Monthly Archives: September 2021

September 21, 2021

Direct Listings: 9th Cir Says Purchasers May Bring Section 11 Claims

Some commenters have suggested that one of the advantages of a direct listing might be the ability to insulate companies & other potential IPO defendants from Section 11 liability by making it impossible to satisfy the statutory requirement to trace the shares purchased to those sold in the offering. Last year, a California federal court rejected that argument and the 9th Circuit has affirmed the lower court’s ruling.

Section 11 provides that if the registration statement for a security contains an untrue statement or omission, any person acquiring “such security” may bring an action against the parties enumerated in the statute. Courts have generally interpreted the “such security” language to mean the securities issued under the particular registration statement, and have thus imposed an obligation on plaintiffs to “trace” their securities to those issued in the offering.

In Pirani v. Slack Technologies, (9th Cir.; 9/21), the 9th Circuit observed that the case involved an issue of first impression – “what does ‘such security’ mean under Section 11 in the context of a direct listing, where only one registration statement exists, and where registered and unregistered securities are offered to the public at the same time, based on the existence of that one registration statement?” It concluded that the term encompassed both the securities that were registered in connection with the direct listing and those that were unregistered:

Slack’s unregistered shares sold in a direct listing are “such securities” within the meaning of Section 11 because their public sale cannot occur without the only operative registration in existence. Any person who acquired Slack shares through its direct listing could do so only because of the effectiveness of its registration statement. Because this case involves only one registration statement, it does not present the traceability problem identified by this court in cases with successive registrations. . . All of Slack’s shares sold in this direct listing, whether labeled as registered or unregistered, can be traced to that one registration.

In her Twitter thread about the decision, Prof. Ann Lipton suggests that the case could have implications for Section 11 claims that go beyond direct listings. For instance, she says that “the same logic could equally be applied to companies that release shares from lockup early; those shares, too, are only trading on the exchange because of the earlier-filed registration statement.”

John Jenkins

September 21, 2021

Enforcement: The SEC’s First Crowdfunding Case Targets a Portal

A few months ago, I blogged about a recent study suggesting that there was an epidemic of non-compliance when it came to crowdfunded offerings. So, maybe it isn’t surprising that in its first Regulation Crowdfunding enforcement proceeding, the SEC’s Division of Enforcement targeted not only alleged fraudsters, but a crowdfunding portal that the SEC claims ignored “red flags” and otherwise failed to comply with its obligations to protect investors. Here’s an excerpt from the SEC’s press release:

According to the SEC’s complaint, Robert Shumake, alongside associates Nicole Birch and Willard Jackson, conducted fraudulent and unregistered crowdfunding offerings through two cannabis and hemp companies, Transatlantic Real Estate LLC and 420 Real Estate LLC. Shumake, with assistance from Birch and Jackson, allegedly hid his involvement in the offerings from the public out of concern that his prior criminal conviction could deter prospective investors. The complaint alleges that Shumake and Birch raised $1,020,100 from retail investors through Transatlantic Real Estate, and Shumake and Jackson raised $888,180 through 420 Real Estate. Shumake, Birch, and Jackson allegedly diverted investor funds for personal use rather than using the funds for the purposes disclosed to investors.

As alleged, TruCrowd Inc., a registered funding portal, and its CEO, Vincent Petrescu, hosted the Transatlantic Real Estate and 420 Real Estate offerings on TruCrowd’s platform. Petrescu allegedly failed to address red flags including Shumake’s criminal history and involvement in the crowdfunding offerings, and otherwise failed to reduce the risk of fraud to investors.

In its complaint filed with a Michigan federal court, the SEC contends that portal’s alleged shortcomings violated Section 4A(a)(5) of the Securities Act and Rule 301(c)(2) thereunder, which obligates an intermediary to deny access to its platform if the intermediary “has a reasonable basis for believing that the issuer or the offering presents the potential for fraud or otherwise raises concerns about investor protection.”

John Jenkins

September 21, 2021

Tomorrow’s Webcast: “Navigating De-SPACs in Heavy Seas” – FREE Bonus for Members

The boom in SPAC IPOs has left hundreds of newly-public buyers flush with cash and chasing De-SPAC mergers before the clock strikes midnight – but competition for deals is fierce and regulators are ramping up their scrutiny of SPAC deals.  Tune in tomorrow for the webcast – “Navigating De-SPACs in Heavy Seas” –  to hear Erin Cahill of PwC, Bill Demers of POINT BioPharma, Reid Hooper of Cooley and Jay Knight of Bass Berry discuss the key issues facing SPACs as they seek to complete their de-SPAC transactions in this challenging environment.

Yes, you read that correctly – this is a webcast hosted by, but we’re also offering it without any additional charge as a bonus for our members!

If you attend the live version of this 60-minute program, CLE credit will be available. You just need to submit your state and license number and complete the prompts during the program.

John Jenkins

September 20, 2021

Narcissistic CEOs: Oversized Egos Produce Oversized Deals

In what may be the least surprising finding by a study since the one that concluded that people are happier on the weekend, researchers recently found that more narcissistic CEOs like to “go big or go home” when it comes to M&A. Here’s an excerpt:

We find that highly narcissistic CEOs spend more money on corporate acquisitions than less narcissistic CEOs and that highly narcissistic CEOs favor size over quantity when making corporate acquisitions. Furthermore, we find that such irrational focus on size over quantity is penalized by the stock market. Our findings are based on UK non-financial firms and contribute to the existing literature by investigating preferences of narcissistic CEOs in the corporate acquisition arena and the stock market’s reactions to such preferences.

I guess one question you might have is exactly how these folks decided how narcissistic a particular CEO was? It turns out the answer is based on three little words – “I, me, mine.” The primary indicator that the study used for narcissism was how many times the CEO used first person singular pronouns in quarterly earnings conferences.

John Jenkins

September 20, 2021

IPOs: “ESG” is the Magic Word for Better Pricing

Speaking of word choices, it turns out that there’s a magical incantation for better IPO pricing, and this Mayer Brown blog reports that a recent study says it’s “ESG”:

Alessandro Fenili and Carlo Raimondo, in their study and paper ESG and the Pricing of IPOs: Does Sustainability Matter, find a significant relationship between a discussion of ESG related issues and IPO pricing. They performed textual analyses of 783 US IPOs completed during the period from 2012 through 2019 across various industries.

Given investor interest in sustainability and ESG in their investment decisions, the study focuses on the amount of information about sustainability disclosed by IPO issuers. In order to assess IPO disclosures, the study considered a list of words that were associated with ESG topics. Then, they performed textual and other analyses on the IPO prospectuses. A large increase in the number of ESG “words” in the IPO prospectuses was found to lead to reduced information asymmetry (investors have better information on which to base their investment decision regarding the IPO issuer’s ESG focus) and to less IPO underpricing.

The blog says that the study provides evidence of a strong association between ESG disclosure during an IPO and less IPO underpricing and more accurate evaluation by investors of the IPO issuer’s valuation.

Wow, so that’s all it takes? I bet there are a lot of unicorns feeling kind of silly now about wasting their time writing founders letters and over-the-top mission statements for their S-1s. I’m not sure how everyone will use these findings, but I’ve spent enough time working with investment banks to be pretty confident in my prediction that the next coal mining or fracking company prospectus you pick up will be chock full of ESG-related jargon. If you don’t believe me, just remember, these are the folks who turned cab dispatchers and commercial real estate businesses into tech companies through the power of bankerspeak.

Once again, the English philosopher Bishop Berkeley nailed it several centuries ago – “to be is to be perceived.”

John Jenkins

September 20, 2021

Lawyer Nightmares: CIK Number Change Results in 12(j) Proceeding

Here’s the scenario: a company moved to Canada and changed its name, and when it did so, it mistakenly changed its CIK number with the SEC. As a quick trip to the Edgar page on the SEC’s website will inform you, that “Central Index Key” number is used to identify corporations and individual people who have filed disclosure with the SEC. You aren’t supposed to change your CIK for a name or address change, but hey, what’s the worst that could happen? How about the SEC instituting a Section 12(j) proceeding seeking to involuntarily deregister your securities:

On September 22, 2020, the Commission issued an order instituting an administrative proceeding (“OIP”) against STRATABASE under Section 12(j) of the Securities Exchange Act of 1934.1 The OIP alleged that STRATABASE had violated periodic reporting requirements and sought to determine, based on those allegations, whether it was “necessary and appropriate for the protection of investors to suspend . . . or revoke the registration” of STRATABASE’s securities.

On June 21, 2021, the Division of Enforcement moved to dismiss this proceeding. The Division states that, on June 9, 2021, it spoke with counsel for Strata Power Corporation, the successor to STRATABASE. The Division states that it subsequently confirmed the following representations made during that conversation by counsel for Strata Power Corporation: (i) that when STRATABASE changed its name after moving to Canada in 2004, it also inadvertently changed CIK numbers; and (ii) that Strata Power Corporation was up to date in its periodic filings at the time that this proceeding was instituted and remains current.

Fortunately, the SEC granted the Division’s motion to dismiss, but can you imagine being the poor lawyer who received notice of the institution of this proceeding?

John Jenkins

September 17, 2021

New Podcast: Jolie Yang on “Working in Fintech”

We’re regularly posting new podcasts for members. In this 11-minute podcast, Jolie Yang – Corporate Counsel at Coinbase – talks with me about her journey from BigLaw to Fintech. We discuss:

1. How it feels coming from established BigLaw firms to a high-profile, newly public company where things might move more quickly and processes might still be getting worked out

2. Advice for other in-house folks whose companies might be considering going public via a direct listing

3. What’s it like being a securities lawyer in an industry that’s innovating and disrupting the very definition of “securities”

4. One thing that more “traditional” securities lawyers would benefit from understanding about crypto and fintech

Liz Dunshee

September 17, 2021

SEC Whistleblowers: New $110 Million Award Pushes Total Payouts Over $1 Billion

Lynn predicted several months ago that this would be the year that the SEC would surpass the $1 billion mark for lifetime awards under its whistleblower program. That happened on Wednesday, when the SEC announced its second-highest award in the history of the program – $110 million! – along with a $4 million award.

The SEC’s press release recaps how many payouts there have been since the whistleblower program started – and where the money comes from:

The SEC has awarded approximately $1 billion to 207 individuals since issuing its first award in 2012. All payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators. No money has been taken or withheld from harmed investors to pay whistleblower awards. Whistleblowers may be eligible for an award when they voluntarily provide the SEC with original, timely, and credible information that leads to a successful enforcement action. Whistleblower awards can range from 10-30% of the money collected when the monetary sanctions exceed $1 million.

This Compliance Week article says that over $500 million has been awarded this fiscal year alone, on top of $175 in fiscal 2020! The Commission is on a roll, and as this Arnold & Porter memo explains, Chair Gensler has signaled that he may unwind the limitations on whistleblower awards that were put in place during the prior administration. I blogged when those rules were adopted that they were somewhat controversial.

The biggest award ever happened in October last year, in the amount of $114 million. Of course, we never know for sure who these payments are made to or what allegations are involved, but the order says that the big winner here contributed significant independent information that raised a strong inference of securities law violations, and suffered significant hardships because of it. I blogged earlier this year about what companies can do to prepare for the possibility of a whistleblower.

Liz Dunshee

September 17, 2021

Transcript: “Newly Public – Building Reporting & Governance Functions”

The transcript from our recent webcast – “Newly Public: Building Reporting & Governance Functions” – is now available to our members. This webcast was full of practical tips for anyone preparing for or recently emerging from an IPO – or considering a move to a company that’s preparing to go public. Fenwick’s Dave Bell, National Vision’s Jared Brandman, Vontier’s Courtney Kamlet and DocuSign’s Trâm Phi discussed:

1. IPO Backstories

2. Why Advance IPO Planning is Required

3. Identifying Responsibilities

4. Setting Cost Expectations

5. Engaging Service Providers

6. Setting Timetables

7. Establishing Director Relationships & Expectations

8. Determining Your Disclosure Style

9. Cultural Transition

10. How Outside Counsel & Peers Can Help

Liz Dunshee

September 15, 2021

Human Capital: Sample “Talent Management” Form 10-K Disclosures

SEC Chair Gary Gensler testified yesterday before the Senate Committee on Banking, Housing and Urban Affairs. Here are his prepared remarks – and here’s the 2-hour C-SPAN video.

Chair Gensler covered human capital disclosures as well as cybersecurity, climate risk, SPACs, China-based companies, Rule 10b5-1, crypto and more. As regular readers of this blog know, Chair Gensler has initiated projects on all of those topics and various remarks have suggested that he is in the “cryptocurrency is a security” camp.

Yesterday’s testimony reinforces the expectation that we’ll see proposed rulemaking for additional human capital disclosure, on top of the incremental disclosure requirements that were adopted late last year. What are companies doing so far in response to those 2020 amendments? This DFIN memo highlights recent Form 10-K disclosure from three companies about the specific topics of employee turnover & talent management. Here are some takeaways from the samples:

ConocoPhillips included an employee demographics table. It showed the percentage of male & female employees, and the percentage of “person of color” and non-POC employees, in the categories of all employees, all leadership, top leadership and junior leadership. The company committed to publicly disclose its next Consolidated EEO-1 Report (which is now available on the company’s Diversity & Inclusion page).

Cummins disclosed that its Board “recast our Compensation Committee as the Talent Management & Compensation Committee to reflect the Board’s commitment to overseeing and providing guidance to our leadership team in this important work.

Signet Jewelers also added “Human Capital Management” to the title of its Compensation Committee, and described the board’s oversight role on those activities.

At our “Proxy Disclosure & Executive Compensation Conferences” – coming up virtually on October 13th – 15th – we’ll be covering new expectations for human capital management and diversity & inclusion, Form 10-K disclosures, and how to effectively share your progress. Check out the full agenda – 17 panels over 3 days. Register today so that you’re armed with these insights as you head into the 2022 proxy season! Members of our sites can attend for a discounted rate!

Liz Dunshee