August 12, 2019

Risk Factors: “Active Shooters” Join the Parade of Horribles

Given the times in which we live, I guess it’s not surprising that some companies have added “risk factor” disclosure about the potential implications of an active shooter to their SEC filings. Here’s an excerpt from this WSJ article:

A handful of public companies have begun quietly warning investors about how gun violence could affect their financial performance. Companies such as Dave & Buster’s Entertainment Inc., Del Taco Restaurants Inc. and Stratus Properties Inc., a Texas-based real-estate firm, added references to active-shooter scenarios in the “risk factor” section of their latest annual reports, according to an analysis of Securities and Exchange Commission filings. The Cheesecake Factory Inc. has included it in its past four annual reports.

So, what do these risk factors look like? Here’s what The Cheesecake Factory said in its 2019 10-K (pg. 25):

Any act of violence at or threatened against our restaurants or the centers in which they are located, including active shooter situations and terrorist activities, may result in restricted access to our restaurants and/or restaurant closures in the short-term and, in the long-term, may cause our customers and staff to avoid our restaurants. Any such situation could adversely impact customer traffic and make it more difficult to fully staff our restaurants, which could materially adversely affect our financial performance.

Dave & Buster’s 10-K included identical language (pg. 23). The language in Del Taco’s 10-K  (pg. 21), and Stratus’s 10-K (pg. 17) was a little different.  While I understand why companies are doing this, I’m not sure this kind of thing is what risk factor disclosure is intended to capture. Our tendency (mine too) to throw any item that’s been added to our national anxiety closet into a risk factor isn’t very helpful to investors. The problem is that not all disclosure adds value – some just creates “noise.”

In the U.S., we’ve learned that an active shooter is the kind of random event could happen to anyone, and the effect of such an event on any business would be terrible. So to me, it’s sort of like getting struck by a killer asteroid. I think this is the kind of thing that Judge Easterbrook was getting at in this excerpt from his 1988 opinion in Weilgos v. Commonwealth Edison:

Issuers need not “disclose” Murphy’s Law or the Peter Principle, even though these have substantial effects on business. . . Securities laws require issuers to disclose firm-specific information; investors and analysts combine that information with knowledge about the competition, regulatory conditions, and the economy as a whole to produce a value for stock.

But let’s face it – you’re not going to change your approach here and neither am I. That’s because while we can debate risk factor metaphysics, the reality is that the explosive growth in event-driven securities class actions is a big part of our personal anxiety closets too.

Venture Capital: Snoop’s Got His Mind on His Money & His Money on His Mind

My kids think I’m dorkier than Ari Melber when I reference hip-hop.  But there’s no way I’m not going to use a “Gin & Juice” reference in the title when this Pitchbook article says that Snoop Dogg is an investor in Swedish payment services provider Klarna, which is now Europe’s second most valuable VC-backed company with a $5.5 billion valuation following its recent $460 million capital raise.  Here’s an excerpt:

Founded in 2005, Klarna provides consumer financing for purchases at third-party merchants. Rather than requiring consumers to pay in full via credit card at the time of sale, Klarna acts as a middleman to front the payment for a purchase, with merchants receiving the full amount upfront while the consumer repays Klarna over time.

The Swedish company is perhaps most recognizable for its partnership and investment relationship with Calvin Broadus, better known as Snoop Dogg. Broadus is front-and-center in Klarna’s recent marketing campaign, known as “Smoooth Dogg.” Such marketing efforts could prove beneficial as Klarna plans to use its new windfall to significantly expand in the US, Broadus’ home country and where his career grew rapidly in the 1990s.

Regular readers of this blog know that Snoop has some impressive culinary skills, but you also should note that this isn’t his first rodeo when it comes to venture capital. He’s an investor in both Reddit & the trading app Robinhood, and a general partner in Casa Verde Capital, which recently completed a $45 million capital raise & focuses on investments in – here’s a shock – the cannabis industry.

Cryptocurrencies: Kik Claps Back at SEC Complaint

In June, I blogged about the SEC’s decision to bring an enforcement action against Kik Interactive for its $100 million unregistered token deal.  As that blog noted, Kik’s founders are crypto-evangelists who have raised a $5 million war chest to fund its defense against the SEC’s allegation that its tokens are “securities.” It recently filed a 130-page answer to the SEC’s complaint, in which it accuses the agency of “twisting the facts” about its Kin token.  Check out this TechCrunch article for more details.

John Jenkins