Earlier this week, the WSJ’s popular “Heard on the Street” column fired a broadside at emerging growth companies and called into question the SEC’s efforts to enhance the benefits associated with EGC status. Unfortunately, the column did so by using a small group of foreign penny stock issuers to paint the entire EGC category of issuers as a scam factory. Check out this excerpt:
The U.S. government has tried to address the long decline in stock-exchange listings by relaxing the rules for small public companies. But this approach creates a persistent risk: more stock scams.
The quandary is on display now at the Securities and Exchange Commission. Its chairman, Paul Atkins, is pushing to further ease the reporting obligations for many smaller companies under a 2012 statute called the JOBS Act. The law gives special treatment to “emerging growth companies,” or EGCs, including exemptions from many accounting, auditing and disclosure requirements.
At the same time, Atkins is leading a fresh attack on stock frauds targeting individual investors. Since late September, the SEC has suspended trading in 12 companies’ stocks. That is more suspensions than in the previous four years combined. The SEC cited potential manipulation that appeared to be aimed at inflating the stocks’ prices and volume.
The critical link: All 12 are emerging growth companies under the JOBS Act. Though the acronym stands for “Jumpstart Our Business Startups,” these aren’t American companies. It is highly doubtful any of them could have gone public on U.S. exchanges without the JOBS Act and the regulatory relief afforded by their EGC status.
All 12 are based in Asia, including four in Hong Kong and one in China. Ten went public this year, and two last year, on the Nasdaq Stock Market. All 12 initially went public as “penny stocks,” pricing their IPOs at less than $5 per share. Yet most didn’t stay that way.
The article goes on to recount how the prices of these penny stocks soared during the relatively brief period following their IPOs until the SEC suspended trading.
The apparent manipulation of prices in a couple of handfuls of foreign penny stocks is a pretty slender reed upon which to rest a broader indictment of EGCs, and I think the case gets weaker as the column goes on. For example, the column says that the stock market is “awash with struggling EGCs” and points to the fact that of the 304 listed companies currently trading below $1 a share 205, or 67%, self-identified as EGCs, and that 63% of that group were foreign companies, most of which came from China or Hong Kong.
I don’t think the fact that most of the companies that trade below $1 are foreign companies is a big surprise to anyone who has been paying attention over the past 15 years. Putting that issue aside though, I’d have guessed that EGCs accounted for much more than 67% of sub-dollar stocks. That’s because most IPOs significantly underperform the market and, according to WilmerHale’s 2025 IPO Report, nearly 90% of IPO issuers have been EGCs since the enactment of the JOBS Act. (It’s also worth noting that according to an article by Nasdaq’s chief economist, less than 25% of listed companies remain below $1 after 210 days.)
An SEC spokesman is quoted as saying that “it is unreasonable to conclude” that EGCs in general “are at a higher risk of violating securities laws” just because the 12 recent stock suspensions were all at EGCs. That’s right, of course, and the WSJ’s effort to use some scammy behavior on the part of a small group of foreign penny stock issuers to call into question the accommodations provided to EGCs is really a stretch.
There’s been a lot of talk about a potential public company exodus from Delaware, and while there have certainly been some noisy and high-profile departures, the question remains – is there really a broad DExit movement? This recent A&O Shearman article suggests that while this question doesn’t have a clear “yes” or “no” answer at this point, there’s plainly no stampede underway to exit The First State:
Notwithstanding the noise around a so-called “DExit,” the available data reveals a more nuanced reality. During the 2025 proxy season, boards and shareholders exhibited heightened—though hardly runaway—interest in revisiting the choice of Delaware as a corporate domicile. By mid-2025, at least 29 companies had proposals involving Delaware: 18 proposals to leave, 11 to enter.29 The outbound proposals are concentrated among issuers with controlling or highly concentrated ownership structures, a group particularly attuned to shifts in Delaware’s corporate jurisprudence.
Nevada is so far the chief beneficiary of DExit-motivated moves. Between 2024 and mid-2025, a wave of high-profile names— including Tripadvisor, Dropbox, Roblox, Andreessen Horowitz, AMC Networks, MSG Sports, MSG Entertainment, Neuralink, Sphere Entertainment, The Trade Desk, Pershing Square, Jade Biosciences, Tempus AI, XOMA Royalty, Fidelity National Financial, and Affirm Holdings—opted to reincorporate in Nevada.
The July 2025 announcement by Andreessen Horowitz proved especially influential: the firm not only announced its own shift but publicly urged its portfolio companies to follow suit, citing: (a) a perceived rise in subjectivity within the Delaware Court of Chancery; (b) the costs and delays inherent in Delaware litigation; (c) heightened personal exposure for directors; and (d) the relative clarity and breadth of Nevada’s codified business judgment rule.
The article also notes that while Texas trails Nevada, it’s been gaining momentum, noting that by September 2025, Tesla, SpaceX, Zion Oil & Gas, and Dillard’s had completed moves from Delaware to Texas, and that other large-caps, including Walmart and Meta, are evaluating a potential move to The Lone Star State. Still, these moves only represent a “tiny fraction” of Delaware’s corporate base, and the article points out that it still hosts two-thirds of the Fortune 500, and that more than 80% of 2024 IPOs selected Delaware as their jurisdiction of incorporation.
If you work with a company that’s considering moving forward with an IPO next year, you should check out this Cooley blog addressing five common IPO pitfalls and how to avoid them. Here’s an excerpt from the blog’s discussion of how to avoid inconsistent financial reporting adjustments:
You may hear us recommending to late-stage private companies gearing up for an IPO to assess their annual and quarterly financial statement closing timeline readiness and begin preparing their audited financial statements as early as possible. The financial statements included in the Form S-1 registration statement must adhere to strict accounting principles and disclosure requirements, and not having them public company-ready can be a source of delay for the IPO. Not only will audited financial statements (and any required acquired company financials) be needed in order to confidentially submit a draft registration statement to the SEC, but also, the accountants will have to provide comfort on all financial information ultimately included in the final prospectus.
Other potential IPO pitfalls addressed in the blog are the challenges of preparing disclosures illustrating potential growth, understated or missing risk disclosures, the use of jargon, and evolving SEC compliance needs.
In a speech last week at The Brookings Institute, SEC Commissioner Caroline Crenshaw didn’t pull any punches when it came to expressing her dismay about the agency’s current direction. Here’s an excerpt:
Unfortunately, recently, my voice has become one of ubiquitous dissent. It has been unsettling to see how precipitously one Commission is willing to undo the work of the Commission that came before it—all without a single notice-and-comment rulemaking to date. I’m concerned that the fundamental precepts upon which our markets have been built—tenets that have, by and large, kept our markets safe for both issuers and investors alike—are being eroded.
I fear that the very core of our intricate market structure is under attack. And instead of safeguarding our markets for investors to fund their retirements in safe and sustainable ways, we are moving in a direction where markets start to look like casinos. The problem with casinos, of course, is that in the long run the house always wins.
I think Commissioner Crenshaw raises some valid concerns about the potential downsides of the current SEC’s swashbuckling approach to regulatory initiatives. That being said, she doesn’t exhibit a lot of self-awareness about how things have gotten to this point. Commissioner Crenshaw may bemoan her current status as a dissenter, but she was solidly in the majority when the SEC under Chair Gensler rammed through an unprecedentedly burdensome regulatory agenda that prioritized the views of activists and advocacy groups & paid little attention to the issuer community, while simultaneously carrying out an enforcement program that was long on novelty and sometimes short on fairness.
If you keep that recent history in mind, it’s not surprising that the SEC has moved quickly and aggressively in the opposite direction. After all, “elections have consequences, yada, yada, yada. . .” and the agency’s likely agenda under Trump 2.0 was pretty plain for everyone to see. Still, financial regulation is too important to be as politicized as it has become, so I don’t think it’s in anyone’s interest to continue to engage in a regulatory tit-for-tat with each change in administrations.
Unfortunately, my guess is that this kind of tit-for-tat is likely to continue at the SEC for the foreseeable future. As I’ve said before, I think much of the problem stems from legislative gridlock and its effect on how the party in power uses federal agencies to further its agenda. When you factor the likelihood of the SCOTUS overturning Humphrey’s Executor and President Trump’s apparent unwillingness to fill Democratic vacancies on the SEC into the equation, the ideal of the SEC as a relatively non-partisan financial regulator seems even more like a pipe dream.
If you need another sign that the SEC has done a 180-degree turn in its approach to crypto, check out this new Investor Bulletin onCrypto Asset Custody Basics for Retail Investors issued by the Office of Investor Education and Assistance. As with most of these things, it’s definitely “Crypto Custody 101.” For example, here’s an excerpt discussing the difference between self-custody and third-party custody:
Self vs. Third-Party Custody
You also need to decide whether you want to manage your crypto assets on your own (self-custody) or if you prefer to have a third-party manage your crypto assets (third-party custody). Hot and cold crypto wallet options exist for both self and third-party custody.
Self-Custody: With self-custody, you control your crypto assets and are responsible for managing the private keys to any of your crypto wallets. With self-custody, you have sole control over the access to your crypto assets’ private keys. Self-custody also means that you have sole responsibility for the security of your crypto assets’ private keys. If your crypto wallets are lost, stolen, damaged, or hacked, you may permanently lose access to your crypto assets.
I guess the only “basic” that the SEC may have omitted from its discussion of self-custody is the risk that if you opt for that approach, you face a non-zero chance of being tortured and murdered for the keys to your crypto wallet.
Here’s something that my colleague Zach Barlow blogged over on The AI Counsel Blog:
Back in July, members of Congress proposed a prohibition on state AI regulation. Ultimately, these efforts failed, and the proposed ban died in the Senate. Now, just in time for the holidays, the “ghost of moratoriums past” is back. This time, the ban takes the form of an executive order (EO). The President signed EO 14179 last week. This EO seeks to combat state-level AI regulations in several ways.
It establishes an AI litigation task force targeting state AI regulations deemed unconstitutional by the administration.
It withholds Broadband Equity Access and Deployment (BEAD) non-deployment funds from states with “onerous AI laws.”
It directs the FCC and Special Advisor for AI and Crypto to determine if the government should create a federal AI reporting and disclosure standard to preempt state disclosure laws.
It tasks the Special Advisor for AI and Crypto and the Assistant to the President for Science and Technology with developing congressional legislation for a uniform Federal AI policy that would preempt other state AI laws.
While points three and four may suggest that the federal government will regulate AI, that may not be the case. These policies are being put forward for the express purpose of preemption. This would allow the federal government to lodge legal challenges against state laws on the grounds that it has the sole authority to regulate. However, the EO itself is likely to face challenges. Last month, when the EO was in draft form, Crowell gave this analysis, arguing that it faced an uphill battle in part because:
“Federal preemption by executive decree is not a generally accepted practice under the U.S. Constitution and prevalent theories of separation of powers. Courts are usually “even more reluctant” to find state laws preempted based on mere regulations as opposed to statutes, and the U.S. Supreme Court has held recently that the anti-commandeering principles of the Tenth Amendment bar the federal government from prohibiting a state from legislating in a particular sector.”
So the future of EO 14179 is uncertain. We’ll be looking to the courts to see how the administration’s litigation against states plays out. Additionally, we’ll likely see legal challenges flowing the other way as states sue to block the EO’s enforcement.
We cover SEC disclosure and corporate governance risks here, but if you’re on the front lines of risk management for AI, cyber, and other emerging technologies, be sure to subscribe to our AI Counsel Blog, where we roll up our sleeves and address some of the more granular issues that legal and compliance personnel are confronting when trying to manage the risks of emerging technologies.
Earlier this year, we blogged about the DOJ’s decision to prioritize tariff evasion in its white collar enforcement program. This Sidley memo says that the DOJ has been true to its word, with enforcement initiatives demonstrating its willingness to pursue trade and tariff-evasion misconduct through the False Claims Act (FCA), wire fraud, money laundering, and smuggling statutes, as well as under the Foreign Corrupt Practices Act when dealing with corrupt interactions with foreign customs officials. This excerpt summarizes the DOJ’s recent enforcement activities:
Recent DOJ actions underscore an increasingly active enforcement pipeline focused on customs- and tariff-evasion schemes, including matters involving customs brokers and other intermediaries. In 2024 and 2025, notable civil and criminal trade and customs fraud cases range from a large FCA settlement with a corporation to a criminal indictment of multiple individuals and companies alleged to have used fraudulent documents, shell companies, bribes to public officials, and kickbacks to Mexican drug cartels to smuggle billions of dollars’ worth of goods from the United States into Mexico, defrauding Mexico out of hundreds of millions of dollars’ worth of duties owed.
The memo also notes that the DOJ has relaunched its trade fraud task force, increased whistleblower incentives, and has used its data analytics capabilities to identify potential cases.
Today’s first blog mentioned the DOJ’s use of the False Claims Act to target tariff evasion. With its draconian penalties and the ability of private plaintiffs to assert qui tam claims on the government’s behalf, the False Claims Act has long been a formidable weapon in the DOJ’s arsenal. However, recent federal court decisions have called into question the constitutionality of the statute’s qui tam provisions.
Last year, in Zafirov v. Florida Medical Associates (MD. Fla. 10/24), Judge Kathryn Mizelle held that the FCA’s qui tam mechanism allowing violated the Appointments Clause because it allowed private plaintiffs to exercise executive power on behalf of the United States without being properly appointed. This recent Polsinelli memo says that a concurring opinion in a recent 5th Cir. decision endorsed Judge Mizelle’s conclusion:
Notably, in a concurring opinion, Judge James C. Ho. . . urged the court to revisit “serious constitutional problems” with the qui tam provisions. The Fifth Circuit previously affirmed the constitutionality of the FCA’s qui tam structure in Riley v. St. Luke’s Episcopal Hosp. Nonetheless, Judge Ho called on the Fifth Circuit to reconsider Riley. Judge Ho reiterated Judge Mizelle’s reasoning in Zafirov and emphasized that relators exercise executive authority on behalf of the U.S. without appointment or accountability to the President, raising separation-of-powers concerns under Article II.
Judge Ho’s opinion echoed Justice Thomas’s dissent and Justice Kavanaugh’s concurrence (joined by Justice Barrett) in United States ex rel. Polansky v. Executive Health Res., Inc., which questioned whether allowing private relators to litigate on behalf of the country is consistent with the Constitution’s separation of powers.
The memo notes that if these views continue to gain traction among federal courts, the implications for government contractors would be significant, because the vast majority of FCA recoveries arise from qui tam actions. That outcome would be music to the ears of the US Chamber of Commerce, which has filed amicus briefs challenging the constitutionality of qui tam actions under the US and state constitutions in several recent cases.
Wilson Sonsini recently published a memo highlighting five key things you need to keep in mind when preparing your Form 10-K. Here’s an excerpt from the memo’s discussion of the need to refresh risk factor disclosures:
Risk factor updates should align with changes in other sections of the Form 10-K, including the Business section, MD&A, cybersecurity disclosures, and financial statement notes. If the company experienced an extraordinary event during the year, such as a merger, acquisition, significant divestiture, or other change in the business, it should consider whether updates to risk factors are needed to reflect the current state of the business. Hypothetical language in risk factors should be reviewed and updated to reflect actual developments and events, where applicable.
Other topics addressed in the memo include the need to refresh your MD&A disclosures, consider the implications of Staff comment letters, confirm your filer status, review your exhibit index, and carefully review your CEO and CFO certifications.
Yesterday, the White House finally issued the Executive Order that we had all been expecting which specifically targets the proxy advisory firms ISS and Glass Lewis. The Executive Order states:
Section 1. Purpose. Unbeknownst to many Americans, two foreign-owned proxy advisors, Institutional Shareholder Services Inc. and Glass, Lewis & Co., LLC, play a significant role in shaping the policies and priorities of America’s largest companies through the shareholder voting process. These firms, which control more than 90 percent of the proxy advisor market, advise their clients about how to vote the enormous numbers of shares their clients hold and manage on behalf of millions of Americans in mutual funds and exchange traded funds. Their clients’ holdings often constitute a significant ownership stake in the United States’ largest publicly traded companies, and their clients often follow the proxy advisors’ advice.
As a result, these proxy advisors wield enormous influence over corporate governance matters, including shareholder proposals, board composition, and executive compensation, as well as capital markets and the value of Americans’ investments more generally, including 401(k)s, IRAs, and other retirement investment vehicles. These proxy advisors regularly use their substantial power to advance and prioritize radical politically-motivated agendas — like “diversity, equity, and inclusion” and “environmental, social, and governance” — even though investor returns should be the only priority. For example, these proxy advisors have supported shareholder proposals requiring American companies to conduct racial equity audits and significantly reduce greenhouse gas emissions, and one continues to provide guidance based on the racial or ethnic diversity of corporate boards. Their practices also raise significant concerns about conflicts of interest and the quality of their recommendations, among other concerns. The United States must therefore increase oversight of and take action to restore public confidence in the proxy advisor industry, including by promoting accountability, transparency, and competition.
The Executive Order goes on to direct the Chairman of the SEC, the Chairman of the FTC and the Secretary of Labor to take a number of rulemaking and investigative actions.
The Executive Order specifically directs the SEC Chairman to:
– Consistent with the APA, “consider revising or rescinding those rules, regulations, guidance, bulletins, and memoranda that are inconsistent with the purpose of this order, especially to the extent that they implicate ‘diversity, equity, and inclusion’ and ‘environmental, social, and governance’ policies;”
– Consistent with the APA, “consider revising or rescinding all rules, regulations, guidance, bulletins, and memoranda relating to shareholder proposals, including Rule 14a-8 (17 CFR 240.14a-8), that are inconsistent with the purpose of this order;”
– Enforce the antifraud provisions of the federal securities laws with respect to material misstatements or omissions contained in proxy advisors’ proxy voting recommendations;
– Assess whether to require proxy advisors whose activities fall within the scope of the Investment Advisers Act of 1940 to register as registered investment advisers;
– Consider requiring proxy advisors to provide increased transparency on their recommendations, methodology, and conflicts of interest, “especially regarding ‘diversity, equity, and inclusion’ and ‘environmental, social, and governance’ factors;”
– Analyze whether, and under what circumstances, a proxy advisor serves as a vehicle for investment advisers to coordinate and augment their voting decisions with respect to a company’s securities and, through such coordination and augmentation, form a group for purposes of sections 13(d)(3) and 13(g)(3) of the Securities Exchange Act of 1934; and
– Direct the SEC staff to examine whether the practice of registered investment advisers engaging proxy advisors to advise on (and following the recommendations of such proxy advisors with respect to) non-pecuniary factors in investing, including, as appropriate, “diversity, equity, and inclusion” and “environmental, social, and governance” factors, is inconsistent with their fiduciary duties.
The Executive Order directs the FTC Chairman to “review ongoing State antitrust investigations into proxy advisors and determine if there is a probable link between conduct underlying those investigations and violations of Federal antitrust law,” as well as to “investigate whether proxy advisors engage in unfair methods of competition or unfair or deceptive acts or practices that harm United States consumers.”
The Executive Order also directs the Secretary of Labor to “take steps to revise all regulations and guidance regarding the fiduciary status of individuals who manage, or, like proxy advisors, advise those who manage, the rights appurtenant to shares held by plans covered under the Employee Retirement Income Security Act of 1974 (ERISA) (29 U.S.C. 1001 et seq.), including proxy votes and corporate engagement, consistent with the policy of this order.” Further, the Secretary of Labor is directed to “take all appropriate action to enhance transparency concerning the use of proxy advisors, particularly regarding “diversity, equity, and inclusion” and “environmental, social, and governance” investment practices.”
The White House also issued a Fact Sheet regarding the Executive Order. Clearly, the SEC now has a lot to do on the topic of proxy advisory firms!
