If you’ve worked on more than a handful of private placements over the years, you know that in many situations, issuers opt not to file a Form D with the SEC. I’ve heard a lot of reasons for that over the years, most of which seem to be one version or another of, “well, it’s not a condition of the exemption . . .” followed by some kind of mutterings about confidentiality or concerns about sharing information with the “gubmint.” However, Keith Bishop recently blogged about a new study that suggests another reason why issuers so often don’t file a Form D – the desire to avoid “patent trolls.” Here’s the abstract:
We document that the majority of venture-capital backed financing rounds are not accompanied by a Form D filing. We show that filing behavior is predictable and is related to both the ability to fly below the radar and the benefits of withholding information. Financing rounds that are harder to hide, larger offerings and those previously covered by media, are more likely file a Form D while financing rounds by firms with greater proprietary information, early stage firms or companies in biotech, pharmaceutical, and high tech industries, are less likely to file a Form D.
We document one adverse outcome to the filing of a Form D, patent litigation, and show that protection from this type of litigation through the enactment of anti-patent trolling laws subsequently increases the rate of filing. Firms are less likely to file a Form D once the form is required to be filed on Edgar. Finally, we note that reliance on Regulation D is stronger as the firm nears an exit from the private market. Our results suggests that some firms view even minimal disclosure and regulatory oversight as costly.
Keith points out that one of the authors’ conclusions is that the Form D filing rate among California issuers is particularly low, and that these issuers typically don’t file a limited exemption notice filing at the state level either – which the authors suggest means that at least some issuers may be relying on Reg D as an exemption but not filing the form to ensure their privacy.
If you’re considering not making a Reg D filing, bear in mind a few cautionary points. First, although Securities Act Rules CDI Question 257.07 says that a Form D filing isn’t a condition of the exemption, it is still required by Rule 503. In addition, Rule 507 provides that failure to file a Form D may form the basis for disqualifying an issuer from using the exemption in the future. In addition to potential SEC enforcement proceedings, some states may get their noses out of joint if a state Form D isn’t filed and pursue enforcement actions of their own unless you’ve scoped out a non-filing exemption that you can hang your hat on.
The SEC and other regulators have taken a lot of heat for their approach to cryptocurrency regulation, with the SEC in particular being singled out by various crypto-evangelists for its allegedly unreasonably antagonistic approach to regulating digital assets & alleged reliance upon regulation by enforcement.
The crypto industry & its advocates complain that the SEC’s approach stifles innovation, but this FT Alphaville blog says that by being fuddy-duddies, the SEC & other regulators may have helped prevent the crypto meltdown from turning into a 2008-style financial crisis. The Financial Times doesn’t like it when people excerpt its stuff, so you’ll have to read the blog yourself – but it says that the burden isn’t on regulators to accommodate crypto, but on crypto advocates to prove their vaunted tech is more than just tulips & vaporware.
The blog lauds US regulators for their surprising effectiveness at curtailing crypto’s growth and preventing the ongoing crypto meltdown from spreading its contagion to the broader financial system – noting that even at the peak of crypto mania last year, the entire “value” of bitcoin was a mere drop in the bucket of the overall US capital markets.
In January, the Delaware Chancery Court dropped a bit of a bombshell on Corporate America when it refused to dismissCaremark claims against a former McDonald’s officer premised on failures of oversight that resulted in a corporate culture that condoned sexual harassment and misconduct. The plaintiffs also asserted Caremark claims premised on the same alleged oversight failures against McDonald’s current and former directors, but last week, Vice Chancellor Laster dismissed those claims. This excerpt from Fried Frank’s memo on the decision lays out some of the key takeaways:
On the one hand, McDonald’s appears to expand the potential for Caremark liability beyond the parameters many legal analysts had understood to apply. In the two decisions issued in the case, the court has articulated or clarified, for the first time, that: (i) Caremark duties of oversight apply not only to directors but also to officers; (ii) Caremark duties apply not only to a company’s “mission critical risks” but, depending on the facts, may apply to other key risks even if not rising to the level of “mission critical”; and (iii) sexual harassment and similar issues—and, indeed, “maintaining workplace safety” and “tak[ing] care of the corporation’s workers”—are mission critical risks for companies.
On the other hand, however—and perhaps most importantly as a practical matter— McDonald’s reinforces that there is a high bar to a finding of Caremark liability. The court emphasized that it is only when directors or officers act in bad faith that Caremark liability arises. The court stressed that directors or officers who acted to address a problem of corporate misconduct once they learned of it generally would not be deemed to have acted in bad faith, even if the actions they took were insufficient or reflected poor decision-making (so long as they were not so off the mark as to suggest bad faith).
The memo says that this decision is not inconsistent with the prior decision involving the McDonald’s officer because unlike the corporate officer, the directors took action to address the company’s sexual harassment problem when they were made aware of it. Kevin LaCroix weighed-in on this decision this morning on The D&O Diary, and you should be sure to check out his commentary as well.
Many commenters expressed concern about the implications of the earlier decision, particularly the expansion of Caremark beyond oversight of existential risks. UCLA’s Stephen Bainbridge – who has always been dubious of Caremark – has some insightful & colorful thoughts on that decision as well as this one. Prof. Bainbridge gets a lot of points from me for mentioning Arch Oboler, one of the truly great writers of the radio era and a guy to whom I think shows like HBO’s “True Detective” owe an unacknowledged debt.
In one of its more recent rounds of corporate criminal enforcement guidance, the DOJ noted that in assessing the effectiveness of corporate compliance programs, “prosecutors should consider whether the corporation has implemented effective policies and procedures governing the use of personal devices and third-party messaging platforms to ensure that business-related electronic data and communications are preserved.”
This Perkins Coie memo follows up on the DOJ’s guidance and suggests some practice pointers when it comes to personal device policies for corporate directors. This excerpt addresses some key points to consider in implementing such a policy:
1. A plain English policy on devices. First, a policy is a must. The DOJ’s guidance specifically tells prosecutors that a company should be examined to see if it had—and was effectively implementing—policies and procedures about the use of personal devices.
If I am a director, I want to see a policy written in plain English so I can tell my chief compliance officer and general counsel that I could understand it. And as a GC, I want to make sure that the author has drafted it in truly plain English.
2. Data access, not ownership. The company probably doesn’t want to own my device and all the data on it. However, it does want to have reasonable access to my device for appropriate purposes, including assistance with any future investigations.
In some instances, I’m fine owning my own cellphone. Some companies will want to give me a phone with a request that I use it only for corporate business. This is normal; I will respect any requested limits of use on that company phone. In either case, I want to make sure that I’m maintaining the data in a way that follows the policy.
For example, if I’m using a messaging program, my company may tell me to limit my communications to business matters and send messages solely on an approved platform that enables retention of the messages. I won’t be permitted to use non-approved messaging channels to send business-related messages.
The memo also emphasizes the importance of appropriate training, board oversight and the need to keep an eye on how state privacy laws continue to evolve. In particular, the memo points out that the California Privacy Act will soon require companies to identify personal or personally identifiable information and be able to separate such information from business records.
Check out the latest edition of our “Timely Takes” Podcast featuring my interview with Orrick’s J.T. Ho on the Staff’s comments on board risk oversight disclosure. These podcasts are intended to provide a forum through which experts can share their views on recent developments or emerging trends that we think our members would be interested in learning more about. In this 20-minute podcast, J.T. addressed the following topics:
– Background of Item 407(h)’s board risk oversight disclosure requirement
– Reasons for the Staff’s focus on board risk oversight disclosures
– Do the Staff’s comments reflect its view that there’s a “right way” to do board risk oversight?
– Key takeaways for boards and their advisors
While we’re on the topic of risk oversight, be sure to check out our March 21st webcast – “Managing Enterprise-Wide Risks: The Intersection of ERM & Legal” – where our expert panelists (including J.T.) will address how companies are dealing with the increasing demands for enhanced oversight.
If you have insights on a securities law, capital markets or corporate governance trend or development that you’d like to share, I’m all ears – just shoot me an email at john@thecorporatecounsel.net.
Many Delaware companies are considering asking stockholders to approve officer exculpation charter amendments this proxy season. If you’re working with one of them, be sure to check out this Freshfields blog, which reviews how these amendment proposals have fared with stockholders and proxy advisors and addresses several other matters that should be considered by boards thinking about officer exculpation amendments.
Overall, these proposals have been well received by stockholders. Of the 14 submitted to stockholders so far for which results were disclosed, only three failed – and two of those involved companies that required supermajorities to adopt charter amendments. This excerpt indicates that one reason for this success may be how proxy advisors, and ISS in particular, have responded to these proposals.
Of the 15 companies, ISS recommended FOR the proposals at all companies except for two companies. Both of the AGAINST recommendations involved unusual facts. The first of these two companies did not release a proxy statement (or disclose results) and ISS recommended against all proposals on the ballot. The other was holding a meeting to vote on its de-SPAC transaction, which ISS opposed along with every other proposal on the agenda for the meeting.
For the remaining 13 companies, ISS recommended FOR the exculpation amendment proposal each time. This group that garnered ISS endorsements for their exculpation amendment proposals included companies with less than perfect records on governance and even some where ISS was recommending against the company’s director nominees and/or say-on-pay proposals.
The blog notes that while ISS’s voting guidelines provide that its recommendations on exculpation proposals will be made on a case-by-case basis, taking into account the stated rationale for the vote, in practice, it has generally been supportive of officer exculpation proposals. Glass-Lewis’s voting guidelines appear less accommodating toward officer exculpation that ISS’s. However, the blog says that the high level of support for these proposals suggests that if Glass-Lewis is recommending against them, those recommendations aren’t having much influence on the outcome of the vote.
I think Broc – who is the biggest basketball fan I know – would be annoyed with me if I let the SEC’s recent anti-touting enforcement action against former Celtics star Paul Pierce pass without a mention on this blog. The SEC’s order in this settled proceeding alleges that Pierce’s promotional activities for EMAX tokens ran afoul of Section 17(b) of the Securities Act’s prohibition on touting. Here’s an excerpt from the SEC’s press release:
The SEC’s order finds that Pierce failed to disclose that he was paid more than $244,000 worth of EMAX tokens to promote the tokens on Twitter. The SEC’s order also finds that Pierce tweeted misleading statements related to EMAX, including tweeting a screenshot of an account showing large holdings and profits without disclosing that his own personal holdings were in fact much lower than those in the screenshot. In addition, one of Pierce’s tweets contained a link to the EthereumMax website, which provided instructions for potential investors to purchase EMAX tokens.
Without admitting or denying the SEC’s allegations, Pierce agreed to pay a $1,115,000 penalty and approximately $240,000 in disgorgement. He also agreed to not promote any crypto securities for three years.
This Holland & Knight blog reviews the SEC’s action against Pierce and discusses other celebrities who’ve found themselves targeted by the SEC for alleged touting violations. It also offers up some guidance on avoiding similar situations, and says that crypto’s uncertain status makes it particularly important to watch your step when it comes to promotional activities:
The lack of specific guidance on the issue of “crypto as security” leaves any paid promotional activity of coins or tokens by celebrities, athletes and other influencers vulnerable to an SEC investigation, enforcement action or class-action lawsuit. The risk has only increased as the SEC’s Division of Enforcement has expanded its focus beyond coins and tokens to paid promotional activity in connection with certain NFT (non-fungible token) promotions.
A recent ruling by the U.S. District Court for the Southern District of New York denying a motion to dismiss in connection with a complaint alleging certain NFTs are securities will only add fuel to the flames of this growing fire.14 When in doubt, parties should give careful consideration to proactively disclosing any and all compensation received in connection with any promotional activity involving digital assets.
Great advice, but while it would be wise for our nation’s celebrities to show a little caution here, I still bet it won’t be long until more find themselves in the SEC’s crosshairs for touting. After all, a lot of these folks seem to believe that “Fortune favors the brave.”
The January-February Issue of the Deal Lawyers newsletter was just posted and sent to the printer. This month’s issue includes the following articles:
– Delaware Court Addresses Freeze-Out Merger Confronted with Topping Bid
– Tortious Interference Claims in M&A: Deal Jumping
– Bandera Master Fund: Delaware Supreme Court Defers to General Partner’s Contractual Authority
The Deal Lawyers newsletter is always timely & topical – and something you can’t afford to be without in order to keep up with the rapid-fire developments in the world of M&A. If you’re not a subscriber to Deal Lawyers, please email us at sales@ccrcorp.com or call us at 800-737-1271.
It sounds like such a simple thing, doesn’t it? You include a bunch of proposals in your proxy statement, and for each proposal, Item 21 of Schedule 14A requires you to disclose the vote required for approval, the method by which votes will be counted, including the treatment and effect of abstentions, broker non-votes, and, to the extent applicable, a “withhold” vote for a nominee in an election of directors. Unfortunately, as generations of lawyers have learned, getting this disclosure right is often far from an easy process.
That’s the bad news. The good news is that this recent Goodwin memo is a very helpful resource for navigating the intricacies of determining and disclosing required votes in your proxy statement. This excerpt addresses the sometimes murky question of whether a particular proposal is “routine” or “non-routine” under NYSE rules:
Although not required by Item 21 of Schedule 14A, as a result of litigation in Delaware, we believe it is appropriate for proxy statements to identify, to the extent possible, which matters up for vote are considered routine (and therefore eligible for broker discretionary voting) and which are considered non-routine.
This is a straightforward exercise for many matters: NYSE Rule 452 explicitly provides that election of directors, say-on-pay, say-on-frequency, adoption or amendments of an equity plan, and shareholder proposals opposed by management are non-routine. In addition, the NYSE has expressed the view that ratification of the selection of independent auditors is routine.
Other matters may be less clear, and the determination is ultimately made by the NYSE. In this regard, companies should check with the NYSE to determine whether a particular matter is routine or non-routine prior to filing the proxy statement with the SEC.
The memo also addresses the need for companies to review state law and their charter documents in order to determine the vote required to approve a particular proposal, quorum requirements and the impact of broker non-votes and abstentions under various voting standards.
With the SEC’s adoption of cybersecurity and climate change disclosure rules looming and intensifying investor scrutiny of disclosure in these areas, this Perkins Coie blog recommends that companies take a hard look at their disclosure controls and procedures to ensure that cyber & ESG matters are appropriately captured. The blog identifies things that companies should keep in mind as they assess their disclosure controls & procedures in these areas. This excerpt addresses key issues in the data collection and verification process:
Determine what data to collect. Companies must determine what data to capture, and until the exact parameters of the final rules are known, should focus on the data most material to their business and industry. Companies can consider industrywide standards or metrics and whether key investors have preferred reporting frameworks. For example, BlackRock asks companies to report using the framework developed by the TCFD, supported by industry-specific metrics, such as those identified by SASB.
Establish data-gathering procedures and systems. Companies need to establish procedures for how data will be collected, where it is sourced, and how it is stored. Company personnel will need to be assigned responsibility over newly implemented procedures and data collection. Depending on the size and complexity of the data to be gathered, automated data management systems offer advantages over manual collection and storage methods. If companies intend to seek third-party assurance over their data, the procedures and systems need to be of sufficient quality and formality to enable testing by third parties.
Determine how data and resulting disclosures will be reviewed and verified. Companies must put in place procedures to vet the completeness and accuracy of the data collected and resulting disclosures. For example, internal controls and segregation of duties should be implemented to prevent and detect data fraud; also, certification and/or sub-certification procedures can be established whereby company personnel review and certify disclosures pertaining to their respective areas of responsibility. At the end of the day, the data and disclosures should be comparable across time, across communication channels (e.g., Form 10-K vs CSR Report), and amongst peers.
The blog says that companies should consider involving outside advisors such as audit firms and consultants in order to help them design internal controls and procedures or to provide assurance services, and should also assess whether any current disclosure committee needs to be reorganized in order to manage the increased challenges of these expanding disclosure obligations.