Monthly Archives: November 2021

November 30, 2021

The SEC’s Capital-Raising Navigator

I often lament that one day the robots will be coming for my job (perhaps I watched a little too much Westworld), and we may just be a little bit closer with the SEC’s new exempt offering navigator. The Staff in the Office of the Advocate for Small Business Capital Formation has been doing a great job of expanding the resources available to small business seeking capital, and the navigator is one part of that effort. The capital-raising landscape for smaller companies can be daunting, with the patchwork of exempt offering alternatives making it difficult to figure out which exemption works best for a company’s needs. What the Staff has done with the navigator is to steer companies to the most relevant resources, based on answers to a series of straightforward questions.

The navigator pages are careful to note that the information provided is neither a legal interpretation nor a statement of SEC policy, and that if someone has questions, they should consult with an attorney who specializes in securities law. I think this sort of tool can be very helpful to inform entrepreneurs about their potential capital-raising paths so that they can have informed conversations with their lawyers when deciding how to raise capital. I encourage everyone to take a spin through the navigator today!

– Dave Lynn

November 30, 2021

Political Spending – The Latest CPA-Zicklin Index

It is hard to believe that the CPA-Zicklin Index is celebrating its ten-year anniversary. The index, which is a joint collaboration between the Center for Political Accountability (CPA) and The Carol and Lawrence Zicklin Center for Business Ethics Research at the Wharton School of the University of Pennsylvania, has been benchmarking political spending at the largest companies since the Supreme Court decided the Citizens United case in 2010. Today, the CPA-Zicklin Index benchmarks the political spending practices of the S&P 500 companies.

Some key trends from this year’s CPA-Zicklin Index are:

  • The number of S&P 500 companies with policies for general board oversight of political spending is 295, up 13.9 percent from 259 companies in 2020;
  • Companies with board committee review of direct political contributions and expenditures increased to 217 this year, up 9 percent from 199 in 2020;
  • Companies with board committee review of payments to trade associations and other tax-exempt groups increased to 196 companies this year, up 11.4 percent from 176 in 2020;
  • The number of companies that fully or partially disclosed their political spending in 2021 or that prohibited at least one type of spending is 370, representing over 75 percent of the S&P 500 companies evaluated and a record high since this tracking began;
  • The number of companies that fully or partially disclosed their political payments to state or local candidates or committees, or that prohibited them, was 334, another high;
  • The number of companies that disclosed some or all of their political spending was 293; and
  • The number of companies that prohibited direct donations to state and local candidates, political parties, and committees was 136.

The CPA-Zicklin Index also highlights some of the most-improved companies, as well as the companies that is considers “basement dwellers,” and includes some very insightful perspectives on the political spending environment today.

– Dave Lynn

November 30, 2021

A Useful Guide to Securities Class Action Litigation

One of the key risks that we often consider when addressing any disclosure or corporate governance issue is whether the outcome could expose the company and its officers and directors to securities class action litigation. My MoFo colleague Judson Lobdell recently published this very helpful Summary Guide to Securities Class Action Litigation, which does a great job of walking through the legal bases for such claims, the risk factors that can lead to litigation, and the action items that companies should prioritize both before and after the threat of litigation arises. This resource, along with many other related resources, are highlighted in MoFo’s Above Board resource center, which provides relevant resources that are specifically curated for directors and senior management.

– Dave Lynn

November 29, 2021

Nasdaq Proposes Rule Changes for SPACs Listing on the Nasdaq Global Market

Nasdaq is proposing to adopt alternative initial and continued listing requirements for SPACs listing on the Nasdaq Global Market. Nasdaq notes in its proposal that, historically, SPACs chose to list on the Nasdaq Capital Market instead of the Nasdaq Global Market, in part, because it had lower fees and lower initial distribution requirements; however, nothing in NASDAQ’s rules prohibits a SPAC from listing on the Nasdaq Global Market. The SEC’s recent actions on SPAC accounting have prompted some SPACs to seek to list on the Nasdaq Global Market, because, as a result of recent accounting changes, the SPACs no longer have sufficient equity to qualify for initial listing on the Nasdaq Capital Market.

The focus of the Nasdaq rule proposal is on Listing Rules 5405 and 5450, which require all companies (including SPACs) listing on the Nasdaq Global Market to have at least 400 round lot holders for initial listing and 400 total holders for continued listing, respectively. Nasdaq proposes to adopt alternative listing requirements that would allow SPACs to initially list their primary equity security (other than an ADR) on the Nasdaq Global Market with at least 300 round lot holders, and remain listed if they have at least 300 public stockholders, provided that they meet certain additional requirements for initial and continued listing. Nasdaq also proposes to adopt continued listing standards for SPACs that initially listed under the proposed alternative standard and align them with the proposed initial listing standards.

– Dave Lynn

November 29, 2021

A Pandemic Perspective: Whistleblower Complaints Explode

While we certainly had a lot to be thankful for over the Thanksgiving holiday, we also received the disturbing news that a new variant of COVID-19 named Omicron could dash our hopes for a return to “normal” anytime soon. I am beginning to question what “normal” is, and obviously the concept of “new normal” takes on a whole new meaning if we have to embrace another round of public health measures to combat the latest variant as we approach two full years into this global pandemic.

Among the many things that have not been normal throughout this pandemic has been the amount of whistleblower complaints. In this Cooley memo, a huge spike in whistleblower claims is noted on both sides of the Atlantic. In the US, the SEC reported that it paid out more in whistleblower awards in fiscal year 2021 than in all prior years combined since the whistleblower program began in 2011, while the trend in Europe was similar, with two notable whistleblower protection charities there reporting an increase of up to 40% in the number of whistleblowing complaints in 2020-21 when compared to previous years.

The memo notes:

COVID-19 itself is a major contributor to these growing whistleblower numbers. With many employees working from home, they may feel less connected to their employers and colleagues and more inclined to reach out to the authorities without first raising allegations to their employer (for example, by way of the confidential whistleblowing hotline maintained by the Financial Conduct Authority in the UK). In addition, whistleblowers may also find it easier to anonymously collect information relevant to their complaints when they have access to these materials from home.

We have been closely following the trends in whistleblower activity and you can expect a webcast on this topic early next year. Stay tuned for the announcement!

– Dave Lynn

November 29, 2021

Deep Dive with Dave: Keir Gumbs on Staff Legal Bulletin No. 14L

In this latest Deep Dive with Dave Podcast, Keir Gumbs from Broadridge Financial Solutions joins me to discuss the ins and outs of Staff Legal Bulletin No. 14L. As the shareholder proposal season goes into full swing, we talk about the Staff’s change to the approach on the “ordinary business” basis for exclusion and other notable guidance from the latest Staff Legal Bulletin.

– Dave Lynn

November 24, 2021

Ransomware: FBI Says Bad Guys Target Financings and M&A

The FBI issued a warning notification earlier this month that cyber-criminals were targeting companies engaged in significant financial transactions. Here’s the summary:

The FBI assesses ransomware actors are very likely using significant financial events, such as mergers and acquisitions, to target and leverage victim companies for ransomware infections. Prior to an attack, ransomware actors research publicly available information, such as a victim’s stock valuation, as well as material nonpublic information. If victims do not pay a ransom quickly, ransomware actors will threaten to disclose this information publicly, causing potential investor backlash.

This Dechert report on the FBI’s action says that companies engaging in IPOs or significant M&A transactions should not postpone security fixes their transactions are completed. Companies with major financial events on the horizon should be be particularly attentive to cybersecurity vulnerabilities, “including monitoring underground forums for stolen credentials.” The report says that the time period following closing of a merger is also perilous, and that cybersecurity processes and procedures should be aligned before the deal closes in order to reduce the risk.

John Jenkins

November 24, 2021

NFTs: Legal Checklist for Building an NFT Marketplace

Non-fungible tokens, or NFTs, are the latest craze to sweep the crypto world.  This Foley blog provides a legal checklist for parties who may be interested in creating a platform for monetizing artworks or other items through nonfungible tokens. Here’s an excerpt with some of the specific items that entrepreneurs need to keep in mind:

Formation: You’ll need to form a corporate entity before launching a marketplace. This will offer your business the most substantial liability protection, greater ability and credibility when seeking financing from external sources.

Conduct Code: Most NFTs, given the predominance of user-generated content and transactions in NFT marketplaces, include an extra layer of legal restrictions in the form of codes of conduct to govern interactions on the platform.

Smart Contracts: The unique digital creation must be independently identifiable, with ownership transferable within the smart contract. Creators should design-in the economics of trading: How much for a primary sale, how much for secondary sales, royalties, transaction costs and other features of the aftermarket to enable trading, with funds flowing to the appropriate parties by design.

Platform Terms of Service: NFT marketplaces must have essential documents such as Terms of Service, which govern the relationship between the NFT marketplace operator and customers, and between the buyers and sellers of the NFTs featured on the platform. A well-thought-out terms of service agreement can help protect your organization from various legal issues and generally have provisions limiting the company’s overall liability.

There are lots more where these came from, but I’ve got to admit, I’m still scratching my head about NFTs. After all, what’s the long-term investment value of “ownership” of a piece of digital art that a prankster can grab simply by right clicking?

John Jenkins

November 24, 2021

Wu-Tang Clan: DAO Snags O.G. NFT From DOJ!

When last we checked-in on The Wu-Tang Clan, the US Attorney for the EDNY had just announced the sale of the group’s “Once Upon a Time in Shaolin” album to an unidentified buyer.  Now, the NYT reports that the details of that transaction have been made public. By now, it won’t come as any surprise for those of you who’ve been following our reporting on The Wu-Tang Clan that there’s a crypto connection:

PleasrDAO, which took possession of the album on Sept. 10 and is keeping it in a “vault” somewhere in New York City, has decided to come forward, to celebrate its trophy and announce its goal to ultimately, somehow, make the album more widely available for fans to hear — if, that is, it can convince RZA, the Wu-Tang’s leader, and his fellow producer Cilvaringz to allow it.

PleasrDAO’s Jamis Johnson described the purchase as appealing to the group’s interest in acquiring signature items of digital culture, as well as to a wider mission that it shares with many cryptocurrency champions: prying artistic creations from an exploitative, antiquated economic system and offering the promise of a fairer one. “This album at its inception was a kind of protest against rent-seeking middlemen, people who are taking a cut away from the artist,” Mr. Johnson said in a video interview from his apartment in Brooklyn. “Crypto very much shares that same ethos.”

Although “Once Upon a Time” predates the recent craze for NFTs — “nonfungible tokens,” or digital items created using blockchain computer code, preventing them from being duplicated and allowing their provenance to be tracked — the group’s goal of recapturing the value of artistic scarcity in the digital age has led it to become seen as a kind of precursor. “The album itself is kind of the O.G. NFT,” said Mr. Johnson, 34, who was proudly sporting a Wu-Tang T-shirt.

For those of you who aren’t Wikipedia users crypto-savants like me, a DAO is a “decentralized autonomous organization,” which means “an organization represented by rules encoded as a computer program that is transparent, controlled by the organization members and not influenced by a central government. A DAO’s financial transaction record and program rules are maintained on a blockchain.” Yeah, that really didn’t clear things up for me – and neither did a visit to PleasrDAO’s website. But whatever they are, DAOs are definitely tres chic. That’s because the SEC issued a 21(a) report addressing the DAO structure in 2017, & as Dave recently blogged, the agency just brought an enforcement action against another DAO earlier this month.

Anyway, the New York Times says that PleasrDAO wants to release the album in some fashion to the public, but first they’ll need RZA & Cilveringz to sign-off on whatever they’re planning, because they inherited the contractual restrictions imposed on the original buyer, fraudster Martin Shkreli, which prohibit a public release of the album until 2103. Cilveringz is apparently game, but so far there’s no word from RZA, which means that the DAO’s plan to release the O.G. NFT that it acquired from the DOJ may be DOA.

We’re taking a break from blogging for the rest of the week. Happy Thanksgiving!

John Jenkins

November 23, 2021

SEC Enforcement: Actions Against Public Companies Decline in FY 2021

According to Cornerstone Research’s recent report on SEC enforcement activity, the number of actions against public companies declined during fiscal 2021. That marks the second year in a row that the number enforcement actions targeting public companies declined. Here are some of the highlights:

– The SEC filing 53 enforcement proceedings against public companies or their subsidiaries in fiscal 2021, nine fewer than in fiscal 2020 and the lowest level since fiscal 2014. The number of fiscal 2021 filings was 32% lower than the average over the past five fiscal years.

– Reporting and disclosure violations were the primary allegations in 51% of the cases filed during fiscal 2021. FCPA actions accounted for only 8% of the cases – the lowest level on record.

– The SEC noted cooperation in 58% of public company settlements in 2021, which is consistent with prior year averages. The median monetary settlement was $1 million, significantly below the $4 million median average for fiscal years 2012-2020.

– The number of settlements requiring admissions has declined from five in fiscal 2019 to two in fiscal 2020 and bottomed out at zero in fiscal 2021.

In evaluating the report’s conclusions, it’s worth noting – as the report points out – that a decline in enforcement actions against public companies is consistent with trends seen in prior years when there was a transition in SEC Chairs.

John Jenkins