Corporate Transactions

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.

On Monday, October 19, I’ll be moderating a panel on Strategic Considerations for Navigating a Dual-track M&A and Initial Public Offering Pathway at the Association of Corporate Counsel’s Annual Conference here in Boston. I’ll be joined on the panel by Pete Zorn, Esq., VP of Corporate Development and General Counsel of Albireo Pharma; Stan Piekos, former CFO of NEXX Systems; and Joe Ferra, Managing Director in the Healthcare Investment Banking Group at JMP Securities. If you’re attending the ACC conference, we hope you can join us that day at 4:30 for what we expect will be a great discussion. Continue Reading ACC Annual Conference Panel: Dual-Track M&A and IPO Pathways

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.

Last week the SEC issued a no action letter that provides guidance and clarity as to how an issuer of securities can conduct a private placement in a password protected web page under Rule 506(b), without it being deemed a “general solicitation” and thereby being subject to the additional requirements imposed by the new Rule 506(c).  In the alert linked here, our colleagues Dan DeWolf and Sam Effron, who prepared the request to the SEC on behalf of CitizenVC, discuss the challenges faced by issuers seeking to offer securities through a private placement online and what issuers can do to take an offering outside of being considered a “general solicitation.”  This is cutting-edge information that can help issuers raise capital online without having to proceed under the more onerous requirements of Rule 506(c).

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.

Section 162(m) of the Internal Revenue Code precludes the deduction by public companies for compensation paid to certain covered employees in excess of $1,000,000 in any taxable year. This limitation on deduction does not apply to performance-based compensation. Such performance-based compensation is deductible so long as the following requirements are met:

  • the compensation is paid solely on account of the attainment of one or more pre-established, objective performance goals,
  • the performance goals must be established by a compensation committee comprised solely two or more outside directors,
  • the material terms of performance goals under which the compensation is to be paid must be disclosed to and approved by the shareholders, and
  • prior to payment of the performance-based compensation, the compensation committee must certify in writing that the performance goals have been attained.

Under the existing regulations, compensation attributable to stock options or stock appreciation rights are deemed to satisfy the performance-goal so long as, among other requirements, the plan under which the option or right is granted states the maximum number of shares with respect to which the option or right may be granted to any employee during any specified period and that cap is preapproved by the public company shareholders.

On March 31, the IRS issued final regulations clarifying the satisfaction of the performance-goal and shareholder approval requirement with respect to stock options and stock appreciation rights. Specifically, the IRS clarified that the performance-goal requirement is satisfied if the plan states the maximum number of shares with respect to which options or rights may be granted during a specified period to any individual employee. Further, the IRS clarified that the plan will satisfy this per employee limitation even if the plan provides the aggregate maximum number of shares with respect to which any equity-based award may be granted to any individual employee, such as restricted stock units and restricted stock. The IRS noted that this is not meant to be a substantive change in the regulations but only a clarification regarding satisfaction of the per employee limitation requirement.

The final regulations clarifying the per employee limitation requirement apply to compensation attributable to stock options or stock appreciation rights granted on or after June 24, 2011.

The final regulations also clarified the applicability of the transition rules for compensation payable pursuant to a restricted stock unit by companies that become publicly held after the grant. Generally, when a company becomes publicly held, the compensation deduction limitation under Section 162(m) does not apply to any compensation paid pursuant to a plan existing during the period prior to the company becoming public, and the company may rely on this transition relief provision until the earliest of:

  • the expiration of the plan,
  • a material modification of the plan,
  • the issuance of all employer stock that has been allocated under the plan, and
  • the first meeting of the shareholders at which directors are to be elected that occurs after the close of the third calendar year following the calendar year in which the IPO occurs or, in the case of a company that did not have an IPO, the first calendar year following the calendar year in which the company becomes publicly held.

This transition relief applies to any compensation received pursuant to the exercise of a stock option or stock appreciation right, or vesting of restricted stock (even though the compensation from time based restricted stock grants would not generally be exempt as a performance-based grant after the transition period), granted under a plan that would be eligible for the transition relief so long as the grant is before any of the above events. Under the final regulations, the IRS clarified that restricted stock units are eligible for the transition relief only if the compensation attributable to the restricted stock unit is paid (i.e. the shares underlying the award are delivered) before the first to occur of the above events, not merely granted.

The final regulations regarding the transition relief provisions apply to remuneration resulting from a stock option, stock appreciation right, restricted stock or restricted stock unit that is granted on or after April 1, 2015.

While the IRS does not deem these regulations to be significant, they do provide needed clarification to compensation committees and practitioners tasked with ensuring that compensation payable under equity and bonus plans is deductible by the companies. Moreover, private companies that become public are now on notice that the transition relief is limited for restricted stock units that vest after the transition period has terminated.

 

 

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!

 

 

Investors that own more than 5% of a public company’s securities and file under the exempt category (which includes most venture capital firms and other similar investors) are required to file their beneficial ownership reports within 45 days after the close of the calendar year (i.e., on February 14). Investors have a few extra days to file this year, as Valentine’s Day falls on a Saturday, followed by a Monday holiday. Therefore Schedule 13Gs will be due on Tuesday, February 17, 2015.

Don’t Forget Those Filings for Newly Public Companies

Investors in companies that went public in 2014 who either acquired all of their securities prior to the IPO or, if they acquired shares after the IPO, all post-IPO acquisitions plus all other acquisitions of stock during the preceding 12 months did not exceed 2% of the company’s outstanding common stock, are deemed to be exempt investors and are required to file an initial Schedule 13G by February 17, 2015 to report their holdings as of December 31, 2014.

Need a primer on this reporting obligation? To learn more about the rules and the timing of filing Schedule 13Ds and Schedule 13Gs in other circumstances, click here for a detailed memorandum.

The Massachusetts Securities Division has recently joined a number of other states in adopting a “crowdfunding” exemption from securities registration requirements for certain offerings made within the Commonwealth, with the stated purpose of enabling startups and entrepreneurs to more easily use the Internet to raise capital.  Adopted as an emergency regulation that took effect immediately, the exemption permits companies that are incorporated in Massachusetts to raise capital from Massachusetts investors.

Much has been written about crowdfunding at the federal level, which was addressed by the Jumpstart Our Business Startups Act in 2012, but for which the SEC has indicated it is in no hurry to adopt the final regulations that would allow the practice to proceed. Impatient to release the purported floodgates of investor interest in funding local businesses, several states have taken matters into their own hands in passing regulations allowing intrastate crowdfunding, using rules similar to the ones just adopted in Massachusetts.

Under the new rules, a Massachusetts company may use the exemption for offerings of up to $1 million in securities in a one-year period, and up to $2 million in securities in a one-year period if the company has made audited financial statements available to each prospective investor.  The regulations also impose restrictions on the investors in these offerings.  Investors with annual incomes and net worth of less than $100,000 are limited to purchases of the greater of $2,000 or 5% of their annual income or net worth.  Investors with incomes or net worth of $100,000 or more may purchase up to the greater of 10% of their annual income or net worth, with an investment limit of $100,000.  An investor’s annual income and net worth are to be calculated in accordance with the accredited investor calculation under Rule 501 of Regulation D.  The company must also establish a minimum offering amount and, if such amount is not met, the company must return all funds to investors.

Furthermore, offerings must be made in accordance with the requirements of Section 3(a)(11) of the Securities Act of 1933, as amended, commonly known as the intrastate offering exemption, and Rule 147 under the Securities Act, a safe harbor that issuers may use to ensure that they meet the requirements for the intrastate offering exemption.

Certain companies may not use the exemption, including investment companies; hedge funds, commodity pools or similar investment vehicles; reporting companies under the Securities Exchange Act of 1934; companies engaging in blind pool or blank check offerings; or any company involving petroleum exploration or production, mining or other extractive industries.  Certain “bad boy” exceptions also apply.

While we continue to wait patiently for the crowdfunding wheels to turn at the federal level, these rules may provide some flexibility to the small, scrappy Massachusetts startup looking to raise much-needed capital.