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Trump's Nominee for SEC Chief: Implications for Startups and Fintech


Shriram Bhashyam   January 19, 2017

On January 4, 2017, President-Elect Donald Trump nominated Jay Clayton, a private sector Wall Street lawyer, to serve as the next Chairman of the SEC. While the confirmation hearings will tell us a lot about Mr. Clayton’s background, qualifications, and leanings, I can’t wait that long and preview here what the SEC’s agenda may look like in his tenure.
Source: Sullivan & Cromwell LLP

Who is Jay Clayton?

Jay Clayton is a well-respected and veteran Wall Street lawyer, who’s a partner at the white shoe firm Sullivan & Cromwell LLP. His areas of expertise are M&A and capital markets. Some highlights from his deal sheet include representing Barclays in its purchase of assets of Lehman Brothers out of bankruptcy, and working on the Alibaba IPO, the largest IPO of all time. He has represented a slew of banks, hedge funds, and other financial institutions in transactions and before regulators, which I’m sure will receive scrutiny during his confirmation hearings (cough — Sen. Warren — cough).

The Deal Maker and the Prosecutor

I think we’ll see the SEC diverge rather sharply from the course it has taken under outgoing Chair Mary Jo White. Under Chair White, the SEC emphasized enforcement and investor protection, fining and penalizing wrong-doers in record amounts. To be sure, the SEC agenda under Chair White was also informed by the political climate at the time, where Wall Street was vilified and absorbed a lot of the blame for the Great Recession. Additionally, a change in direction at the SEC is informed by the tendencies of the leaders making the nominations, with President-Elect Trump decidedly more laissez-faire than President Obama when it comes to regulation.
Peering under the hood further, Jay Clayton is a deal lawyer through and through. He’s worked at one of the top Wall Street law firms since graduating law school in 1993 and is regarded as a preeminent deal maker. Chair White, by contrast, has a background in litigation and prosecution. Chair White was the U.S. Attorney for the Southern District of New York (which many in the legal community regard as the most desirable prosecutorial position in the country), where she notably led the prosecutions of John Gotti and the terrorists responsible for the 1993 World Trade Center bombing. Following her run as a U.S. Attorney, she was the chair of the litigation department at Debevoise & Plimpton, another venerable Wall Street law firm.

A Lighter Touch

That Mr. Clayton is a deal maker rather than a prosecutor is a strong signal that the SEC’s agenda will lean more towards facilitating capital formation and further away from enforcement. For the fintech and startup communities, there are a few specific ramifications I’ll highlight.
The SEC will likely soften the stance enunciated by Chair White in her “Silicon Valley Initiative” speech on March 31, 2016. In that speech, she put the Valley on notice that the SEC was paying attention to what was going on there, given the “eye-popping” valuations, greater breadth of investor participation, and sheer amounts of capital being deployed. It’s reasonable to think that Mr. Clayton would not focus as much on possible securities fraud in the Valley, and be more deferential to a world where investors are sophisticated and can fend for themselves. I think we’ll also see a slowdown in the momentum of SEC investigations of startups. The SEC is reportedly investigating Theranos and Hampton Creek, for false or misleading statements in their pitch decks and other offering documents related to their fundraising. These types of investigations by the SEC will more likely slow down under Mr. Clayton’s regime.
We’ll probably see an acceleration of rulemakings that ease capital formation. One initiative, currently percolating in the halls of Congress, is the Fix Crowdfunding Act (“FCA”), which is meant to improve upon the JOBS Act. The FCA seeks to, among other things, increase the cap on what an issuer can raise in a crowdfunded transaction from $1 million to $5 million, ease investor caps, and reduce liability to crowdfunding portals. The SEC may throw its weight behind this bill, and if passed, could act swiftly to implement it via rulemaking. I wouldn’t be surprised if there were further initiatives that expand upon the premise of the JOBS Act.

We may also see rules revisiting who qualifies as an accredited investor, an issue which has been debated at the SEC for a few years now. A revised definition of accredited investor may be could broaden its scope, by for example, allowing those with certain financial credentials (e.g., CFA) to qualify as an accredited investor, regardless of income level or net worth.

This post was originally published on Medium (available here).


Tech IPOs and Trump

TrumpIPOTech IPOElection

Nat Disston   December 08, 2016

This election has not been short of surprises, and the stock market is no exception. With the Dow and S&P 500 reaching record highs on Wednesday, it seems the market has recovered from the uncertainty we had just one month ago. That said, the President-elect doesn't step into the White House for another month and a half. It's to be determined if we see another shift after January 20th once the the rubber hits the pavement.

Until then, Trump has shared (some of) his plan as president, and as he appoints his administration, the market will adjust. Based on what we know, we expect the impact to be a mixed bag for tech companies and their IPO plans during the Trump presidency. 

Positives: tax, repatriation, financial regulation
Trump is a business and deals guy, and whether that's good or bad for our President, some of his policies reflect this and the market is currently liking it. Primarily, Trump plans to lower corporate taxes from the standard 35% to 15%. This will certainly help the tech sector broadly as it will boost their bottom line. This could help smaller companies who may have been boxed out of IPOs previously due to their size hit the markets earlier in their life cycle. Larger tech companies usually have a lower effective tax rate (typically in the range of 19% to 26%, which is below the 28.6% S&P average) thanks to tax harbors by keeping cash abroad. In any case, the proposed 15% corporate tax rate is a win. Furthermore, Trump wants to bring foreign cash home to spur US jobs with a 10% tax for the repatriation of foreign cash. It's widely discussed that Apple alone has a whopping $200B in cash abroad. This move would spur hiring in the US along with M&A and R&D activity. Finally, Trump has been pretty outspoken about financial reform after the 2008 recession (Volcker rule, Dodd Frank...) and repealing parts of this would open up financial institutions to taking more risk on their balance sheet, which may include tech investments.

Negatives: trade, immigration, and health care
Sticking to his word to bring many jobs back to the US, Trump wants to place tariffs on goods made abroad to encourage US manufacturing. This will increase consumer costs and impact inflation, and ultimately hurt US companies. In return, this move could also hurt US exports to companies in countries who were impacted by the loss of US manufacturing abroad. On a related note, Trump's outspoken plans for immigration reform have a more direct impact to tech companies as it will make it harder for them to hire top talent. Google, Apple, Amazon, Oracle, Intel, and Microsoft are among the top 25 applicants for H1B visas each year. Furthermore, according to a recent study by the National Foundation for American Policy, more than 50% of private tech companies in the US valued over $1B have at least one immigrant co-founder. Lastly, Trump has a bone to pick with the Affordable Care Act (colloquially known as Obamacare). His recent appointment of Tom Price as secretary of Health and Human Services seems to reconfirm what he said on the campaign trail (for the uninitiated, Obamacare gave birth to a slew of healthcare startups that were built specifically for it). IPOs have a phobia of volatility and uncertainty, and Trump's healthcare plans are exactly that: volatile and uncertain.

In aggregate, the consensus seems to be net positive for tech companies (aside from healthcare: sorry guys), given the administration's policies toward economic growth. The big question is: how pro-technology will Trump actually be?

So what does this mean for tech IPOs under Trump?

In the 30 days since Trump's election, we have little tech IPO data to extrapolate from:
  • Pricings: 1 (a microcap)
  • Filings: 4
  • Pulled + Withdrawn: 3

However, IPO filing activity has remained steady since the election as shown in the chart below by Renaissance Capital.

We have little IPO data to analyze, but the equity markets have performed well since Trump's election, which is encouraging for any company who wants to take their company public. However, it's important to consider that the IPO market usually operates on a very case-by-case basis. Just like private companies raise money when they need it, companies seek an IPO when it's right for them - whether they need the cash for operations or liquidity for their shareholders. There's often an added strategic element such as getting out ahead of competitors (like HortonWorks did ahead of Cloudera and MapR), or waiting for regulatory issues to conclude (see: Uber and Airbnb). In the current market, if a company wants to IPO, it is probably a good time to continue on that path. One thing the IPO market doesn't like is volatility, so we may see another market shift from election day once the Trump administration takes the wheel January 20th and changes direction.