March 2014

HR 3623 does not provide relief
The Great Flood of 1927 by Gil Cohen

In recent weeks, a bill has been reported out of the House Committee on Financial Services promising relief to companies going public.  While I applaud their intentions, this bill will not have much impact, and if anything, is a solution to problems that don’t exist.

On March 14, 2014, the House Committee approved 56-0, a bill titled “Improving Access to Capital for Emerging Growth Companies Act (H.R. 3623).  This purported bipartisan “relief” doesn’t actually provide that much real relief to public companies.  This proposed bill has four major goals.  First, it shortens the period of time that an emerging growth company must publicly file its registration statement before commencing its road show from 21 days to 15 days.  Second, if an issuer loses its emerging growth company status during the registration process, it will be allowed to register as if it had remained an emerging growth company.  Third, an emerging growth company will not be required to include in its registration statement certain historical financial information if the registration statement would be required to be updated to include more recent financial information prior to the registration statement going effective.  And fourth, emerging growth companies will be permitted to submit confidentially registration statements for follow on offerings for up to one year after its initial public offering.

Only one of the goals of HR 3623 is arguably helpful.  In the unusual situation where an issuer was just under $1 billion in revenue when submitting its registration statement and then, due to revenue growth, would no longer qualify as an emerging growth company, it can keep the “benefits” of being an emerging growth company.  It would seem unfair for the issuer to have to lose its status mid-stream, but I don’t know how many issuers this would actually help.

All of the other provisions of HR 3623 are not helpful.  First, not having to include financial information that would otherwise not be required in the final version of the prospectus can reduce some burden of going public; however, because most emerging growth companies voluntarily provide three years of financials rather than two (as permitted) to avoid being perceived as not a “real” public company, this provision is rather meaningless.

Second, shortening the time from which an issuer must publicly file its registration statement until it can commence its road show from 21 days to 15 days will likely be, in practice, meaningless, and potentially dangerous to investors.  There is real value in having the financial press and the public review the public filings of a company going public.  The more people who review the filings, the greater the likelihood that problems with the issuer’s business model or financial statements are discovered.  Most reputable investment banks will likely continue to wait at least three weeks prior to commencing the road show for this reason.

Third, I see very little value in providing an emerging growth company the ability to submit confidentially registration statements for follow on offerings.  The entire value of submitting confidentially is that an issuer can decide not to register its securities before it makes its information publicly available.  In a follow on offering, the issuer will already have made its information public through its initial registration statement and its subsequent periodic reports.

My recommendation is that if Congress truly wants to increase the number of public companies then it should reduce the disclosure obligations of public companies by extending permanently (rather than the current five year maximum benefit) the streamlined disclosure for emerging growth companies (and having it apply to all issuers) and make it more difficult for plaintiffs to recover damages from public companies in securities litigation.  The disclosure burden and litigation risk are contributing much more to the cause of companies not going public than what this bill is attempting to address.

Uniform fiduciary duty standard for broker-dealers
Illustration by Divine Harvester

As we blogged about last August, Section 913 of the Dodd-Frank Act directed the SEC to study the need for establishing a new, uniform, federal fiduciary standard of care for brokers and investment advisers providing personalized investment advice. Recall that, traditionally, broker-dealers and investment advisors are subject to different duties of care: a suitability standard for broker-dealers and a more stringent, fiduciary duty for investment advisors. 

Despite the express mandate given to it by Section 913 of the Dodd-Frank Act, the SEC has made slow progress in determining whether to adopt a uniform fiduciary standard rule. In January 2011, the SEC issued its Section 913 Report, recommending “the consideration of rulemakings” that would establish a uniform fiduciary standard for both broker-dealers and investment advisers. In the wake of issuing its Section 913 Report, in March 2013 the SEC opened its doors comments, requesting data and other information relating to the costs and benefits of implementing a uniform fiduciary standard. While the comment period ended in July of 2013, the SEC has apparently not yet completed its anticipated cost-benefit analysis. Based on the SEC’s regulatory agenda for the 2014 fiscal year, it does not seem to be in much of a rush: in the agenda, the SEC listed the “Personalized Investment Advice Standard of Conduct” as a “long-term action” and as its 40th priority out of 43 items. That said, in a speech at the SEC Speaks Conference in Washington on February 21, 2014, SEC Chair Mary Jo White said she Continue Reading Uniform Fiduciary Standard for Broker-Dealers: An Update