June 9, 2017

House Passes Financial Choice Act

While the rest of us were listening to former FBI Director James Comey’s testimony before the Senate Intelligence Committee, the House passed the Financial Choice Act by a vote of 283-186, with 11 abstentions.  Here’s a shock – the vote was along party lines, with Rep. Walter Jones of North Carolina being the sole Republican to vote against the bill.

Here’s an executive summary of the legislation provided by the House Financial Services Committee. Speaker Paul Ryan praised the bill for reining in “the overreach of Dodd-Frank.”  Investor advocates have a different perspective. CII Director Ken Bertsch commented that “The Choice Act would dismantle important shareholder rights, make investing in public companies riskier and undercut the ability of the Securities and Exchange Commission to protect investors.”

As I previously blogged, this bill is likely “face down & floating” in the Senate – but it’s just the opening salvo.

Enforcement: Stephanie Avakian & Steve Peikin Named Co-Directors

Last week, Liz blogged about reports that Acting Director Stephanie Avakian and Sullivan & Cromwell’s Steve Peikin would serve as co-heads  of the SEC’s Division of Enforcement. Yesterday, the SEC made it official with this press release announcing Stephanie and Steve’s appointment as Co-Directors.

Private Company Employee Stock Valuations: A Shell Game?

This DealBook article criticizes tech companies’ use of 409A valuations for employee stock issuances – calling the approach Silicon Valley’s “dirty little secret”:

This type of valuation allows hot, privately owned technology companies — like Uber, Airbnb or Nextdoor — to issue common stock or stock options to employees at a low price and, at the same time, or nearly the same time, sell preferred stock to outside investors at a price that is often three or four times higher. It’s also a way for company founders to control the market for the stock of their private companies while rewarding themselves and key employees with cheap shares that seem instantly worth a lot more than the price at which they were issued.

I don’t think I’d necessarily call this a “valuation shell game” as DealBook contends. Employees are typically buying common stock, loaded down with fairly outrageous restrictions on transfer. Outside investors are buying “Series Whatever” preferred, with a whole different bundle of rights. Under those circumstances, it doesn’t require a huge leap of faith to justify a significant discount from what outside investors are paying.

DealBook is also critical of the false precision in these 409A valuations – but the same thing can be said of almost any third party valuations. False precision is sort of the nature of the beast.  The other thing is, if this is a shell game, it’s one that’s been going on for ages – and in a lot of places other than Silicon Valley. This is just another variation on the theme of “cheap stock”, which has been an issue in IPOs for decades.

John Jenkins