Whether you spent the weekend as outside counsel frantically finalizing registration statements in order to claim your spot in “the backlog review queue,” a corporate employee worrying whether delayed regulatory approvals could cost you budget or even your job, or a federal employee attempting to plan for a month or more without pay, it likely was welcome news that, with mere hours to spare on Saturday, our legislators came to a last-minute compromise to keep our government running.
Unfortunately, the SEC’s operating plan and Corp Fin’s guidance on how the Commission and Staff will operate during a shutdown could still become relevant, because the resolution only funds the government for the next 45 days – through November 17th. Let’s all hope for the best!
– Liz Dunshee
On Friday, the SEC posted the notice & request for comment for a proposed listing standard from the NYSE that would create a new asset class for “Natural Asset Companies.” Here’s an excerpt that defines what an “NAC” is:
For purposes of proposed Section 102.09, a NAC is a corporation whose primary purpose is to actively manage, maintain, restore (as applicable), and grow the value of natural assets and their production of ecosystem services. In addition, where doing so is consistent with the company’s primary purpose, the company will seek to conduct sustainable revenue-generating operations. Sustainable operations are those activities that do not cause any material adverse impact on the condition of the natural assets under a NAC’s control and that seek to replenish the natural resources being used. The NAC may also engage in other activities that support community well-being, provided such activities are sustainable.
NYSE announced that it was working to develop this new asset class way back in 2021, so it’s been at least two years in the making. A lot has changed since then! ESG sentiment has become more discerning, and many companies have become more transparent over the past two years about environmental risks and emissions. But the proposal predicts that demand for this separate type of investment opportunity exists and will continue to grow because “investors still express an unmet need for efficient, pure-play exposure to nature and climate.”
Under the proposed standard, in addition to GAAP financial reporting provided in SEC filings, NACs would be required to periodically publish an “Ecological Performance Report.” Here’s more detail:
The EPR provides statistical information on the biophysical measures (e.g., tons of carbon, acre feet of water produced), condition, and economic value of each of the ecosystem services produced by the natural assets managed by the NAC. This will allow investors to gauge the effectiveness of management. The information will be consistently produced and periodically reported, following best practices from accepted valuation methodologies, as outlined in the Reporting Framework (as defined below).
The EPR produced by a NAC must follow IEG’s Ecological Performance Reporting Framework (the “Reporting Framework”). The Framework, in turn, is based on the natural capital accounting standards established in the United Nations System of Environmental- Economic Accounting – Ecosystem Accounting Framework (“SEEA EA”).
The EPR will measure, value, and report on the ecosystem services and natural assets managed by a NAC. Under the proposed amendments to the Manual, NACs will conduct a Technical Ecological Performance Study (“Technical EP Study”) annually, following the Reporting Framework. This Technical EP Study will generate the information used to prepare and publish the EPR. The EPR and Technical EP Study must be examined and attested to by a public accounting firm that is registered with the Public Company Accounting Oversight Board (“PCAOB”) and is independent from the NAC and NAC licensor, if applicable, under the independence standard set forth in Rule 2-01 of Regulation S-X (“Independent Reviewer”).
NACs would also be required to adopt policies on biodiversity, human rights, and other matters and post those on their website. The proposal gives more detail on the reporting framework, license, charter & policy requirements, corporate governance standards, and more. The standard, if adopted, will also come with a bunch of new terms to add to your “ESG glossary,” because it includes a whole section dedicated to definitions. The SEC is requesting comments on the proposal.
– Liz Dunshee
Also on Friday, the SEC posted notice & request for comment for a proposed NYSE rule change that would make it easier for companies to raise money from existing shareholders. Long story short, under the proposed amendment, companies would no longer have to get shareholder approval before issuing shares at a discount to “passive” (non-controlling) shareholders, even if the shareholder is buying more than 1% of currently outstanding shares and even if the shareholder owns 5% or more of the company’s outstanding stock or voting power at the time of the transaction – as long as they aren’t part of a control group. Here’s the rationale:
Certain NYSE listed companies are significantly dependent on their ability to regularly raise additional capital to fund their operations or acquire new assets. For example, pre-revenue stage biotechnology companies regularly seek additional capital to fund their research and development activities and real estate investment trusts seek to fund the acquisition of new properties by selling equity securities in private placements or direct registered sales priced at a small discount to the prevailing market price.
It is the Exchange’s understanding that, in many cases, existing shareholders of the listed company are willing purchasers of securities in such circumstances, as they already understand the company’s business and have a positive view of its future prospects. Sales to existing shareholders can also be advantageous to both the issuer and the shareholders because of the speed with which a direct sale to an existing shareholder can be completed if no shareholder approval is required.
However, the benefits of low transaction costs and speed of execution that typically exist when conducting these transactions with existing shareholders face countervailing factors if the counterparty is deemed to be a substantial securityholder for purposes of Section 312.03(b)(i). In such cases, to mitigate potential conflicts of interest, Exchange rules require that any sale below the Minimum Price can relate to no more than one per cent of the shares of common stock or one percent of the voting power outstanding before the issuance. Any such transaction that relates to more than one per cent of the common stock is subject to shareholder approval, which imposes significant delay and additional costs on the issuer, thereby often making the sale impracticable.
The NYSE notes that it is currently the only U.S. exchange with this requirement, which puts its listed companies at a disadvantage. The Exchange believes that transactions with these kinds of passive holders do not give rise to the potential conflicts of interest in the determination of transaction terms that exist where the purchaser has a role in the listed company’s board or management.
The shareholder approval requirement for issuances that exceed 1% of outstanding shares or voting power (other than cash sales for at least the “Minimum Price”) would continue to apply to issuances to officers or directors. In addition, it would apply to any controlling shareholder or member of a control group or any other substantial security holder of the company that has an affiliated person who is an officer or director of the company. The proposal emphasizes that other shareholder approval requirements also would continue to apply:
The Exchange notes that any listed company selling securities in a private placement that does not meet the Minimum Price requirement to a passive investor will remain subject to the shareholder approval requirement of Section 312.03(c) if such transaction relates to 20 percent or more of the issuer’s common stock. In addition, any such transaction would remain subject to shareholder approval under Section 312.03(e) if it resulted in a change of control. Finally, the Exchange notes that Section 312.03(b)(i) as proposed to be amended would continue to provide a significant protection to shareholders against conflicts of interest in sales of securities to related parties and that no other listing venue has such a protection in its rules.
The SEC is seeking comments on the proposal. We have resources in our “NYSE” Practice Area for anyone who is trying to navigate approval requirements or other compliance issues.
– Liz Dunshee