May 29, 2018

Dodd-Frank Reform: Small Caps & Privates Join in Banks’ Party (Reg A+ & 701)

Most of the attention on the Dodd-Frank reform bill that President Trump signed last Friday has focused on the law’s impact on financial institutions – but this Duane Morris blog points out that there’s something in the new law for other companies as well. In particular, the legislation expands the class of companies that are eligible to use Reg A+ to include already public companies. This excerpt explains:

The President today signed the “Economic Growth, Regulatory Relief and Consumer Protection Act.” Most of the bill is centered around easing some Dodd-Frank restrictions as they apply to smaller banks. But buried in Section 508, called “Improving Access to Capital,” Congress adopted a major change to Regulation A+.

Previously, the Reg A+ rules required, in Section 251(b)(2), that a company cannot use Reg A+ if it is subject to the SEC reporting requirements under Section 13 or 15(d) of the Securities Exchange Act immediately prior to the offering. This includes, for example, every company listed on a national exchange such as Nasdaq or the NYSE and many companies that trade over-the-counter. The new law reverses that and orders the SEC to change the rules to permit reporting companies to utilize Reg A+.

Along the same lines, the new statute also provides that companies can satisfy their Reg A+ periodic reporting obligations through the filing of the Exchange Act reports mandated for other reporting companies.

Stinson Leonard Street’s Steve Qunilivan also points out that there’s good news for private companies too – the new law relaxes some of the requirements under Rule 701:

Section 507 of the bill directs the SEC to increase Rule 701’s threshold for providing additional disclosures to employees from aggregate sales of $5,000,000 during any 12-month period to $10,000,000. In addition, the threshold is to be inflation adjusted every five years.

We’re posting memos about the new law in our “Regulatory Reform” Practice Area

Reg A+ May Actually be Working!

Reg A+’s expansion may turn out to be bigger news than you might think. A lot of questions have been raised about the efficacy of the JOBS Act’s efforts to rejuvenate Reg A – but this recent study reviews experience under the new regime & suggests that those efforts appear to be working. Here’s an except:

Not only has the use of Regulation A grown exponentially, but the exemption may now rival or even surpass its previously more popular predecessor, Regulation D’s Rule 506. Regulation A+ is an example of Congress using its legislative powers to take something that was structurally flawed and problematic and making it into a regulation that, while still having some flaws, now appears to be more appealing to emerging growth and start-up companies.

But the study also says that success has brought its own problems:

By the same token, Regulation A+ is not an unqualified success. The considerable increase in the use of Regulation A has surfaced potential problems such as the increased exposure of this option to “lay” investors; i.e. investors with modest income, modest net worth, and little to no financial sophistication. While these are the investors that Regulation A actively seeks, there are concerns about how issuers, regulators and the market as a whole will react if/when these investors suffer significant losses in this private equity startup company space.

SEC Commissioner Nominees: Another Senate Banking Staffer?

Want to become an SEC Commissioner? You’d better have the Senate Banking Committee on your resume. According to this WSJ article, the Committee’s chief counsel, Elad Roisman, may be the choice to fill the slot of departing Commissioner Mike Piwowar:

The White House is considering nominating a top aide to the Senate Banking Committee chairman for a GOP opening on the Securities and Exchange Commission, according to people familiar with the matter. Elad Roisman, the chief counsel to the banking panel led by Mike Crapo (R., Idaho), is a top contender to succeed Michael Piwowar at the top U.S. markets regulator, these people said. Mr. Piwowar plans to leave the SEC by July.

The article points out that Roisman – who’s only 37 years old – would join a long list of former Banking Committee staffers who have gone on to serve as SEC Commissioners – including Piwowar and current SEC commissioners Kara Stein & Hester Peirce. The logic being – if you work for the Senate Banking Committee, your Senate confirmation hearings are likely to be smooth…

John Jenkins