Brian Hirshberg

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An at-the-market (ATM) offering is an offering of an issuer’s securities into the existing trading market for such securities at publicly available bid prices. An issuer’s internal legal team and outside counsel play critical roles in properly documenting an ATM offering. In this Lexis Top 10 Practice Tips: At-The-Market Offerings, we provide 10 practice tips that can help attorneys effectively and efficiently assist with an ATM offering.

On September 6, 2018, House Committee on Financial Services Chairman Jeb Hensarling and Representative John Delaney released a discussion draft of the Bipartisan Housing Finance Reform Act (the “Act”).  The Act would require eligible private credit enhancers (as approved by the Federal Housing Finance Agency, “PCEs”) to engage in approved credit risk transfer transactions.  PCEs would be new entities in the secondary mortgage market that would be required to provide eligible private insurance for conventional mortgage loans financed through Ginnie Mae.  In order to encourage investment in the credit risk transfer securities issued by the PCEs, the Act would expand the current Section 3(c)(5)(C) exemption to include all risk-sharing transactions and the investment in any other products created pursuant to the Act with an aim of diversifying risk away from the current government housing finance system.

The current Section 3(c)(5)(C) exemption generally excludes from the definition of “investment company” any entity primarily engaged in, among other things, purchasing or otherwise acquiring mortgages and other interests in real estate.  In order to qualify for this exemption, a mortgage REIT must comply with strict asset tests, including having at least 55 percent of its assets consist of mortgages and other liens on, or interests in, real estate that are the functional equivalent of mortgage loans, referred to as “qualifying assets,” and at least 80 percent of its assets consist of qualifying assets and real estate-related assets.  The Act would expand the exemption’s qualifying asset definition to expressly include any financial instrument that transfers credit risk on mortgage loans.

Neither Chairman Hensarling nor Representative Delaney is planning to run for re-election to Congress in 2018.  We will continue to track the progress of the draft Act as it is considered by the House Committee on Financial Services.

A summary of the draft Act is available here.

 

On May 30, 2018, the Division of Investment Management of the Securities and Exchange Commission issued an exemptive order that permits private business development companies (“BDCs”) to conduct an exchange offer pursuant to which BDC investors, including directors and officers of the BDC, may elect to exchange their BDC shares for shares in a new split-off extension fund.  The new split-off extension fund would receive a pro rata portion of the BDC’s assets and liabilities, including each of the BDC’s portfolio investments, in proportion to the percentage of the BDC shares exchanged.  Relief from the Division was required to allow the BDC’s investment adviser to also act as the investment adviser of the new split-off extension fund and avoid potentially triggering common control prohibitions under the Investment Company Act of 1940.  As private BDCs do not have publicly traded shares, this new exchange option would provide private BDC investors with a liquidity opportunity following the extension fund’s initial public offering.  This new liquidity option should be considered when drafting a private BDC’s organizational documents in order to maximize its liquidity options at a later stage.  A copy of the exemptive order can be found here.

On May 23, 2018, the Securities and Exchange Commission (the “Commission”) proposed establishing a research report safe harbor (Rule 139b) for unaffiliated brokers or dealers that publish or distribute research reports that cover investment funds.  The Commission took this action in furtherance of the mandate of the Fair Access to Investment Research Act of 2017 (the “FAIR Act”).  The FAIR Act required the Commission to expand the Rule 139 safe harbor for research reports to cover research reports on investment funds.  Rule 139 permits a broker or dealer that is distributing an issuer’s securities to publish a research report about those securities without the report itself being deemed an offer to sell such securities.  If adopted as proposed, the safe harbor would be made available to research reports on mutual funds, exchange-traded funds, registered closed-end funds, business development companies and similar covered investment funds.  The safe harbor would be unavailable with respect to broker-dealers’ publication or distribution of research reports about closed-end registered investment companies or business development companies during their first year of operation.  The adoption of an expanded safe harbor would reduce obstacles that currently prevent certain investors from accessing research reports on investment funds.  However, the safe harbor would not extend to research reports issued by brokers or dealers affiliated with the investment fund.  The public comment period will remain open for 30 days.  The proposed rule is available here.

Effective May 11, 2018, the U.S. Treasury’s Financial Crimes Enforcement Network (“FinCEN”) implemented a new customer due diligence requirement.  The requirement applies to certain financial institutions, including banks, broker-dealers and mutual funds, at the time each new account is opened.  The rule enhances the information that financial institutions must collect regarding the identity of individuals (i.e., beneficial owners) who own or control their legal entity customers, which includes any corporation, limited liability company or partnership.  Information must be collected for each owner of 25% or more of the equity interests of a legal entity customer.  As a result of the rule’s recent implementation, financial institutions are devoting significant time and resources to modifying their internal systems and to implementing appropriate procedures to ensure compliance with the rule.  Certain entities are excluded from the definition of “legal entity customer.”  For example,  SEC reporting companies are excluded from the rule because they are subject to public disclosure and reporting requirements that provide information similar to what would otherwise be collected under the rule. Companies listed on foreign exchanges are not excluded from the definition of legal entity customer. Such companies may not be subject to the same or similar public disclosure and reporting requirements as companies publicly traded in the United States and, therefore, collecting beneficial ownership information for them is required. Certain institutions are considering revising some standard form agreements, including underwriting agreements and engagement letters, to include ownership certification representations and covenants to ensure compliance.  FinCEN has provided financial institutions with a certification form that may be used to obtain the required beneficial ownership information.  To read FinCEN’s “Frequently Asked Questions” relating to the new rule, please click here, and to read SIFMA’s memorandum relating to the new rule in the context of certain sales of securities, click here (with attachments providing form certifications at the 25% equity ownership threshold and 10% equity ownership threshold).

On January 1, 2018, a European Union law regulating packaged retail insurance-based investment products (“PRIIPs”) went into effect targeting securities offered to retail investors by investment funds.  If a security is considered a PRIIP, the issuer is required to publish a strictly regulated key information document (“KID”) that must be continuously updated during the distribution of the security.  The liability for the content of the KID is assumed by the issuer by operation of law.  The broadly drafted regulation has the potential to impact the ability of investors to purchase securities issued by U.S. exchange-listed real estate investment trusts (“REITs”).  To determine whether the securities of a particular REIT should be considered PRIIPs and thereby subject to the regulation, all relevant operational facts and characteristics of the REIT must be reviewed in an analysis similar to the undertaking by REITs at the time the Alternative Investment Fund Managers Directive (“AIFMD”) was implemented throughout the European Union.  Securities are considered PRIIPs if the amount repayable to the retail investor is subject to: (i) fluctuation because of exposure to reference values or (ii) the performance of one or more assets that are not directly purchased by the retail investor.  Securities issued by REITs that are structured as alternative investment funds under AIFMD are considered PRIIPs.

Nasdaq Inc. plans to propose a rule to the Securities and Exchange Commission (SEC) that, if adopted, would allow stock exchanges (such as Nasdaq Inc. and the New York Stock Exchange) to provide smaller public companies with the option of limiting the trading of their listed securities to a single stock exchange.  Presently, numerous secondary stock exchanges facilitate trading in public company securities even though the securities are separately listed on the company’s primary stock exchange.  The proposed rule would likely increase total trading volume on the smaller public company’s primary stock exchange and, as a result, has the potential to increase the smaller public company’s liquidity and access to capital.  Securities trading on private venues is not expected to be impacted by the proposed rule.  Allowing more trading options for smaller public companies appears consistent with SEC Chairman Jay Clayton’s stated goal of making the U.S. stock market more desirable and attractive for smaller public companies.  The SEC is requesting public comment on the proposal.

Last year, the Staff of the Division of Corporation Finance announced that it would expand its acceptance of draft registration statement submissions from emerging growth companies to all companies seeking a review of their registration statement. This expansion of the confidential registration statement review process was made available for both initial public offerings (“IPOs”) and those offerings within one year of a public company’s IPO.  Notwithstanding the expanded availability, the process of the non-public, confidential review was left unchanged requiring issuers to publicly file the confidentially submitted registration statement (and other nonpublic draft submissions) at least 15 days prior to any marketed offering presentation or at least 15 days prior to the requested effective date of the registration statement.

As a result of the aforementioned expanded confidential review process, on March 16, 2018, the Staff of the Division of Investment Management announced that it will similarly accept draft registration statements that are submitted by a business development company (“BDC”), even if the BDC does not qualify as an emerging growth company, for nonpublic, confidential review. The Division also will similarly accept for nonpublic, confidential review draft registration statements relating to offerings that are submitted by BDCs within one year of an IPO.

A copy of the Division of Investment Management’s announcement is available here.