One of the things I learned as young securities lawyer was that securities offerings can be made only by prospectus. Accordingly, one of the first things we did whenever we embarked on an IPO was to send a memo to our clients reminding them of the limitations imposed on communications under the securities laws and
Capital Raising
SEC: Are You Listening?
I have often said that the SEC is an outstanding agency – for example, see here. I still believe that, although my belief has been tested in the last couple of years by the “regulatory rampage” in which the SEC has engaged.
But there is always room for improvement, and in a November speech…
Note to SEC: The internet and social media are here – deal with it!
Remember those three monkeys – see no evil, hear no evil, speak no evil? Well, that’s kind of how the SEC views the internet and social media. Time after time after time, the SEC has cautioned that social media are fraught, to the point that I sometimes wonder if there is a watermark, visible only to securities lawyers, in every SEC pronouncement about the web and social media that says “PROCEED AT YOUR PERIL!” And, unfortunately, many (too many, IMHO) SEC attorneys follow the SEC’s lead and either don’t encourage or actively discourage clients from taking advantage of the opportunities afforded by technology.
An example may be helpful. Several years ago, when I was in-house, we decided to include in our proxy statement a live link to something on our website. When we sent our draft proxy statement to outside counsel for the customary rules check, one of the comments we received was a strong admonition to remove the link or at least not make it “live.” The rationale was that there might be something on our website that we wouldn’t put in an Exchange Act filing and that the link would somehow suck all that bad stuff into the proxy statement and lead to liability.
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Direct Listings – A viable IPO alternative?
Popular cryptocurrency exchange Coinbase went public on Nasdaq on April 14 using a direct listing. The company achieved a huge valuation (more than $100 billion) in this offering. While it’s too early to tell whether Coinbase’s stock price will hold up over time, the initial success of this offering is impressive. This continues a string of successful direct listing offerings by large technology companies such as Slack, Spotify, Palantir and Asana, all of which utilized this process to become public companies. What is a direct listing and how is it better (or worse) than a traditional IPO? More importantly, should you use a direct listing to take your company public? (Spoiler alert: maybe not).
Direct listing is a somewhat rare process in which a company achieves public company status without using traditional underwritten IPO sales efforts. Historically, only the company’s existing shareholders were allowed to sell shares in a direct listing. The company would not receive any of the proceeds of the offering as it would not be allowed to issue new shares, and accordingly all funds would go directly to the selling shareholders. On December 22, 2020, however, the SEC approved a rule change proposed by the NYSE that allows a company to conduct a primary offering through a direct listing under certain circumstances. Nasdaq later submitted a similar proposal which is currently under SEC review but which should be approved, as it is substantially similar to the NYSE proposal. This should fuel even more interest in direct listings going forward.
Continue Reading Direct Listings – A viable IPO alternative?
Show me the money: Increased funding limits for exempt offerings may increase access to capital
The SEC recently increased the funding limits for several types of exempt offerings. The increases were fairly substantial, and we believe they may create increased opportunities to raise external financing. Smaller companies in particular should be aware of these increases, as they may provide increased access to capital.
The new funding limits were included in a Final Rule entitled “Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets,” issued by the SEC on November 2, 2020. The SEC also issued an explanatory Press Release which contains a helpful Fact Sheet regarding the Final Rule and the new funding limits. The purpose of the Final Rule was to harmonize and bring some consistency to the somewhat complex system of securities offerings that are exempt from registration with the SEC. This system is a critical component of the capital raising process, and for many smaller companies these exempt offerings are the only methods available for external capital raising. This Final Rule became effective on March 15, 2021.
This Final Rule impacted three exemptions from registration that are widely used, especially by smaller companies: Regulation Crowdfunding, Regulation A (commonly known as “Regulation A+”) and Rule 504 of Regulation D. The major changes are as follows:
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The SEC Harmonizes the Private Placement Exemption Rules
On November 2, 2020, the SEC announced the adoption of extensive amendments to the rules governing exempt offerings, more commonly known as “private placements.” The announcement stated that the amendments are intended to “harmonize, simplify, and improve” the exempt offering framework, allowing issuers to move from one exemption to another, and to (1) increase the offering limits for certain private placements and revise certain individual investment limits, (2) establish consistent rules governing offering communications and permit certain “test-the-waters” and “demo day” activities, and (3) harmonize disclosure and eligibility and bad actor disqualification provisions.
The amendments are designed to promote better access to private capital while maintaining investor protections and simplifying the complex patchwork of federal private placement exemptions that has existed for over 50 years. However, they contain their own complexities and some pitfalls that can make compliance challenging.
Below are highlights of the amendments adopted by the SEC.
Continue Reading The SEC Harmonizes the Private Placement Exemption Rules
Will Finders Find Relief from SEC Restrictions?
On October 7, 2020, the SEC proposed the creation of “limited, conditional” exemptions from broker-dealer registration for certain “finders” in private company capital raising transactions. This has long been a problem area for private companies, as current regulations impose restrictions that may prevent them from using unregistered finders to raise capital, or impose draconian penalties on them if they do. Since these companies are often unable to raise capital on their own and normally do not have access to the efforts of established, registered broker dealers, the already difficult challenge of raising early stage capital is made even more difficult. The SEC’s October 7, 2020 Press Release and Fact Sheet lay out these proposed exemptions in detail, and the Fact Sheet contains links to a chart and a video that may be helpful.
It’s too early to tell if these proposed exemptions will be beneficial to small companies. Will they actually facilitate small companies’ ability to raise early stage capital? That remains to be seen, but it’s a positive sign that the SEC is expending at least some efforts to help small companies in their capital raising efforts.
Here are the high points of the proposed exemptions:
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SEC changes “accredited investor” definition – good, but not enough
On August 26, 2020, the SEC adopted changes to its definition of “accredited investor.” The SEC Release can be found here. The new rules will become effective 60 days after their publication in the Federal Register (around the end of October 2020). These changes are definitely a move in the right direction, and they indicate that the SEC may be willing to further expand and modernize the accredited investor qualification requirements, but I don’t believe they will have a significant impact on the private securities offering process. .
The accredited investor requirements largely determine eligibility to participate in private securities offerings. The current requirements are primarily based on financial status. For most individual investors to qualify as accredited investors, they need an annual income of $200,000 (or $300,000 combined with their spouse) or a net worth (including their spouse’s net worth but excluding the value of their primary residence) of $1 million.
These quantitative requirements have been subject to criticism. They have been in effect since 1982, with the only change being the exclusion (in early 2012) of the value of the investor’s primary residence in the net worth test. Some commentators say that these requirements are too restrictive and exclude too many investors from participation in private offerings, thus stifling the capital available to smaller companies. That criticism may have become less valid over time; when the $200,000 annual income test was first implemented in 1982, less than 1% of potential investors qualified. Due to inflation and the lack of an increase in the income requirement, approximately 9% of potential investors currently qualify. . Conversely, however, this standard has been criticized by other commentators on the basis that it allows more investors to participate in risky and dangerous private investments because the qualification standards have not changed over time. This has led to some calls for indexing the income standard to inflation. The SEC did review these quantitative standards but declined to make any changes at this time.
Continue Reading SEC changes “accredited investor” definition – good, but not enough
Aristotle was right (or, “tell your story or someone else will”)
Aristotle is said to have coined the phrase “nature abhors a vacuum.” Far be it from me to question Aristotle, but while he was right, I think his view was too narrow — the abhorrence of vacuums goes far beyond nature and extends to investors and the media, among many others. Companies that hide behind closed doors and ignore or deny requests for information from investors and the media run the risk of finding themselves without a welcoming audience when they eventually choose to communicate.
Let’s be clear – any securities lawyer worth his or her salt knows that sometimes the best thing to say is “no comment” or its equivalent. I’ve given that advice very often. The problem is that in my experience, most of the time when a company says “no comment” or “we don’t respond to rumors,” the rumor is likely true. Conversely, when the rumor is just that, a rumor, companies tend to squeal like a proverbial stuck pig. For some reason, companies that engage in this sort of behavior fail to understand how it plays out among investors and the media.
It has also been my experience that securities attorneys all too often think they are smarter than their clients’ communications and investor relations advisors and disregard the advisors’ recommendations. Even a smart lawyer isn’t likely to know more than these advisors about IR or communications – in fact, many lawyers are terrible communicators. So it’s worth listening to and considering those advisors’ recommendations instead of dismissing them out of hand. Personally, I’ve learned a great deal from investor relations and communications advisors.
Continue Reading Aristotle was right (or, “tell your story or someone else will”)
Testing-the-waters provisions to be available to bigger fish
On February 19, 2019, the Securities and Exchange Commission voted to propose a new rule that would expand the availability of the “testing-the-waters” provisions that enable eligible companies to engage in certain communications to gauge institutional investor interest in a proposed IPO. Currently, only companies that qualify as “emerging growth companies” or “EGCs” are eligible to test the water. The new rule and related amendments would expand the availability of the provisions to all types of issuers, including investment companies.
The purpose of the testing-the-waters provisions is to allow potential issuers to gauge market interest in a possible initial public offering or other registered securities offering by discussing the offering with certain investors, including qualified institutional buyers (“QIBs”) and institutional accredited investors (“IAIs”), prior to filing a registration statement. SEC Chairman Jay Clayton said that “[t]he proposed rules would allow companies to more effectively consult with investors and better identify information that is important to them in advance of a public offering.” The proposed rules and related amendments are intended to give more issuers a cost-effective and flexible means of communicating with institutional investors regarding contemplated offerings and evaluating market interest.Continue Reading Testing-the-waters provisions to be available to bigger fish