January 28, 2021

Market Mania: All is Well!

I was hoping to punt coverage of the amateur trading insanity to John’s blog rotation next week, but it seems notable that the SEC’s Acting Chair Allison Herren Lee – along with Pete Driscoll, Director of the Division of Examinations, and Christian Sabella, Acting Director of the Division of Trading and Markets – issued this joint statement yesterday to say they’re on the case. Of course, the statement doesn’t name names, but it’s hard to think it’s referring to anything other than the out-of-this-world trading of GameStop and a few other companies, which has been the subject of at least 10 WSJ articles, an Elon Musk tweet and a Vox explainer in the past 24-48 hours.

GameStop’s stock triggered at least nine trading halts on Monday, according to Bloomberg News. It closed yesterday at $347.51, down slightly from its opening price but still more than a 1740% increase over the high-teens closing price of earlier this month. And while the company isn’t in passive index funds that track to the S&P 500, it is included in some retail exchange traded funds, so the trading is impacting more than just the company itself. Don’t worry, “All is well!

My favorite coverage so far has been from Matt Levine – here’s an excerpt from yesterday’s “Money Stuff” column:

You know who has a weird job right now? George Sherman. GameStop’s executives and board of directors don’t seem to have said much recently. What could they say? “Huh, nice that the stock’s up.” One important thing to remember is that while you and I and Reddit and Elon Musk can all treat GameStop’s stock as an absurd gambling token, a toy adrift on market sentiment far from any economic reality, it is still the stock of a company. The company’s executives still come to work each day and have to figure out what this all means. Does the price signal sent by the capital markets tell them something about how they should invest and what their hurdle rate for new projects should be? (Lol no.) Should they keep doing the stock buyback that they still have authorized? (Lol no.)

Should they sell a ton of stock to all these redditors who want it so badly? Yes, of course, absolutely, I said so on Monday, but it’s tricky. For one thing if they sell stock at the top they will surely get sued. For another thing, even at these prices, you want something sensible to do with the money; you can’t be like “we’re gonna sell a billion dollars of stock because we can, and use the money to pay ourselves bonuses and open some stores I guess?” Also, though, what is happening with their stock is a strange and for all anyone knows delicate piece of magic, and it’s very possible that filing to sell more stock would mess it up.[3] For technical reasons (more shares for short sellers to borrow), for fundamental reasons (dilution?), for anti-establishment resentment reasons (“ahh Wall Street is taking advantage of this rally for its own ends”) or for general emotional reasons (“man even GameStop is a seller at these prices”). I would not be especially surprised if GameStop announced a stock offering and the stock fell all the way back to, you know what I am not going to type a number here, but let’s just say a normal price.

GameStop actually does have a $100 million ATM offering going right now, under a Form S-3ASR that it filed in early December – or at least, it did have an ATM offering going at some point in the recent past, and it hasn’t reported whether all of that stock has been sold. If there’s still room under the program, theoretically it could hit the market at these wild valuations.

That could be a little more doable than, say, filing a pro supp right now and including disclosure that anyone who buys in the offering is nuts. Hertz tried that last summer when it was in bankruptcy and also trading at weirdly high values, and then quickly suspended the offering when the SEC Staff raised questions. Any other fast moves to capitalize on this could not only open the company up to potential shareholder litigation, but also leave it holding a big bag of cash that looks pretty attractive to activists if and when the stock falls back to Earth.

It’s hard to say which company will next catch the eye of the Reddit YOLO crowd – there are a few contenders already, which the SEC is probably watching. If these speculative frenzies continue, it can’t hurt to be prepared for the questions you’ll inevitably get as counsel. As a starting point, check out these MoFo FAQs on at-the-market offerings and Regulation M – and the other resources in our “Equity Offerings” Practice Area.

Avoid a “Semi-Hack”: Change Your URLs

Last week, as reported in the Financial Times, Intel released its earnings about 12 minutes earlier than planned due to some people getting early access to an infographic that described the quarterly results. Kudos to the company for acting quickly to address the issue – they were scheduled to put everything out right after market close, but instead reported at about 3:48 p.m.

As Byrne Hobart notes, what actually caused people to have early access to the infographic in this case was that they realized the URL for each quarter’s earnings followed a sequential pattern, and the infographic was posted live to that page before earnings were officially released:

Intel had an infographic for their Q3 earnings, in a file that ended with “Q3_2020_Infographic.pdf” and had a URL with a sequential numbering scheme. Q4’s earnings presentation had the same file naming scheme, so it was easy to guess.

This kind of thing happens from time to time, and it’s an interesting edge case in US securities law. Technically, the information wasn’t misappropriated; no one at Intel violated a duty to keep it confidential in exchange for some consideration from a trader. But in practice, the technicality matters less than appearances. Because it looks like insider trading, and fits the broad definition of hacking, trading based on the possession of this infographic is a poor risk-reward even if it turns out to be legal.

I personally love sequential URLs for their convenience. But I guess whatever technical securities law questions this type of scenario might raise, the practical takeaway is that the convenience isn’t worth it when it comes to posting material non-public information. Either keep your files gated until go-time, or change your URLs to gobbledygook.

January-February Issue: Deal Lawyers Newsletter

This January-February Issue of the Deal Lawyers newsletter was just posted – & also mailed (try a no-risk trial). It includes articles on:

– An Extraordinary Course: Important Lessons from the Delaware Court of Chancery Decision in AB Stable VIII v. MAPS Hotels

– Background of the Merger: Drafting Tips

– Investment Banker’s Valuation COVID-19 Initiatives

– Innovations in Transactional Law: Finding the Next Opportunities for Efficiency

Remember that you can also subscribe to our newsletters electronically – an option that many people are taking advantage of in the “remote work” environment. Also – as a “thank you” to those that subscribe to both & our Deal Lawyers print newsletter – we make all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.

And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.

Liz Dunshee