The SEC’s Office of the Advocate for Small Business Capital Formation (“OASB”) recently issued its 2021 Annual Report (the “Report”), which reviews the capital raising activities of a variety of companies, from startups and emerging businesses to smaller public companies. The OASB, together with the SEC’s Division of Economic and Risk Analysis, provided updated data (for July 1, 2020 through June 30, 2021) on the reliance on various exempt offering alternatives. Public offerings accounted for over $1.7 trillion of capital raised, while exempt offerings accounted for over $3.2 trillion of capital raised. We highlight notable trends from the Report below.

Initial public offerings. 2020 and the beginning of 2021 saw a significant increase in initial public offering (“IPO”) activity. Companies raised $317 billion in IPOs, with a median deal size of $225 million. IPO activity, compared to the 2019-2020 period, resulted in 3.6x more IPOs, raising 2.8x more capital. Increases in amounts raised across all sectors were noticeable. For example, technology companies raised $57 billion in IPOs within the 2020-2021 time period, compared to $7 billion between 2019-2020. Companies backed by venture capital continued to comprise the majority of exchange-listed IPOs, as shown in the following diagram:

Source: OASB Report, p. 35

Other registered offerings. $1.4 trillion was raised through other registered offerings, including follow-on and secondary public offerings. The median deal size for other registered offerings was $350 million.

IPO alternatives: Special purpose acquisition companies (“SPACs”) and direct listings. From July 1, 2020 through June 30, 2021, there were 1,005 entrants into the public market; more of these companies entered the market through SPAC offerings (as compared to through traditional IPOs), as shown by the following diagram:

Source: OASB Report, p. 35

Regulation D offerings. Companies raising capital through private placements made in reliance on Rule 506(b) of Regulation D raised over $1.9 trillion, with a median deal size of $1.8 million. Rule 506(c) offerings raised $124 billion ($850k median); and Rule 504 offerings raised $313 million ($160k median). Notably, tech companies raised $33 billion, which is a significant decrease from the $92 billion raised in the 2019-2020 time period.

Regulation Crowdfunding. Crowdfunding activities raised $174 million, with a median deal size of $130 million. The number of Regulation Crowdfunding offerings increased by 61% year-over-year in 2020, with 40% of the companies completing Regulation Crowdfunding offerings having women or underrepresented minority founders.

Regulation A. Regulation A offerings raised over $1.7 billion, with a $2.3 million median deal size. This was a relatively steady increase compared to 2019-2020 numbers. Real estate companies remain the primary issuers under Regulation A, raising $923 million, while other sectors collectively raised $854 million in the 2020-2021 time period.

Other exempt offerings. Section 4(a)(2), Regulation S and Rule 144A private placements accounted for $1.3 trillion of the capital raised within the Report’s time period.

Trends in small and emerging company financings. Of the financing options available to small companies, equity investments accounted for only 6% of external capital funding, with loans and lines of credit being the primary source used. During the pandemic, COVID-19 emergency relief was integral to the survival of many small businesses, with 91% of employers seeking relief by applying for loans through the Paycheck Protection Program.

Trends in late-stage company financings. Capital raised through venture capital (“VC”), private equity and other investment funds continues to increase year-over-year. VC deal value reached $164 billion in 12,084 deals in 2020, with 2021 on track for a record-breaking year with $150 billion raised in 7,058 deals through June 30, 2021.

Source: OASB Report, p. 29

During the pandemic, many firms focused resources on later-stage companies over angel/early-stage companies. Late stage private placements raised $110 billion in 2020 and $109 billion was raised in 2021 through June 30. Crossover investors also continuing to provide strategic value to companies. 74% of IPOs, by count, were backed by crossover investors. VC-backed exit activity in 2021 surpassed that of 2020, with $373 billion of exits raised in aggregate.

Trends in environmental, social and governance (“ESG”) investing. The Report identified ESG-related trends in 2020-2021, including the launch of more than 20 ESG-focused SPACs raising over $5 billion in aggregate in 2020. In 2020, companies hired a marked increase in the number of IPO underwriters classified as minority-, women- or veteran-owned firms, as shown in the following diagram:

Source: OASB Report, p. 36

The NYSE’s yearly statistics release highlights a second consecutive year of record new listings and the exchange’s increased focus on sustainability.  This year’s listings added $1 trillion of new market capitalization to the exchange, with a total of 2,400 companies listed.  Technology, biotech, and consumer products companies were prominently represented.  Four of the five largest IPOs and seven of the ten largest international IPOs in 2021 listed on the NYSE.  As companies demonstrate renewed interest in IPO alternatives, the exchange saw four direct listings, following the two direct listings in 2020.  Companies also listed on the exchange through SPAC initial business combinations, spinoffs and transfers from other exchanges.

Growing issuer consciousness about, and increased investor interest in, ESG factors are reflected in the NYSE’s release.  To date, more than two-thirds of companies listed in the MSCI USA ESG Index Leaders are listed on the NYSE.  Overall, 99% of IPOs listed on the NYSE in 2021 had at least one woman on their board, as issuers strive for greater gender diversity on public company boards of directors.  Notably, FIGS, a medical scrubs company, which is led by two female co-founders, and undertook an IPO, listed on the NYSE.  The exchange also saw an increase in environmentally-focused companies, such as electrical vehicle companies, as well as companies devoted to social impact. In order to promote sustainability, the NYSE partnered with Intrinsic Exchange Group, published the NYSE Best Practice Guide for ESG Disclosure, maintained the NYSE’s Board Advisory Council, and provided tools and services for the listed issuer community, specifically ICE Data Viewer for ESG. 

Biotech companies continued to account for a significant portion of listings on the NYSE, with the largest biotech IPO of 2021, Ginkgo Bioworks, listing on the NYSE. The first Bitcoin futures-linked ETF, ProShares, also was launched on the NYSE this year.

The full release can be found here.

FINRA posted a set of FAQs on the filing requirements of Rules 5122 (Private Placements of Securities Issued by Members) and 5123 (Private Placements of Securities).  The FAQs discuss filing retail communications relating to private placements, including where to file such communications, whether updated versions of retail communications need to be refiled, when to file, how to file retail communications such as videos and websites, retail communications promoting or recommending multiple private placements and which firm is responsible for filing when one FINRA member firm submits filings on behalf of other member firms.

The FAQs are available at: Frequently Asked Questions Related to Filing Requirements of Rules 5122 and 5123 |

On December 20, 2021, the US Securities and Exchange Commission’s Division of Corporation Finance (“Division”) issued the Sample Letter (“Letter”) to companies based or having the majority of their operations in the People’s Republic of China (“China-based Companies”). The Letter requires China-based Companies to disclose in their public filings “more prominent, specific and tailored” risks associated with investing in these companies in compliance with their disclosure obligations under the federal securities laws and to enable investors to make informed investment decisions.

In the Letter, the Division provided a sample comment letter to a China-based Company identifying the types of disclosures that should be addressed, including the relevant risks and the potential impacts on such company’s operations. These issues include, (i) the corporate structure of the China-based Company, (ii) the relationship between the entity conducting the offering and the entities conducting the operating activities, (iii) the operations conducted by subsidiaries and through contractual arrangements with a variable interest entity (“VIE”) based in China, (iv) potential impact if VIE structure were disallowed or the contracts were determined to be unenforceable, (v) the potential impact of the Holding Foreign Companies Accountable Act and related rules in the listing and trading of its securities, (vi) permission or approval required to be obtained from Chinese authorities to operate its business or offer securities to foreign investors, (vii) how cash is transferred within the organization and (viii) the Chinese government’s significant oversight and discretion over the conduct of the company’s business.

For SPACs, the Division requires them to also disclose (i) if their sponsor/s or executive office/s are in China or have significant ties with China, (ii) if contemplating to merge with a company incorporated in China, (iii) what challenges SPAC investors might face in enforcing their rights under the SPAC’s controlling agreements with the VIE, (iv) any impact Chinese laws or regulations may have on the SPAC’s ability to consummate a business combination with an operating company in China and (v) the cash flows associated with the business combination.

A copy of the Letter may be viewed here.

On December 20, 2021, Commissioner Elad L. Roisman submitted his resignation from the US Securities and Exchange Commission (SEC), indicating an intent to step down by end of January 2022. In his statement, Commissioner Roisman expressed gratitude for his time as Commissioner and Acting Chairman of the agency, stating that it has been the “greatest privilege of [his] professional life.” Commissioner Roisman has been with the SEC since September 2018, also serving as Acting Chairman for a period of time from 2020–2021.

Commissioner Roisman focused much of his tenure at the SEC on updating and improving the proxy voting process, protecting elder investors, and modernizing the US Treasury markets. With respect to the SEC’s policymaking over the past several years, Commissioner Roisman had a reputation for being a consensus builder, often expressing an open mind in his public statements, even when he personally would have preferred a different approach.

Commissioner Roisman did not state his plans for the future. Prior to serving as an SEC Commissioner, he was the Chief Counsel for the US Senate Committee on Banking, Housing, and Urban Affairs. Prior to that, he served as Counsel to SEC Commissioner Daniel M. Gallagher. Earlier in his career, he was Chief Counsel at NYSE Euronext and also practiced law at the law firm of Milbank, Tweed, Hadley & McCloy LLP in New York.

See Chair Gensler’s brief statement, as well.

On December 15, 2021, the US Securities and Exchange Commission (the “SEC”) issued proposed amendments to its existing rules regarding disclosures about purchases of an issuer’s equity securities by or on behalf of the issuer or an affiliated purchaser, commonly referred to as “buybacks.” The Proposed Amendments would apply to issuers that repurchase securities registered under Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”), including foreign private issuers and registered closed-end investment management companies (“registered closed-end funds”).

Read the full Mayer Brown Legal Update.

On December 15, 2021, the Securities and Exchange Commission (the “SEC”) proposed amendments (the “proposal”) to Rule 10b5-1 under the Securities Exchange Act of 1934 (the “Exchange Act”) and related disclosure obligations for public companies. The proposal would (i) add new conditions to the availability of the affirmative defense to insider trading liability contained in Rule 10b5-1 that are designed to address concerns about abuse of the rule by issuers and insiders to trade securities on the basis of material nonpublic information (“MNPI”) and (ii) enhance public disclosure by issuers and insiders of such trading plans. This Mayer Brown Legal Alert describes the proposal and discusses some practical considerations.

This practice note discusses recent market trends regarding registered direct offerings. It begins by discussing the advantages these offerings provide to issuers and continues with a review of current deal structure and process and applicable shareholder approval requirements. It concludes with an overview of market trends for registered direct offerings, including recent notable transactions, activity level, and industry insights.

Read the full article here.

In their article Insider Giving in Duke Law Journal, S. Burcu Avci, Cindy A. Schipani, H. Nejat Seyhun, and Andrew Verstein, use their dataset to illustrate the scope, strategies, and effects of insider giving.  In this context, insider giving refers to shareholders with inside information and/or the ability to backdate their gifts donating securities to charity before price drops, allowing them to claim tax deductions.  The authors highlight strategies used by directors and officers using their access to corporate information to time their charitable giving.  They identify four strategies:  waiting game, spring loading, gun jumping, and bullet dodging.  The study advances the premise that insider giving is a widely-used alternative to insider trading because it faces a lower risk of enforcement.  Shareholders also benefit from lax reporting requirements for gift giving.  The laws applicable to insider giving are less clear and less well developed compared to those specifically addressing insider trading.  However, remarks by SEC Chair Gensler call for amendments to Rule 10b5-1, which may address insider giving, see more on 10b5-1 plans here.

The study sample includes US common stock from January 1986 through December 2020; the total number of gifts is 9,858.  Notably, they find that in the year before gifts were made by large shareholders the stock price rose about 6% abnormally relative to the market index, and the stock price fell abnormally about 4% relative to the overall stock market following the gift date.  The average maximum stock price occurred near the day of the gift.  Thus, indicating, according to the authors, that potentially manipulative timing strategies were used for gift giving.  In addition, their data demonstrates that access is more important than backdating (even though the two can occur concurrently). However, their data tends to indicate that backdating appears to be commonplace; for gifts reported between 3 and 20 day delays, stock prices rose about 5% before the gift and declined 5% in the year after, suggesting possible backdating.

The authors’ findings indicate that large shareholder gifts to charity are primarily based on material non-public information from top executives, and less so from backdating.  According to the authors, these practices harm corporate issuers, retail traders, and the market.  The authors call for reforms including less lenient policies towards suspiciously timed gifts, which potentially involves amendments to current securities laws.  This article can be read here.

Recent investigations share findings that over 130 US Federal judges presided over cases in which they had a financial conflict of interest since 2010.  In a 422-4 vote this week, the House passed a bipartisan bill that would require US federal judges to share their financial disclosure reports publicly.

Under this bill designed, which is modelled on the Stop Trading on Congressional Knowledge Act of 2012 (the “STOCK Act”), which makes insider trading for members of Congress illegal, US Federal judges must now:

  • disclose stock trades worth over $1,000 within 45 days; and
  • publish securities transactions reports online within 90 days of filing.

The bill also requires the creation of an online database containing information (without redactions) related to US Federal judges’ financial disclosures. The database must be available for download, complete with sorting and searching capabilities.  It is unclear whether the legislation will be enacted.