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US Securities and Corporate Governance

Offerings

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SEC Modernizes Framework for Exempt Offerings

In another 3-2 vote, on November 2, 2020 the SEC approved significant amendments to the framework for exempt offerings intended to harmonize and simplify the framework for exempt offerings under the Securities Act of 1933.  The amendments:

  • Simplified the “integration doctrine” that restricts the ability of issuers to move or switch from one exemption to another
  • Permit certain “demo day” and “test-the-waters” communications, and clarify other rules on communications
  • Increase the offering limits for certain offerings and individual investment
  • Harmonize certain disclosure and eligibility requirements and bad actor disqualifications

We have prepared a client alert describing the amendments that can be found here.

SEC Proposes Limited Exemption for Persons Acting as “Finders” in Private Capital Transactions to Accredited Investors

The SEC announced on October 7, 2002 that it had approved, by vote of 3-2, a proposed limited conditional exemption for individuals acting as “finders” in private market transactions with accredited investors.  The text of the proposed exemption can be found here.

When small businesses engage in capital raising transactions in reliance on exemptions from registration under the Securities Act of 1933 (the “1933 Act”), they often look to “finders” to assist in identifying and, in some cases, soliciting potential investors.  Such finders (and issuers using them) must determine whether they are required to register as “broker dealers” under the Securities Exchange Act of 1934 (the “1934 Act”). In making that assessment, finders and issuers (and their legal counsel) have been left to parse through various no-action letters and SEC enforcement actions to discern the SEC’s regulatory position.  In that context, certain activities, as well as the presence of “transaction-based compensation” in these arrangements, have proved to be particularly nettlesome. The proposal would provide a non-exclusive safe harbor from broker registration, and would enable those who qualify to receive transaction-based compensation.

The proposal would be limited to natural persons, and would create two categories: Tier I Finders and Tier II Finders.  Both tiers would be subject certain conditions:

  • the issuer must not be required to file reports under the 1934 Act and must be conducting the offering in reliance on an applicable exemption from registration under the 1933 Act;
  • the finder must not engage in a “general

SEC stays approval of NYSE rule changes allowing primary capital raises by issuers in direct listings

On August 26, 2020, pursuant to delegated authority by the Commission, the SEC’s Division of Trading and Markets approved changes to NYSE listing rules to allow companies to raise capital in connection with a direct listing on the NYSE without a firm commitment offering.   Currently, the NYSE has discretion to approve direct listings at the time of effectiveness of a company’s initial registration statement under the Securities Act of 1933 filed solely for the purpose of allowing existing shareholders to sell their shares without a firm commitment offering (a “selling shareholder direct listing”).  Under the new rules, the NYSE would be permitted to approve a direct listing by a company that sells shares itself in the opening auction on the first day of trading on the NYSE (a “primary direct listing”) in addition to, or instead of, a selling shareholder direct listing.

On August 31, 2020, the SEC notified the NYSE that the rule changes have been stayed following receipt of notice, reportedly by the Council of Institutional Investors (CII), that CII plans to submit a petition for review by the full Commission of the delegated approval by the Division of Trading and Markets.

The CII had commented on the rule proposal expressing concern about, among other things, the potential for reduced liability under technical principles under Section 11 of the Securities Act of 1933 due to challenges in tracing shares back to the registration statement.  The SEC staff had considered those concerns, but had noted

Registered U.S. Securities Offerings in the COVID-19 Pandemic

Despite the ongoing COVID-19 pandemic, companies continue to access the capital markets.  In fact, liquidity concerns have put even greater emphasis on securities offerings for some companies.  But there can be no question that COVID-19 has affected capital market transactions and companies should be mindful of the new environment.

Companies should consider a variety of offering issues that have been affected by the ongoing health crisis.  These include:

Access to the market.  Companies should consult with financial advisors as to the feasibility of offerings during this turbulent time.  Companies may need to be much more flexible in timing and pricing their offerings.

Disclosure.  As always, companies must evaluate the sufficiency of their disclosures.  The difference now is that there may be a higher risk than usual as to whether all material nonpublic information has been disclosed.  The SEC staff has encouraged disclosure to be as timely, accurate and as robust as practicable under the circumstances created by the COVID-19 pandemic.  The Chairman of the SEC and the Director of the Division of Corporation Finance have pressed publicly for these robust disclosures to include management’s expectations about the effects of the pandemic going forward as well as the effects thus far.  They suggested that detailed discussions of current liquidity positions and expected financial resource needs, as well as company actions to protect worker health and well-being and customer safety, could all be material to investors and encouraged disclosure.  As we have previously discussed, companies need to give special

Temporary SEC rules ease Regulation Crowdfunding to address urgent COVID-19 capital needs

The Securities and Exchange Commission (the “SEC”) recently adopted temporary final rules to Regulation Crowdfunding to address companies’ urgent COVID-19 capital needs.  The temporary rules provide tailored, conditional relief to established smaller companies from certain Regulation Crowdfunding requirements relating to the timing of the offering and the availability of financial statements required to be included in issuers’ offering materials.  For example, the temporary rules provide an exemption from certain financial statement review requirements for issuers offering $250,000 or less in securities in reliance on Regulation Crowdfunding within a 12-month period.

The SEC included the following table summarizing the existing Regulation Crowdfunding and changes resulting from the temporary rules:

  Regulation Crowdfunding Temporary Rule Amendments Eligibility The offering exemption is not available to:

·       Non-U.S. issuers;

·       Issuers that are required to file reports under Section 13(a) or 15(d) of the Securities Exchange Act of 1934;

·       Investment companies;

·       Blank check companies;

·       Issuers that are disqualified under Regulation Crowdfunding’s

disqualification rules;

·       Issuers that have failed to

file the annual reports

required under Regulation Crowdfunding during the

two years immediately

preceding the filing of the offering statement In addition to the existing eligibility criteria, issuers wishing to rely on the temporary rule amendments must also meeting the following criteria:

·       The issuer cannot have been organized and cannot have been operating less than six  months prior to the

commencement of the offering; and

·       An issuer that has sold

securities in a Regulation

Crowdfunding offering in the past,

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