectiveness initiative, the resource extraction payments rule, and possible revisions to the conflict minerals rule.  The written testimony is available here.

Chair Clayton focused his testimony on the Commission’s plans with respect to the fiscal year 2019 budget requests, and provided some commentary regarding the best interests rule proposal.  The written testimony is available here.