Category Archives: General

David N. Feldman

Regulation A+ Offerings Have Raised Over $600 Million

Today, Sebastian Abero, the head of the SEC’s Office of Small Business Policy, had some very positive news for those interested in the new Regulation A+. He revealed that, since the Reg A+ rules were adopted by the SEC in June 2015, through September 2017, there have been 69 completed Reg A+ offerings raising a total of $611 million. That’s an average of $8.8 million per deal. As we also know, seven of those companies completed offerings that immediately commenced trading on national securities exchanges.

Abero was speaking at the annual SEC Government-Business Forum on Small Business Capital Formation, this year being held in Austin, TX. Other speakers included SEC Chairman Jay Clayton. Mr. Clayton’s remarks focused on helping what he called “Mr. and Ms. 401(k)” obtain opportunities to invest in growth companies. He acknowledged that a “one size fits all regulatory structure does not fit all” as he talked about the benefits of scaled disclosure for smaller issuers.  He acknowledged there is room for improvement in the regulations to remove some of the “speed bumps” in the path to capital formation. He also hinted at expanding which companies can benefit from reduced disclosure as “smaller reporting companies.”

Investment banker Mark Elenowitz also spoke this morning at the Forum and pushed to increase the maximum that can be offered in Reg A+ deals to $75 million (a bill is working its way through Congress to do that). Nasdaq Vice President AnneMarie Tierney agreed with increasing the cap. She also talked about the challenges of best efforts underwritings in Reg A+ deals. The best efforts deals can garner less aftermarket support than in firm commitment underwritings. Panelists also suggested that the resales of Reg A+ securities should be exempt from SEC registration when trading in the over-the-counter markets. Currently issuers have to rely on certain somewhat cumbersome exemptions.

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.

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

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.

David N. Feldman

Flash: Obama Signs New Small Business Initiatives Into Law

They got tucked into a transportation bill (Fixing America’s Surface Transportation Act or the FAST Act), but with a deft set of amendments the Reforming Access for Investments in Startup Enterprises Act of 2015 (or the RAISE Act) and other small business initiatives were signed by the President on December 4, 2015 and are now law. The new law also includes a direction to the SEC to change Form S-1 to allow forward incorporation by reference in filings by smaller reporting companies. This is a big and positive change for companies not eligible to use short form registration on Form S-3.

The RAISE Act assures an exemption from SEC registration for a resale of a security to an accredited investor who has access to certain information from the company, no bad actors or shells allowed, no general solicitation or advertising, no start-up companies and the class of stock being sold has to have existed for at least 90 days. This eliminates the old awkward invented Securities Act Section 4(1-1/2) exemption which was used in practice and accepted by the SEC but actually nowhere in the statute. This could help add comfort to secondary market folks who help people buy pre-IPO stocks like Facebook and Twitter before they go public. It could also help PIPE (private investment in public equity) investors who wish to transfer their shares more confidently in a private transaction before they would otherwise be eligible to sell the shares publicly.

Other very exciting changes in the law:

  • mandating the SEC look to ease disclosure burdens on smaller companies, to study ways to improve and simplify disclosure rules, and reduced disclosure for emerging growth companies.
  • lengthening the time you can keep your IPO filing confidential under the JOBS Act to 15 days before the first road show (from 21 days)
  • permitting a JOBS Act IPO filing to exclude financials that are likely to go stale by the time of the actual offering.
  • allowing an emerging growth company to still be treated like one through its JOBS Act IPO even if it stops being an EGC during the process.

Thanks House Financial Services Committee for pushing these through the “I’m Just a Bill” process!