February 10, 2020

IPOs: A Fix for Section 11 Liability?

With D&O insurance premiums on the rise & more Section 11 suits being filed in plaintiff-friendly state courts, IPO companies and their directors & officers face an increasingly hostile environment.  This Wilson Sonsini memo points out that for some companies, a direct listing may provide a practical solution for avoiding Section 11 liability by making it impossible to satisfy the statutory requirement to trace the shares purchased to those sold in the offering. This excerpt explains why:

In a direct listing, no shares are sold by the company and therefore no capital is raised. Rather, a company files a registration statement solely to provide certain of its existing shareholders, such as early stage investors and employees, the ability to resell their shares directly to the public.

The existing shareholders include both those whose shares are registered pursuant to the company’s registration statement and those whose shares are exempt from the registration requirements of the securities laws. The shareholders have complete discretion about whether to sell their shares and all are equally able to sell shares upon the company’s direct listing – i.e., starting from the moment of the opening bell.

There are no initial allocations: any prospective purchaser can place orders with their broker of choice. Because both registered and unregistered shares are available for sale upon the company’s direct listing and the sales are conducted through anonymizing brokerage transactions, it is not possible for any purchaser to trace the particular shares she bought back to the registration statement covering the direct listing. Accordingly, no purchasers have standing to assert an offering claim under the ’33 Act.

Before we all get too carried away, the memo also points out that this is a fix that only works for those few cash-rich unicorns that don’t need to raise capital in an IPO. But the memo says there’s another potential fix that could work for the rest of the pack – with a little cooperation from their underwriters. How? Just tweak the shareholder lockups to allow some shares to be sold into the market in exempt transactions simultaneously with the IPO. That would also make tracing of shares to the IPO impossible. Well, at least until Blockchain ruins things for everybody. . .

Compliance Officers: NYC Bar Says It’s Time to Turn Down the Heat

As a former junior high school football coaching super-genius, I know I would’ve done things differently in the 4th quarter of the Super Bowl if I were coaching the 49ers instead of Kyle Shanahan. While “Monday Morning QBs” like me are merely obnoxious bores, Matt Kelly recently blogged about an NYC Bar Association report that says our regulatory counterparts cause big problems for corporate compliance officers:

The New York City Bar Association released a report on Tuesday warning that compliance officer liability continues to be a worrisome part of regulatory enforcement, and called for more guidance about when a compliance officer’s conduct can leave him or her in regulators’ crosshairs.

The report focused on compliance officers working in financial services firms, although compliance officers from any industry will appreciate the points raised. Its chief complaint is that compliance officers fear growing personal liability for failures of their firm’s compliance program, when those failures might be more due to insufficient budgets, weakly structured compliance roles, or management that just doesn’t care much about the importance of a strong compliance function.

The report also complained that enforcement actions against compliance officers suffer from hindsight bias. That is, compliance officers are supposed to implement programs “reasonably designed” to prevent violations, but you can’t really assess the quality of that effort until a violation has actually happened — which creates the risk that what seemed reasonable at the time will look unreasonable after something has gone wrong.

The report recommends that regulators take a number of actions designed to provide greater clarity to compliance officers concerning what’s expected of them, and Matt’s blog also notes that some heavy hitters in the financial services industry have endorsed the report’s recommendations.

ESG Investing: It’s a Woman’s World – And It May Stay That Way

This Fortune article says that while men dominate most areas of finance & investing, socially responsible investing is a field where women are clearly in command:

It was the usual setup for panelists at a finance conference talking about making smart investments. They were all the same gender. In this case, all women. That probably wasn’t surprising, considering the event was hosted by the United Nations-backed Principles for Responsible Investment. Still, Karine Hirn, founding partner at East Capital in Hong Kong, watched in admiration. She celebrated on Twitter: “Climate finance is at last opening up perspectives for great talent within the otherwise very unbalanced world of finance.”

Men rule that world, except for one key field: the fast-growing arena of what’s known by the shorthand ESG. There’s big money pouring in, and there are big names promoting the idea of applying environmental, social and governance standards to the business of making money.

As more money has been poured in to ESG investments, the field has attracted more men – but women may have a key advantage here: a substantial installed base of talent. Companies are fighting for ESG investing talent, and that battle favors those who’ve been involved for years – many of whom are women.

John Jenkins