NEWS ROUND UPApril2017
A Morrison & Foerster summary of recent developments affecting Israeli companies active in the capital markets.
IN THIS ISSUE
Momentum Builds in the U.S. IPO Market...p. 1
SEC Adopts T+2 Settlement Cycle for Securities Transactions...p. 1
JOBS Act-Related Technical Amendments...p. 2
SEC Provides Relief from Enforcement Actions Regarding Certain Portions of the Conflict Minerals Rule...p. 2
Delaware Paves the Way for the Use of Blockchain Technology...p. 2
Securities Liability for Foreign Issuers...p. 3
Rise in Securities Suits...p. 3
SEC Chief Accountant's Remarks on Enhancing Audit Committee Effectiveness and Advancing Effective ICFR...p. 3
Renaissance Capital reported a strong start to the year in its U.S. IPO
Market 1Q 2017 Quarterly Review. The first quarter of 2017 saw 25
T IPOs, which raised $9.9 billion, a jump from 1Q 2016's eight IPOs raising
less than $1 billion. This was a seven-quarter high for capital raised. Median deal size also rose to $190 million.
There was an even distribution of IPO activity across various
sectors. The energy sector made
up 20% of 1Q 2017 IPOs, raising $1.5 billion. The tech sector
S raised the most capital this
quarter, $4.0 billion from its four IPOs. Biotech IPO activity saw its
U lowest levels since 4Q 2012 with
only three IPOs this quarter. The tech sector had the largest U.S.
IPO since the Alibaba IPO in
2014, with the Snap IPO raising
Private equity-backed IPOs accounted for 12 IPOs, raising $5.1 billion in proceeds. This was the first time in four years that PE-backed IPOs accounted for more capital raised and a greater number of deals than venture capital-backed IPOs. VC-backed IPOs made up 32% of the first quarter's IPOs, with eight IPOs, raising $4.1 billion in proceeds.
There were 16 IPO withdrawals and 33 new filings during 1Q 2017. A number of unicorn companies, valued at over $1 billion, were on track for their IPOs but instead opted for M&A exits this quarter.
SEC Adopts T+2 Settlement Cycle for Securities Transactions
On March 22, 2017, as previously anticipated by the market, the Securities and Exchange Commission (SEC) adopted an amendment to Rule 15c6-1 under the Securities Exchange Act of 1934 to shorten the standard settlement cycle for most broker-dealer transactions from three business days after the trade date (T+3) to two business days (T+2). The SEC proposed the amendment on September 28, 2016, in connection with a variety of related changes to the SEC's rules and the rules of selfregulatory organizations such as FINRA to facilitate the U.S.'s move to a T+2 settlement cycle.
According to the SEC, Rule 15c6-1, as amended, is designed to enhance efficiency, reduce risk, and ensure a coordinated and expeditious transition by market participants to the shortened standard settlement cycle.
Broker-dealers will be required to comply with the rule beginning on September 5, 2017, and to assist them (and other securities professionals and the investing public) in their preparation for the implementation, the SEC has established an e-mail address (T2settlement@sec.gov) for the submission of inquiries to the SEC staff.
For additional discussions of the proposed T+2 changes, see our previous articles here (FINRA), here (NSCC and NYSE) and here (SEC Rule 15c6-1(a)).
JOBS Act-Related Technical Amendments
The SEC adopted technical amendments to conform several rules and forms to amendments made to the Securities Act of 1933 ("Securities Act") and the Securities Exchange Act of 1934 ("Exchange Act") by Title I of the Jumpstart Our Business Startups (JOBS) Act. For example, under the definition of the term "emerging growth company" (EGC), the JOBS Act required inflation indexing the annual gross revenue amount. With the amendments, the revenue threshold for EGCs is now $1.07 billion. The final rules also address various provisions of the Securities Act and the Exchange Act, as well as Exchange Act periodic and current reports, Regulation S-K, and Regulation SX that did not currently reflect JOBS Act provisions. Sections 4(a)(6) and 4A of the Securities Act set forth dollar amounts used in connection with the crowdfunding exemption, and Section 4A(h)(1) states that such dollar amounts shall be adjusted by the SEC not less frequently than once every five
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years to reflect Consumer Price Index (CPI) changes.
See the final rule: https://www.sec.gov/rules/final/2 017/33-10332.pdf.
See the SEC press release: https://www.sec.gov/news/pressrelease/2017-78.
SEC Provides Relief from Enforcement Actions Regarding Certain Portions of the Conflict Minerals Rule
On April 3, 2017, the District Court for the District of Columbia (the "District Court") entered a final judgment (the "Final Judgment") in the case of National Association of Manufacturers, et al., v. SEC. The Final Judgment affirms the prior holding of the U.S. Court of Appeals for the District of Columbia in National Association of Manufacturers that Exchange Act Section 13(p)(1) and Rule 13p-1 (together, the "Conflict Minerals Rule") violate the First Amendment to the extent the Conflict Minerals Rule requires regulated entities to report to the SEC and to state on their websites that any of their products have "not been found to be DRC (Democratic Republic of Congo) conflict free." The Final Judgment solely sets aside the portion of the Conflict Minerals Rule that requires regulated entities to report to the SEC and make the website statements. The District Court remanded the Rule in all other respects, to the SEC.
On April 7, 2017, the staff of the SEC's Division of Corporation Finance (the "Staff") issued guidance on the impact of the Final Judgment on the Conflict Minerals Rule (the "SEC Guidance"). The SEC Guidance seeks to reduce the uncertainty surrounding the Conflict Minerals Rule with regard to potential enforcement actions, given that the Final Judgment and the decision of the U.S. Court of Appeals in National Association of
Manufacturers leaves open the question of whether the description of being "DRC conflict free" is required by statute, or instead, a product of the SEC's rulemaking. The Staff explained that it will not recommend enforcement action if companies (including those subject to paragraph (c) of Item 1.01 of Form SD) only file disclosure under the provisions of paragraphs (a) and (b) of Item 1.01 of Form SD. However, the Staff expressly noted that the SEC Guidance is still subject to any further action taken by the SEC and does not express any legal conclusion on the Conflict Minerals Rule itself.
The Final Judgement is available here.
The U.S. Court of Appeals for the District of Columbia in National Association of Manufacturers is available here.
The SEC Guidance is available here.
Delaware Paves the Way for the Use of Blockchain Technology
Following last May's announcement of the "Delaware Blockchain Initiative" by former Delaware Governor Jack Markell, on March 13, 2017, the Corporate Council of the Corporation Law Section of the Delaware State Bar Association released groundbreaking draft legislation proposing to amend several sections of the Delaware General Corporation Law (DGCL) in an attempt to clarify the application of existing laws to, and facilitate the use of, blockchain technology for various corporate purposes.
Our client alert covers the proposed legislation as it relates to the use of blockchain technology for (i) the creation and administration of corporate records and (ii) the electronic transmission of stockholders' communications.
To read our full client alert, please visit: https://goo.gl/pAgVzh.
Securities Liability for Foreign Issuers
On March 28, 2017, the U.S. District Court for the District of Salt Lake City granted the SEC's request for a preliminary injunction in SEC v. Traffic Monsoon, LLC. The SEC's complaint was brought in connection with Traffic Monsoon's operation as a web traffic exchange, in which it sold several different products designed to deliver "clicks" or "visits" to the websites of its customers, which the SEC alleged violated Exchange Act Section 10(b) and Rule 10b5. In its argument against the SEC's request for a preliminary injunction, Traffic Monsoon relied on Morrison v. Nat'l Australia Bank Ltd. to assert that Exchange Act Sections 10(b) and Section 17 do not authorize a U.S. district court to enjoin activity related to foreign transactions, claiming that approximately 90% of Traffic Monsoon's customers purchased products over the internet while located outside the United States. In Morrison, the Supreme Court replaced the longstanding "conduct and effects test" with the "transactional test," holding that Section 10(b) and Rule 10b-5 could be applied only in connection with the purchase or sale of a security listed on an American stock exchange and the purchase or sale of any other security in the U.S.
In Traffic Monsoon, the defendants claimed that notwithstanding the passage of Section 929P(b) of the Dodd-Frank Act, which reinstated the conduct and effects test that had been repudiated in Morrison, the SEC lacked jurisdiction in Traffic Monsoon in accordance with Morrison's transactional test. Section 929P(b) clarified, among other things, that U.S. district courts have jurisdiction over Exchange Act Section 10(b)
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and Section 17(a) actions brought by the SEC if the conduct and effects test has been satisfied. However, the Traffic Monsoon court disagreed with the defendants' claim, holding that the legal context in which Section 929P(b) was drafted, legislative history and express purpose of Section 929P(b) all point to a congressional intent that Section 10(b) and Section 17(a) should be applied to extraterritorial transactions to the extent that the conduct and effects test can be satisfied. Using the conducts and effects test, the Traffic Monsoon court found that the SEC had jurisdiction to bring an injunction against the defendants, given that Traffic Monsoon was conceived and created in the United States, along with the promotion of its products. This decision is notable because it represents the first time that a U.S. district court has affirmatively held that Section 929P(b) supersedes Morrison. More importantly, it functions as a warning to issuers that their foreign activities may nevertheless be subject to liability under U.S. securities laws, even if other U.S. district courts have continued to use Morrison's transactional test.
A copy of the Traffic Monsoon decision is available at: https://goo.gl/72bMzA.
Rise in Securities Suits
The Securities Regulation & Law Report recently published a report that surveyed the number of securities class actions against foreign private issuers with a class of securities listed on a U.S. securities exchange. The number of securities class actions against foreign private issuers has steadily risen in the last four years. Much of the increase had in prior years been attributable to lawsuits involving Chinese reverse mergers. In the recent report, there was a notable spike in the number of suits against Israeli issuers, with eight new suits having been brought against Israeli issuers in
2016. This accounted for the nearly 20 percent of the securities class actions involving foreign private issuers. Of course, this may be attributable to the fact that many such suits target technologybased companies that often have significant volatility, and Israeli companies pursuing listings in the United States by and large tend to be tech companies.
SEC Chief Accountant's Remarks on Enhancing Audit Committee Effectiveness and Advancing Effective ICFR
In a pair of recent speeches, SEC Chief Accountant Wesley R. Bricker emphasized the importance of reinforcing and advancing credible financial reporting through effective audit committees and effective internal control over financial reporting (ICFR). Mr. Bricker highlighted several ways to advance the role and effectiveness of audit committees, including the following:
Audit committees should understand the businesses they serve and the impact of the operating environment the economic, technological, and societal changes on corporate strategies.
Balancing audit committee workload is critical given the need for audit committees to stay current on emerging issues, whether financial, ICFR, or disclosure-related through continuing education and other means.
Audit committees should consider training and education programs to ensure that their membership has the proper background and stays current as to relevant developments in accounting and financial reporting, including the recently issued
accounting standards relating to revenue recognition, leasing, financial instruments, and credit losses.
With respect to ICFR, Mr. Bricker noted that management's ability to fulfill its financial reporting responsibilities significantly depends on the design and effectiveness of ICFR. Companies should also be aware that certain areas of ICFR may be impacted by the transition to the new revenue standards and that they should take appropriate steps to ensure the effectiveness of ICFR, including the following:
Refreshing other components of internal control over financial reporting, including professional competence.
Considering whether the existing controls support the formation and enforcement of sound judgments (regarding the nature of revenue recognition, the economic substance of revenue arrangements, whether to report revenue on a gross or net basis, etc.) or whether changes are necessary.
Making sure they have appropriate resources to evaluate revenue arrangements and properly apply the principles of the new standards.
Considering whether their reporting systems are designed to accurately capture the effects of changes to customer contracts and other information required for compliance with the new standards.
Keeping in mind that the effectiveness of any changes to internal controls is predicated on a comprehensive and timely assessment of risks that may arise as a result of applying the new standards. Appropriate identification and assessment
of risks may require involvement of management and employees from both the accounting and financial reporting functions and other functional areas of a company.
Mr. Bricker's speeches are available at: https://goo.gl/Z0UE3k and https://goo.gl/LfcrLV.
Foreign Private Issuers: SEC Disclosure Issues and Developments Bloomberg BNA Webinar
Thursday, April 20, 2017 1:00 p.m. 2:00 p.m. EDT
During this session, we will review the benefits and accommodations available to foreign private issuers, or non-U.S. domiciled companies, that choose to access the U.S. capital markets. We will discuss assessing status as a foreign private issuer, the initial and ongoing disclosure requirements for foreign private issuers, liability considerations, and related topics. The speakers also will address important recent developments significant to foreign private issuers.
For a 25% off promotional code, e-mail CMG-Events@mofo.com.
To register, or for more information, visit: https://goo.gl/UndXgm.
The U.S. IPO Market: Market and Legal Developments IFLR Webinar
Wednesday, April 26, 2017 11:00 a.m. 12:30 p.m. EDT
After the 2016 decline in the number of U.S. initial public offerings (IPOs), commentators questioned whether the trend toward companies deferring initial public offerings and remaining private longer would be a new norm. Already this year's IPO market appears to be rebounding. Join us for a discussion of the current IPO market and legal developments.
To register for this free webinar, please visit: https://goo.gl/0sQHRU.
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CLIENT RESOURCE CORNER
We have a number of resources available to our clients and friends including:
MoFo Jumpstarter. Our Jumpstart blog is intended to provide entrepreneurs, domestic and foreign companies of all shapes and sizes, and financial intermediaries, with up to the minute news and commentary on the JOBS Act. Visit: www.mofojumpstarter.com
MoFo's Quick Guide to REIT IPOs.
Our recently updated Quick Guide to REIT IPOs provides an overview of the path to an IPO for a REIT. The guide also addresses regulatory, tax and accounting considerations relevant to sponsors considering forming a REIT. Our guide is available here: https://goo.gl/jwrKE1.
The Short Field Guide to IPOs.
In our recently updated IPO Field Guide we provide an overview of the path to an initial public offering and address a number of recent developments. Our guide is available here: https://goo.gl/Cvxa4S.
Capital Markets Practice Pointers.
In our practice pointers, which address a range of topics of interest, we offer guidance on frequent issues encountered in connection with securities disclosures and filings. Visit our Practice Pointer webpage at https://goo.gl/FizH9N.
Social media sites are transforming not only the daily lives of consumers, but also how companies interact with consumers. Social media generates new legal questions at a far faster pace than the law's ability to provide answers to such questions. In an effort to stay on top of these emerging issues, and to keep our clients and friends informed of new developments, Morrison & Foerster has launched a newsletter devoted to the law and business of social media. Visit www.mofo.com/sociallyaware.
James Tanenbaum (212) 468-8163 firstname.lastname@example.org
Anna Pinedo (212) 468-8179 email@example.com
Ze'-ev Eiger (212) 468-8222 firstname.lastname@example.org
Lloyd Harmetz (212) 468-8061 email@example.com
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Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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