Fintech companies continue the global trend of companies choosing to remain private longer and raising large amounts of capital through private channels.  A recent CB Insights report covered the financing trends of fintech companies for the first half of 2018.  As of the date of the report, there were 29 fintech unicorns valued at $84.4 billion globally.  The second quarter of 2018 valued five fintech companies at unicorn status (over $1 billion).  Three of these new unicorns are based in the United States.

U.S. fintech companies raised $3.2 billion in new capital over 146 deals in the second quarter of 2018, bringing the total number of deals for the first half of the year to 303, raising approximately $5.3 billion.  Compared to Q2 2017, last quarter’s total capital raised increased over 52%.  Not surprisingly, later-stage capital raises made up over 83% of deals in the second quarter, raising approximately $2.7 billion over 74 deals.

There was only one IPO exit by a fintech unicorn in the U.S. in the second quarter of 2018, which raised $874 million.  Globally, M&A exits accounted for approximately 85% of fintech company exits, with 39 M&A transactions, while there were only seven fintech IPOs completed in the first half of 2018.

For more information, read CB Insights’ Global Fintech Report Q2 2018.

Large, late stage private capital raises for privately held companies continue to be the preferred method of financing growth for many new companies, particularly those in the tech sector.  A recent analysis conducted by data provider CB Insights examined what the industry calls “mega-deals” or “private-IPOs,” which are private placements raising over $100 million in proceeds.  These deals, which have a median deal size of $160 million, have largely contributed to the emergence of unicorns, or private companies valued at over $1 billion.  This trend in private capital raising has become more prevalent since the enactment of the JOBS Act in 2012, which has made it easier for companies to remain private longer.

A closer look at the data compiled by CB Insights shows that, over the last five years in the United States, over 90% of capital raises for private companies were later stage or mezzanine investments.  These deals have raised over $300 billion in capital for companies, with $151.7 billion of these deals fitting into the rubric of “private-IPOs.”  Based on the CB Insights analysis, it would appear that transaction volumes for 2018 are on pass to surpass those in 2017.  While legislators contemplate the capital formation-focused package of legislation that has been dubbed “JOBS Act 3.0,” and consider measures to make going public more compelling, it’s clear that there is no shortage of private capital to finance promising companies.

Late on Tuesday night, the House passed the recently unveiled JOBS & Investor Confidence Act on a vote of 406-4. The almost unanimous decision advances the bill, commonly referred to as JOBS Act 3.0, which is comprised of 32 individual capital formation-related pieces of legislation.

Among other reforms, the bill proposes changes to existing rules that would affect regulations on angel investors; the definition of an “accredited investor”; the expansion of IPO on-ramp expeditions for EGCs; and the easing certain securities regulations for IPOs.

House Majority Leader Kevin McCarthy, co-author of the original JOBS Act, noted that the Act is “…evidence of this House’s commitment to expanding opportunity for American workers and investors.”

We will be following this post with a more comprehensive legal update discussing the bill.

Today, a bipartisan, capital formation-focused, package of legislation was unveiled by House Financial Services Committee Chairman Jeb Hensarling and Ranking Member Maxine Waters.  The “JOBS and Investor Confidence Act of 2018” is comprised of 32 individual bills, including those we have previously blogged about, that have already passed in the Committee or in the House this term.

Chairman Hensarling noted that the efforts of the Committee and the package “…will play an important role in sustaining long-term economic growth and global competitiveness.”

A chart of the bills that comprise the legislative package can be found here.

The House Financial Services Committee met last week and approved eight capital formation-related bills. The bills require the Securities and Exchange Commission to take action to change certain of its definitions in its rules and provide guidance on a number of securities-related issues.  These include amending the definition of a qualifying investment; requiring a study on IPO underwriting fees with the Financial Industry Regulatory Authority; and requiring a study on expanding investments in small-cap companies. Committee Chairman Jeb Hensarling noted that these bills “…will help our small businesses gain capital, help entrepreneurial ventures, and help companies in America go public and stay public.”

Below we provide a summary of the principal bills:

H.R. 6177, the “Developing and Empowering our Aspiring Leaders Act,” requires the SEC to revise the definition of a qualifying investment to include equity securities acquired in a secondary transaction.

H.R. 6319, the “Expanding Investment in Small Businesses Act,” requires the SEC to study whether the current diversified fund limit threshold for mutual funds of 10% constrains their ability to take meaningful positions in small-cap companies.

H.R. 6322, the “Enhancing Multi-Class Share Disclosures Act,” requires issuers with a multi-class stock structure to make certain disclosures in any proxy or consent solicitation materials.

H.R. 6324, the “Middle Market IPO Underwriting Cost Act,” requires the SEC, in consultation with FINRA, to study the direct and indirect costs associated with small and medium-sized companies to undertake initial public offerings.

H.R. 6320, the “Promoting Transparent Standards for Corporate Insiders Act,” requires the SEC to consider certain amendments to Rule 10b5-1 and directs the SEC to consider how any amendments to Rule 10b5-1 would clarify and enhance existing prohibitions against insider trading while also considering the impact of any such amendments on attracting candidates for insider positions, capital formation, and a company’s willingness to operate as a public company.

H.R. 6323, the “National Senior Investor Initiative Act of 2018,” creates an interdivisional task force at the SEC, to examine and identify challenges facing senior investors and requires the Government Accountability Office to study the economic costs of the exploitation of senior citizens.

The U.S. IPO market has kept a steady pace through the second half of 2018, according to EY’s quarterly IPO trends report.

54 IPOs were completed in the second quarter of 2018, raising $12.9 billion, which amounts to a total of 101 IPOs, raising $29.9 billion for the first half of the year.  This is a 20% year-over-year increase in proceeds, and a 30% year-over-year increase in volume compared to the second half of 2017.

The median deal size for IPOs in the second quarter was $124.2 million, with only one IPO raising over $1 billion in proceeds.

The technology sector saw both the highest number of IPOs completed and the most proceeds raised in the second quarter of 2018, with 17 transactions, raising $5.1 billion.  Many of these tech sector-IPOs were done by unicorn companies.  Below we provide a graph of the top five sectors by number of IPOs based on EY’s data.

In addition, EY reports that 39 of the newly public companies chose to list on the Nasdaq, while 15 listed on the NYSE during the second quarter of 2018.

For more, see EY’s Global IPO trends: Q2 2018 report.

Wednesday, July 18, 2018
1:00 p.m. – 2:00 p.m. EDT

The new administration began with calls for a repeal of the Dodd-Frank Act and related regulations. Over time, banking agency actions and legislation have brought about more measured regulatory changes. During our session, we will review the changes that have come as a result of actions taken by the banking agencies, including proposed amendments to the Volcker Rule and the proposed stress capital buffer. We will also address the changes contained in the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act. We will also provide some perspective on the additional changes that should be expected in the near term.

We will address the following:

  • Overview—outlining changes being made/proposed by banking agencies and legislative changes;
  • Amendments proposed by the agencies to the Volcker Rule;
  • Amendments to the Volcker Rule contained in the Crapo legislation;
  • Changes to the designation of entities subject to the enhanced prudential supervision provisions; and
  • Securities law provisions contained in the Crapo legislation.

Speakers:

  • David R. Sahr
    Partner, Mayer Brown LLP
  • Anna T. Pinedo
    Partner, Mayer Brown LLP

For more information, or to register for this complimentary session, please visit the event website.

The Senate Banking Committee recently considered various securities-related bills, including the following:

  • S. 536 Cybersecurity Disclosure Act, which would require that a public company disclose whether a cybersecurity expert is on its board of directors;
  • The 8-K Trading Gap Act of 2018, which would ban trading by insiders during the period of time between when directors and officers become aware of material nonpublic information and the date on which such information is disclosed in a Current Report on Form 8-K;
  • S. 588 Helping Angels Lead Our Startups Act, or the HALOS Act, which clarifies whether certain communications, including presentations made at demo days and similar events, would constitute general solicitation;
  • S. 2126 Fostering Innovation Act of 2017, which would extend the Sarbanes-Oxley Section 404(b) exemption for an additional five years for former emerging growth companies (EGCs) that maintain a public float below $700 million and average annual revenues below $50 million; and
  • S. 2347 Encouraging Public Offerings Act of 2018, which would extend the ability to test the waters to non-EGCs.

While it is not clear whether these and some of the proposed bills introduced in the House of Representatives will be adopted or even consolidated into “JOBS Act 2.0”- type legislation, many of these are consistent with the recommendations contained in the U.S. Treasury’s report on capital markets, as well as with measures introduced in prior sessions of Congress that garnered bipartisan support.

 

There are a number of legislative proposals making their way through the House, including: H.R. 5054, the Small Company Disclosure Simplification Act of 2018, which provides EGCs and smaller reporting companies an exemption from xBRL requirements (referred to in our prior blog post), H.R. 6035, the Streamlining Communications for Investors Act, which is a measure that would direct the Securities and Exchange Commission to amend Rule 163 under the Securities Act in order to allow underwriters and dealers acting by or on behalf of a WKSI to engage in certain communications, and a measure that would direct the Commission to increase and align the smaller reporting company definition and the non-accelerated filer financial thresholds, and a measure requiring the Commission to conduct a study with respect to research coverage of small issuers before their initial public offerings.

All of these bills emanated from the recommendations contained in the report prepared by SIFMA and other trade associations titled “Expanding the On-Ramp: Recommendations to Help More Companies Go and Stay Public,” which we blogged about previously.

The Financial Services Committee has passed H.R. 6035 with some bipartisan consensus.  This measure is similar in scope to the amendments to Rule 163 of the Securities Act that the Commission had proposed a few years ago and never adopted.  Given the fact that most follow-on offerings are conducted on a wall-crossed basis these days, it would make sense to allow underwriters acting on a WKSI’s behalf to approach investors even prior to the WKSI filing an automatic shelf registration statement.

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.