Monthly Archives: June 2018

June 29, 2018

SEC Adopts $250M “Smaller Reporting Company” Def’n

Yesterday, the SEC announced that it adopted amendments to expand the number of “smaller reporting companies” that qualify for scaled disclosure. Here’s the 105-page adopting release – and we’re posting memos in our “Smaller Reporting Companies” Practice Area (also see this blog from Cooley’s Cydney Posner & this blog from Dorsey’s Cam Hoang). These are the key points:

– Companies with a public float of less than $250 million will qualify as SRCs.

– A company with no public float or with a public float of less than $700 million will qualify as a SRC if it had annual revenues of less than $100 million during its most recently completed fiscal year.

– A company that determines that it does not qualify as a SRC under the above thresholds will remain unqualified until it determines that it meets one or more lower qualification thresholds. The subsequent qualification thresholds, set forth in the release, are set at 80% of the initial qualification thresholds.

– Rule 3-05(b)(2)(iv) of Regulation S-X is amended to increase the net revenue threshold in that rule from $50 million to $100 million, so that more companies may be able to omit dated financial statements of acquired businesses.

– The final amendments preserve the application of the current thresholds contained in the “accelerated filer” and “large accelerated filer” definitions in Exchange Act Rule 12b-2. As a result, companies with $75 million or more of public float that qualify as SRCs will remain subject to the requirements that apply to accelerated filers, including the timing of the filing of periodic reports and the requirement that accelerated filers provide the auditor’s attestation of management’s assessment of internal control over financial reporting required by Section 404(b) of the Sarbanes-Oxley Act of 2002.

That last point was emphasized during the SEC’s open meeting (here’s Commissioner Stein’s Statement – and here’s Commissioner Piwowar’s Statement). Corp Fin has begun to formulate recommendations to the Commission for possible additional changes to the “accelerated filer” definition that, if adopted, would have the effect of reducing the number of companies that qualify as accelerated filers (and are subject to auditor attestation requirements). Some – but not all – believe this would promote capital formation by reducing compliance costs for those companies.

SEC Adopts Inline XBRL

Yesterday, with Commissioner Peirce dissenting, the SEC announced amendments to require the use of Inline XBRL for financial statement information. This means that companies will embed XBRL data directly into Edgar filings instead of posting separate files – and the new data will be readable by both humans & machines. The amendments also eliminate the requirements for companies to post XBRL data on their websites.

There’s no change to the categories of filers or scope of disclosures subject to XBRL requirements. Here’s the 143-page adopting release – also see this Cooley blog.

There’s a phase-in period to comply:

– Large accelerated filers that use U.S. GAAP will be required to comply beginning with fiscal periods ending on or after June 15, 2019.

– Accelerated filers that use U.S. GAAP will be required to comply beginning with fiscal periods ending on or after June 15, 2020.

– All other filers will be required to comply beginning with fiscal periods ending on or after June 15, 2021.

– Filers will be required to comply beginning with their first Form 10-Q filed for a fiscal period ending on or after the applicable compliance date.

SEC Proposes Changes to Whistleblower Program

In March, John blogged about the largest whistleblower award to-date – and noted that the SEC has awarded more than $262 million to 53 whistleblowers since the program’s inception in 2012.

Yesterday, the SEC proposed amendments to its whistleblower program. The amendments will allow awards based on deferred prosecution & non-prosecution agreements and clarify the requirements for anti-retaliation protection, among other things. There’s also a controversial proposal to cap award amounts. Here’s the SEC’s announcement & fact sheet. The comment period will remain open for 60 days following publication of the proposing release in the Federal Register.

Liz Dunshee

June 28, 2018

Virtual Annual Meetings: 27% Annual Growth Rate

This review from ISS Analytics shows that there were 127 virtual-only meetings through mid-May, compared to just 99 last year. And for the full year, at least 300 companies are expected to hold some sort of virtual annual meeting (including hybrid) – compared to 236 in 2017 (this doesn’t include companies that webcast meetings on their own). A recent Broadridge summary also notes:

– 10% of virtual meetings were hybrid

– Of the 24 companies that held a hybrid meeting in 2016, 12 of them switched to virtual-only in 2017

– 97% of virtual-only meetings were conducted with live audio, rather than video

– 57% of the companies holding virtual meetings were small-cap, 26% were mid-cap & 17% were large-cap

– 98% of companies allow questions to be submitted online during the live meeting

P&G’s Close Contest: Registered & Plan Shares to Blame for Uncertainty?

Broadridge recently reported this finding from the voting review of Proctor & Gamble’s short-slate proxy contest – where the voting margin ended up being less than 1% of votes cast:

The uncertainty in the validity of the votes occurred entirely within the registered shares and plan shares, while the votes of all of the street name shares were accepted as accurate and not contested.

Proxy Cards & VIFs Will Be More Identical

According to this newsletter, Broadridge is redesigning its “Voting Instruction Form” to make more space for full proxy card language. Here’s an excerpt from the newsletter:

Mr. Norman referred to previous discussions held with the SEC staff on the nature and use of abbreviations when faced with proxy language that is too voluminous to fit within the standard voter instruction form (VIF). He stated that in his recent discussions with the staff, the staff had expressed the view that the VIF should be revised so that it could allow the same language that appears on the proxy card, rendering the need for abbreviations obsolete.

Members of Broadridge management stated in response they were working on a redesign of an expanded VIF designed to permit full use of proxy card language on the VIF. A prototype of the proposed VIF has been drafted and is being submitted for quality assurance testing, with the goal that the new VIF form will be ready for use in September, the beginning of the 2018 fall “mini” proxy season.

Liz Dunshee

June 27, 2018

Big Investors Don’t Want Analysts Snooping on Them

Recently, Broc blogged about the SEC allowing anyone to track who reads filings on Edgar. Now we have a different “big data” concern: banks are tracking readership of sell-side research. Here’s an excerpt from this WSJ article:

Banks, under pressure to find new ways to boost revenue in their giant research arms, are collecting loads of data on what their clients are reading and when. Beginning about two years ago, banks started moving from the old system of emailing PDFs to using new websites using HTML5 – a web coding language that allows for more tracking of user activity – for distribution of research notes. With the new technology, they can typically see in real-time exactly what pages are being read, for how long, and by which users.

There’s reason for large investors to feel uneasy about this – and they do:

Some bankers said that hedge funds have asked if they can see a stream of aggregated research data, such as what notes are the most read, or longest read, but also that their banks weren’t selling that information, people familiar with those requests said.

The amped up data-tracking has rankled some customers, who worry that even anonymized readership habits, if shared with other clients, could allow rivals to get ahead of their trades. Capital Group, a Los Angeles firm with about $1.7 trillion in assets under management, has asked banks and other research providers to archive readership data related to the firm and not use it in any way for a period of time, according to people familiar with the discussions.

Are the investors getting that promise in writing? For better or worse, it’s exceedingly common these days for companies to capture & share customer information. I blogged a few months ago on “The Mentor Blog” about how that practice is leading to new liability exposures for officers & directors…

Off-Cycle Engagement: Avoiding Blunders

This Cleary Gottlieb memo gives eight tips on how to handle off-cycle engagement – from shareholders themselves. The intro explains why you should care:

Notwithstanding the chorus of shareholder-engagement advisors & investors singing the praises of holding off-cycle meetings – the truth is that the upside of these meetings is somewhat limited and the downside risks are significant. When pressed, any investor will tell you that if there were an actual proxy contest, even a company with a record of excellent off-cycle engagement is far from immune from a decision by the investor to vote in favor of an activist’s short-slate – and it often happens at the 11th hour of the proxy contest.

More importantly, a poor off-cycle meeting can be more detrimental than no meeting. Indeed, investors report that they regularly leave these meetings with a worse impression of companies. And since many institutional investors will each hold portfolios consisting of hundreds or even thousands of companies, many of them won’t take a meeting each year due to limited bandwidth – which amplifies the adverse consequences of a poor meeting.

Tomorrow’s Webcast: “Proxy Season Post-Mortem – Latest Compensation Disclosures”

Tune in tomorrow for the webcast — “Proxy Season Post-Mortem: The Latest Compensation Disclosures” – to hear Mark Borges of Compensia, Dave Lynn of and Morrison & Foerster, and Ron Mueller of Gibson Dunn analyze what was (and what was not) disclosed this proxy season.

Liz Dunshee

June 26, 2018

Disclosure: Priority Access for “Platinum Elite Members”?

One of the many infuriating airline industry “innovations” over the past several years has been the practice of charging an additional fee for a priority boarding slot.  So, I was a little surprised that two prominent law professors recently suggested applying a variation of this priority access model to corporate disclosures:

In our recent article, Making a Market for Corporate Disclosure, we argue that the under-disclosure concern could be addressed in a far broader way by constructing a well-regulated market for tiered access to corporate disclosure. We contemplate a transparent market for early-access rights to corporate information. In this market, firms could sell access to information that they soon would release to the public.

For example, when they have new information that they are willing to share with the public, firms could offer a well-advertised early peek—say, starting at 11:00 a.m.—to anyone willing to pay the market price for it. So long as firms had to make any selectively released disclosure products with material information available to the public by, say, 1:00 p.m., market supply of and demand for those products could generate improved public disclosure. All the while, the current floors of mandatory disclosure need not be changed.

Law professors love ideas like this (anybody up for legalizing insider trading?), but I dunno guys – I’m not sure there’s any aspect of the airline industry that I’d suggest anybody use as a model for anything.

Poll: Paying for Disclosure

Please take a moment to participate in our anonymous poll:

bike tracks

Transcript: “M&A Stories – Practical Guidance (Enjoyably Digested)”

We have posted the transcript for the recent webcast – “M&A Stories: Practical Guidance (Enjoyably Digested).”

John Jenkins

June 25, 2018

Earnings Reports: “Fraudtastic 4?”

Last week, the WSJ reported that some companies may have found another way to be “creative” when it comes to reporting their results – and it’s attracted interest from SEC Enforcement. Here’s an excerpt:

Enforcement officials at the Securities and Exchange Commission have sent queries to at least 10 companies, asking the firms to provide information about accounting adjustments that could push their reported earnings per share higher, one person familiar with the matter said.

The queries follow the release of an academic paper that found evidence of companies nudging up earnings results. The academic research found the number “4” appeared at an abnormally low rate in the tenths place of companies’ earnings per share. Reporting that figure as “5” or higher allows a firm to round up its earnings per share another cent. For instance, a company with earnings of 55.4 cents a share would round to 55 cents a share, while a company with earnings of 55.5 cents a share would round to 56 cents.

What’s kind of puzzling is how long it’s taken for this alleged practice to draw attention from regulators. Warren Buffett actually raised this issue – and cited the study referenced in the WSJ article – at the 2010 Berkshire-Hathaway annual meeting.

Board Oversight: Updating Caremark for the #MeToo Era?

We’ve previously blogged about the increasing focus on the board’s oversight responsibilities in the area of sexual harassment. This Cleary Gottlieb blog  suggests that the principles underlying Delaware’s Caremark doctrine might well provide the basis for an expanded concept of what’s required of corporate boards in the #MeToo era. This excerpt explains:

Chancellor Allen anticipates today’s business challenge for directors by expressly premising his holding on moral considerations: “one wonders on what moral basis might shareholders attack a good faith business decision of a director as ‘unreasonable’ or ‘irrational’” (emphasis added). That is not to say that the Caremark opinion suggests that moral failures should be a basis for director liability.

Rather, the Caremark opinion suggests that the standard for director liability should in some way reflect the moral issues at stake: asking whether there is a moral basis for the courts to hold directors liable for not ferreting out an obscure compliance failure that results in a modest financial penalty is also by implication asking whether there is a moral basis for the courts to not hold directors liable for turning a blind eye to issues of great political, social or cultural consequence.

For those who consider social issues as being beyond the responsibility of corporate boards, the blog cautions that Caremark’s “duty of attention” may provide the moral basis for judging directors based on how they deal with these issues.

Cybersecurity: What to Think About When Buying Cyber Insurance

Earlier this year, we blogged about efforts by some of the nation’s largest companies to get into the cyber insurance game. Now this Wachtell memo has some advice for those on the buy side about what they should consider when shopping for coverage. This excerpt addresses coverage for “preexisting conditions”:

Companies should understand whether a policy will restrict coverage for breaches stemming from conditions existing at the time the policy is purchased. While sometimes explicit, such limitations can also be implicated through the use of a “retroactive date” for the start of coverage. As some cyber events are caused by a latent, sometimes long-existing, vulnerability in a company’s infrastructure, this type of carveout could result in a significant gap in coverage.

Other topics include coverage of third party claims, the need to ensure that policy provisions are consistent with cyber-incident response plans, & coverage for data under the control of third parties.

John Jenkins

June 22, 2018

SCOTUS: SEC’s ALJ Appointment Process Unconstitutional

Yesterday, in Lucia v. SEC, the SCOTUS held that the SEC’s appointment process for its ALJs violated the Appointments Clause of the U.S. Constitution. As this excerpt from the opinion’s syllabus notes, the Court’s decision was based primarily on its earlier decision in Freytag v. Commissioner, 501 U. S. 868 (1991), which held that Tax Court “special trial judges” were “officers of the United States” for purposes of the Appointments Clause:

Freytag’s analysis decides this case. The Commission’s ALJs, like the Tax Court’s STJs, hold a continuing office established by law. SEC ALJs “receive[ ] a career appointment,” to a position created by statute. And they exercise the same “significant discretion” when carrying out the same “important functions” as STJs do. Both sets of officials have all the authority needed to ensure fair and orderly adversarial hearings – indeed, nearly all the tools of federal trial judges.

The Trump Administration’s decision to “switch sides” in this case & support the argument that the SEC’s ALJs were unconstitutionally appointed might suggest that the case was decided along partisan lines. But that’s not what happened.  Justice Kagan delivered the Court’s opinion, and the Chief Justice and Justices Thomas, Kennedy, Alito & Gorsuch joined in the opinion.  Justice Breyer also concurred – in part – in the Court’s decision. Justices Ginsburg, Sotomayor & Breyer (in part) dissented. We’re posting memos in our “SEC Enforcement” Practice Area.

What About Prior ALJ Decisions?

As we’ve previously blogged, some have suggested that the decision to invalidate the SEC’s appointment process for its ALJs might call into question the validity of prior decisions.  The Lucia Supreme Court didn’t speak to that issue directly, but if you’re interested in reading tea leaves, check out this excerpt from Justice Kagan’s opinion:

This Court has held that “one who makes a timely challenge to the constitutional validity of the appointment of an officer who adjudicates his case” is entitled to relief. Ryder v. United States, 515 U. S. 177, 182–183 (1995). Lucia made just such a timely challenge: He contested the validity of Judge Elliot’s appointment before the Commission, and continued pressing that claim in the Court of Appeals and this Court.

That emphasis on a “timely challenge” suggests that parties who didn’t make a timely objection to the ALJ’s authority in their particular case may be out of luck if they try to challenge a decision now.  Or maybe not – look, I mostly played softball in law school, so don’t expect profound insights on SCOTUS opinions from me.

SEC to Consider Proposed Changes to “Smaller Reporting Company” Definition

According to this “Sunshine Act” notice, the SEC will consider adopting proposed amendments to the definition of the term “smaller reporting company” at an open meeting to be held next Thursday, June 28th. Other items of interest on the agenda include:

– Consideration of a proposed rule amendment that would mandate the use of “Inline XRBL” – which allows filers to embed XRBL data in filings – in operating company financial statement information and mutual fund risk/return summaries.

– Whether to propose amendments to the SEC’s whistleblower rules.

John Jenkins

June 21, 2018

The “Nina Flax” Files: The List of Lists

I’m pretty excited that Nina Flax of Mayer Brown is willing to share the following with us (let Nina know what you think of her list of lists!):

At the recent “Women’s 100” in Palo Alto, I decided to share two (overachiever, I know) interesting facts during the intros (where each attendee stands up & provides a “fun fact” about themselves). In addition to the fact that I’ve been to North Korea, I am a perpetual “list maker.” My second fun fact was: the night before the event, I couldn’t fall asleep (common problem for me), so I had been up until 2 am making an excel list of all of the words my son knows. Yes, I am crazy.

But I am also fortunate! Apparently, lists are cool. So Broc & Liz asked me to contribute some lists for this blog. Where to begin? A list of potential lists! So here it goes…

1. Things On My “To Do List” I Never Get To
2. Why I Love LinkedIn
3. Crazy Things I’ve Done For The Job Lately
4. How I Try to Balance Work & Life
5. Things I Miss From Pre-Law Days
6. Things I Still Do Infrequently
7. Some Truly Horrifying Quotes
8. The Hidden Gem Associates
9. Meaningful Law School Characters
10. Things I Feel When Reviewing Agreements
11. Things About My Job That Exhaust Me
12. Ways We Make Our Office Fun
13. My “Personal Grateful” List for Today
14. My “Work Grateful” List for Today
15. Things That Are Always On My Desk
16. How I’ve Mastered Work Travel
17. My Favorite Shows I’ve Binge Watched Lately
18. Questions I Have About The “Other Side”
19. Why I Always Question My Skills
20. Things I Constantly Scope on Amazon

I am sure I will come up with a bunch more – and I am not promising any of the above in any particular order! Stay tuned…

Auditors Being Tipped Off Before Inspections: Will Your Company’s Name Surface?

Yes, your company may be impacted by shenanigans committed by your independent auditor. The intro from this MarketWatch piece by Francine McKenna makes that clear:

Former KPMG executives are on trial for obtaining confidential information about audit inspections. The auditor of some of the world’s largest banks including Citigroup, Credit Suisse and Deutsche Bank was tipped off before a regulator inspected them.

It’s been previously reported that KPMG executives were able to extract from the regulator, the Public Company Accounting Oversight Board, confidential information ahead of inspections, and use that information to correct their work and at least in one instance, withdrawn an opinion. But MarketWatch now has court documents that, for the first time, names the audit clients caught up in the scandal.

The SEC’s Proposed Long-Term Strategic Plan

Every time that the SEC comes out with its strategic plan, I blog about how I dislike five-year horizons for any plan since unforeseen events often change priorities & needs (here’s an example of a past blog). As noted in this Cooley blog, the SEC has come out with a draft of its latest strategic plan. Nothing earth-shattering as it essentially recaps what Chair Clayton has been saying since he took office – here is Chair Clayton’s testimony about the plan…

Broc Romanek

June 20, 2018

How Investors Read Proxies (In the Real World)

Recently, I blogged about a study that tracks whether mutual funds & proxy advisors are reading your proxy online. I threw in an aside that “If I was an institutional investor, I would still be asking for paper as that seems like a far easier way to actually read a proxy.” It might be easier to read a proxy if you did a straight read – but the reality is that investors drill down into the areas that they are most interested in.

In other words, investors typically read proxies electronically. They like the ability to word search. They like the ability to quickly move around. In fact, they like it when you provide links in your “executive summary” of the proxy to more detailed discussions. Karla Bos of Aon provides even more wisdom:

1. Another big reason that investors use electronic proxies (aside from sheer volume) – governance teams often cut & paste sections of the proxy into emails or other materials for their portfolio managers & proxy committees

2. Investors want links from the table of contents (no links there often means the rest of the proxy and perhaps the company’s governance are “old school” — first impressions count)

3. When investors analyze your proposals, before going to your proxy, many rely on proxy advisor reports or data feeds (for the facts, not their recommendations), so remember that if investors can’t quickly find what they need, the proxy advisors may not either

4. On word searches – ensuring your investors can quickly find what they want means you have to know them and the terms & content they’re looking for

5. I like how GE uses internal links – and even includes an index of frequently requested information right up front. But proxies don’t have to have all the bells & whistles that GE’s does to make navigation more shareholder friendly.

So there you have it, several more “pro tips” to learn from this blog. And yes, I was wrong. And you were right…

Revenue Recognition: Corp Fin Comments Begin

Just yesterday, I blogged that Corp Fin planned a lighter touch when issuing comments on the new revenue recognition standard – and now Steve Quinlivan has blogged about how the comments have begun rolling in…

Big Four Audit Quality Review Results Decline

As the Big Four appear to continue to push back against the PCAOB regulating them here in the US (the PCAOB’s budget was cut in December & much of the senior staff has been let go since), here is sobering news from the UK’s Financial Reporting Council:

The Big Four audit practices must act swiftly to reverse the decline in this year’s audit inspection results if they are to achieve the targets for audit quality set by the Financial Reporting Council (FRC). Overall results from the most recent inspections of eight firms by the FRC show that in 2017/18 72% of audits required no more than limited improvements compared with 78% in 2016/17. Among FTSE 350 company audits, 73% required no more than limited improvements against 81% in the prior year.

Across the Big 4, the fall in quality is due to a number of factors, including a failure to challenge management and show appropriate scepticism across their audits, poorer results for audits of banks. There has been an unacceptable deterioration in quality at one firm, KPMG. 50% of KPMG’s FTSE 350 audits required more than just limited improvements, compared to 35% in the previous year. As a result, KPMG will be subject to increased scrutiny by the FRC.

Meanwhile, two editorial pieces – this one by the financial editor of the Times and this one by a senior editor at Bloomberg – has suggested that the Big 4 might need to be broken up…

Broc Romanek

June 19, 2018

Revenue Recognition: Corp Fin Plans Lighter Touch

This nice blog from Cooley’s Cydney Posner offers a bunch of interesting nuggets from an interview with SEC Chair Jay Clayton and Corp Fin Director Bill Hinman at a recent WSJ event. Here are the highlights:

1. Corp Fin’s Approach to Revenue Recognition Comments – Hinman reportedly said that the staff understands that the rule is complex to apply and is focused on helping issuers comply; the staff doesn’t “have a particular agenda or standard comments…We don’t expect to repeat the same comment for five different companies.” He contrasted the staff’s approach to revenue recognition with its approach to compliance with the SEC’s guidance on non-GAAP financial measures or compliance with GAAP, where the staff would often issue standard comment letters.

2. Talk to Staff for Reg S-X 3-13 Waivers – Hinman reportedly advised issuers to skip the 30-page treatises; first talk with the staff.

3. Mandatory Auditor Rotation Not Priority – Although some European regs require mandatory auditor rotation every 10 years, Clayton also noted that “mandatory rotation of company auditors ‘is not something that is front and center in my mind.’”

4. Fine-Tuning Dodd-Frank; Not Overhauling It – Clayton, speaking at the annual meeting of the WSJ’s CFO Network, said that “regulators are evaluating how postcrisis rules have performed in practice, and that he had concerns about some of the unintended side effects from some regulations. But any changes will be around the edges, keeping the core of postcrisis overhauls in place, he added. ‘I don’t think Dodd-Frank is changing a great deal, just to put a pin in it.’

Corp Fin Director Hinman Talks Cybersecurity Disclosures

Here’s the intro from this blog by John Atwood:

Bill Hinman, director of the SEC’s Division of Corporation Finance, said the staff is looking closely at companies’ risk disclosure surrounding cybersecurity in this year’s filings following the update to the SEC’s cyber guidance that was issued in February. At the PCAOB’s recent Standing Advisory Group meeting, he noted that some aspects of the guidance have been controversial, so he explained some of the Commission’s thinking behind the guidance.

Hinman said that the staff wanted to focus the guidance on a few areas to which it wanted to draw more attention. The first area was internal controls and how companies were designing internal controls so that when a cyber incident occurs, there were the right procedures in place to escalate the issue.

Companies should not just have IT personnel looking at cyber risks anymore, he said. The issues now should be brought to the attention of disclosure experts at the company, as well as the general counsel. Hinman said the staff wanted to remind companies that they should have procedures in place that would cause escalation to occur, so it was added to the guidance.

May-June Issue of “The Corporate Executive”

We recently mailed the May-June issue of “The Corporate Executive” – and it includes articles on:

– Court Decisions Breathe New Life into Lawsuits over Directors’ Compensation—And What You Need to Do about It
– Understanding the New Qualified Equity Grant Deferrals
– Elon Musk’s Mega Grant
– Rule 701 Disclosure Threshold Finally Increased

Broc Romanek

June 18, 2018

Corp Fin Director Weighs In Big-Time: Digital Assets as “Securities”

Last week, Corp Fin Director Bill Hinman delivered this speech on digital assets as “securities” – which caused a stir. Here’s an excerpt from this Debevoise & Plimpton memo about it (also see this WSJ article):

Certain digital assets are not, today, securities. Director Hinman expressly noted during the speech that the virtual currencies Bitcoin and Ether, as offered and sold today, are not securities. This is the first time that an SEC official has publicly indicated that a virtual currency, other than Bitcoin, does not constitute a security and, importantly with respect to Ether, notwithstanding a history of fundraising that accompanied its creation. Underlying his view is the fact that applying the disclosure regime of the U.S. federal securities laws to current transactions in these virtual currencies would add little value because the underlying software platforms are sufficiency decentralized and sufficiently functional. In other words, there is no informational asymmetry between founder/sponsor/promoter, on the one hand, and investors, on the other, that puts investors at risk.

Other digital assets may not, today, be securities. Director Hinman covered three additional points during the speech that may help to bring additional virtual currencies and other digital assets out of the regulatory “shadows.” First, he allowed that there may be other sufficiently decentralized networks and systems where regulating the tokens or coins that function on them as securities may not be required. Second, he made clear his view that “whether something is a security is not static and does not strictly inhere to the instrument.” Consistent with relevant case law and the SEC’s long-stated views, the economic substance of the transaction in question always determines the legal analysis, and this cuts both ways:

– A digital asset that was originally distributed in a securities offering may later be sold in a manner that does not constitute an offering of a security; and
– Digital assets with utility that function solely as a means of exchange over a decentralized network could be packaged and sold as an investment strategy that can be a security.

Finally, Director Hinman laid out a framework containing two sets of non-exclusive factors that the SEC considers in assessing whether a digital asset is offered as an investment contract and is thus a security. The critical underpinnings of the Hinman Factors are: (i) the role that a third party, whether a person, entity or coordinated group of actors, plays in driving an expectation of an investment return and (ii) whether the economic substance of the transaction indicates that the digital asset truly functions more like a consumer item and less like a security.

As an aside, here’s something wild: The best “wallets” for cryptocurrency are glorified USB drives. So since the exchanges aren’t secure, the traders download their “keys” to the drive every night and lock it in a safe. Blockchain! So easy! And then there’s this guy’s story – forgot his pin, tried a bunch of stuff to recall it (including hypnosis) and then paid someone almost $4k to hack the drive…

More on “First Universal Proxy Card!”

Last week, Liz blogged about the first US-incorporated company to use a universal proxy card – and as an aside, she mused about whether this was a strategy by Sandridge Energy. A member responded with these thoughts:

I suppose a key element of the strategy could involve the grant of discretionary authority to the proxies appointed on the universal card. Specifically, even shareholders wishing to support (partially or fully) the Icahn group will appoint management proxies to vote in their discretion on such other business as may properly come before the meeting or any adjournment or postponement thereof.

I am not certain, but suspect, that if a card were returned with fewer than seven “for” votes in the election of directors, the proxies also would be able to vote in accordance with the board’s recommendation. Thus, if the shareholder cast five votes in favor of Icahn nominees (and cast no votes for any of the Company nominees), the proxies likely can cast two votes in favor of two Company nominees. If correct, there could be controversy because the proxies might be able to distribute those votes in a way to knock out one or more Icahn nominees. Interesting stuff.

HBO’s “Succession”: Duty to Disclose CEO’s Illness

Spoiler alert! The title of this blog already gave away the end of the first episode of HBO’s new show – “Succession.” Sorry about that. Anyway, I thought I would turn off “Succession” about five minutes into the first episode given that we already hear too much about powerful, white, rich families. But I have found it interesting.

For starters, it’s close to home in that I work for a family-owned company that has successfully lived through a recent transition in senior management (Jesse Brill has turned over running the company to his son, Nathan). Then, I am in the midst of my own long-term succession planning as I train Liz about the facets of this job (John isn’t the heir apparent – he & I are the same age).

More importantly, the show grapples with issues that arise for many of you reading this blog. The show’s family-owned business is a publicly-held media empire (but supposedly not based on the Murdochs). As the title of the show suggests, the main premise of the show is about how to handle CEO succession planning. And Episode 2 mainly deals with the duty to disclose a CEO’s illness.

In Episode 2, several characters discuss the CEO’s illness & whether investors should be told. Some of the statements are inaccurate of course. It’s a tricky topic. The most inaccurate statement is that the SEC has a rule compelling disclosure of a CEO’s illness (ie. an affirmative duty to disclose). There is a more accurate statement about the NYSE having a standard that requires disclosure of the CEO’s illness (it’s clearly material in this case). And then there are multiple references to Steve Jobs – as Apple’s decision to be mum about Steve’s health is held up as precedent as part of the argument to do the same in the show.

Here are my three main blogs on the securities law aspects of this topic:

A Delicate Disclosure Issue: Steve Jobs’ Health

More on Steve Jobs & Disclosure of Health Issues

A Recap of Thoughts on Apple & Illness Disclosures

Broc Romanek