Our partner Pamela B. Greene was recently quoted in a Boston Globe article focusing on a local company’s use of Regulation A+ (or “Reg A+”) as a new way to raise capital, and the benefits and risks that may be associated with this kind of offering. The rules allowing Regulation A+ were adopted by the SEC in March 2015, as mandated by the Jumpstart Our Business Startups (JOBS) Act, and are designed to facilitate smaller companies’ access to capital. The rules enable smaller companies to offer and sell up to $50 million of securities in a 12-month period, subject to eligibility, disclosure and reporting requirements. A Cambridge, MA medical robotics company called Myomo is planning to complete an offering using this method. The article in which Pam is quoted can be found here.
Public companies will soon be required to include an active hyperlink to each exhibit to all registration statements filed under the Securities Act of 1933, as amended, and all periodic and current reports filed under the Securities Exchange Act of 1934, as amended, filed on or after September 1, 2017.
Under Regulation S-K Item 601, public companies are required to file their material agreements, certificates of incorporation, bylaws and other specified documents as exhibits to their SEC filings. Exhibits that are identified in the exhibit index to the filing may be attached to the filing or, in the case of previously-filed exhibits, may be incorporated by reference from the previous filing to the extent permitted by the SEC’s rules and forms. Currently, an investor seeking access to an exhibit that is incorporated by reference into a filing must first determine where the exhibit is located by reviewing the exhibit index and then search for and locate the filing which contains the exhibit, which can be time-consuming and cumbersome. The exhibit hyperlink rule, therefore, is intended to facilitate easier access to these exhibits for investors and other users of the information.
Key points to note about the exhibit hyperlink rule:
- An active hyperlink will be required for each exhibit identified in the exhibit index of the filing, including exhibits that are incorporated by reference from a prior filing and exhibits that are attached to the new filing. The hyperlink rule, however, does not require the hyperlinking of any XBRL exhibits or exhibits filed with Form ABS-EE. The SEC also decided not to require companies to refile electronically any exhibits previously filed only in paper.
- The requirement to include exhibit hyperlinks applies to Securities Act registration statements, including all pre-effective amendments; Exchange Act periodic and current reports; registration statements on Form F-10 and annual reports on Form 20-F; and does not apply to other forms under the multi-jurisdictional disclosure system used by certain Canadian issuers or to Form 6-K.
- The exhibit hyperlink rule is effective for filings submitted on or after September 1, 2017. Smaller reporting companies or non-accelerated filers that submit filings in ASCII format will be required to file their registration statements and periodic reports that are subject to exhibit filing requirements in HTML format and to comply with the exhibit hyperlink rule for filings submitted on or after September 1, 2018. The hyperlink rule does not apply to exhibits filed in paper pursuant to a temporary or continuing hardship exemption under Rules 201 or 202 of Regulation S-T or pursuant to Rule 311 of Regulation S-T.
- If a filing contains an inaccurate exhibit hyperlink, the inaccurate hyperlink alone would not render the filing materially deficient nor affect the company’s eligibility to use Form S-3. However, the company must correct a nonfunctioning or inaccurate hyperlink, in the case of a registration statement that is not yet effective, by filing a pre-effective amendment to the registration statement or, in the case of a registration statement that is effective or an Exchange Act report, by correcting the hyperlink in the next Exchange Act periodic report that requires or includes an exhibit pursuant to Item 601 of Regulation S-K (or, in the case of a foreign private issuer, pursuant to Form 20-F or Form F-10).
SEC Acting Chairman Michael S. Piwowar issued a public statement on February 6, 2017 requesting input on any unexpected challenges that companies have experienced as they prepare for compliance with the CEO pay ratio rule, which will become required disclosure in public company 2018 proxy statements. Piwowar also directed SEC staff to “reconsider the implementation of the rule” based on comments submitted.
This public statement and request for comments is a first step in considering changes to the rule, as part of the Republican Party’s effort to modify or roll back certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd Frank). Any SEC modifications to the CEO pay ratio rule would take time to implement and may be challenged. The easiest route to prevent its implementation would be for Congress to repeal this provision of Dodd Frank.
As SEC Chair Mary Jo White stated in the SEC’s announcement, “[t]he amendments to [the SEC’s] rules of practice provide parties with additional opportunities to conduct depositions and add flexibility to the timelines of [the SEC’s] administrative proceedings, while continuing to promote the fair and timely resolution of the proceedings.” For example, under amended Rule 360, orders instituting proceedings would designate the time period for preparation of the initial decision as 30, 75, or 120 days from completion of post-hearing or dispositive motions. Further, amended Rule 360 extends the length of the pre-hearing period from four months to a maximum of 10 months for cases designated as 120-day proceedings, a maximum of six months for 75-day cases, and a maximum of four months for 30-day cases.
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.
On October 13 from 1 – 2:30 pm ET, join Pam Greene and a panel of other experts for a timely webinar covering Regulation A+: Practical Tips and Guidance for Launching a Mini-IPO. Regulation A+ went into effect in June 2015 to allow private US and Canadian based companies to raise equity – up to $20 million under Tier I and up to $50 million under Tier II – from both accredited and nonaccredited investors, subject to certain limitations.
During this webinar, our distinguished panel, including Pam Greene, member in the Corporate and Securities Practice at Mintz Levin; TJ Berdzik, CFA, of StockCross Financial Services, Inc.; Maggie Chou, of OTC Markets; Yoel Goldfeder, of Vstock Transfer; and Rudy Singh, of S2 Filings, will discuss the legal and business considerations in launching a Tier II Regulation A+ offering, how investors can achieve liquidity through the OTC Market, and why many are calling Tier II offerings a “Mini-IPO”.
We hope you can take part in what is sure to be an informative discussion. Click here to register.
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
On August 5, by a vote of 3-to-2 with the SEC Commissioners voting along party lines, the SEC approved the final rule to implement the requirements of Section 953(b) of the Dodd-Frank Act, which instructed the SEC to amend existing rules under Item 402 of Regulation S-K to require public companies to disclose the ratio of their CEO’s annual total compensation to that of the median annual total compensation of all company employees. All public companies will be subject to this new disclosure requirement, with the exception of emerging growth companies, smaller reporting companies and foreign private issuers.
The rule requires companies to disclose:
(a) The median of the annual total compensation of all company employees, excluding the CEO;
(b) The annual total compensation of the company’s CEO; and
(c) The ratio of (a) to (b).
Companies will be required to provide disclosure of this ratio commencing with their first fiscal year beginning on or after January 1, 2017, which information will be disclosed in the Executive Compensation section of a company’s Form 10-K (or proxy statement). Thus, disclosure will begin in the 2018 proxy season. In addition to the ratio itself, disclosure describing the methodology used to identify the median employee, determine total compensation and any material assumptions, adjustments (including allowable cost-of-living adjustments) or estimates used to identify the median employee or to determine annual total compensation will also be required. As described in the proposed rule, when identifying the median employee, the final rule requires companies to include all employees, including full-time, part-time, temporary, seasonal, and foreign employees employed by the company or any of its subsidiaries and to annualize the compensation of permanent employees who were not employed for the entire year, such as new hires. Companies may not, however, annualize the compensation of part-time, temporary, or seasonal employees. Consultants and other advisors who are not employees and individuals who are employed by unaffiliated third parties are not to be included in the calculation.
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:
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.