CBInsights recently published its Global Fintech Report for the third quarter of 2019. For 2019, global fintech funding totaled $24.6 billion through the third quarter of 2019, which is still a decline from 2018. Global venture-backed fintech deals rebounded during the quarter in the United States but remain at a three-year low. Globally there are 58 fintech unicorns that are in aggregate valued at $213.5 billion. Of these, 33 are in the United States. Asia fintech venture-backed equity funding totaled $1.8 billion across 152 deals in third quarter 2019. North America fintech venture-backed equity funding totaled $4.3 billion across 182 deals. There were 10 mega-round investments completed in the third quarter 2019 for a total of $1.9 billion. There were two companies that became unicorns during the quarter, an insurer, Hippo, and a working capital lender, C2FO. Europe fintech venture-backed equity funding totaled $1.7 billion across 90 deals.

In this Lexis Practice Advisor Practice Note, we discuss two releases published by the Securities and Exchange Commission (SEC) on August 21, 2019. One release contains interpretation and guidance regarding the applicability of certain rules (Proxy Voting Advice Guidance) promulgated under Section 14 of the Securities Exchange Act of 1934, as amended to proxy voting advice. The other, which technically is a “policy statement,” provides guidance on the proxy voting responsibilities of investment advisers (Investment Adviser Guidance) under the Investment Advisers Act of 1940, as amended.  As both sets of guidance will be effective upon publication in the Federal Register, both sets will apply to the 2020 proxy season.

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The Securities and Exchange Commission announced that it will host a conference on December 4, 2019 entitled “The State of Our Securities Markets.” The conference includes representatives from various government agencies, as well as private sector representatives. Areas of focus at the conference will include global macroeconomic trends—and their impacts on our capital markets; changes to the global equity and credit markets—including how today’s markets differ from those of the early 2000s and market concentration and fragmentation within certain areas of the securities markets, including relevant causes and potential risks and effects. The panel on equity and debt capital markets is slated to discuss changes to the global equity and credit markets, including how today’s markets differ from those of the early 2000s, and the dynamics, trends, and risks shaping tomorrow’s markets, including corporate debt levels and high yield debt, CLOs, the impact of economic growth slowdown in the U.S. and Europe, dynamics in China and Asia, bank risk, and relevant regulation. The program will be webcast. See details here.

In this Lexis Practice Advisor Practice Note, we discuss new Rule 163B adopted by the US Securities and Exchange Commission (SEC). On September 26, 2019, the SEC extended the ability to test the waters to all issuers by adopting the highly anticipated new Rule 163B under the Securities Act of 1933, as amended (the Securities Act). The new rule allows any issuer, or any person acting on the issuer’s behalf, to engage in test the waters communications with potential investors that are reasonably believed to be institutional accredited investors or qualified institutional buyers, either prior to or following the date of filing of a registration statement relating to the offering, without violating the Securities Act’s “gun jumping” rules. Prior to Rule 163B, the ability to test the waters was limited to emerging growth companies only.

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IPOs in 2019 have raised more capital across a smaller number of deals, as we have previously blogged. EY’s recent Trends in US IPO Registration Statements report notes that the US Securities and Exchange Commission (“SEC”) has prioritized increasing access to the public capital markets in an environment where more companies are staying private longer. EY cites an SEC Division of Economic and Risk Analysis 2018 study that reported that companies raised almost $2.6 trillion more capital through the US private markets than through registered offerings from 2010 to 2016. The SEC has worked toward this goal by, among other things, changing the definition of a smaller reporting company, extending “testing-the-waters” provisions that were formerly only available to emerging growth companies (“EGCs”) to non-EGCs, and allowing non-EGCs to submit IPO registration statements for confidential SEC review. According to the report, EGCs have accounted for almost 90% of IPOs in the first three quarters of 2019.

Created by the Jumpstarting Our Business Startups (“JOBS”) Act, an EGC may elect to make scaled disclosures in its IPO registration statement, as well as confidentially submit its registration statement. Citing the SEC’s Annual Performance Report, EY’s report notes that the SEC issued initial comments to confidentially submitted registration statements in an average of 25.5 days in 2018. In 2018, a median of 125 days elapsed from initial submission to IPO date for both EGCs and non-EGCs.

Among the scaled disclosures available to EGCs, between 2014 and 2019, 98% of EGCs opted for reduced disclosure of executive compensation, 74% opted for two years of audited financial statements (instead of three), and 28% opted for the adoption of new accounting standards using private company effective dates. The report noted that 64% of EGCs in the first nine months of 2019 elected to use private company effective dates for new accounting standards. Compared to 51% in 2018, this increase is likely attributed to EGCs wanting an additional year to adopt new accounting standards, such as new accounting standards on leases and credit losses, which become effective in 2020.

The report also mentions that 4% of companies that conducted an IPO in the first three quarters of 2019 reported one or more restatements of their financial statements in their registration statements. About 40% of companies in the first nine months of 2019 have voluntarily disclosed material weaknesses in their registration statements. The top three material weaknesses disclosed included (1) lack of personnel with appropriate experience in US GAAP or SEC reporting; (2) financial statement close process; and (3) information technology general controls.

Securities and Exchange Commission Chair Jay Clayton made remarks at the University of Pennsylvania, which covered a broad range of topics. Chair Clayton noted that under his tenure the SEC’s Reg Flex agenda has become less aspirational and has been more focused on identifying the near-term actions that the SEC expects to undertake. To that end, Chair Clayton reported that the SEC advanced 23 of the 26 rules in the near-term agenda, or 88% of all items. Of the 26 rules, the 11 listed for adoption by 2018 were all completed. The number of items on the SEC’s near-term agenda increased to 39. As of the date of his remarks, the Chair noted that the SEC has advanced 33 of those 39 rulemakings, or nearly 85% of the items. The Chair then turned to a discussion of the importance of modernizing regulations to keep up with market and other developments, and pointed to a number of examples of rulemaking undertaken by the SEC that are examples of the efforts to modernize the regulatory framework.

The Chair spoke about the SEC’s rule in market monitoring, which is not commented on much. Chair Clayton noted that the SEC is monitoring developments relating to monetary policy. With respect to the debt markets, Chair Clayton noted that a much larger and growing share of debt, including corporate debt, is now held outside of banks, including by funds. The SEC is evaluating what this may mean for market structure. He discussed the SEC’s collaborative efforts with the Federal Reserve, the Treasury and other agencies. In addition to monitoring the size of corporate debt, the SEC also is monitoring the location and type of holders, and credit quality, as well as interrelatedness, such as the connections among banks and non-banks arising from credit lines to investment and other types of funds, clearing banks’ supply of balance sheet capacity to permit client clearing, exposure of banks to funds— of all types—public, private, open, closed, levered, etc.—through derivatives, and overlaps in portfolio holdings, particularly those holdings susceptible to similar price and liquidity shocks.

See the text of his full remarks here.

Date: December 2, 2019
Time: 1:00pm – 2:00pm ET
Speakers: Polia A. Nair, Ernst & Young LLP & Anna Pinedo, Mayer Brown LLP

During this webcast, we will review the overall areas of focus identified by the SEC staff for public companies, the disclosure issues that members of the SEC staff have highlighted as important for upcoming annual reports on Form 10-K and Form 20F, and discuss the particular hot button issues for life sciences companies. Among other things, we will discuss:

• SEC comment letter trends;
• A review of SEC proposed amendments to Regulation S-K disclosure requirements;
• Early experiences with CAMs;
• Revenue recognition comments relating to licensing and collaboration agreements;
• Other SEC disclosure areas of focus;

For more information, or to register, please visit our event site.

Healthcare companies have raised over $37.5 billion globally in the first three quarters of 2019 in over 3,409 private venture funding rounds according to a recent CB Insights report. Compared to full year 2018, the report’s projections for funding through the end of 2019 will not surpass 2018’s $54.7 billion of private venture funding. Globally, there are now 37 healthcare unicorns valued at $92.1 billion. Of these healthcare companies valued at over $1 billion, 18 are based in the United States.

Digital health companies now account for 31% of healthcare deals, raising $12.4 billion across 1,052 deals globally. The digital health sector includes companies within the healthcare industry that focus on technology as a key differentiator, according to CB Insights. Within this subsector, the percentage of late-stage financings continues to rise. Through the third quarter of 2019, 19.7% of financing rounds have been Series C or later. Additionally, digital health companies have raised multiple $100 million plus, or “mega rounds.” In the United States, digital health companies have completed eight mega rounds in 2019.

A few healthcare subsectors have seen funding decline. For example, microbiome startups have raised $502 million in private venture capital across 51 deals—this is a 44% decrease compared to the end of the third quarter of 2018. Virtual primary care startups have also seen funding decline globally by almost 60% year-over-year. These companies have raised $889 million across 40 deals within the first nine months of 2019, with $605 million of funding raised in the third quarter alone.

Startups focused on artificial intelligence in healthcare saw a 47% increase in funding year-over-year, raising over $3.1 billion across 261 deals through the end of the third quarter of 2019. While cannabis companies have raised $2.7 billion in private venture capital in 2019, the report notes that publicly traded cannabis stocks have lost market cap due to the vaping crisis, regulatory uncertainty around CBD, as well as legislative developments.

On November 5, 2019, the US Securities and Exchange Commission proposed several amendments to Rule 14a-8 promulgated under the Securities Exchange Act of 1934. The proposed amendments are intended to “recognize the significant changes that have taken place in our markets in the decades since these regulatory requirements were last revised….” This Legal Update discusses the proposed changes and notes practical considerations for public companies.

Read our Legal Update.

Securities and Exchange Commission Chair Jay Clayton gave opening remarks in connection with the Investor Advisory Committee meeting.

The Committee’s meeting agenda includes a discussion of whether and how investors use environmental, social and governance (ESG) data in connection with deciding on investments. Institutional investors have been increasingly vocal regarding their interest in ESG matters and in particular in receiving additional disclosures from public companies regarding their ESG policies, oversight of ESG matters at the board of directors level, and related issues. Similarly, proxy advisory firms also have announced voting guidelines relating to ESG matters. Chair Clayton highlighted his interest in understanding the data that companies use to make decisions and what data do investors use to make investment decisions. Chair Clayton noted that, with respect to ESG matters, not all companies in the same sector use the same or comparable data in their decision making and investor analysis also varies widely. Consistent with prior comments, as well as with comments made by other Commissioners, Chair Clayton noted that the disclosure framework has focused on principles-based requirements that are based on eliciting information that is material to investors.

The Chair also noted his interest in the Committee’s views regarding the second agenda item, which is a discussion of the concept release on harmonization of securities offering exemptions.

Finally, the Chair offered suggestions of topics and areas of focus for the Committee, which we reprint below, as they provide some insight on Commission priorities:

  • “Self-directed individual retirement accounts (IRAs): Do retail investors in self-directed IRAs have sufficient protections, and is there anything further the Commission should do to help these investors?
  • Teachers and military service members: What else can and should the Commission do to protect America’s teachers and military service members when they invest in the securities market?
  • Minority and non-English speaking communities: Are there any regulatory barriers or hurdles that may be discouraging access to investment services for minority and non-English speaking communities, or leading to higher prices or inferior financial product choices? What can the Commission do to address this topic from a regulatory or investor education point of view?
  • Retail access to investment opportunities: How can we help ensure that retail investors have access to the same attractive investment opportunities available to institutional investors in our private markets, while still providing appropriate investor protections? Are there changes in our regulation of funds that we should consider, including regulatory changes that would focus on the alignment of retail investor interests and expectations with the interests of fund managers?
  • Retail investor protections in an increasingly global world: What are the differences in protections afforded to retail investors in U.S. and non-U.S. jurisdictions, respectively, and do retail investors understand these differences?
    • Take one of our topics today—ESG. What assurances do retail investors have in the U.S. and outside the U.S. that a company that claims to meet certain ESG standards actually does so? I have serious concerns that retail investors do not appreciate the lack of protections in this regard when investing in companies outside the U.S., and I continue to be concerned that it is not adequately discussed.
    • On the topic of audit quality, I also have concerns that retail investors do not appreciate the regulatory challenges of investing in registrants whose auditor is based in certain jurisdictions. Even in cases where the auditor signing the audit opinion is based in the United States, investors may not be focused on the fact that significant portions of the audit may have been done by affiliate firms in other jurisdictions. What more can we do to ensure that investors are cognizant of the current regulatory challenges?
  • LIBOR transition: The pending LIBOR transition presents risks that market participants, working with central banks and regulatory authorities, need to address. What can the Commission do to help market participants address these risks and avoid the substantial frictions, including frictions that will harm investors directly (including retail investors), through higher costs, and as a result of uncertainty more generally?
  • Index construction: Do retail investors and those who advise them understand how indices are constructed from (1) a technical perspective (e.g., weightings, adjustments and the like), (2) from a market exposure perspective (e.g., opportunities and risks the index incorporates), and (3) as a subset of those opportunities and risks, any key value judgments the index provider has made (e.g., to include or exclude certain types of companies)? What can we do to ensure that investors understand these topics? Should we encourage or require more disclosure?
  • Credit rating agencies: How much do retail investors rely on credit rating agencies and how much influence do they have in today’s marketplace? Are they appropriately disclosing, monitoring and managing their conflicts? Are investors actually harmed by the compensation models of credit rating agencies? Are there alternative payment models that would better align the interests of rating agencies with investors?”