When the US Supreme Court issued its June 30th ruling on West Virginia vs. Environmental Protection Agency, the court concluded that the EPA exceeded its powers to limit greenhouse gas emissions from power plants because the agency did not have clear congressional authorization to do so.
The implications of that decision also put into question the power of other federal agencies, including the SEC, to make rules and regulations not specifically authorized by Congress.
The SEC has embarked on an extensive new rules agenda, the most significant of which is the Climate Change Disclosure rules (ESG). Those proposed rules are far reaching and would require US public companies to assess and disclose how their businesses impact climate change. In certain cases, companies would be required to report on greenhouse gas emissions generated by themselves and their suppliers.
In the West Virginia vs EPA case, the justices, in a 6-3 opinion written by Chief Justice John Roberts, formally adopted what has come to be called the major questions doctrine as a rationale for restricting agencies’ power.
The major questions doctrine holds that in “extraordinary” cases involving matters of great “economic and political significance,” federal agencies must be able to point to specific congressional authorization for their actions. Courts should otherwise be “skeptical,” the decision said, that agencies have authority to set broad policy through novel statutory approaches. Where Congress has chosen not to pass legislation giving an administrative agency specific authority to implement new regulations, the agency is prevented from bypassing Congress and adopting broad regulations on its own.
When the comment period ended for the proposed Climate Change Disclosure rules ended on June 17, the SEC had received 3,400 comment letters and significant pushback from companies which said the proposed rules are unclear, burdensome, and costly. Pushback also came from lawmakers, legal scholars, and attorneys general from 12 states who challenged the SEC’s legal authority to enact ESG rules.
The SEC expects to issue its final ruling in October 2022.
The numbers are in
IPOs Nosedive in First Half
The number of US Initial Public Offerings (IPOs) fell sharply in the first half of 2022, making it the weakest 6-month period since 2017, according to FactSet, which attributed the decline to two main factors: the severe drop in SPAC IPOs and a sharp decline in the US stock market.
FactSetreports that only 92 companies raised just under $9 billion in the first half of this year. That represents a very slow start considering that in 2021 a total of 1073 companies raised $317 billion.
After peaking in Q1 2021 in both the number of deals and dollars raised, SPAC activity began its downward trend for the remainder of 2021, largely the result of increased SEC scrutiny.
In addition, the stock market “suffered its worst first half of a year since 1970, as surging global inflation forced central banks to institute aggressive rate hikes after a decade of easy monetary policy,” added FactSet.
Of the 92 total IPOs reported for the first half 2022, 57 IPOs in Q1 2022 represented an 87.6% decline from Q1 2021. Only 35 IPOs priced in Q2, representing an 82.5% decline from the same period last year. Q2 2022 also was the “single weakest single quarter since the first quarter of 2017”, according to the FactSet report.
SPACs, which fueled IPO activity in recent years, represented only 27 of the 92 deals reported by end of first half 2022.
The decline in gross proceeds from IPOs was “even more stark”, with IPOs raising significantly less cash than last year. In Q1 2022, gross proceeds totaled $6 billion, down 96% compared to Q1 2021. The $3 billion in gross proceeds raised in Q2 2022 was down 94.7% compared to Q2 2021, and “was the smallest quarterly total since Q1 2016”, noted FactSet.
Obviously fewer IPOs result in less money raised, but the average deal size continued to drop as well. In Q1 2022, the average IPO raised just $104.7 million; in Q2 2022, the average deal size fell to $85 million.
Finance and Health Tech Sectors did Best
The Finance sector led in both the number of deals and monies raised this year, with 33 deals raising a total of $5.3 billion. Health Technology came in number two, with 18 deals raising $1.8 billion. Combined, the two sectors represented 79% of total gross proceeds raised this year.
Financial Sponsors Sit It Out
After surging to a seven-year high in 2021, financial-sponsor-backed IPOs dropped dramatically in the first half of 2022, with six VC-backed IPOs in Q1 and two VC-backed in Q2. The latter represented the “weakest quarter for VC-backed IPOs since the first quarter of 2009, amid the Great Recession,” added FactSet. Private Equity saw similar declines, with just three PE-backed IPOs coming to market this year.
Disclose or Delist
China Audit Cooperation Deal in Doubt
After two years of negotiations between US and Chinese officials over the PCAOB’s access to inspect the audit reports of US exchange-listed Chinese companies, SEC Chair Gary Gensler is publicly doubting whether a deal can be reached in time to prevent Chinese companies from being delisted from US stock exchanges.
“It’s quite possible that there’s no deal here. I’m not particularly confident,” Gensler said during a media conference call following an SEC rule making meeting last week.
The Wall Street Journalreports that talks between Chinese and American regulators have intensified in the last two months to avoid the possible delisting of approximately 150 non-compliant Chinese-based companies trading on the US exchanges.
Redactions in auditors’ documents are a key barrier because the PCAOB requires complete access to audit papers as part of its inspection process.
Chinese authorities for decades have resisted allowing the PCAOB to review the audit reports of its companies that trade on US exchanges, citing national security concerns. After frustration over non-compliance, Congress in 2020 passed the Holding Foreign Companies Accountable Act which bans the trading of securities on US exchanges of companies whose auditors can’t be inspected by the PCAOB for three consecutive years. Under that law, which was signed in 2021, Chinese companies have until Spring 2024 to comply, or be delisted.
Since then, a legislative bill that will shorten that deadline has made its way through committees in both the House and Senate. If it passes later this year, Chinese companies could face delisting as early as March 2023.
In anticipation of potential delisting, some Chinese companies are opting to list outside the US, such as on the Hong Kong exchange.
Small Business Got the Blues
Historically an optimistic group, the NFIB’s Small Business Optimism Index shows that the mood among small business owners dropped 3.6 points in June to 89.5, marking the sixth consecutive month below the 48-year average of 98.
Fears of higher inflation, persistent labor shortages and higher taxes have caused small business owners’ expectations for better business conditions to hit a new low.
Expectations for better conditions have worsened every month this year. “On top of the immediate challenges facing small business owners, including inflation and worker shortages, the outlook for economic policy is not encouraging either as policy talks have shifted to tax increases and more regulations,” said NFIB Chief Economist Bill Dunkelberg.