The ongoing regulatory push and pull over digital tokens just took another strange turn. On Wednesday, the SEC announced that it had instituted administrative proceedings under Section 12(j) of the 1934 Act to halt the effectiveness of a Form 10 filed to register two tokens under Section 12(g) of the 1934 Act. The Form 10 that is the subject of the proceeding is one of a bizarre group of filings made by American CryptoFed DAO LLC.
As you may recall, Form 10 is a registration statement form that an issuer can use to, among other things, voluntarily register a class of equity securities under Section 12(g) of the 1934 Act, and it goes effective by lapse of time after 60 days. As with other registration statements, the Staff in Corp Fin reviews Form 10 registration statements; however, unlike 1933 Act registration statements such as Form S-1, the rules governing Form 10 do not provide for a “delaying amendment” that will delay the effectiveness of the registration statement until the Staff acts to accelerate the effectiveness. As a result, the Staff will typically request that an issuer withdraw the Form 10 prior to going effective and then refile the Form 10 when the issuer responds to the Staff’s comments.
American CryptoFed made a series of filings with the SEC beginning in mid-September 2021. It filed the Form 10 and a Form S-1, as well as several free writing prospectuses. The registration statements purport to register two digital tokens issued by American CryptoFed – called the “Ducat” and “Locke” tokens. Both registrations statements state the nonsensical notion that the issuer is registering the tokens with the SEC as utility tokens, not as securities. The Form 10 also addresses how the issuer intends, upon effectiveness of the Form 10, to distribute one of the tokens to a variety of entities through a registration statement on Form S-8. The disclosure in the Form 10 opens with the statement:
American CryptoFed DAO, LLC (“CryptoFed”) agrees with commissioner Hester M. Peirce of U.S. Securities and Exchange Commission (SEC) that the SEC is a “disclosure regulator, rather than a more interventionist merit regulator.” “The SEC’s Division of Corporation Finance may examine a company’s registration statement to determine whether it complies with our disclosure requirements. But the SEC does not evaluate the merits of offerings, nor do we determine if the securities offered are “good” investments.” [footnotes omitted]
According to the SEC’s order, the Corp Fin Staff spoke with the issuer about the Form 10 on October 4, advising the issuer that there were serious deficiencies with the filings. On October 6, 2021, American CryptoFed filed a document that purported to be an amended Form 10, consisting of a cover page and several paragraphs asserting that the Ducat and Locke tokens were not securities. “Bedbug” letters on the Form 10 and the Form S-1 were sent on October 8. The Form 10 was not withdrawn, and as a result it would have gone effective on Monday, November 15 absent the Commission’s action. The SEC notes in the order instituting the Section 12(j) proceedings that because the Form S-1 contains a delaying amendment, the Commission was not instituting proceedings with respect to that registration statement.
The SEC alleges that the Form 10 fails to contain many of the disclosures required by the form (such as financial statements, MD&A, description of business, description of securities, beneficial ownership), and included materially misleading information concerning the issuer’s intended distribution of the Locke token using Form S-8.
The effectiveness of the Form 10 is stayed pending the proceedings, and the case will be assigned for a hearing by an SEC administrative law judge.
The SEC announced that its Small Business Advisory Committee will meet on November 16 and it will “explore ways to foster entrepreneurship and capital access in rural and under-resourced areas.” The agenda for the meeting notes that the Committee will host several presentations and panel discussions on capital access issues, as well as programs that could be used by those in rural and under-resourced areas.
The Committee will also get a demo of the SEC’s new Capital Raising digital hub, which is designed to “help users narrow down their options for how to raise capital based on their expressed needs.” I always say that one day the robots will come for my job, and perhaps this new digital hub is the first step.
The bizarre American CryptoFed filings and the Small Business Advisory Committee’s agenda for next week’s meeting got me thinking about the multitude of challenges that some issuers face when seeking to raise capital. I am co-teaching a course on 1933 Act exemptions called “Beyond the IPO” at Georgetown Law this semester, and trying to explain the exempt offering landscape to law students one night a week for thirteen weeks is a good reminder of just how complex the system can be for someone who is not steeped in the finer points of the securities laws.
Those of us who have been at this for a while can sometimes take it for granted that we have a good understanding of the inner workings of the SEC, while others who are either advisers or issuers that do not live and breathe this stuff can often see the SEC as a “black box” and the capital-raising regulations as a maze of traps for the unwary. It has always been this concern – the fact that sometimes the knowledge and understanding of the intricacies of the securities laws and the operation of the SEC can be held by a select few, while others face more challenges in navigating the system – that has driven me to try to freely share all of the knowledge and experience that I have gained, through this site in particular, and through other publications, public speaking, professional organizations and teaching. I believe that is the least I can do to try to promote fair access to capital while acknowledging the difficult task that the SEC has in maintaining an effective regulatory approach that protects investors while promoting capital formation.
On this Veteran’s Day, it is important to honor the service of military veterans who have made many sacrifices to protect us and our way of life. I am so grateful for their service to our country and I am glad that we have this holiday to remind us of their contributions.
An important element in honoring our veterans is considering the contributions they make to our economy and society after the conclusion of their military service. Some veterans elect to continue their public service in positions as first responders or in government roles, while others enter the private sector. As such, military veterans make up a critically important part of our workforce in this country.
With the SEC’s recent amendments to Item 101 of Regulation S-K requiring disclosure about human capital resources, we now have a glimpse into how companies support their employees who are military veterans. Many companies disclose that they have internal employee resource or inclusion groups that are dedicated to military veterans. The groups are often dedicated to supporting the attraction, development and retention of talent, provide professional and leadership opportunities, and support community and business efforts within the company. Some companies, such as JPMorgan Chase & Co., actually provide statistics on the percentage of its worldwide employees that are military veterans (3%). We will likely see this type of disclosure continue to evolve over time, as companies consider how to effectively describe their workforce and how that workforce is developed and supported.
Today, let’s not forget to show our gratitude to our nation’s veterans for all of the important work that they do in the military and when they go on to become our colleagues in the workforce.
Yesterday, the SEC posted a notice indicating that it will consider two rulemaking actions at an open meeting next Wednesday. The Commission will consider whether to adopt amendments to the proxy rules relating to the use of universal proxy cards, and will consider whether to propose amendments to the proxy rules governing proxy voting advice by the proxy advisory firms.
The universal proxy rulemaking has been dragging on for quite some time. The rule changes were originally proposed in 2016, and then the comment period was reopened in April of this year. The rules regarding proxy voting advice were on a much faster track (although they were a long time in coming), given that they were proposed in 2019, adopted in 2020, and then subject to reconsideration this year.
With these actions now on the calendar, it seems that the SEC rulemaking floodgates are starting to open, and we should no doubt see quite a bit of activity in the coming months.
In the latest Deep Dive with Dave podcast, I speak with David Hamm from Summit Materials about a podcast he has recently launched, Conversations with GCs.
As we have previously reported, over the past few months companies across a wide range industries have been receiving comments from the Corp Fin Staff that are focused on climate change disclosure. In September, the Staff published a sample comment letter highlighting its comments on climate change disclosure. Now that companies have had a chance to respond to the initial round of comments and the Staff has had time to consider those responses, we are now seeing round 2 of the climate change comment letters.
Comments in the first round of letters asked questions focusing on a company’s materiality analysis with respect to information about climate change, harkening back to the SEC’s 2010 climate change disclosure guidance. In round 2, the Staff is generally digging deeper into a company’s materiality analysis, asking for additional details on the company’s determination that disclosure of climate change matters was not material. In some cases, the follow-up comments request more quantitative information from companies in support of the materiality determination. Some companies and practitioners have been surprised by this approach, noting that the Staff has in the past been more deferential to a company’s conclusions as to materiality.
It is obvious from these round 2 comment letters that the Staff is not going to “let it go” when it comes to climate change, and additional work will be necessary to justify for the Staff why climate-related disclosure was not included in the periodic reports that the Staff has reviewed. Areas of focus in the round 2 comments letters appear to be:
More information concerning disclosure decisions with respect to specific transition risks related to climate change that are relevant to a company’s business and operations;
Considerations made in determining whether to disclose the direct and indirect consequences of climate-related regulations or business trends;
The existence (or nonexistence) of material capital expenditures for climate-related purposes, and how that materiality decision was made;
Consideration of the impact of weather-related events on a company’s results of operations and financial condition; and
The quantification of material compliance costs associated with climate change.
We expect that with climate change disclosure rules just around the corner, the Staff has an incentive to continue to press for more information through the comment process. The round 2 comment letters that we have seen appear to be focusing mostly on asking for additional information and analysis, rather than requesting specific disclosures in the future, or seeking amendments to prior periodic reports.
The Staff’s ongoing climate change disclosure review project often raises the question: what should companies do going into the Form 10-K season knowing what areas the Staff has focused on in the comment process? My advice has generally been “stay the course.” Unless you are a recipient of a one of the Staff’s climate change comments letters – in which case the outcome may depend on the ultimate resolution of those comments – now is probably not the best time to completely revamp your climate-related disclosure in the Form 10-K.
As had been the case before the Staff’s review project got under way, it is critically important to consider the SEC’s 2010 guidance when preparing your disclosures, and it may be appropriate to take extra steps this year to document and “pressure test” your materiality analysis when considering that guidance. Further, it is always helpful to draw on your engagement efforts to understand what information investors are interested in seeing, so that you can consider that input when preparing the Form 10-K and proxy statement.
We will undoubtedly see rule proposals regarding climate change risks in the near term, and when those rules are ultimately adopted, it will then be appropriate to reconsider your disclosure approach in light of those more specific disclosure requirements.
As the proxy season fast approaches, be sure to keep up with the latest developments covered in our Proxy Season Blog. For example, Emily recently highlighted the best practice takeaways from Broadridge’s 2022 proxy design library. If you do not have access to the Proxy Season Blog, subscribe today!
Yesterday, the SEC announced the appointments of Erica Y. Williams as Chairperson and Christina Ho, Kara M. Stein, and Anthony (Tony) C. Thompson as Board members of the PCAOB. The SEC stated that Duane DesParte will continue to serve as a Board member and will remain Acting Chairperson until Erica Williams is sworn in.
Under the Sarbanes-Oxley Act, the SEC has the authority to select the members and the Chairperson of the Board of the PCAOB. As John noted earlier this year, the SEC announced that it had removed PCAOB Chair William Duhnke and had designated Duane DesParte to serve as acting Chair. At the same time, the SEC announced that it was seeking candidates to replace all five current members of the PCAOB Board.
Williams is a partner at Kirkland & Ellis LLP and had previously served in various roles at the SEC and as Special Assistant and Associate Counsel to President Obama.
Ho has held positions with the Treasury Department, University of Maryland, Deloitte & Touche LLP and Elder Research.
Stein served as a Commissioner of the SEC from 2013 to 2019, and has also had roles at the University of Pennsylvania Carey Law School, the Center on Innovation at University of California Hastings Law and on the Hill.
Thompson currently serves as the Executive Director and Chief Administrative Officer of the CFTC, has served in other federal government positions and is an Air Force veteran.
Commissioners Peirce and Roisman, who had expressed concern with the firing of the PCAOB Board back in June, issued a statement expressing support for the new Board.