The Director of the SEC’s Division of Corporation Finance (the “Division”), Erik Gerding, shared his views on the state of public company disclosures during 2023 and the SEC Staff’s review priorities for 2024.  The statements were made in April 2024 at the Practicing Law Institute’s 2024 The SEC Speaks Conference and were recently published in full on the SEC’s website.  The Director noted that in 2023, the emerging areas of focus for the Division Staff included market disruptions in the banking industry, cybersecurity risks, the impact of inflation, and disclosures related to newly adopted rules, such as pay versus performance.  In 2024, Director Gerding anticipates that the Division Staff will continue to closely monitor disclosures by companies based in the People’s Republic of China (“China-Based Companies”) in addition to new disclosure priorities such as artificial intelligence (“AI”) and potential exposure due to changes in the commercial real estate (“CRE”) market. 

The Division conducts an annual report review program to monitor and enhance compliance with disclosure rules and accounting requirements filed by public companies. Consistent with prior years, some of the top areas of comment for 2023 included financial reporting topics, especially relating to areas that involve judgment or as to which the Financial Accounting Standards Board or the International Accounting Standards Board have recently issued accounting standards.  These areas included segment reporting, including compliance with new U.S. GAAP disclosures effective in annual periods beginning after December 15, 2023; compliance with rules related to the use of non-GAAP financial measures; critical accounting estimates disclosures in MD&A; and disclosures related to supplier finance programs in the notes to the financial statements and any related information related to these arrangements included in MD&A.

The Director anticipates that many of the disclosure priorities from 2023 will continue through 2024 and the following year.  For example, the Division expects to continue its focus on China-Based Companies and seek to elicit disclosure from companies regarding any material risks they face in connection with the PRC government intervening in, or exercising control over, their operations in the PRC.  The Director warned that, while inflation concerns may be diminishing, it is not the time to revert to boilerplate disclosures.  The Director reminded the audience that any material ongoing impacts should be disclosed, and that the Division asks companies not just to note high level trends but also to discuss the more particularized risks and impacts on the specific company.  Finally, given the market disruptions in the banking industry stemming from the collapse of Silicon Valley Bank, the Director noted that the Division will continue to take a careful look at updated disclosures related to interest rate risk and liquidity risk for financial institutions.

Emerging areas of focus for the Division Staff include disclosures related to AI and potential exposure due to changes in the CRE market.  As companies increasingly incorporate AI into their operations, the SEC will be focusing on how companies define and tailor their disclosures commensurate to the risks and impacts of utilizing AI technology on the company’s operations, as opposed to utilizing boilerplate or “generic buzz” disclosures. Similarly, the Division Staff encourages companies with CRE exposure to provide more granular information where possible to improve investors’ understanding of the material risks inherent in the company’s CRE or other loan portfolios and any mitigating steps they are taking to address those risks. The SEC Staff is also tracking how companies are navigating the disclosure requirements resulting from newly adopted rules including those relating to clawbacks, SPACs, and cybersecurity.  Read Director Gerding’s full remarks.

Based on data in Carta’s recently published State of the Markets report, the venture markets have experienced a slight uptick in number of deals and in dollars raised quarter-over-quarter.  Companies on Carta’s platform completed 4% more deals and raised 12% more capital during the second quarter of 2024 compared to the first quarter.  During the first half of 2024, venture capital funds invested a total of $39.6 billion in 2,525 deals.  Compared to the second half of 2023, investments increased by 5%, but deal volume declined 18%.  While those numbers may not sound remarkable, they may signal positive direction for the venture market.

Down-rounds fell to a six-quarter low, with down-rounds accounting for 17.4%, compared to 24.2% in the first quarter of 2024.  The number of seed stage deals declined by 2%, Series A deal count increased 16% and Series B deal count increased 5% quarter-over-quarter.  The number of Series C deals declined by 7%, while later-stage Series D deals increased notably, by 35%.  Early-stage rounds accounted for 29% of capital raised, Series B and C rounds accounted for 46% of funding, and late-stage deals accounted for 25% of capital raised.

Data source: Carta

Carta reports that overtly investor-friendly terms in financing rounds have become less prevalent since 2020 for both primary rounds and bridge rounds.  For example, deals with participating preferred stock have declined from 8.6% to 5.1%.  Deals that incorporate cumulative dividends have declined from 8.2% and 3.3%.  The terms of preferred stock in recent transactions also have experienced some change—with the incidence of transactions incorporating a liquidation preference of over 1x declining, with approximately 6% of deals including these terms at the beginning of 2023 and now only 3.7% of deals incorporating such terms.  Bridge rounds tell a similar story as far as participating preferred stock and cumulative dividend terms.  With these modest moves back toward what many founders consider “normal” terms, it is likely that additional founders and companies will seek venture funding from traditional venture funds, leading to an uptick in market activity.

Source: Carta

The decline in median pre-money valuations has slowed since the beginning of 2022 compared to the decline in total deal volume, particularly in early-stage rounds. In the second quarter of 2024, seed valuations surpassed levels in the first quarter of 2022, increasing by 2%.  Valuations at post-seed stages are generally moving up but have yet to reach their 2022 levels.

Whether your interest in the venture market stems from investing or innovative companies, a robust market is welcome and creates additional opportunities.  When the economy slows or other uncertainties affect decisions (think inflation, war, elections), many players in the market just slow down to wait for issues to become clear.  This is normal risk-avoidance behavior, but it tends to take the “venture” out of the venture capital world and slow everything down.  We welcome the signs of an upswing.

September 18, 2024
8:30 a.m. – 9:30 a.m. EDT
Mayer Brown LLP 14th Floor, 1221 Avenue of the Americas, New York, NY 10020

Join us for this in-person CLE on September 18, 2024.

We will discuss the following, among other issues:

  • An overview of Reg M, specifically, Rules 101 and 102
  • An overview of the SEC’s Reg M amendments, including new exceptions
  • Reg M’s new record-keeping obligations under the Exchange Act
  • Reg M reporting obligations under FINRA Rule 5190 and when these are triggered
  • Related market developments

This is an in-person presentation, with CLE credit, intended to encourage discussion. There will be no recording, and no zoom or hybrid option available.

Breakfast will be served.

Please email ckaplan@mayerbrown.com to register.

Fintech Capital Raising Trends in 2024

Global capital raising in the fintech sector rose 19% quarter over quarter, while deal volume declined 16%, signaling that investors remain cautious, according to CB Insights’ State of Fintech quarterly report.  U.S. fintech deals raised $4.8 billion in 324 deals.  CB Insights’ report discusses financing, exit, and other trends in the fintech sector.  Below we highlight notable trends.

Late-stage deals

Despite this overall investor caution, investors showed more confidence in late-stage companies than they had in the prior two years.  Late-stage deals accounted for 20% of global deal share in Q2 2024, up from 18% in 2023.  Late-stage rounds make up 27% and 35% of the payments and lending subsectors, respectively, of deals year to date (YTD).  In the United States, late-stage deals accounted for 7% of overall deals.

Mega rounds and unicorns

Two late-stage fintech “mega-rounds,” Stripe’s $684 million Series I and AlphaSense’s $650 million Series F, accounted for 15% of overall global funding in Q2 2024.  U.S. deals represented $2.4 billion of mega-round funding.  There have been 27 mega-rounds in 2024, which raised $4.2 billion.  There are now 329 fintech unicorns globally, with nine new unicorn “births” in 2024.  Of the 329 fintech unicorns, 171 are U.S.-based.

Exits

With the IPO market still on a recovery trajectory, fintech companies have completed 12 IPOs and two SPAC mergers globally in 2024.  The U.S. market accounts for only three of these IPOs and no SPAC merger.  The top two IPOs of Q2 2024 include Ibotta’s $2.7 billion U.S. IPO and the $973 million Saudi IPO by Rasan. Global M&A activity has increased slightly, with 312 transactions completed in 2024, including 112 M&A transactions in the United States.

Fintech Subsector Funding

Payments companies raised $3.4 billion in 178 deals in 2024, with an average deal size of $15.8 million.  As noted above, Stripe raised $684 million in a Series I round.  The next largest payments company rounds include Ramp’s $150 million Series D round and Guesty’s $130 million Series F round—both U.S. companies.  Globally, there have been two IPOs, one SPAC merger, and 25 M&A transactions completed by payments companies.

Digital lending companies have raised $1.5 billion in 138 deals in 2024, with an average deal size of $11.7 million. The largest Q2 2024 digital lending deals were all undertaken by non-U.S. companies and include India-based Fibe’s $66 million Series E round, UK-based Colendi’s $65 million Series B round, and Canada-based Brim’s $63 million Series C round. Digital lending companies have completed 12 M&A transactions and one SPAC merger in 2024.

Insurtech companies have raised $2.1 billion across 195 deals in 2024, with an average deal size of $13.2 million. U.S.-based Sidecar Health raised $165 million in its Series D, making it the top equity insurtech deal in Q2 2024. Two IPOs and 20 M&A transactions have been completed by insurtech companies.


On July 30, 2024, the FDIC proposed revisions to the restrictions on brokered deposits. The revisions would undo many of the key elements of the 2020 revisions and would dramatically expand the number of deposit brokers and the amount of deposits that are brokered. Listen to our podcast to understand what this rollback will mean for banks and deposit intermediaries. Listen here.

Mayer Brown’s Global Financial Markets podcast helps clients deal with the legal and business challenges resulting from the ongoing turbulence in worldwide financial markets. By mobilizing the firm’s global resources from multiple practices and offices, the series provides clients with knowledgeable and timely counsel on a broad spectrum of their legal needs.

As part of a panel discussion at the Practising Law Institute’s 2024 SEC Speaks Conference held on April 2, 2024, the Director of the SEC’s Division of Corporation Finance, Erik Gerding, highlighted several risks and disclosures relating to commercial real estate (CRE) that the Staff has recently focused on and expects to continue to focus on when reviewing periodic filings given the current market distress and uncertainty in the CRE sector.

Noted CRE-related risks included heightened vacancy rates, elevated interest rates, extended loan maturities, and increased loan delinquencies.  While REITs and those investing in REITs are likely already familiar with many of these risks, Director Gerding noted that the SEC Staff was considering, and will continue to consider, how banks disclose disaggregation of loan portfolio characteristics; geographic and other concentrations; loan-to-value ratios; loan modifications; nonaccrual loan policies; policies related to the timing, frequency, and sources of appraisals; and risk management.  The SEC Staff will also consider how office and retail REITs describe default risks or liquidity issues and any mitigating efforts, debt maturity and lease term schedules, trends in lease renewals, major tenant rollovers, financial viability of tenants, property dispositions, asset impairments, and tenant receivables.

The Director encouraged companies to consider other areas of their disclosures where more granular information could be provided in order to improve investors’ understanding of the material risks inherent in a company’s CRE or other loan portfolios and any mitigating steps companies are taking to address those potential or actual risks.  Director Gerding also noted that companies should keep in mind that other types of industries outside of banks and REITs could be impacted by the CRE environment and that companies should continue to reevaluate these disclosures as the interest rate environment changes.  Read Director Gerding’s recently published statement.

On July 30, 2024, the Federal Deposit Insurance Corporation (FDIC) proposed revisions to the restrictions on brokered deposits (the “Proposal”). The Proposal is intended to strengthen the restrictions to reflect the FDIC’s experience since earlier revisions in 2020 and the regional bank failures of 2023. This is generally accomplished by undoing key elements of the 2020 revisions and would dramatically expand the number of deposit brokers and the amount of deposits that are brokered. 

The FDIC will accept comments on the Proposal for 60 days after they are published in the Federal Register, which is expected shortly. In this Legal Update, we provide a background on the brokered deposits restrictions and discuss key elements of the Proposal.

Continue reading this Legal Update.

Last week, SIFMA released its annual Capital Markets Fact Book, which reports comprehensive data on capital markets activity generally.  The U.S. equity markets represent 42.6% of the $115 trillion global equity markets, with the second largest market, the EU, accounting for 11%.  U.S. ECM activity saw an increase of 39.9% year-over-year, with $139.1 billion raised in 2023.  IPOs accounted for $20.2 billion in issuance volume and follow-on offerings accounted for $107.1 billion in issuance volume. 

The U.S. fixed income markets account for 39.4% of the $140.7 trillion of fixed income securities outstanding.  The U.S. fixed income market is 2.1x larger than the next largest market, the EU, which makes up 18.4% of the debt markets.  U.S. DCM issuances declined 6.9% year-over-year with corporate bond issuances increasing 5.6% year-over-year to $1.4 trillion.  MBS and ABS issuances accounted for $1.3 trillion (a 38.9% decrease) and $270.5 billion (a 10.7% decrease).  Of course, many of these trends have been reversed in the first half of 2024.

Source: SIFMA

Read SIFMA’s full report for more data.

On July 31, 2024, the US Securities and Exchange Commission (SEC) staff in the Division of Corporation Finance posted three new Compliance and Disclosure Interpretations (C&DIs) related to the rules and forms adopted under Regulation AB, the Securities Act, and the Exchange Act with respect to asset-backed securities. C&DIs provide guidance to those who must comply with the federal securities laws. However, because they represent the views of the staff, they are not legally binding. This Legal Update provides further detail on the three new C&DIs.

Continue reading this Legal Update.

On June 21, 2024, The Nasdaq Stock Exchange (“Nasdaq”) filed a proposed rule change with the Securities and Exchange Commission to modify the application of the bid price compliance period as a result of which a company takes action that causes non-compliance with another listing requirement. Companies that have equity securities with low trading prices often effect reverse stock splits in order to regain compliance with the minimum bid price required by Nasdaq. The reverse stock split then results in a proportionate reduction in the number of publicly-held shares and that, in turn, may have the unintended result of triggering non-compliance by the listed company with other Nasdaq listing rules. Nasdaq’s proposed rule clarifies that the listed company will not be afforded additional time in order to regain compliance as a result of the newly created deficiency. Nasdaq would amend Rule 5810(c)(3)(A) to provide that the listed company will not be considered to have regained compliance if the action its takes in order to regain compliance results in the company then falling below the numeric threshold for another listing requirement. 

A link to the proposed rule can be found here.