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.

Pursuant to Section 1502 of the Dodd-Frank Act, which added new Section 13(p)(1) to the Securities Exchange Act of 1934, as amended, the SEC promulgated Rule 13p-1 (the “Conflict Minerals Rule”), which required that issuers that manufacture (or contract to manufacture) products in which conflict minerals are “necessary to the functionality or production of the product” are required to disclose whether or not their products contain tin, gold, tantalum, or tungsten mined from the Democratic Republic of Congo (the “DRC”) and nine of its neighboring countries.  This provision was included in the Dodd-Frank Act at the request of legislators who believed that the process of mining for and producing these particular minerals in certain countries is contributing to a grave, ongoing humanitarian crisis in that region of Africa. Continue Reading DC Circuit Court Reaffirms Earlier Decision Partially Invalidating Conflict Minerals Rule on First Amendment Grounds

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).

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!

 

 

On Monday, the Securities and Exchange Commission (the “SEC”) proposed rules requiring disclosure of companies’ policies with respect to hedging transactions, in order to implement Section 955 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The rules do not prohibit hedging transactions or require companies to adopt policies with respect to hedging, but would instead require companies to disclose whether any corporate hedging policies exist and whether they permit directors, officers or other employees who receive equity securities as part of their compensation, or otherwise hold equity securities of the issuer, whether directly or indirectly, to hedge or offset any declines in the market value of those equity securities.

Many companies already prohibit hedging transactions as part of their corporate governance policies, or at the least require pre-approval by a policy administrator before such transactions can be entered into. Hedging by company personnel is generally frowned upon as a means of reducing the economic risks of share ownership.

Currently, Item 402(b) of Regulation S-K requires certain disclosures related to hedging policies, but only with respect to named executive officers of an issuer.  Furthermore, Item 402(b) does not apply to smaller reporting companies, emerging growth companies or registered investment companies.

The rules proposed on Monday would add new paragraph (i) to Item 407 of Regulation S-K, and would require companies to disclose, in annual meeting proxy and information statements, whether they permit employees and directors to hedge their companies’ securities.  Unlike existing requirements, the rules would not exempt smaller reporting companies, emerging growth companies, or closed-end investment companies that have shares listed on a national securities exchange, and would instead apply to all companies subject to the federal proxy rules.

Congress, as part of the Dodd-Frank Act, mandated the proposed rules to provide shareholders with information regarding whether employees or directors are permitted to engage in transactions that “avoid the incentive alignment associated with equity ownership.”  The proposed rules are the second of four sets of rules required to be adopted by the SEC under the Dodd-Frank Act relating to executive compensation, each of which is intended to provide investors with additional information about the governance practices of the companies in which they invest. The first set of these rules, pertaining to the ratio of the CEO’s compensation to that of a company’s median employee, have remained in proposal form since September 2013.

The SEC will collect public comments on the rule for 60 days following publication in the Federal Register. We’ll provide additional information as to the rules when they are finalized.

 

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.

IPO recovery? Last year was the most active year for IPOs in the United States since 2000. That’s right: an astounding 275 IPOs were completed in 2014, topping the 2013 total of 222 by more than 23%.[1] Total U.S. IPO proceeds also shattered 2013’s high-water mark of $55 billion (most since $96.9 billion in 2000) with a whopping $85 billion in proceeds. These proceeds, including the highest quarterly total (Q3: $37 billion) since the fourth quarter of 1999 ($46 billion), were boosted by the record-setting $22 billion IPO from Chinese e-commerce giant Alibaba in September 2014.[2]  The year 2000 (over 400 IPOs) was the last year of a 10-year boom in US IPOs that reached its peak in 1996 (over 700 IPOs).

After the “irrational exuberance” of the tech bubble of the late 1990s, the U.S. IPO market has been slow to regain momentum. It took four years to cross the mark for 200 IPOs in a year, after which the market was roughly flat for another three years. This slow growth was dealt a major blow, however, by the 2008 financial crisis: only 31 IPOs were completed in 2008, and it wasn’t until 2013 that we crossed the mark for 200 IPOs in a year again, with a total of 222 IPOs.

US IPO Activity between 2000 and 2014

 

2014 U.S. IPO Statistics:

  • 275 IPOs, $85.2b raised. 275 IPOs represents a 23% increase over 2013 totals.
  • Highest sector total: 102 healthcare IPOs, boosted by the continued biotech boom. Biotech issuance nearly doubled from 37 in 2013 to 71 in 2014, good for 25% of total deal volume.
  • Average IPO performance: 21% (above 10-year mean, but below 41% in 2013).
  • Alibaba and 10 other companies posted >$1b deals, a post-2000 record.
  • Energy IPOs beat their previous record with over $12b in proceeds raised. This includes traditional oil and gas companies.
  • With 7 IPOs in excess of a billion dollars, the financial industry increased IPO proceeds by 82% over 2013. The number of offerings fell by 20% to 36, however.
  • Valuation pressures were higher in 2014 than in 2013: on average, IPOs priced 7% below the midpoint, with 40% coming to market below the proposed range (second highest level in the past decade).
  • The current backlog of publicly filed potential IPOs sits at around 125 companies.  I expect that we will see more than 200 IPOs in 2015 – but we will see if the market shows continued growth and tops last year’s total.

Chart of largest US IPOs


[1] Please note that there will be some variance in the statistics for IPOs generally. This is because most data sets exclude extremely small initial public offerings and uniquely structured offerings that don’t match up with the more commonly understood public offering for operating companies. The IPO data in this post is based on information from http://bear.warrington.ufl.edu/ritter/IPOs2012Statistics.pdf and Renaissance Capital- manager of IPO-focused ETFs-  www.renaissancecapital.com.