2015 proved to be a tough year for venture-backed IPOs with the total number of IPOs completed decreasing by 37% from 2014. The outlook for IPOs in 2016 is still uncertain following a dramatic decrease in IPO activity in the first quarter of 2016 compared to IPO activity in the comparable periods over the last five years. Despite the decrease in activity, there is still optimism by the pipeline of outstanding pre-IPO companies ready to access the public markets. Here’s a venture-backed IPO survey for 2015 from Gunderson Dettmer, focusing on key governance and disclosure items.
Among others, the findings of the 60 venture-backed companies include:
– All but two are incorporated in Delaware
– 35% listed on the Nasdaq Global Select Market, 35% on the Nasdaq Global Market, 23% on the New York Stock Exchange, and 7% on the Nasdaq Capital Market
– Average time from incorporation to IPO was nearly nine years
– Average time from initial registration statement submission to the SEC to pricing the IPO was nearly five months
– 62% relied on insiders buying in the IPO, up from 51% in 2013
– Only three of the companies completed follow-on offerings in 2015
Last week, Corp Fin published this “Small Entity Compliance Guide” about the changes to the Exchange Act Section 12(g) threshold. Also check out this blog by Nasdaq Private Market’s Annemarie Tierney about “What is the RAISE Act and How Useful will it be to Sellers of Private Company Shares?”…
On May 17, 2016, Fortune Magazine published an article by Geoff Colvin, “Take This Market and Shove It,” examining the growing trend of companies staying private rather than opting for an IPO. The article notes that while the total number of U.S. companies continues to grow, the number that are traded on stock exchanges has plunged 45% since peaking 20 years ago, and that IPOs, once an indicator of U.S. business dynamism, dried up after the dot.com bust in 2000 and have never fully recovered, even though today’s economy is far larger. The article provides various explanations for why some public companies are returning to private ownership and many other companies are simply staying private, while public companies are increasingly becoming fewer and bigger. Although going or staying private allows companies to invest for the long-term and focus on their businesses rather than Wall Street expectations, the article notes that another important driving force has been the increasing fear of activist investors. Other significant factors noted by the article include the following:
– A decreasing reliance of companies on physical assets (e.g., factories and machinery), resulting in a decreasing reliance on IPOs for broad-based financing.
– All-time low interest rates, resulting from a savings glut and easy monetary policies across the globe, and the tax deductibility of interest payments.
– The high costs associated with going public. Underwriting and registration costs average 14% of the funds raised and offerings are usually underpriced by on average 15% in order to produce a first-day “pop.” Public companies also face additional rules, notably those imposed by the Sarbanes-Oxley of 2012 and the Dodd-Frank Act. In addition, public company disclosures are replete with information for competitors to study.
– The ability of PE firms to provide broad managerial advice to private companies. In addition, public companies suffer from the so-called agency problem (the misalignment of owners and managers), which does not arise in private companies because the majority owners are usually either the managers themselves or members of a powerful board of directors.
– Private ownership is also attractive to managers because executive compensation is not publicly reported.
The article also refers to an informal online survey indicating that 77% of CEOs think it would be easier to manage their company if they were private rather than public and that only 8% of CEOs thought that they did not have all of the cash they needed to fund investments.
SCOTUS: No Federal Jurisdiction Over State Law Claims That Don’t Raise ’34 Act Issues
The disclosure in this Form 8-K filed by Invesco reflects a question posed to the Big 4 recently by the SEC Staff. This position by the SEC seems like it could ultimately impact clients of the Big 4 if a passive investor (eg. large bank) holds more than 10% of a company’s equity and also provides a line of credit to the auditor. It appears that this could have unintended consequences unless the ultimate goal is for companies to have more auditor options than the Big 4. At this time, I hear that the Staff was allowing companies to file 10-Qs but there still isn’t a resolution on the underlying question. Here’s an excerpt from the Invesco 8-K:
PricewaterhouseCoopers LLP (“PwC”) has advised Invesco Ltd. (the “Company”) that PwC is in discussions with the Staff of the United States Securities and Exchange Commission (the “SEC”) regarding the interpretation and application of Rule 2-01(c)(1)(ii)(A) of Regulation S-X (the “Loan Rule”) with respect to certain of PwC’s lenders who own interests in closed-end and open-end mutual funds managed by the Company’s wholly-owned investment adviser subsidiaries.
The Loan Rule prohibits accounting firms, such as PwC, from having certain financial relationships with their audit clients and affiliated entities. The Loan Rule provides, in relevant part, that an accounting firm is not independent if it receives a loan from a lender that is a “record or beneficial owner of more than ten percent of the audit client’s equity securities.” Under the SEC Staff’s interpretation of the Loan Rule, some of PwC’s relationships with lenders who own shares of certain closed-end and open-end funds within the Invesco investment company complex may be in violation of the Loan Rule, calling into question PwC’s independence with respect to such funds, such funds investment advisers and affiliated entities of such investment advisers, including the Company. PwC’s interpretation of the Loan Rule, in light of the facts of these lending relationships, leads it to conclude that there is no violation of the Loan Rule and its independence has not been impaired. PwC has advised the Company that it continues to have discussions with the SEC’s Staff to resolve this interpretive matter.
While PwC represented to the Company that it feels confident that PwC’s interpretation of the Loan Rule is correct, neither PwC nor the Company can be certain of the final outcome. In light of the circumstances described above, the Company is updating its risk factors by providing an additional risk factor set forth below.
PCAOB Inspections: Deficiencies Down at Larger Auditors (But Up for Smaller)
Recently, the PCAOB Staff released a “Staff Inspections Brief” that provides 2015 inspection observations. The number of audit deficiencies identified for annually inspected auditors (those with over 100 public clients) actually decreased. For auditors with less than 100 public clients (who are inspected every three years), the Staff found “an overall high number of audit deficiencies”…
And PCAOB Board Member Jeanette Franzel recently delivered this speech about how the PCAOB should modify its risk-based audit inspection approach to take into account the significant improvements in audit quality that have been happening…
Congress: House Passes 5-Year Audit Attestation Exemption Extension
On Monday, the House passed the “Fostering Innovation Act of 2015,” notwithstanding this letter to Paul Ryan and Nancy Pelosi from the SEC’s Investor Advocate urging a vote against it. The bill, which presumably now moves to the Senate for consideration, amends Section 404(b) of SOX (internal controls), “to provide a temporary exemption for low-revenue issuers from certain auditor attestation requirements.”
More specifically, the bill would temporarily exempt from the SOX auditor attestation requirement — that the issuer’s auditor attest to management’s assessment of the effectiveness of the issuer’s internal control over financial reporting — any issuer that ceased to be an emerging growth company after the fifth anniversary of its IPO, had average annual gross revenues of less than $50 million as of its most recently completed fiscal year, and is not a large accelerated filer.
The issuer would become ineligible for the exemption at the earliest of the last day of its fiscal year following the tenth anniversary of its IPO, the last day of its fiscal year when its average annual gross revenues exceed $50 million, or the date on which it becomes a large accelerated filer.
The first thing I need to note is that I have moved up the date of our webcast – “Non-GAAP Disclosures: What Is Permissible?” – to Thursday, June 9th at 11 am eastern. Meredith Cross has joined the all-star panel too. So put that on your calendar as companies are scrambling to rethink their non-GAAP disclosures in the wake of Corp Fin’s CDIs.
I bet the Staff rationalizes their breach of the APA with their repeated use of the word “could.” Somehow, the optionality/flexibility suggested by “could” will be lost by the time they reference it in comment letters.
Another comment I received was:
The Staff tried very hard to rewrite the SEC’s rules by requiring GAAP measures to always be mentioned prior to the corresponding non-GAAP measure. However, the plain-English meaning of the words “equal prominence” cuts against them.
As noted in the MarketWatch article below – in which I have a quote – I do believe that the SEC has been forced to act in some way because too many companies have gotten lazy or cute (or worse). For example, if non-GAAP appears – or is discussed first – how can that be equal prominence? But when you think about it, can you ever really have “equal” prominence? How does it work? Two columns instead of consecutive?
By the way, the PCAOB Standing Advisory Group’s recent meeting covered the auditor’s role regarding non-GAAP financial measures – see this briefing paper…
Earnings Releases: Are IROs Getting Sloppy?
With the SEC ramping up its attention to non-GAAP measures – leading to last week’s issuance of CDIs in that area – this MarketWatch article entitled “Here’s how investors are duped each earnings season” highlights areas beyond non-GAAP where it seems like some companies are not taking the earnings release process seriously – or perhaps they just need some new blood handling those duties. I’m quoted near the end…
Transcript: “M&A Research – Nuts & Bolts”
We have posted the transcript for our recent DealLawyers.com webcast: “M&A Research: Nuts & Bolts.”
As I have blogged many times (here’s one), the SEC’s Reg Flex Agendas tend to be “aspirational” – and experience bears that out as the SEC often misses its “target” deadlines. I actually loathe blogging when a new Reg Flex Agenda comes out – because some folks read too much into it. In fact, I’m only blogging about it now to try to stave off more misinformation (until just the last few years, the Reg Flex Agenda was completely ignored by everyone)!
Anyway, the latest edition is out – and the following proposed & final rulemaking projects are listed with a April 2017 timeframe:
– Finalize the outstanding compensation proposals (clawbacks/P4P/hedging & pledging/institutional investment manager filing of Form N-PX to disclose their proxy voting- this one has been on the Reg Flex Agenda since 2010!)
– Propose the S-K & S-X changes arising out of the disclosure effectiveness concept releases
– Propose universal proxy
– Propose additional board & nominee diversity disclosures
– Propose changes arising out of the Item 407 audit committee disclosures concept release
– Propose changes to “smaller reporting company” definitions
– Propose changes to Guide 3 (bank holding companies) & Guide 7 (mining)
– Propose the ridiculous 10-K Summary Page, as required by the FAST Act
There are numerous other rulemakings listed. Given the Presidential election, which often increases the likelihood of a change in who is serving as the SEC Chair, this April 2017 timeframe is even more dubious than usual. A new SEC Chair would take time to be confirmed – and then it takes a while for a new Chair to decide their rulemaking priorities and get the ball rolling…
Drilling Down: What is the “Regulatory Flexible Agenda?”
Given that there is so much misinformation out there, let me lay out what the Reg Flex Agenda is – and isn’t. The Regulatory Flexibility Act requires each federal agency – in April and October – to publish an agenda in the Federal Register identifying rules that the agency expects to consider in the next 12 months that are likely to have a significant economic impact on a substantial number of small entities.
The Regulatory Flexibility Act specifically provides that publication of the agenda does not preclude an agency from considering or acting on any matter not included in the agenda – and in fact, an agency is not required to consider on any matter that is actually included in the agenda. As a result, the target dates in the Reg Flex Agenda are fairly meaningless. The SEC may act sooner or later – or even never!
And since the Reg Flex Agenda is not an “official” agenda of what the SEC really will do, all kinds of whacky and aspirational stuff makes it into each Reg Flex Agenda. For example, an SEC Commissioner might have a pet project that gets listed – but the SEC Chair might not have any intention of letting that idea see the light of day.
This bizarre “fictional” stature of the Reg Flex Agenda can cause challenges for the SEC if they get called down to Congress to testify and a member of Congress asks why the agency hasn’t hit a target date. It’s tough to testify that “Yes, Senator, I know we listed that rulemaking as being completed ‘in the Fall’ – but you should ignore the Reg Flex Agenda.” But this is reality…
End-to-End Vote Confirmation: Best Practices & Standardized Processes
Although a number of transfer agents haven’t yet expressed the willingness to make the investments necessary to achieve end-to-end confirmation, a working group – led by Broadridge – has established full end-to-end vote confirmation procedures, standardization and best practices. The working group also concluded that the projects and pilots in which it has been engaged have demonstrated viability of vote confirmation. This is a huge step towards building greater confidence in the voting process. Bravo!
As could be expected, a number of players were chomping at the bit last Monday when Regulation Crowdfunding became effective. The lowdown of this activity is covered in this blog by Steve Quinlivan – including the 29 issuers who filed a Form C with the SEC (which is the requisite filing to commence crowdfunding) so far. As noted in this blog by Gunster’s Robert White, crowdfunding would even be much more popular if the framework were different – but there are efforts afoot to get the problems fixed…
As folks wrap up their conflict minerals reports ahead of next Tuesday’s deadline, it might be useful look over this Elm Sustainability Partners analysis of the reports filed early this year, including:
– Most of the CMRs so far contain language that would make for an expensive IPSA similar to what was warned about last month.
– Several CMRs do not include a list of smelters/refiners.
– Although we support brevity in CMR language, that has limits. One CMR is a total of 15 sentences with no listing of smelters/refiners or countries of origin.
The long-sought insider trading case involving big golfer Phil Mickelson was finally brought yesterday (here’s a statement from Enforcement Director Andrew Ceresney). This truly is a high profile case considering Mickelson is so well known & the gambler involved is the most successful gambler in the US. The kicker for our community is that Mickelson got his trading tips from this gambler who routinely got inside information from a board member – over a period of five years! Mickelson won’t be brought up on criminal charges (his civil charges named him as a “relief defendant”) – but the director is (and already has pleaded guilty)! Not just the usual civil stuff from the SEC. Great story to tell your directors to scare them straight (this blog by David Smyth analyzes the case nicely).
This Stanford report about “What actions should the board of directors take when the CEO engages in behavior that is questionable but not illegal?” is also worth including in your board materials…
Tune in on June 2nd for the webcast – “Yes, It’s Time to Update Your Insider Trading Policy” – to hear Chris Agbe-Davies of Spectra Energy, Ari Lanin of Gibson Dunn, Alan Dye of Hogan Lovells and Section16.net and Marty Dunn of Morrison & Foerster provide practical guidance on revisiting your insider trading policy, as well as your insider trading training program for officers, employees and directors.
SEC Urges Senate to Tweak Email Privacy Bill
Here’s an excerpt from this WSJ article from early in the week:
The Securities and Exchange Commission is pressing the Senate to scale back legislation it says will hamper its civil fraud cases, after the agency was caught flat-footed when the House unanimously backed the measure two weeks ago. SEC Chairman Mary Jo White, joined by her two fellow commissioners, on Thursday urged key Senate lawmakers to make changes to an email-privacy bill that aims to restrict the SEC and other civil agencies from subpoenaing email providers, such as Google, Hotmail and Yahoo.
House and Senate versions of the bill “pose significant risks to the American investing public by impeding the ability of the [SEC] to investigate and uncover insider trading, illegal pyramid schemes, and other types of fraud,” the SEC officials wrote in a letter to Senate Judiciary Committee Chairman Charles Grassley (R., Iowa) and other key senators. The letter was signed by Ms. White and commissioners Kara Stein and Michael Piwowar.
Thursday’s letter is significant because it is unusual for all three SEC commissioners to agree on an issue at the politically divided agency. Ms. White is an independent, while Ms. Stein is a Democrat and Mr. Piwowar is a Republican.
SEC Commissioners: Two Nominees Passed By Committee (But Still Might Not Be Confirmed)
Yesterday, as noted in WSJ article, the Senate Banking Committee approved of the two SEC Commissioner nominees – Lisa Fairfax and Hester Peirce – by a voice vote about six weeks after their hearing was suddenly curtailed, but there still could be trouble in obtaining confirmation on the Senate floor, according to the article…
As I promised in my blog yesterday, here’s a blackline of Corp Fin’s non-GAAP CDIs – courtesy of Simpson Thacher’s Yafit Cohn! And here’s the memos that I’m posting in our “Non-GAAP Measures” Practice Area – as one of the memos highlights, pay special attention to the CDI on adjusted revenue measures…
CII’s Testimony on Capital Formation
Here’s CII’s 16-page testimony submitted for the hearing entitled “Legislative Proposals to Enhance Capital Formation, Transparency, and Regulatory Accountability” before the House Financial Services Subcommittee on Capital Markets. The testimony addresses the regulation of proxy advisors & voting in general, among other topics…
Early Bird Discount Expires Tomorrow: Executive Pay Conferences
Here are the agendas – 20 panels over two days. You’ll notice that many panels have a new novel feature – a post-panel commentary by different experts than the experts on the panel. For example, after Corp Fin Director Keith Higgins speaks, Meredith Cross & Mark Borges will kibitz on what we just heard from Keith. Think of it as being akin to post-debate analysis on the cable networks. The panels include:
1. Keith Higgins Speaks: The Latest from the SEC
2. SEC Speaks: Post-Panel Commentary
3. The SEC All-Stars: The Bleeding Edge
4. The Proxy Designers Speak: How to Make Disclosure Usable
5. Navigating ISS & Glass Lewis
6. Hot Topics: 50 Practical Nuggets in 60 Minutes
7. Pay-for-Performance Disclosure: Now What
8. P4P: Post-Panel Commentary
9. Creating Effective Clawbacks (& Disclosures)
10. Clawbacks: Post-Panel Commentary
11. Pay Ratio: Now What
12. Pay Ratio: Post-Panel Commentary
13. Pay Ratio: The In-House Perspective
14. Pay-for-Performance: How to Do The Proper Messaging
15. Proxy Access: Tackling the Challenges
16. Proxy Access: Post-Panel Commentary
17. Pledging & Hedging Disclosures: What to Do Now
18. Pledging & Hedging Disclosures: Post-Panel Commentary
19. Dealing with the Complexities of Perks
20. The Big Kahuna: Your Burning Questions Answered
Early Bird Rates – Act by May 20th: Huge changes are afoot for executive compensation practices with pay ratio disclosures on the horizon. We are doing our part to help you address all these changes – and avoid costly pitfalls – by offering a special early bird discount rate to help you attend these critical conferences (both of the Conferences are bundled together with a single price). So register by the end of this Friday, May 20th to take advantage of the 20% discount.
Yesterday, Corp Fin issued 12 new & revised CDIs. These new & revised CDIs are spread throughout this list of non-GAAP CDIs. About half of the 12 are new – and half are revised. The CDI dates are located at the bottom of each CDI. Tomorrow, I’ll blog a link to a blackline of the changes (I’m be in the air most of today.)
We have a webcast coming up in mid-July – “Non-GAAP Disclosures: What Is Permissible?” – featuring Brink Dickerson of Troutman Sanders; Chris Holmes of E&Y; Deb Kelley of Genesis; and Dave Lynn of TheCorporateCounsel.net and Morrison & Foerster…
PCAOB Re-Proposes Disclosure of “Critical Audit Matters”
Last week, after five years of outreach, the PCAOB once again attempted to make the auditor’s report more relevant and informative to investors by re-proposing the auditor reporting standard, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion, and related amendments.
Typically, as you know, auditors just give companies a pass/fail grade and provide no description of any issues or problems that occurred during the audit process; those problems are instead taken up with the audit committee. However, PCAOB Chair Jim Doty commented, “in today’s complex economy, and particularly in light of lessons learned after the financial crisis, investors want a better understanding of the judgments that go into an opinion – not a recitation of the standard procedures that apply to any audit, but the specific judgments that were most critical to the auditor in arriving at the opinion.”
While the reproposal would retain the standard pass/fail model, it would also provide for the inclusion in the auditor’s report of “critical audit matters” and new elements related to auditor independence and auditor tenure. According to the proposing release, the communication of critical audit matters “would inform investors and other financial statement users of matters arising from the audit that required especially challenging, subjective, or complex auditor judgment, and how the auditor responded to those matters.” Here is the press release and a fact sheet.
SEC Enforcement Chief Gives Update on Private Equity
In this blog, Steve Quinlivan covers this speech by Andrew Ceresney, Director of the SEC’s Division of Enforcement, about the SEC’s private equity enforcement initiative…
Spanking brand new. By popular demand, this comprehensive “Escheatment Handbook” covers the entire terrain, from the basics to how to respond to audit requests (including those from contract auditors) & deal with escheatment litigation. This one is a real gem – 22 pages of practical guidance – and its posted in our “Escheatment” Practice Area.
Director Independence: The Role of Relationships Between Fellow Directors
In the context of a defendant motion to dismiss, in Delaware County Employees Retirement Fund v. Sanchez, the Delaware Supreme Court reversed the Court of Chancery on appeal in holding that stockholder plaintiffs in a derivative action alleged facts supporting a pleading stage inference that a director was not sufficiently independent due to a long-standing friendship and business relationship. As described in this Paul Weiss memo, the Court considered the allegations in their totality and focused on:
– Detailed allegations of a close, 50-year friendship, which weighed in favor of a pleading inference that a director lacks independence
– Allegations of a close, long-term friendship as opposed to allegations of more superficial relationships
– Detailed allegations of business relationships between an admittedly interested director and another director (whose independence was disputed) together with allegations of their close friendship, which the Court concluded were sufficient to allege a lack of independence
The memo notes that “it remains to be seen how the Court of Chancery will hold on remand on a more developed record.”
Rental Car Market: Soon to be Disrupted!
Most of us in this community do a lot of traveling – so I’m so happy to report that the crappy rental car oligopoly may soon be dust due to the arrival of Skurt, as detailed in this blog. A few weeks ago, I spent an entire hour between picking up my bags and getting into my rental car – waiting a half hour for the shuttle, then doing the 20-minute shuttle ride and finally a paperwork screw-up. Skurt dramatically reduces all of that hassle. I’ve used Skurt & it indeed is good and is true!