At the Wall Street Journal’s CFO Network annual meeting held in Washington DC on June 11, 2018, Securities and Exchange Commission Chair Jay Clayton provided some insights on areas of focus for the Commission. Chair Clayton noted that the Commission remains focused on measures designed to promote capital formation without sacrificing investor protection. Chair Clayton noted that the Commission continues to work on disclosure effectiveness reforms. He also noted that the Commission is working on amendments to the definition of “smaller reporting company,” and anticipates that the amendments will be released before October. The moderator asked Chair Clayton to comment on the increasing significance of private capital. Chair Clayton noted that the Commission is focused on the decline in the number of U.S. public companies and on the state of the U.S. initial public offering market. He noted that retail investors are being shut out of investment opportunities given that most private placements are available only to accredited investors. He noted that the Commission is looking at the private placement framework, and noted that, at present, the private placement is quite binary—if you are an accredited investor, you are able to participate in a private placement and potentially face significant losses, and if you are not an accredited investor, you are largely foreclosed from participating in the private placement market. Chair Clayton also discussed proposed Regulation Best Interest as well as a number of other priorities.
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 Likewise, the amendments to implement the FAST Act report and disclosure update and simplification (to eliminate outdated, redundant and otherwise repetitive requirements) remain in the final rule stage.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.
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.
May 21 – 22, 2018
PLI New York Center
1177 Avenue of the Americas
New York, NY 10036
Join PLI’s expert faculty of leading practitioners and regulators as they discuss and analyze the changing regulatory framework and market for private offerings. The faculty will begin by addressing the basics of private placements, sales of restricted securities, Rule 144 and Section 4(a)(1-1/2) transactions and block trades. Speakers will also address the changes to private and exempt offerings brought about by the JOBS Act, including matchmaking platforms, “accredited investor” crowdfunding, offerings using general solicitation, Rule 144A offerings, and the practical implications of these changes for issuers, broker-dealers and investment advisers. Panelists will discuss the considerations that have led many companies to remain private longer and defer IPOs, while creating liquidity opportunities for holders through private secondary trading markets. Panelists will also address the basics of traditional private placements, PIPE transactions, and Rule 144A transactions, as well as recent developments affecting each of these capital-raising alternatives.
Partner Anna Pinedo will serve as chairperson for this event and will speak on the “Welcome and Introduction to Private Placements and Hybrid Financings” panel on day one of the conference and on the “Welcome and Introduction to Conducting Hybrid Offerings” panel on day two. Partner Michael Hermsen will speak on the “Regulation A Offerings” panel on day one.
To register for this conference, or for more information, please click here.
The final report from the Forum session held last fall in Austin, Texas was recently published. The recommendations were consistent with those of prior such gatherings. We summarize the principal recommendations. First, the Forum recommends amendment of the accredited investor definition in order to expand the categories of qualification to include, regardless of net worth or net income, certain persons holding FINRA licenses or CPA or CFA designations, knowledgeable employees, and persons that have passed a sophistication test. Second, the Forum recommends amendments to Regulation A to mandate blue sky preemption for secondary trading of Regulation A Tier 2 securities, allow at-the-market offerings, allow reporting companies to use Regulation A, increase the offering threshold to $75 million, and require portals conducting Regulation A offerings to be registered. Third, the Forum notes that the SEC ought to lead a joint effort with FINRA to provide clear guidance to participants in Regulation Crowdfunding offerings. Fourth, the Forum recommends various changes to Regulation Crowdfunding, including, among other things, raising the investor’s investment limitations and to increase the offering limit. Fifth, the Forum recommends exempting small or intermittent finders from broker-dealer registration requirements.