David N. Feldman

Financial CHOICE Act Would Broaden Form S-3 Availability

On May 4, 2017, the House Financial Services Committee, by a vote of 34-26, passed the Financial CHOICE Act of 2017, which now moves to the full House. Most of the bill relates to rollbacks of Dodd-Frank provisions that relate primarily to issues affecting large financial institutions. Among other things it would repeal the Volcker Rule which prohibits banks from doing proprietary trading and sponsoring hedge and private equity funds.

One small section of the summary of the bill is called “Capital Formation.” The Committee’s summary of the bill praises the ideas that come out of the annual SEC small business conference and criticizes the SEC for its slow implementation of the Jumpstart Our Business Startups (JOBS) Act of 2012. But they noted tremendous benefit coming out of the JOBS Act rollout and added more goodies to the bill to enhance capital formation opportunities.

Most important, the bill would allow all SEC reporting companies to use short registration Form S-3, which could be a tremendous help for over-the-counter issuers current in their filings. It also would exempt emerging growth and smaller reporting companies from burdensome XBRL financial reporting rules.

The bill also requires the SEC to formally respond to each recommendation from the small business conference and disclose what action, if any, it is taking in response. It also eliminates the requirement of a broker-dealer or funding portal in JOBS Act Title III crowdfunding under certain circumstances. It is not yet clear whether the bill is likely to pass; we will continue to monitor its progress.

SEC Issues Updated Guidance Regarding Conflict Mineral Rules

 

On April 7, 2017, the SEC Division of Corporate Finance issued updated guidance regarding the SEC’s conflict minerals rules, stating that, in light of uncertainties regarding how the SEC will resolve issues relating to its conflict mineral rules, the SEC will not recommend enforcement action with respect to a company – even if it is subject to Item 1.01(c) of Form SD – to comply with the disclosure obligations under the SEC’s conflict minerals rules by only including in its Form SD the disclosures required by Items 1.01(a) and (b) of Form SD.

The SEC was prompted to update its guidance by the April 3, 2017 final judgment of the U.S. District Court for the District of Columbia in National Association of Manufacturers, et al. v. Securities and Exchange Commission,[1] in which the court held that the provisions of Item 1.01(c) of Form SD that require companies to report to the SEC and state on their websites that a product has “not been found to be ‘DRC conflict free’” violates the First Amendment of the U.S. Constitution.

Continue reading SEC Issues Updated Guidance Regarding Conflict Mineral Rules

David N. Feldman

Spotify May Go Public With “Self-Filing”

IPO alternatives appear to be alive and well as we learn from press reports that unicorn music service Spotify may go public through a “self-filing,” also known as a “direct listing.” In my first book, over 10 years ago, I talked at length about the potential value of this very straightforward technique. Assuming you otherwise qualify for an exchange listing, you simply file to register some already outstanding shares for trading, without raising new money, and off you go. Recent self-filers include Coronado Biosciences.

What is the main benefit of most IPOs? Raising money. Apparently Spotify, having raised $1 billion, is good on that front. Then why do they want to go public? We can only speculate as to Spotify’s reasons, but the most common reasons are to raise more money in the future, to make acquisitions easier using public stock as currency, to reward executives with valuable stock options, and to create a path to liquidity for those who have founded and built the company.

Through this process, Spotify saves dilution from IPO investors and the cost of underwriters. Why raise money you don’t need? Since reverse mergers, which also can be used in the “no need to raise money” scenario, are much more difficult to do these days, self-filings deserve some attention.

David N. Feldman

“T+2” Trade Settlement Arrives

If you don’t know what the headline means, maybe just skip this one. Otherwise read on! Last week, the SEC approved a rule change that shortens the typical settlement period for public trading through brokers (known as “T+” for “trading plus”) to two business days from three. The SEC believes this will reduce trading risks. The rule comes into effect officially in September.

Does this matter to investors? Well, if you are selling stock it means the money will now be in your account in two business days. The prior rule for most trades was three business days. But be careful because some trades, like in mutual funds, settle more quickly. So if you’re buying one and selling another make sure the settlement times match or there is enough money in your account to cover. Some brokerage firms let all trades go through as long as they are made on the same day even if they settle differently.

What’s the bigger picture? In the olden days when horses had to bring stock certificates from place to place, settlement periods were typically 14 days. Then in the 70s and 80s with computerized trading it went to T+5, then T+3, and now T+2. The speed with which everything happens in the stock markets continues to accelerate thanks to everything being computerized at this point. So everything, including money, moves faster than ever. So when will it be T+one millisecond? Maybe not that far away.

David N. Feldman

Just a Snap to Huge IPO

It appears the initial public offering market is indeed waking up. Last Thursday, Snap Inc. raised $3.4 billion in its IPO onto the New York Stock Exchange. OK not the biggest ever, since Alibaba raised almost $22 billion in 2014. But it’s the biggest tech IPO since the Amazon of China smashed the records. Snap, which of course owns the wildly popular app Snapchat, sold IPO shares at $17 and closed up over 40% on the first day. It rode up a little the next few days and is now back to where it closed on Thursday. Still pretty good. The company is valued now at roughly $24 billion.  Three years ago Facebook offered to buy the company for $3 billion.

In a funny side story, several other companies with “Snap” in their name also shot up on Thursday in apparent investor confusion. That includes Snap Interactive, another app company, and Snap-On, the well-known tool company. Will we see trademark infringement cases? Not likely.

Another interesting sidenote was the detailed disclosure in the Snap IPO filing about cybersecurity. They admitted that the supposedly “disappearing” posts on Snapchat remain on their servers, and they admitted they have been hacked in the past. They further acknowledged that they collect a bunch of data on how people use the site, who they communicate with and the like. They have also been required by regulators to work harder to ensure that children under 13 don’t have Snapchat accounts.

So let’s give an attaboy to the Snap folks, their underwriters and the market as this huge offering hopefully will further strengthen the rebounding IPO market.

David N. Feldman

Trump’s Order on Reducing Regulations Does Not Apply to the SEC

On January 30, Pres. Trump issued an executive order that for every new regulation proposed, an agency must eliminate two old regulations. The order also requires the net cost of a new regulation to be zero after taking into account cost savings from regulations eliminated. Military and national security regulations are exempt from the order. The head of the Office of Management and Budget also is allowed to make exceptions. In signing the order, the President was surrounded by small business leaders, and said, “We’re cutting regulations massively for small business … that’s what this is about today.”

Many in the capital markets space feared this could hamper the SEC’s rulemaking process, as some “new regulations” can actually reduce regulatory burdens. For example, many have sought to convince the SEC to expand the use of short form registration on Form S-3 to all reporting companies – which would enhance opportunities for capital formation but would require a new regulation. Thankfully, last week the White House issued interim guidance on the order. Among other things, it said the order does not apply to “independent agencies” (ie those that are outside the federal executive departments), which includes the SEC.

A number of liberal groups filed a lawsuit last week to challenge the order, saying it forces agencies to be arbitrary, and that the order was outside the President’s powers. They are seeking an injunction to kill the order. Many, frankly, are scratching their heads over this order. Even those who strongly support easing business regulation are not sure this is the best way to do it. At least the SEC (and most of the finance-related agencies) may move forward in its usual manner.

 

David N. Feldman

First Cannabis Company is Exchange-Listed Amid Uncertainty

In a major positive step for the cannabis industry, the New York Stock Exchange last month listed a new real estate investment trust called Innovative Industrial Properties (NYSE:IIPR), the first cannabis company to be listed on a US national exchange. The company plans to invest solely in real estate intended to be leased out to cannabis growers. In the IPO they raised $67 million, much less than expected. The price has not moved above the IPO price, but it has moved steadily up recently after an initial drop on its first few days of trading.

Other challenges analysts cite: the concentration of investment in one industry, management not experienced in cannabis, and the high uncertainty of the future of federal oversight under President-elect Trump. Trump has said he is fully behind medical marijuana, not a fan of recreational use but believes it should be up to the states, has been against the war on drugs for years and is certainly pro-jobs and pro-taxes coming in. But many are concerned about his nomination of Alabama Senator Jeff Sessions to be the next US Attorney General. As recently as this April, Sessions said, “Good people don’t smoke marijuana” and that it’s “not the kind of thing that ought to be legalized.”

Congress has kept the feds from using money to go after those properly complying with state cannabis laws. But those actions, in appropriation bills, have to be renewed each year, and recent parliamentary changes may make that more difficult. The key question will be whether Trump allows Sessions free rein on the issue. That’s the unknown. But this new listing is still very big for the industry, especially after Nasdaq’s very strong refusal to list MassRoots earlier this year.

David N. Feldman

SEC Issues Encouraging White Paper on Regulation A+ Performance

Following up on positive statements by senior SEC staffers at the recent PLI Securities Law seminar and the SEC small business forum in November, the Commission also recently issued a white paper on how things are going under updated Regulation A, now known as Regulation A+. The white paper can be viewed at http://bit.ly/2ihfssS.

As we have known, the big headline was that, through October 31, just 16 months after the new Reg A+ rules took effect, 20 issuers completed financings raising a total of $189.7 million. That’s an average of $9.485 million raised per deal. The SEC believes this number is understated due to the time frames tested. And the amount per deal is skewed somewhat by some very small financings that we know were completed. But still. As comedian Larry David might say, “Pretty pretty pretty pretty cool.”

Other interesting tidbits: of the 84 Reg A offerings qualified by the SEC since June 2015, a majority, 49, were Tier II and the rest were the smaller Tier I offerings. Probably more important, 85% of the funds sought to be raised in those qualified offerings were in Tier II deals. Issuers are still working to get more of these closed Tier II deals trading on an exchange, and that is expected in the months ahead. Also, equity deals rule, comprising 85% of the Reg A+ offerings. As we also knew, most of the offerings and closed deals were best efforts or self-underwritten.

But my favorite quote from the SEC: “Early signs indicate that Regulation A+ may offer a potentially viable public offering on-ramp for smaller issuers—an alternative to a traditional registered IPO—and either an alternative or a complement to other securities offering methods that are exempt from Securities Act registration.” Here comes 2017!!

David N. Feldman

SEC Approves Important Rule 504 Changes

A little known and little used part of Regulation D under the Securities Act is about to get some new attention. In what appears to be a gift to the states after somewhat eviscerating their power with the Regulation A+ changes, the SEC, on October 26, 2016, approved final changes to Rule 504. This rule now allows raising up to $5 million in an offering exempt from SEC registration, with as many accredited and non-accredited investors as you would like. The prior limit was $1 million.

There are two ways to use Rule 504. First, you can raise money with no advertising or general solicitation, and not be required to seek SEC or state approval; the securities issued will be “restricted, in other words not able to be publicly traded. Second, you can advertise and solicit, and the stock can trade afterwards on the OTC Pink market, if you go through a registration process in the states where you are making offers. In that case, even though the stock trades, the company does so as a non-reporting company (but some basic information is still filed with OTC Markets). In both cases there would be no SEC filings. And for those seeking to trade and offer in multiple states, many states “piggyback” and do not require a separate reviewif another state has already approved; and sometimes a coordinated review process can be applied.

Unfortunately, a while back, some unsavory types got in trouble for conducting Rule 504 offerings with no information, then getting involved in manipulative trading and the like. But as with other techniques, like reverse mergers, that had been abused, there were and are legitimate quality players in the space. Hopefully they will see this newly increased limit as making Rule 504 much more attractive as they consider the growing panoply of financing options now available for smaller companies.

 

First SEC Staff Comments on Recent Non-GAAP CDIs

As many of us have noticed, the first comment letters from the staff in the SEC’s Division of Corporation Finance, following Corp Fin’s recent issuance of new CDI guidance on the presentation of non-GAAP financial measures, have become available publicly.  The comment letters shed additional useful light on Corp Fin’s views concerning non-GAAP presentations.

One of the comment letters sent to Alexandria Real Estate Equities, Inc. on June 20, 2016, provides a particularly helpful glimpse into Corp Fin’s views about the use of non-GAAP information in the executive summary of MD&A.  The staff’s letter includes the following comment in reference to MD&A in the registrant’s 2015 Form 10-K:

We note that in your executive summary you focus on key non-GAAP financial measures and not GAAP financial measures which may be inconsistent with the updated Compliance and Disclosure Interpretations issued on May 17, 2016 (specifically Question 102.10). We also note issues related to prominence within your earnings release filed on February 1, 2016. Please review this guidance when preparing your next earnings release.

Indeed, the executive summary portion of the MD&A – when initially conceptualized in the SEC’s 2003 release providing interpretive guidance in the preparation of MD&A – was supposed to include an overview to facilitate investor understanding.  The overview was intended to reflect the most important matters on which management focuses in evaluating operating performance and financial condition.  In particular, the overview was not supposed to be duplicative, but rather more of a “dashboard” providing investors insight in management’s operation and management of the business.

Looking back at the release to write this blog entry, I note references, with regard to Commission guidance on preparation of the MD&A overview, explaining that the presentation should inform investors about how the company earns revenues and income and generates cash, among other matters, but should not include boilerplate disclaimers and other generic language.  The Commission even acknowledged that the overview “cannot disclose everything and should not be considered by itself in determining whether a company has made full disclosure.”

Many companies have presented in their MD&A overview those non-GAAP measures used by management to operate the business and otherwise manage the company.  Where appropriate, references typically are made to the information appearing elsewhere in the document, presented to enable compliance with applicable rules and guidance for non-GAAP presentations.  Interestingly, the staff, in its comment, questions the “prominence” of the non-GAAP presentation in the context of the earnings release (noting that the staff provides less specificity in the portion of its comment relating to the MD&A overview).  This focus on prominence – to the extent the staff’s concerns relate to the MD&A overview – is worth further consideration in preparing MD&A disclosure.   In this connection, query whether the staff – in questioning prominence – could be expressing a view that when management analyzes for investors the measures on which it focuses in managing the business, if management relies on non-GAAP measures, it necessarily must focus on (and explain) – with no less prominence – the corresponding GAAP measures.