The recently published MoneyTree Report provides an overview of venture capital investment trends. In 2018, VC-backed companies raised $99.5 billion, an increase in annual funding of 30%, despite a decline in the number of deals. In 2018, the number of early-stage deals declined, but the number of later-stage deals increased. There were 184 “mega-rounds” completed in 2018, or funding rounds of $100 million or more. Globally, there were 382 mega-rounds completed in 2018 although overall financing activity globally declined in 2018. There were 55 companies that attained unicorn status in 2018. At year-end 2018, there were 140 venture-backed unicorns. By sector, Internet companies led with 540 deals completed in the fourth quarter raising $9.1 billion. This was followed by 162 healthcare financings and $4.0 billion. Fintech-related funding increased 38% in 2018 over 2017.
Thursday, February 7, 2019
1:00 p.m. – 2:00 p.m. ET
The U.S. capital markets remain an attractive source of capital for emerging companies in the life sciences sector. Over 21.7% of the 2017 IPOs were life sciences companies. Many of these IPOs were preceded by late stage (or mezzanine) private placements made principally to U.S. institutional investors.
- Financing alternatives for pre-IPO companies;
- The late-stage (or “cross-over”) private placement market;
- Considering milestones when planning a financing strategy; and
- Post-IPO alternatives, including registered direct offerings, PIPE transactions, at the market offerings, and related financing considerations
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According to statistics from Dealogic and the Citi Capital Markets Review and 2019 Outlook, there was a modest decline in 2018 follow-on offering volume compared to 2017. The decline is likely attributable to increased volatility during the year. The Review notes several important trends in follow-on activity, citing increased reliance on marketed (versus unannounced or accelerated marketed) offerings, a larger percentage of first follow-ons following early IPO lock-up releases, an increase in acquisition financing, and increased forward sales of equity. The Review notes that in 2018, 37% of first follow-ons had an early lock-up release, up from 23% in 2017 and 8% in 2006. Another notable trend was the decline in follow-on offerings including secondary stock, perhaps as a result of financial sponsors choosing to wait for less volatile markets. Forward sales, principally in the REIT and energy sectors, increased from four in 2017 to 22 in 2018.
The number of small businesses in the United States continues to climb, according to a recent CB Insights report. In 2015, there were approximately 31.9 million small businesses in the United States. There are now an estimated 39.9 million small businesses, with a projected 2.6 million additional firms expected by 2020. Defined as firms with 0-49 employees, small businesses are active in a wide variety of industries with healthcare, hospitality/food services and retail trade as the top three sectors.
While U.S. small business growth is promising, many small businesses face difficulties accessing capital. According to a Federal Reserve survey cited in the report, 44% of employer firms noted credit availability or securing funds for expansion was a major challenge. Accessibility to funding, however, seems not to have slowed the growth in the fintech sector.
Fintech startups have raised over $10 billion in funding since 2013. Small business payments companies have raised approximately $3.9 billion in funding since 2013. Accounting/tax and fundraising fintech small businesses follow with $2.1 billion and $1.7 billion of funding secured, respectively, since 2013.
For additional trends affecting small business and fintech, see CB Insights’ report: https://www.cbinsights.com/reports/CB-Insights_The-US-Small-Business-Fintech-Report.pdf
More companies continue to raise large sums of capital through late-stage or pre-IPO private placements as they prepare, or in some cases delay, going public. Tech companies are among the most highly-valued of these private companies. A recent study by CB Insights looked at the capital raised by tech companies that went public in 2018. It was found that, on average, these companies raised over $103.0 million in pre-IPO funding. This is almost 2.5 times more than capital raised in 2017, in which tech companies raised $41.9 million, on average, before their IPOs. Xiaomi Corporation and Spotify Ltd raised the most capital pre-IPO with $3.4 billion and $2.3 billion of funding secured, respectively. 2019 promises to continue the trend of larger pre-IPO financings, with companies that have raised as much as $16.9 billion poised to go public next year.
According to a recent research report by CB Insights, in the third-quarter of 2018, there were 375 VC-backed equity financings that raised over $5.64 billion for fintech companies globally. In total, 1,164 fintech financings have been completed in 2018, through October 31, raising over $32.6 billion in offering proceeds. Approximately 40% (462) of these deals are from U.S. issuers. Payments, alternative lending, and capital markets tech companies accounted for the majority of fintech financings, with 169, 145 and 141 deals completed in 2018, respectively.
The fintech sector also continues the trend of late-stage financings for companies that wish to remain private. In the United States, there were 17 mega-rounds, or financings of over $100 million each, completed by fintech companies. There are now 34 fintech unicorns globally, valued at $117 billion, in aggregate. 21 of these unicorns are U.S. companies, with four having completed mega-rounds in 2018.
To read CB Insights’ full briefing report, click here.
In a speech yesterday, Securities and Exchange Commission Chair Jay Clayton provided an overview of the Commission’s significant accomplishments in 2018.
Chair Clayton noted his approach to the Reg Flex agenda and the setting of more realistic rulemaking priorities. In the last year, he noted that the Commission advanced 23 of the 26 rules on the Commission’s near-term agenda. Among the key accomplishments in 2018, Chair Clayton cited the Commission’s work with regard to proposed Regulation Best Interest. With respect to capital formation, Chair Clayton noted the Commission’s amendments to the smaller reporting company definition and the disclosure effectiveness related updates.
In terms of priorities for 2019, Chair Clayton again cited completion of the Commission’s work on proposed Regulation Best Interest as one of the most important projects.
Chair Clayton also pointed to proxy plumbing as another key objective for 2019. Addressing regulation of proxy advisory firms, Chair Clayton noted that “there should be greater clarity regarding the division of labor, responsibility and authority between proxy advisors and the investment advisers they serve. We also need clarity regarding the analytical and decision-making processes advisers employ, including the extent to which those analytics are company- or industry-specific. On this last point, it is clear to me that some matters put to a shareholder vote can only be analyzed effectively on a company-specific basis, as opposed to applying a more general market or industry-wide policy.”
Chair Clayton cited changes in the capital markets and reaffirmed the commitment to review initiatives “to facilitate access to capital for issuers and to make sure Main Street investors have the best possible mix of investment opportunities.” Based on prior comments, this would appear to allude to opportunities to invest in private companies, including unicorns. The Commission also is considering expanding test the waters communications to non-emerging growth companies, evaluating quarterly reporting requirements, and streamlining or harmonizing securities offering exemptions. He noted that the staff is working on a concept release to solicit input about key topics, including whether the accredited investor definition is appropriately tailored to address both investment opportunity and investor protection concerns.
Chair Clayton noted that the Commission is monitoring three risks: (1) the impact to reporting companies of the United Kingdom’s exit from the European Union, or “Brexit”; (2) the transition away from LIBOR as a reference rate for financial contracts; and (3) cybersecurity. Among other things, the Commission staff will focus on disclosures related to Brexit risks. Chair Clayton noted that he “would like to see companies providing more robust disclosure about how management is considering Brexit and the impact it may have on the company and its operations.” Chair Clayton also noted that the transition away from LIBOR is a significant risk for many market participants—whether public companies who have floating rate obligations tied to LIBOR, or broker-dealers, investment companies or investment advisers that have exposure to LIBOR. Finally, he commented on cybersecurity. The full text of yesterday’s remarks can be found: https://www.sec.gov/news/speech/speech-clayton-120618.
On November 1, 2018, the North American Securities Administrators Association, Inc. (“NASAA”) released for public comment proposed updates to the SCOR Statement of Policy and the SCOR Form (Form U-7). According to the NASAA, the proposed updates are meant to incorporate many of the investor protections that have been put in place under state and federal crowdfunding laws in light of the evolution and availability of methods to raise capital in small offerings.
Changes to the SCOR Statement of Policy (last updated in 1996)
- Application of SCOR: The proposed updates amend the types of federal exempt offerings that can be registered at the state level under the SCOR Statement of Policy. Specifically, SCOR will no longer apply to Regulation A offerings, but will apply to the registration of intrastate offerings exempt under new federal Rule 147A. Additionally, the proposed updates increase the offering amount limitation from $1 million to $5 million, in line with the Rule 504 offering amount limitation increase.
- Issuer Eligibility: The proposed updates remove the existing requirement that the offering price for securities offered be greater than or equal to $1.00 per share or unit of interest.
- Financial Statements: The proposed updates revise the financial statement requirements to provide for tiered compilation, review, and audit requirements based on the amount of the offering. In addition to the tiered approach, the proposed updates require (1) an issuer’s CEO and CFO to certify that annual financial statements are true and complete in all material respects and (2) an issuer provide interim financial statements if annual financial statements are dated more than 120 days prior to the date of filing. The proposed updates to the financial statement requirements are based on Regulation Crowdfunding.
- Bad Actor Disqualifications: The proposed updates revise the bad actor disqualification provisions to merge aspects of federal bad actor provisions applicable to Rule 506 and Rule 504 offerings and to capture individuals materially participating in the offering or the operations of the issuer, as well as events that may include the potential for fraud. The proposed updates, however, veer from related federal provisions and do not grandfather any bad acts that occurred prior to the adoption of the SCOR Statement of Policy.
- Investment Limits: The proposed updates incorporate the individual investment limits set forth in federal Regulation Crowdfunding and require that in each sale of securities in a SCOR offering, an issuer must reasonably believe that the aggregate amount of securities sold to any investor by one or more issuers offering or selling securities under a SCOR offering during the twelve-month period preceding the date of sale, together with the securities sold by the issuer to the investor, does not exceed:
- The greater of $2,000 or 5% of the lesser of the investor’s annual income or net worth if either the investor’s annual income or net worth is less than $100,000; or
- 10% of the lesser of the investor’s annual income or net worth, not to exceed an amount sold of $100,000, if both the investor’s annual income and net worth are equal to or more than $100,000.
- Sales Reporting Requirement: The proposed updates incorporate a sales reporting requirement similar to that contained in intrastate crowdfunding laws and federal Regulation Crowdfunding, which would require an issuer to file a sales report no later than 30 days after the termination or completion of an offering or, if the offering has not been terminated or completed within 12 months, file a sales report containing the information required in Section VIIIA for the initial 12 months.
- Ongoing Reporting Obligations: The proposed updates incorporate ongoing reporting requirements based on those required under Regulation Crowdfunding. An issuer would be subject to the ongoing reporting requirements until the earlier of (1) the securities issued in connection with the SCOR offering are no longer outstanding or (2) the issuer liquidates or dissolves its business.
- Review Standards: The proposed updates include a new provision related to review standards and, unlike the proposed updates set forth above, is optional. In jurisdictions that choose to adopt this provision, offerings will be reviewed for disclosure and for compliance with applicable Statements of Policy with certain modifications incorporated from NASAA’s Coordinated Review Protocol for Regulation A offerings. Specifically, (1) the Statement of Policy Regarding Promoters’ Equity Investment will not apply and (2) the Statement of Policy Regarding Promotional Shares will apply except that one-half of any promotional shares required to be locked-in or escrowed may be released on the first and second anniversary of the date of completion of the offering, such that all shares may be released from lock-in or escrow by the second anniversary of the date of completion of the offering.
Changes to the SCOR Form (Form U-7) (last updated in 1999)
- The proposed updates to the SCOR Form are meant to streamline the form by removing duplicative or unnecessary items and to make the form more user friendly.
Comments on the proposed updates to the SCOR Statement of Policy and SCOR Form are due by December 3, 2018.
On November 16, 2018, the American Bar Association’s Committee on Federal Regulation of Securities hosted a dialogue with William Hinman, Securities and Exchange Commission (“SEC”) Director of the Division of Corporation Finance. During the discussion, Hinman highlighted his priorities for the Division. Hinman wants to find other ways for mainstream investors who are not accredited investors to gain access to private investments. Hinman noted an uptick in initial public offering filings. He said companies are spending more time with comment letters, are writing meaningful responses and disclosures and are taking advantage of the draft submission process. Hinman explained the Staff is trying to do as much as possible through rulemaking and policies to make the public reporting system more attractive to companies looking to raise capital. With regards to disclosures, Hinman encouraged companies to take a narrow, tailored approach. As an alternative to generic disclosures, Hinman encouraged issuers to examine and disclose specifically how certain risks, such as Brexit and LIBOR, may impact their companies. On the Division’s long-term agenda, Hinman noted plans to issue a comprehensive concept release on private capital raising. The concept release will examine current statutes, rules and policies. Hinman wants to see if there are any holes in the current regulatory framework that need to be revised to better harmonize private capital raising. On the Division’s short-term agenda, Hinman noted plans to approach the remaining Dodd-Frank Act rulemaking provisions in sequential order, beginning with hedging disclosures.
On October 23, 2018, the Heritage Foundation hosted a discussion entitled, “Problems with the JOBS Act and How They Can Be Fixed” that featured University of Kentucky College of Law Professor Rutherford B. Campbell. The discussion centered on the impact of the 2012 Jumpstart Our Business Startups Act (the “JOBS Act”), its benefits, its shortcomings, and recommendations on how to address those shortcomings related to Titles II, III and IV.
The JOBS Act was enacted to reduce the regulatory burden on small businesses seeking to raise capital to launch or grow their business. Campbell praised Title II’s elimination of the prohibition against general solicitation and general advertising under Rule 506(c). However, he lamented that Rule 506(c) was still limited to sales to accredited investors. Campbell discussed Title III and argued that small businesses are simply not utilizing Regulation Crowdfunding. Campbell noted the mere $49 million in funds that was raised through Regulation Crowdfunding in 2017. He asserted that the limitations and concerns regarding integration “make no sense at all.” As an alternative, Campbell recommends a two-way regulatory integration safe harbor that allows for crowdfunding and permits traditional advertising while conducting a campaign. Additionally, Campbell recommends rethinking the periodic reporting requirement under Regulation Crowdfunding. By doing so, Campbell believes more small businesses will utilize Regulation Crowdfunding. Campbell then examined Regulation A+ under Title IV, noting there are still compliance, accounting and legal hindrances. As a solution, Campbell proposes federal preemption for Tier 1 offerings. Overall, Campbell advocates for the implementation of these recommendations to enhance the current regulatory framework for small business capital formation.