United States: Capital Markets Impact Of Regulatory Reform Legislation

On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (Act) was signed into law. Although the bulk of the Act addresses regulatory requirements of financial institutions, there are a few discrete provisions also impacting the capital markets.

Encouraging Employee Ownership

Rule 701 under the Securities Act of 1933 (Securities Act) provides an exemption from the registration requirements of the Securities Act for securities issued in compensatory circumstances to specified investors (i.e., officers, directors, employees and consultants) by companies that are not subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (Exchange Act). Currently, Rule 701(e) requires that if the aggregate sales price or amount of securities sold in a consecutive 12-month period exceeds $5 million, the company must deliver specified disclosures to investors within a reasonable period of time before the date of sale. These additional disclosures include a summary plan description or a summary of the material terms of the plan, information about risks of the investment, and financial statements as of a date no more than 180 days before the sale of securities in reliance on this exemption.

Section 507 of the Act requires that the US Securities and Exchange Commission (SEC) increase the threshold from $5 million to $10 million for the maximum amount of securities that can be sold in a 12-month period under Rule 701 without triggering the additional disclosure requirements. Section 507 also requires that the SEC index this amount every five years to reflect changes to the Consumer Price Index for All Urban Consumers, rounding to the nearest million. The SEC is to amend Rule 701(e) by July 23, 2018 (60 days from the date of enactment of the Act) to reflect the requirements of Section 507.

Improving Access to Capital

Regulation A under the Securities Act provides an exemption from the Securities Act registration requirements in connection with companies raising capital in securities offerings of up to $50 million in a 12-month period, provided that the disclosure and other requirements of Regulation A are satisfied. Often called "Regulation A+," this regulation currently is available only to companies that are not subject to the reporting obligations of Section 13 or Section 15(d) of the Exchange Act.

Section 508 of the Act expands the availability of Regulation A+ by requiring the SEC to remove the requirement that the company issuing securities not be subject to the Exchange Act's reporting requirements immediately before such offering. In addition, Section 508 requires the SEC to amend Regulation A+ so that any company that is subject to Section 13 or 15(d) of the Exchange Act will be deemed to have met the periodic and current reporting requirements of Regulation A+ if it satisfies the Section 13 reporting requirements.

National Securities Exchange Regulatory Parity

Section 18 of the Securities Act exempts securities listed on national securities exchanges from registration or qualification under state securities (or "blue sky") laws and regulations. Originally, the Section 18 exemption applied automatically to securities of the exchanges that were expressly designated under that statutory provision. For securities on other exchanges to be entitled to the exemption from state registration requirements, the SEC had to determine by rule that the exchange had listing standards substantially similar to the listing standards of the statutorily designated exchanges.

Section 501 of the Act amended Section 18(b) of the Securities Act to eliminate differences between exchanges in the applicability of the federal preemption of state registration of securities offerings. As amended, Section 18 exempts from state registration requirements securities that are designated by the SEC as qualified for trading in the national market system and authorized to be listed on a national securities exchange.

SEC Algorithmic Trading Study

Section 502 of the Act requires the SEC to submit a study on algorithmic trading to committees of the Senate and the House of Representatives, reporting on the risks and benefits of algorithmic trading in the capital markets in the United States. This report, which is due not later than 18 months after the enactment of the Act, must cover:

  • An assessment of the effect of algorithmic trading in US equity and debt markets on the provision of liquidity in stressed and normal market conditions;
  • An assessment of the benefits and risks to US equity and debt markets by algorithmic trading; and
  • An analysis of whether the activity of algorithmic trading and entities that engage in algorithmic trading are subject to appropriate federal supervision and regulation.

Based on the above-described analysis, the report must recommend whether any changes should be made to regulations and whether the SEC needs additional legal authority or resources to do so.

Practical Considerations

Private companies that rely on Rule 701 to offer securities on a compensatory basis to officers, directors, employees and consultants may want to revisit their programs to determine whether it would be beneficial for them to increase the size of their programs, while remaining at a level where they would not need to incur the expenses of additional required disclosures.

The amendments to Regulation A+ should enhance capital-raising flexibility, especially for smaller companies that are not eligible to use the streamlined shelf registration procedures afforded by an automatically effective Form S-3 or for public companies that are looking to raise less than $50 million. Therefore, public companies, or soon-to-be public companies, may want to assess whether it makes sense for them to raise capital in a securities offering that is exempt under Regulation A+.

The parity of treatment of securities exchanges for the purposes of federal preemption of state securities registration or qualification could offer additional flexibility for companies selecting the exchange upon which they will list their securities.

People with insights on the impact of algorithmic trading on US capital markets should consider providing input to the SEC. Although the SEC has not announced a comment initiative on this subject in response to the Act as of the date of this Legal Update, it is likely that the SEC will seek feedback in this area as part of its analysis for the required report to Congress.

Originally published 30 May 2018

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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