There are several reasons we expect more interesting developments in capital markets throughout 2021, both on the regulatory side and in transactions. With a Democratic administration and a new Securities and Exchange Commission chairman with a long history of regulatory oversight, there will likely be more rule-making overall in the U.S. and more attention to enforcement.
Here are five trends we anticipate will dominate the capital markets during 2021.
1. Continued Heavy Focus on ESG
New developments abound in the environmental, social, and corporate governance (ESG) and sustainability space from standard setters, non-government organizations (NGOs), advisory service providers, rating agencies, institutional investors and asset managers. The private sector has driven this march toward sustainable finance and investing largely because the standards and metrics on which performance or disclosure can be based have not yet been universally adopted and accepted. The SEC has now made this an area of focus, so expect to see some rulemaking on this during the year.
2. Continued Assault on Traditional IPO Book-Building Process
During the late 1990s and early 21st century, several auction-based initial public offerings prompted the market to wonder whether the traditional book-building method would survive long term, but it remained largely loyal to the traditional model. Enter direct listings and special purpose acquisition companies (SPACs).
The success of certain recent direct listing secondary offerings has begun a movement away from traditional underwritten IPOs and prompted some companies considering IPOs to reconsider their strategy, arguing that traditional underwritten offerings leave too much money on the table with the “IPO discount” and have high transaction costs. The NYSE finalized rule changes allowing companies to do primary offerings using the direct listing method and Nasdaq adopted similar rule amendments allowing direct primary listings.
Will direct primary listings ultimately threaten the traditional underwritten IPO? This year may shed some light on whether this new offering structure will gain traction, if the market is not otherwise overshadowed by the continuing strength of the SPAC market.
3. Companies to Begin Taking Advantage of Recent SEC Rulemaking
In 2020, the SEC modified its rules in several areas, such as the requirement to include comprehensive financial disclosures in SEC filings, “testing the waters”, and disclosure simplification. These new developments, including streamlining private offering exemptions and the recent expansion of the Regulation A+ threshold, should make raising “public” capital more attractive to business enterprises—affecting debt and equity markets. These changes may be subtle, but the rule-making initiatives were important steps in eliminating several challenges some companies face in raising capital or remaining public.
4. Liability Management Transactions and Pre-Packs
Many companies with public debt, particularly those severely affected by the Covid-19 pandemic, will need to address their liabilities as well as their liquidity needs and be forced to engage in liability management transactions with their security holders. Options include exchange offers, cash tender offers, consent solicitations, and re-packaged plans of reorganization. The structures for, and the legal regime applicable to these transactions have not significantly changed since the 1980s. However, the debt tender offer rules were streamlined through a 2015 SEC no-action letter, and other techniques that previously caused concerns are now standard in many exchange offers.
Companies with balance sheet or liquidity problems have also tapped equity markets for relief through convertible debt offerings and rights offerings. The dilution caused by these issuances is often outweighed by the relief provided. We expect 2021 will see a variety of restructurings that will test some traditional transaction structures.
5. Challenges to Dual-Class Voting Share Structures Will Continue
Corporate governance for companies doing an IPO will continue to be at the forefront of internal strategic discussions, with focus on the acceptability of dual-class voting structures in which shares sold to the public have fewer voting rights than shares retained by founders/insiders. However, major asset managers argue against capital structures with classes of stock having multiple votes. Index providers often will not include shares of companies with multiple vote shares classes in their indices, making the marketing of them more difficult.
U.S. stock exchanges allow these structures, but many foreign exchanges do not, prompting “forum shopping” among exchanges, particularly for foreign companies. The recent proposed changes to the London listing rules which would allow dual class structures may even the playing field. Support has grown for a middle ground, with dual-class structures kept in check through sunset provisions and other limitations.
... And the Five Trend Disruptor
A phenomenon has erupted in equity capital markets that may overshadow all of the foregoing trends: the rise of the individual retail investor and the power of social media. This was made evident by the recent surge in trading prices of certain stocks prompted by a wave of buying largely motivated by retail investors with the publicly announced mission of squeezing the investors who betted against those stocks. The SEC has announced its intention to investigate these actions and we have not heard the end of this story.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Barbara A. Jones is a member of Greenberg Traurig LLP’s Global Capital Markets and Global Mergers & Acquisitions practice groups. She serves as coordinator of the firm’s interdisciplinary Covid-19 economic stimulus task force, is co-chair of the interdisciplinary Blockchain & Digital Assets practice group, and is coordinator of its conflict minerals compliance initiative.
Marc M. Rossell is co-chair of Greenberg Traurig LLP’s Latin America practice and a member of the firm’s Global Capital Markets practice. He focuses on capital markets transactions, including both equity and debt securities offerings and structured finance.