Middle-Market Public Policy Roundup

In this week’s roundup, we look at some possible changes coming to the Securities and Exchange Commission. The SEC is proposing to expand a rule that would permit companies to communicate with certain investors before they go public. According to the proposed rule, companies would be allowed to communicate with certain investors to determine if sufficient interest in their company exists in public markets before or after they file a registration statement.

Congress is also seeking to codify an SEC no-action letter that exempts merger and acquisition brokers who meet certain conditions from having to register as a broker-dealer. After circulating Capitol Hill since 2014, a recently re-introduced bill would exempt small merger and acquisition brokers from registering with the agency. In 2017, the bill passed in the House of Representatives but failed in the Senate. Its advocates now hope to codify it in order to prevent the SEC from changing its mind in the future.

SEC Looks to Expand ‘Test the Waters’ Ability for Prospective IPOs

The Securities and Exchange Commission released a proposed rule Tuesday that would expand the ability for companies exploring an initial public offering to communicate with investors prior to an initial public offering to gauge market interest.

This “test the waters” approach was originally passed by Congress in the 2012 Jumpstart Our Business Startups Act, designed to create an easier process for emerging growth companies—classified as those with under $1 billion in annual gross revenues—to go public.

Under the proposed rule, any issuer, or person authorized to act on its behalf, would be permitted to engage in oral or written communications with some institutional investors either prior to or following the filing of a registration statement and to determine whether such investors might have an interest in a contemplated registered securities offering.

According to the proposed rule, there would be no filing or legending requirements but test-the-waters communications may not conflict with material information in the related registration statement.

Additionally, issuers subject to Regulation FD, which addresses the selective disclosure of information by publicly traded companies and other issuers, would need to consider whether any information in a test-the-waters communication would trigger disclosure obligations under Regulation FD or whether an exemption under it would apply.

“Extending the test-the-waters reform to a broader range of issuers is designed to enhance their ability to conduct successful public securities offerings and lower their cost of capital, and ultimately to provide investors with more opportunities to invest in public companies,” said SEC Chairman Jay Clayton in a press release.

This proposal comes on the heels of a 2017 decision by the SEC to extend the submission deadline of confidential draft filings for companies going public. Prior to the JOBS Act, confidential draft filing was only available to emerging growth companies. Both of these provisions were included in the Encouraging Public Offerings Act of 2017, a bill passed by the House of Representatives unanimously in the last Congress but stalled in the Senate.

Comments on the proposed rule will be due 60 days after publication in the Federal Register.

If this is an issue of interest to you, please reach out to policy@acg.org.

Bill Would Exempt Small M&A Brokers from Registration

A new bill would exempt a merger and acquisition broker facilitating the sale of small, privately-held companies from registering as a broker-dealer with the Securities and Exchange Commission.

Introduced by Representative Bill Huizenga, R-Mich., the Small Business Mergers, Acquisitions, Sales, and Brokerage Simplification Act of 2019, would allow M&A brokers who meet certain criteria to be exempted from registration.

To be eligible for the exemption, an M&A broker must not provide financing, cannot have been barred from association with broker-dealers by any regulatory authority, must not have custody of securities or funds and does not have the ability to bind parties with regards to M&A transactions.

According to the bill, all company sales mediated by an M&A broker would need to have under $25 million in EBITDA and under $250 million in gross revenue in order to qualify for the exemption.

This bill has been introduced each Congress since 2014, when the SEC’s Division of Trading and Markets issued a no action letter on this issue. Proponents of the bill want to codify the no action letter into law so they can prevent the SEC from changing its position in the future. Last Congress, the bill passed unanimously out of the House of Representatives, but it subsequently stalled in the Senate.

If this is an issue of interest to you please reach out to policy@acg.org.