Regulatory Landscape of Private Securities Primary and Secondary Markets in the U.S.

Transcription

1 Regulatory Landscape of Private Securities Primary and Secondary Markets in the U.S. Vladimir Ivanov U.S. Securities and Exchange Commission Washington DC

2 Disclaimer The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement of any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author s colleagues upon the staff of the Commission.

3 Section 3(a)(11): Intrastate exemption No limitation on amount raised and number of investors involved (issuers and investors must be residents in state) No restrictions on general solicitation as long as intrastate charter of offering is kept Restricted securities, resales limited to investors within the state for a period of 9 months. Subject to state securities laws (Blue Sky laws) Federal Exemptions for Private Offerings Section 4(a)(2) No limitation on amount raised and number of investors involved No general solicitation allowed Investors must meet sophistication and access to information tests Restricted securities Subject to state securities laws (Blue Sky laws)

4 Federal Exemptions for Private Offerings Regulation D Rule 504, Rule 505, Rule 506(b), and Rule 506(c) Limits on amount raised: up to $1 million (Rule 504), $1-- $5 million (Rule 505), no limitation (Rule 506(b), Rule 506(c)) Have to file Form D General solicitation: allowed (Rule 506(c) and sometimes Rule 504), not allowed (Rule 504, Rule 505, Rule 506(b)) Investors: no limit (Rule 504), up to 35 non-accredited (Rule 505, Rule 506(b)), only accredited (Rule 506(c)) Restricted securities, some exceptions for Rule 504 Subject to state securities laws: yes (Rule 504, Rule 505), no (Rule 506(b), Rule 506(c))

5 Federal Exemptions for Private Offerings Regulation A Limitation on amount raised: up to $20 million for Tier 1, up to $50 million for Tier 2 Have to file Form 1-A and 1-Z; annual, semi-annual, and current reports for Tier 2 offerings General solicitation: testing the waters allowed Freely resalable securities Subject to state securities laws: yes (Tier 1), no (Tier 2) Regulation S Only for offer and sale of securities outside the U.S. No limitation on amount raised, all investors must be issuers No general solicitation Shares restricted during distribution compliance period Exempt from state securities laws

6 Federal Exemptions for Private Offerings Rule 144A A safe harbor exemption from registration that is available solely for resale transactions by persons other than the issuer Securities should be sold to Qualified Institutional Buyers (QIBs): accredited investors that owns at least $100 million in securities of unaffiliated entities Securities resold should not be of the same class as those listed on a U.S. national exchange Restricted securities A rule 144A offering is a two-step process First, an issuer undertakes a private placement of securities (primarily debt, for US issuers) to one or more investment banks or broker-dealers called initial purchasers under Section 4(a)(2) or Regulation D. Second, the concurrent resales of those securities by the initial purchasers to QIBs under Rule 144A. In these resale transactions, the initial purchasers act in substantially the same role as the underwriters of an SEC-registered offering.

7 Federal Exemptions for Private Offerings JOBS Act Title III Regulation Crowdfunding Proposed on October 23, 2013 Limitation on amount raised: $1 million in the past 12 months No limitation on type of investors Issuers have to file Form C and Form C-AR General solicitation allowed Investment limits Restricted securities Exempt from state securities laws All transactions must go through a funding portal Funding portals have the ability to limit offerings

8 * Other private include Reg S and other Section 4(2) offerings Sources: EDGAR Form D and Form D/A filings for Rule 504, 505, and 506 offerings; Thomson Financial for all others Public vs. Private Capital Raising 1,500 1,250 1,000 $ billions Registered debt Registered equity Reg D Rule 144A Other private*

9 Number of Regulation D offerings: ,000 2,500 20,000 2,000 15,000 1,500 10,000 1,000 5, New Reg D offerings S&P500 Source: EDGAR Form D filings

10 Capital raised through Rule 506(c) and Rule 506(b) offerings of Regulation D: September 23, December 31, 2014 Exemption Form D Filings Total amount sold ($ billions) Mean amount sold ($ millions) Median amount sold ($ millions) Median offer size ($ millions) 506(c) 2,117 $33 $13 $0.7 $ (b) 24,500 $1,520 $26 $1.6 $2.2 All ,617 $1,553 $25 $1.5 $2.3 Regulation D** 27,710 $1,555 $24 $1.4 $2.0 Total amount sold includes incremental amounts reported to be raised in amended filings (Form D/As). Mean and median amounts sold based on initial (new) Form D filings only. Median offer size is based on offerings that report their amount of offering. ** Includes all four exemptive rules: Rules 504, 505, 506(b) and 506(c). Source: EDGAR Form D filings

11 Amounts raised by fund and non-fund issuers in Rule 506 market: September 23, December 31, 2014 Rule 506(b): Amounts Raised Rule 506(c): Amounts Raised Funds - Incremental 43% Non Funds- Initial 11% Funds - Incremental 23% Non Funds- Initial 34% Funds- Initial 44% Non Funds - Incremental 2% Funds- Initial 41% Non Funds - Incremental 2% Source: EDGAR Form D and Form D/A (amended) filings

12 Issuers in the Reg D Market Total capital raised ($ billions), Hedge Funds 388 Other Investment Funds 426 Private Equity Funds 316 Non-Financial Issuers (Operating) 133 Financial Services 17 Real Estate 21 Venture Capital Funds 30 $0 $500 $1,000 $1,500 $2,000 $2, Source: EDGAR Form D and Form D/A (amended) filings

13 Issuers in the Reg D Market Number of new issuances, Non-Financial Issuers (Operating) 12,389 Hedge Funds 1,848 Real Estate 2,789 Financial Services 1,145 Other Investment Funds 1,603 Private Equity Funds 1,550 Venture Capital Funds 680 Source: EDGAR Form D filings (new offerings only) 0 10,000 20,000 30,000 40,000 50,000 60,000 70,

14 Issuers in the Reg D Market Regulation D offerings by type of security issued: Equity 71, % Pooled Investment Fund Interests 26, % Option, Warrant or Other Right to Acquire Another Security 13, % Debt 14, % Security to be Acquired Upon Exercise of Option or Warrant 8, % Source: EDGAR Form D filings

15 Issuers in the Reg D Market Most active non-fund issuers by amount sold: Banking Other Real Estate Technology Health Care Energy Manufacturing Retailing Agriculture Business Services Restaurants Travel 1.6% 3.8% 1.6% 1.4% 0.3% 0.8% 0.8% 0.6% 0.2% 0.3% 0.5% 0.2% 10.1% 12.5% 12.5% 12.4% 8.8% 9.0% 10.0% 8.5% 16.0% 17.2% 33.2% 37.5% 0% 5% 10% 15% 20% 25% 30% 35% 40% Source: EDGAR Form D filings

16 Investors in the Reg D Market Total Number of Investors Mean Investors per Offering Median Investors per Offering Fraction of offerings with at least one nonaccredited investor * Hedge Funds 38,311 29, % 7% Private Equity Funds 17,947 27, % 3% Venture Capital Funds 4,528 11, % 1% Other Investment Funds 27,085 33, % 4% Financial Services 19,641 16, % 11% Real Estate 35,982 73, % 12% Non-financial Issuers 91, , % 9% All offerings 235, , % 8% * data is annualized. Double counting occurs if investors participate in more than one offering during the year Source: EDGAR Form D filings from 2009 to Amended (Form D/A) filings excluded

17 Use and Cost of Intermediaries Commissions paid by type of Reg D issuer: % 6% 5% 4% 3% 2% 1% 0% Hedge Fund Private Equity Fund Venture Capital Fund Other Investment Fund Financial Services Real Estate Non-Financial (Operating) Avg total fees 2014 Avg total fees Source: EDGAR Form D filings from 2009 to Amended (Form D/A) filings excluded

18 Use and Cost of Intermediaries Use of financial intermediaries by size of Reg D offering: % 30% 25% 20% 15% 10% 5% 0% $0-1 million $1-5 million $5-10 million $10-50 million Greater than $50million % Offerings with Intermediaries 2014 % Offerings with Intermediaries Source: EDGAR Form D filings from 2009 to Amended (Form D/A) filings excluded

19 Use and Cost of Intermediaries 7% Commissions paid by size of Reg D offering: % 5% 4% 3% 2% 1% 0% $0-1 million $1-5 million $5-10 million $10-50 million Greater than $50million Avg total fees 2014 Avg total fees Source: EDGAR Form D filings from 2009 to Amended (Form D/A) filings excluded

20 Secondary Markets for Private Offerings Over-the-counter (OTC) market: OTC Bulletin Board and OTC Markets Group OTCBB an interdealer quotation system that is used by subscribing FINRA members to reflect market making interest in OTCBB-eligible securities 1999 OTCBB firms required to file with the SEC OTC Markets Group the leading U.S. interdealer electronic quotation and trading system for OTC securities 2007 OTC Markets Group introduces information tiers: OTCQX, OTCQB, and OTC Pink tiered marketplaces OTCQX: for companies with high financial standards, that are current in their disclosure and receive third party advisory OTCQB Venture Marketplace: for entrepreneurial and development stage U.S. and international companies. To be eligible, companies must be current in their reporting and undergo an annual verification and management certification process.

21 Secondary Markets for Private Offerings OTC Markets Group OTC Pink: companies with variable degree of reporting Current information Limited information No information An OTC company is not required to report to the SEC (i.e., is not a reporting company) An OTC company can become SEC reporting company by registering its securities with the SEC Other private exchanges: SecondMarket, SharesPost, NASDAQ Private Market PORTAL market (Rule 144A securities) How would the JOBS Act affect the secondary markets for private offerings?