As Zachary shared on PracticalESG.com earlier this week, California’s climate disclosure laws face new legal challenges. ExxonMobil has filed a lawsuit arguing that the laws violate the First Amendment and the National Securities Market Improvement Act. Zachary reminded us that the California Chamber of Commerce has an ongoing lawsuit also challenging the constitutionality of SB 253 and SB 261 under the First Amendment. (First Amendment challenges were successful in lawsuits involving the SEC’s conflict minerals disclosure rules a decade ago.) A differentiator of the new lawsuit is that it also challenges the disclosure requirements as preempted under NSMIA.
As a reminder on the scope of the California laws, the WSJ says:
The rules are specific to California but their oversight reaches businesses across the globe. Under SB 253, companies doing business in the state with an annual total revenue exceeding $1 billion, be they public or private, will have to disclose their greenhouse gas emissions—the ones from their immediate operations, such as electricity intake, and those from their sprawling supply chain. Even if they are based elsewhere in the U.S. or overseas, the rules will apply.
The climate risk reporting rule, SB 261, will affect more companies. It requires public and private firms doing business in California with annual revenue of more than $500 million to disclose climate-related financial risks, along with the measures they are taking to mitigate and adapt to such risks, starting Jan. 1.
At the end of last month, the California Air Resources Board (CARB) posted a preliminary list of companies that it believes fall within the scope of the state’s Climate Corporate Data Accountability Act. The list is not determinative — and CARB is seeking feedback on covered entities through a voluntary survey.
Members of PracticalESG.com can learn more about SB 253 and SB 261. Interested in a full membership with access to the complete range of benefits and resources? Sign up now and take advantage of our no-risk “100-Day Promise” – during the first 100 days as an activated member, you may cancel for any reason and receive a full refund.
The Center for Audit Quality (CAQ) recently analyzed S&P 500 company 10-Ks available as of June 2025 to assess how disclosures regarding digital assets, AI and climate are evolving, and summarized their findings in three reports — one for each topic. Let’s take a look at the trends in today’s blogs – beginning with digital assets.
47 S&P 500 companies, approximately 9%, mentioned digital asset-related information in their 2024 10-K.
More than half of these companies operate in the financial services sector, while the remainder span the information technology, energy and utilities, and consumer discretionary sectors.
Most companies that mentioned digital asset-related information in their 10-K did so in Item 1A. Risk Factors. Some companies also mentioned digital asset-related information within Item 8. Financial Statements, Item 1. Business, and Item 7. MD&A. A few companies also mentioned digital asset-related information in Item 1C. Cybersecurity.
Most of the companies that provided disclosure within Item 1. Business were financial institutions, exchanges, or payment processors. These companies discussed their platforms and products that enable customers to buy, sell, and hold their digital assets. Additionally, there were a few companies that discussed regulation around digital assets or noted risks to their competitiveness resulting from digital asset-related products offered by competitors.
Most mentions of digital asset-related information in Item 8. Financial Statements fell within notes discussing the company’s significant accounting policies. While less common, we also observed mention of digital asset-related matters in footnotes covering commitments and contingencies, fair value measurement, goodwill and other intangibles, segments, revenue, and various others.
On this topic, in particular, I wonder how much disclosures have expanded in the 10-Qs filed this year, even in the S&P 500 (Coinbase Global just joined the S&P 500 in May), and if they haven’t yet, it sure seems like they will soon.
Moving on to AI, the CAQ reports: “448 S&P 500 companies, or 90%, mentioned AI-related information in their 2024 10-K. This was an increase of almost 25% from the 359 companies that did so in 2023.” Of those companies, AI was usually mentioned in Item 1A. Risk Factors or Item 1. Business, but it was also mentioned in Item 7. MD&A, Item 8. Financial Statements, and Item 1C. Cybersecurity plus — but less often — in Item 11. Executive Compensation, Item 2. Properties, and Item 3. Legal Proceedings
– Within Item 1. Business, companies discussed their use of and investments in AI-related technologies often indicating how they had incorporated it into new or existing products or services or into their own internal operations. Companies also discussed current and potential regulation in the US and the EU around AI and related technologies.
– Within Item 7. MD&A disclosures, companies often discussed their adoption and use of AI through AI-related acquisitions, investments in AI-related products or services, or AI-related enhancements to their internal operations and infrastructure. Some companies also provided information about their governance and risk management processes around AI and its rapid advancement.
– AI-related mentions in the financial statements increased by more than 50% from the prior year. While companies increased disclosures across a variety of footnotes, we observed the greatest increase in disclosures related to acquisitions, description of business, and significant accounting policies.
In addition to risk factor disclosure, an increasing number of companies mentioned AI in their Cautionary Note Regarding Forward-Looking Information.
With respect to climate, the CAQ looked at what S&P 500 companies said in their 10-Ks about:
– Greenhouse gas emissions (scope 1, 2, and 3),
– Net zero, carbon neutral commitments, and other emissions reduction commitments, and
– Related reporting standards, frameworks, or requirements.
Almost all (494) S&P 500 companies mention climate change in their 10-K filings, and this number held steady year over year (after increasing since 2021 10-Ks). Not surprisingly, risk factor disclosure was most common (but slightly down year over year), while the number of companies mentioning climate in Item 1. Business and Item 7. MD&A was up.
In 2024, we observed a roughly 16% decrease in companies that disclosed a net zero or carbon neutral commitment compared with 2023. 74 companies (roughly 19% fewer than the prior year) indicated that they had a GHG emissions reduction goal.
[A] number of companies associated dollar amounts with their climate-related information. These disclosures varied and included capital expenses, research and development (R&D) costs, losses associated with severe weather events, investments, green bonds or sustainability-linked debt, and regulatory and compliance costs.
Financial statement disclosure also increased by 18% — usually related to significant accounting policies, commitments and contingencies or litigation, debt or borrowing arrangements and income taxes. There were even some CAMs (the critical audit matters section of the auditor’s report), for example:
Regulatory Assets and Liabilities – Impact of Rate Regulation on the Consolidated Financial Statements: “These analyses are generally based on … considerations around the likelihood of impacts from events such as unusual weather conditions, extreme weather events and other natural disasters, and unplanned outages of facilities.”
Wildfire-Related Contingencies and Recoveries: “We identified wildfire-related contingencies and related-recoveries, specifically the WEMA, as well as the related disclosures as a critical audit matter because (1) of the significant judgments made by management to estimate losses, (2) the outcome of the wildfire-related contingencies materially affects the Company’s financial position, results of operations, and cash flows and (3) the significant judgments made by management in determining whether recoveries from WEMA are probable.”
As reported yesterday by Reuters, a California-based biotech company just priced an IPO after its registration statement went effective — during the government shutdown and 20 calendar days after filing in accordance with Section 8(a) of the Securities Act. The offering was already publicly flipped on September 19, before the shutdown, starting the 15-day clock (and suggesting there were likely few, if any, Staff comments still outstanding). Having filed on October 6 before the Corp Fin Staff’s updated guidance, the S-1/A contained a pinpoint price. It also, of course, removed the delaying amendment and included the magic words from Rule 473(b).
The commencement press release included the following:
MapLight has included in the registration statement the proposed public offering price and the number of shares offered and specific language under Rule 473(b) promulgated under the Securities Act of 1933, as amended (the “Securities Act”), such that the registration statement is expected to become automatically effective 20 calendar days after today’s filing, or October 26, 2025, pursuant to Section 8(a) of the Securities Act. MapLight expects to complete the pricing of the proposed public offering on or after such date. In the event that the federal government and the SEC resume normal operations prior to October 26, 2025, MapLight will re-evaluate the use of Section 8(a) in connection with the proposed public offering.
As a result of the shutdown of the federal government, we have determined to rely on Section 8(a) of the Securities Act to cause the registration statement of which this prospectus forms a part to become effective automatically. Our reliance on Section 8(a) could result in a number of potential adverse consequences, including the need for us to file a post-effective amendment and distribute an updated prospectus to investors, or a stop order issued preventing use of the registration statement, and a corresponding substantial stock price decline, litigation, reputational harm or other negative results.
The registration statement of which this prospectus forms a part is expected to become automatically effective by operation of Section 8(a) of the Securities Act on the 20th calendar day after the most recent amendment of the registration statement filed with the SEC, in lieu of the SEC declaring the registration statement effective following the completion of its review. Although our reliance on Section 8(a) does not relieve us and other parties from the responsibility for the adequacy and accuracy of the disclosure set forth in the registration statement and for ensuring that the registration statement complies with applicable requirements, use of Section 8(a) poses a risk that, after the date of this prospectus, we may be required to file a post-effective amendment to the registration statement and distribute an updated prospectus to investors, or otherwise abandon this offering, if changes to the information in this prospectus are required, or if a stop order under Section 8(d) of the Securities Act prevents continued use of the registration statement. These or similar events could cause the trading price of our common stock to decline substantially, result in securities class action or other litigation, and subject us to significant monetary damages, reputational harm and other negative results.
I *think* this is the first operating company IPO to price during the shutdown. (It seems there have been twoSPACs.) We don’t know of any IPOs that priced during the 2018-2019 government shutdown. Numerous companies had removed their delaying amendments, but most (like this one) added the delaying amendment back on the registration statement when the SEC reopened. If anyone knows of a prior instance of an IPO pricing after the S-1 went effective under Section 8(a), please reach out!
As anyone trying to get an IPO done right now knows, despite the welcome updated Rule 430A guidance from the SEC Staff, there are still lots of unusual complications to consider or work through while the government is shut down. For more FAQs on some of these issues, here’s a Davis Polk alert on public offerings during the shutdown with a suggestion for a way to upsize if you opt not to use Rule 462(b).
Can we upsize the offering after effectiveness like in a regular-way IPO?
Yes, but with a change to the usual mechanics.
The SEC guidance did not address whether a company can register additional shares post-effectiveness with Rule 462(b) (the rule ordinarily used, which refers to a registration statement being “declared effective”), and we believe there are risks to relying on that rule during the shutdown.
That said, a workaround can get the company to the same place, as long as the company is OK paying an additional registration fee that it might not use. The company could register 20% more shares (and pay the correspondingly higher fee), and reflect the registration of the additional shares in the fee table filed with the registration statement. The company should then disclose on the cover page of the prospectus (right after the description of the underwriters’ option to purchase additional shares) the number of additional shares it has registered in case the company decides to increase the size of the offering after effectiveness. Similar disclosure should be included in the offering summary, the underwriting section, and the selling stockholder table when applicable.
It also addresses, “What if something happens during the 20-day period that requires disclosure?”
If something happens during the 20-day period that warrants disclosure in the IPO prospectus, amending the registration statement to include it would restart the 20-day period. Rather than filing an amendment, an eligible company could instead include disclosure of the material development in a free writing prospectus (FWP) filed with the SEC, and then reflect the change in the final prospectus. However, a development can only be handled in an FWP if it does not “conflict with” the information in the registration statement. What that means is a judgment call that will depend on facts and circumstances.
If the company moves forward with this approach, it would need to complete the final prospectus with pricing terms and updated disclosure immediately after pricing so that the prospectus is filed with the SEC and ready for use before any sales are confirmed (so it will be deemed to be part of the registration statement on the date it is first used after effectiveness by operation of Rule 430C). What this means in practice is a significant acceleration of the usual timetable for finalizing the prospectus.
Finally, don’t forget that minor changes may be necessary in the closing deliverables — for example, the legal opinions should state that the registration statement “became” effective rather than “was declared” effective.
It also includes a tip for companies without a pending registration statement. It says that if you expect to file one in the near future, you should do so sooner rather than later to get in the queue. The SEC will be backed up when the government reopens and presumably will review registration statements in the order they were received.
As Dave shared in mid-October, Chairman Atkins recently gave a speech that outlined his vision for improvements he’d like to see in the Wells process.
As many of you know, the Wells process is the mechanism through which the enforcement staff notifies potential respondents or defendants of any charges—and the basis for such charges—that the staff intends to recommend to the Commission. The potential respondents or defendants are then provided an opportunity to make written or video submissions to the Commission setting forth their interests and position on the subject matter of the investigation.
These “Wells submissions” provide in most cases a last opportunity for potential respondents or defendants to persuade the staff that an enforcement action, either in whole or in part as the staff intends to recommend it, is not warranted. They also provide the Commission with a different, and potentially convincing, view of the facts and law concerning the matter.
But the Wells process presents a number of challenges for defense attorneys and their clients. From this Fortune article:
As Securities and Exchange Commission defense counsel, we can attest first-hand to the dread our clients experience when we inform them that we have received a “Wells Notice” from the Division of Enforcement at the SEC. The Wells Notice, which serves as the civil equivalent of a criminal grand jury target letter, informs the recipients that the Division is prepared to recommend to the Commissioners that they be sued. The putative defendants then learn that they have only two weeks to submit a written defense or “Wells Submission,” that may or may not be read by commissioners, and that the price of a submission is that the defendant is forced to agree that the submission itself may be used against them in any subsequent proceeding. Hardly a level playing field — until now.
This Dechert memo summarizes the key points of his speech:
Timing of Wells Submissions: Moving forward, Division staff will provide potential respondents and defendants with “at least four weeks” to complete Wells submissions. On the flip side, there should not be delays in making submissions or unreasonable requests of Division staff, as the foundation of the Wells process is good faith by both sides.
Access to Evidence: As mentioned during the SEC Speaks conference earlier this year, Chairman Atkins reiterated that Division staff must be forthcoming about sharing the investigative file with potential respondents and defendants. This information includes transcripts, documents, and other parts of the investigative record. Chairman Atkins cautioned, though, that Division staff still must adhere to limitations when applicable, such as information that would identify whistleblowers or implicate a parallel criminal investigation.
Meetings with Division Staff: Senior Division leadership will continue to meet with defense counsel prior to making an enforcement recommendation to the Commission. However, Chairman Atkins expressed that Division staff should engage more with defense counsel during earlier phases of the investigation “to discuss the direction of an investigation,” including when there is a belief that “the staff is operating under a mistaken view of the facts.”
White Papers: Chairman Atkins noted the value of white paper submissions in addressing concerns over certain legal or factual issues. These submissions are particularly helpful “in cases where a potential respondent or defendant feels obligated to make a public disclosure of a Wells notice or to save on the costs of making a Wells submission.” He also confirmed that white papers, like Wells submissions, will be provided to the Commission for review and consideration.
Commissioner Review: Commissioners currently receive every Wells submission, both in settled cases and in contested ones. Chairman Atkins stressed that the Commissioners should read the submissions, even if the recommendation has changed from what was included in the Wells notice.
Coupled with the staff now open to considering proposed settlements of enforcement proceedings and waiver requests simultaneously, this is welcome news for those navigating enforcement proceedings.
New research highlighted on the CLS Blue Sky Blog asks whether the public’s perception of the SEC influences engagement with U.S. financial markets and finds resoundingly that it does. The SEC itself monitors its public perception. The Office of Public Affairs monitors social media sentiment since negative posts could “disrupt the SEC’s regulatory agenda” and impact the public’s perception of the SEC. But little is known about how that public perception affects investor behavior.
The authors of a recent paper measured public sentiment by reviewing over 645,000 tweets that mentioned the SEC’s official Twitter (now X) account between 2012 and 2021, quantified the posts’ sentiments as positive, negative, or neutral toward the SEC and then aggregated these sentiments into a measure of public perception. Here’s what they found:
While it holds neutral views of the SEC about 58 percent of the time, the public maintains positive perceptions 29 percent of the time and negative perceptions 13 percent of the time. Moreover, perception shifts dramatically around major events: enforcement actions, regulatory changes, leadership transitions, and even broader crises like the COVID-19 pandemic.
The researchers then compared changes in perception against trading activity and found that “when public perception of the SEC improves, retail trading increases; when it deteriorates, trading declines” with an economically meaningful magnitude.
– Retail investors account for roughly 20-30 percent of U.S. equity market volume – a substantial force in market liquidity and price discovery
– Retail trading volume is 3.6 percent higher during positive perception periods and 3.4 percent lower during negative periods
– The effects are strongest . . . among small firms and companies with low institutional ownership – precisely where SEC oversight is most important for investor protection
– When multiple social media users agree in their perception (showing low disagreement in sentiment), the effects are even more pronounced
It goes on to say that “SEC perception affects not just how much retail investors trade, but how they trade.”
During periods of positive SEC perception, retail investors rely more heavily on earnings information in their trading decisions. They’re more likely to buy stocks with positive earnings surprises and sell those with negative surprises. In other words, when the SEC is perceived favorably, retail investors appear to have greater confidence in the credibility of SEC-regulated disclosures.
It concludes with some implications for the SEC and this final thought.
Public perception matters – for trading volume, for information processing, and ultimately for the SEC’s ability to maintain fair and efficient markets. In the attention economy, perception isn’t just reality; it’s a force that shapes market outcomes.
I guess Glinda was right — it’s “about popular” — but I must “protest” with the remainder of this song. It’s also about “aptitude.”
A recent Troutman Pepper Locke alert discusses a board’s obligations when a venture-backed company is considering a down round (raising funds at a lower valuation than a prior financing). Because these deals mean greater-than-anticipated dilution for existing holders — and potential shareholder opposition even when the down round is the best, or even the only, available option — they are often designed to encourage existing holders to participate, which “encouragement” can take the form of a carrot or a stick.
Such features may include pay-to-play or pull-up mechanisms, compulsory conversions, warrant coverage, or super-priority liquidation preferences, all of which can present turbulent waters for a board of directors to navigate . . .
The investors leading a down round financing often view themselves as backstopping the company at a time when others won’t, and expect to be compensated accordingly. On the other hand, management may focus on maintaining their jobs as a primary driver and their equity stake as a secondary driver. Other key stakeholders often include new investors, who may be looking for an opportunistic investment, and non-participating existing equity holders, who will be diluted and who may or may not be engaged and supportive of the transaction. The board of directors considering such a transaction should pay careful attention to its fiduciary duties as it works to bring this diverse set of stakeholders together.
Here are a few tips from the alert regarding decision-making and processes.
Informed Decision Making
Seek out alternatives: The board should consider and seek out alternative options, including bridge loans, simple agreements for future equity, convertible note offerings, mergers, asset sales, or other transactions that may be less offensive to non-participating equity holders.
Research: The board should review current market terms for similar transactions in the same or similar industries if possible, and use these as a guideline in establishing financing terms for the down round.
Process
Fair value: The board should establish a fair price for the down round. While not required, getting a 409A valuation from an independent and reputable third-party valuation firm is effective in supporting the company’s position that the pricing of the down round was appropriate.
Independent committee: If possible, the board should establish a committee of independent and financially disinterested board members to evaluate and negotiate the terms of a down round and approve the transaction.
Conflicts of interest: Any board actions involving interested directors should have the interested directors recuse themselves, and any written resolutions should clearly acknowledge which directors are interested. Transactions involving interested directors can receive extra scrutiny on review and have their own set of approval provisions within the Delaware General Corporation Law and other state laws; it is imperative to follow those provisions.
The article also addresses documentation, equity holder considerations and compliance.
Contractual blockers have become a common tool in offerings of preferred stock and warrants to cap an investor’s beneficial ownership at 4.9% or 9.9% — which can effectively prevent the investor from becoming subject to Section 13(d) or Section 16. That is, unless the blocker is considered “illusory.” Here’s a recent development on contractual blockers that Alan shared earlier this month on Section16.net:
It has become settled law that a blocker in a derivative security can be effective to cap the holder’s beneficial ownership at an amount not exceeding the cap so long as the blocker is contractually binding. The SEC filed an amicus brief in 2001 supporting that position provided that the blocker is not “illusory.” The SEC’s brief listed four factors it considers relevant to whether a blocker is illusory. In a recent decision dismissing a complaint filed by Bed Bath & Beyond against an investment fund and its manager, a judge in the SDNY applied those factors in finding that blockers included in derivative securities acquired by the fund were not illusory.
The fund invested in BB&B on February 7, 2023, by purchasing three derivative securities: convertible preferred stock, warrants to purchase more preferred stock, and common stock warrants. The preferred stock and the common stock warrants contained blockers limiting the fund’s ownership to no more than 9.9% of the outstanding common stock. The strike prices of the derivatives allowed the fund to buy common stock at discounted prices, which the fund began doing immediately through serial conversions, each for a number of shares that kept the fund below the cap, followed by a sale of the acquired shares before submission of the next conversion request. Within two weeks the number of outstanding shares doubled, and within three months BB&B filed for bankruptcy.
BB&B challenged the validity of the blockers and sought $310 million in short-swing profits. The defendants argued that the blockers were contractually binding and therefor effective to limit ownership. The court agreed the blockers were binding but also agreed with the SEC (and BB&B) that a blocker also must not be illusory. The court then addressed the SEC’s factors.
Whether the blocker is easily waivable by the parties. BB&B argued that the parties could have agreed at any time to amend the derivatives to eliminate the blockers. The court said that argument was “nonsensical” and would render every contract illusory. In any case, the documents expressly prohibited amendment of the blocker provisions.
Whether the blocker lacks an enforcement mechanism. The plaintiff argued that BB&B had no way to determine whether the fund’s ownership exceeded the cap and that, in any case, BB&B lacked the will to enforce the blockers because BB&B would have been “thrilled” to receive the additional cash. The court said an enforcement mechanism existed because the fund was required to represent in each conversion or exercise request that the issuance would not cause the fund to exceed the cap. Whether BB&B had any interest in enforcing the caps was not relevant. BB&B also argued that it could not have enforced the blockers because a side letter prohibited it from requesting any information from the fund beyond the conversion and exercise requests. The court said a blocker can be valid even if enforcement rests with the derivative’s holder. The terms of the blockers also served as an enforcement mechanism, in that the blockers provided that any issuance in excess of the cap would be null, void and cancelled ab initio, and that any excess shares would be cancelled and not eligible to vote at meetings of stockholders.
Whether the blocker has not been adhered to in practice. The fund submitted 90 exercise and conversion requests, including 15 during the first two days after acquiring the derivatives. Following each exercise, the fund immediately sold the acquired shares and submitted another exercise request. BB&B argued that the fund remained the beneficial owner of sold shares until the sales settled, meaning the cap was regularly exceeded. The court concluded that shares the fund sold could be excluded from the fund’s beneficial ownership calculation because shares are deemed sold when the seller is irrevocably committed to the transaction, which occurs on the trade date, not the settlement date.
Whether the blocker can be avoided by transferring the securities to an affiliate. The plaintiff didn’t argue that the blocker could be avoiding by transferring the securities to an affiliate, so the court didn’t address this factor.
The court’s decision serves as a useful guide in drafting blocker provisions. Also useful is the court’s statement (in footnote 8) that the SEC’s list of factors that tend to support a conclusion that a blocker is valid does not suggest that the absence of those factors undermines the validity of a blocker.
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