The IPO market in 2016 was abysmal, especially for the life sciences sector. Annual IPO proceeds fell to the lowest level since 2003. The IPO market forecast for 2017 is uncertain. Some life sciences companies that went public during the last IPO wave ending in 2015 still have plenty of cash yet they have “hit the wall” clinically, making them “fallen angels”. In this environment, the “fallen angel” reverse merger has emerged as an attractive way for many promising life sciences companies to raise capital and to go public.

In response to these trends, my colleague Matt Gardella and I have assembled a stellar panel of experts for a discussion about fallen angel reverse mergers as an alternative to the traditional IPO. Please join us at Mintz Levin on Monday, March 6th starting at 3:00 PM to learn whether this important approach to going public might be right for your company. Our panel will provide the perspectives of the deal lawyer, the private company, the fallen angel, the investor, the investment banker, and the Nasdaq listing consultant. You will gain insights into the key issues involved in evaluating a fallen angel reverse merger strategy, negotiating a deal, smoothly completing a transaction, and being ready for life as a public company.

Please note: This panel is an in-person event at our Boston offices with a networking period afterwards.

Click here for information and registration.

A recent First Circuit decision raises the pleading bar for plaintiffs asserting violations of Section 11 of the Securities Act. Only would-be plaintiffs who acquired a security that is the direct subject of a prospectus and registration statement are entitled to sue under Section 11. That right to sue is limited to plaintiffs who either purchased their shares directly in the offering, or who otherwise can trace their shares back to the relevant offering. This has been referred to as the “traceability” requirement. Until now, Section 11 plaintiffs have generally sought to establish standing by pleading a simple statement to the effect that they “purchased shares of stock pursuant and/or traceable to the offering.” For companies whose stock is all traceable to a single offering, this pleading burden presents little burden, as all shares self-evidently derive from the offering. But when stock has been issued in multiple offerings, a plaintiff has to plead that his or her shares were issued under the allegedly false or misleading registration statement, and not some other registration statement.

Continue Reading First Circuit Strengthens “Traceability” Pleading Requirement for Section 11 Claims

Our Venture Capital & Emerging Companies practice group analyzed the SEC’s recently released equity crowdfunding rules (referred to by the SEC as “Regulation Crowdfunding”) in a concise and easy-to-digest article authored by Sam Effron and Kristin Gerber.

The article does a great job of highlighting some of the regulation’s shortcomings, such as the limits it places on amounts that can be raised (at both the company and investor level); the requirement that companies complete and file a new Form C; and certain ongoing reporting obligations for companies.  In all, the added costs, burdens, and risks associated with complying with this regulation means that in most cases there are better alternatives (such as raises under Rule 506) for start-up companies looking to access the capital markets.

Following up on their discussion last week about the SEC’s CitizenVC no action letter, our colleagues Dan DeWolf and Sam Effron have written another alert about the SEC’s recently issued compliance and disclosure interpretations relating to private placements under Regulation D.  For example, they discuss the treatment of securities offerings to an angel investing club and to large groups at venture fairs and demo days; what constitutes a pre-existing relationship; and what makes a relationship “substantive” so that contact with an investor is not considered a “general solicitation” under the SEC’s rules.  You can read more here.

Mintz Levin’s Institutional Investor Class Action Recovery practice recently launched a new blog: Class Action Recovery for Mutual Funds.  This new blog will report on various happenings in class action cases that may not be covered in other securities litigation blogs or publications, and that will be of special interest to institutional investors. With the claims process itself becoming more adversarial, the blog will follow developments in the administration of claims, including ways in which defendants may be participating in the claims process with the intent to reduce valid claims   Additionally, the blog will cover interesting developments in securities class action cases, such as noteworthy objections, motions and opt-outs, as well as new developments in non-U.S. securities actions that will be of interest to those seeking to recover in foreign jurisdictions against non-U.S. issuers.

Mintz Levin Partner Pam Greene was interviewed on Friday by Law360 regarding the advent of Regulation A+ and its anticipated impact on capital-raising by smaller companies. Pam noted that Tier 2 offerings can be likened to a “mini IPO” because they let companies raise capital under less onerous requirements than a full-fledged public company faces. “This will be an easier path for smaller companies to go public that is less expensive than an IPO,” Greene said.

Read more here.

The SEC has also posted links to the new forms to be used in connection with Regulation A+ offerings and post-offering reporting:

Form 1-A: Regulation A Offering Statement

Form 1-K: Annual Reports and Special Financial Reports

Form 1-SA: Semiannual Report or Special Financial Report Pursuant to Regulation A

Form 1-U: Current Report Pursuant to Regulation A

Form 1-Z: Exit Report Under Regulation A

Form 8-A: Registration of Certain Classes of Securities Pursuant to Section 12(b) or (g)

 

Despite the attempt by the State of Montana’s securities division to stay the rule, Regulation A+ is effective as of today, June 19, 2015.

Regulation A+ allows companies organized in the U.S. and Canada to raise money from investors, even those that are not accredited investors, under a less burdensome regime than traditional going public transactions and through the use of general solicitation, even to unaccredited investors, which is not allowed under current private placement rules.  Regulation A+ replaces and expands the seldom used Regulation A by increasing the offering limit under the rule from $5 million to up to $20 million for “Tier 1 Offerings” and up to $50 million for “Tier 2 Offerings.” The regulation also preempts state law review for Tier 2 Offerings, for which the disclosure documents will instead be reviewed by the SEC.

While Regulation A+ has critics on both sides of the table – that it doesn’t go far enough in providing flexibility, or that it goes too far and does not adequately protect unsophisticated investors – it should be a welcome avenue for smaller companies who believe their companies have significant value to test the appetite of investors, raise capital publicly at a lower cost, and become accustomed to the public disclosure regime by preparing less burdensome ongoing disclosure. It remains to be seen how companies take advantage of these new rules and whether investors are at the ready.

The Securities and Exchange Commission adopted yesterday a new set of regulations entitled Regulation “A+,” designed to provide a more streamlined approach for small and mid-sized companies to offer securities to the public. These rules will become final 60 days after publication by the SEC in the Federal Register. We will be preparing a detailed client advisory analyzing these new rules for our friends and clients.

Regulation A+ was initially proposed by the SEC in December 2013 as an amendment to little-used current Regulation A.  The purpose of this new rule is to implement Section 401 of the Jumpstart Our Business Startups Act (the JOBS Act) which directed the SEC to adopt rules exempting offerings of up to $50 million of securities annually from the registration requirements of the Securities Act of 1933, as amended. Regulation A+ as adopted yesterday provides for 2 tiers of offerings with differing requirements.  Tier 1 is for offerings of securities of up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer; and Tier 2 is for offerings of securities of up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer. Both tiers are subject to certain basic requirements, while Tier 2 offerings are also subject to additional disclosure and ongoing reporting requirements, such as filing an offering circular with the SEC which will be reviewed by the SEC before qualifying the offering, audited financial statements, and annual reports. Additionally, the amount of securities a non-accredited investor may purchase in an offering will be capped when buying securities not listed on a national exchange.

These rules also provide for the preemption of state securities law registration and qualification requirements for securities offered or sold to “qualified purchasers” in Tier 2 offerings. Tier 1 offerings will be subject to federal and state registration and qualification requirements; however, companies may take advantage of the coordinated review program recently developed by the North American Securities Administrators Association (NASAA), the association of state regulators, that is expected to reduce the compliance costs for small businesses seeking to receive state approval for these offerings.

However, as with many of the rules recently proposed or adopted by the SEC, this one is not free from criticism, as NASAA yesterday released the following statement:

“We appreciate that all five Commissioners recognize the efforts of state securities regulators and NASAA to successfully implement a modernized and streamlined Coordinated Review program for Regulation A offerings to help small and emerging businesses raise investment capital. The program has been lauded for effectively streamlining the state review process that promotes efficiency by providing centralized filing, unified comments, and a definitive timeline for review.

However, it appears that the SEC has adopted a rule that fails to fully recognize the significant benefits of this program to issuers and investors alike. We continue to have concerns that the rule does not maintain the important investor protection role of state securities regulators and must look more closely at the final rule as we evaluate our options.”

The SEC hopes that Regulation A+ will fare better than the current Regulation A and become a more practical way for smaller issuers to access the public markets. Only time will tell if these new offering requirements will lead to easier access to capital.

On March 12, 2015, SEC Chair Mary Jo White gave a speech at the Corporate Counsel Institute at Georgetown University that shed light on disqualifications, exemptions, and waivers under the federal securities laws.  Most notably during her speech, SEC Chair White provided the factors that the Commission will consider when determining if a person should receive a waiver from a statutory disqualification.

SEC Chair White began her speech by explaining how disqualifications “guard against future participation in certain capital market activities by entities or individuals whose misconduct suggests that they cannot be relied upon to conduct those activities in compliance with the law and in a manner that will protect investors and our markets.”  White then noted that in order to temper the potential over-breadth of disqualification provisions under the federal securities laws, the SEC may issue waivers upon a showing of good cause.

White explained that the SEC has and will continue to determine whether to grant waivers on a case-by-case basis, based on the Commission’s determination of whether the entity or individual, going forward, can engage responsibly and lawfully in the activity at issue in the particular disqualification.  White then enumerated the various factors that her staff considers in determining whether an entity or individual has shown good cause to support a waiver from disqualification under the federal securities laws.  These factors include:

Continue Reading Factors the SEC Considers When Deciding Whether to Grant a Waiver to a Statutory Disqualification

Please join us at 12:30 p.m. on March 10, 2015 for a webinar titled, “Preparing for and Addressing Activist Shareholders: A Case Study from the Valeant/Pershing Square Bid for Allergan.”  My colleague Joel Papernik and I will be discussing a topic that rose to prominence for many public companies in 2014 and that shows no signs of abating in 2015.  Joel will begin the presentation with an overview of the existing landscape of shareholder activism, and then will launch into a discussion of the general defensive measures companies are taking even before being targeted by an activist shareholder.  During the second half of the presentation, I will use the highly-publicized tender offer that Valeant and Pershing Square made to Allergan as a case study for exploring how the federal securities laws can be implicated in a proxy contest and tender offer.  We are presenting this webinar in conjunction with the Northeast Chapter of the Association of Corporate Counsel.  We hope you can tune in!