American literature has produced a lot of memorable first lines. From Moby Dick’s “Call me Ishmael. . .” to The Adventures of Augie March’s “I’m an American, Chicago born. . .” opening salvos like these draw readers in and compel them to read on. Everyone has their favorite, but for me, nothing tops this:
“We were somewhere around Barstow on the edge of the desert when the drugs began to take hold. I remember saying something like “I feel a bit lightheaded; maybe you should drive….” And suddenly there was a terrible roar all around us and the sky was full of what looked like huge bats, all swooping and screeching and diving around the car, which was going about a hundred miles an hour with the top down to Las Vegas.”
So, be sure to register for our PDEC Conferences today! We hope to see you there in person, but as always, we have a virtual option for those of you who are unable to travel to Las Vegas for the event. You can sign up online or reach out to our team to register by emailing info@ccrcorp.com or calling 1.800.737.1271. In the immortal words of Raoul Duke, “buy the ticket, take the ride.”
Last month, the Division of Corporation Finance issued a statement to the effect that certain crypto Protocol Staking activities did not involve the offer or sale of securities for purposes of the federal securities laws. Yesterday, Corp Fin issued another statement expressing the same view with respect to “Liquid Staking”:
It is the Division’s view that “Liquid Staking Activities” (as defined below) in connection with Protocol Staking do not involve the offer and sale of securities within the meaning of Section 2(a)(1) of the Securities Act of 1933 (the “Securities Act”) or Section 3(a)(10) of the Securities Exchange Act of 1934 (the “Exchange Act”). Accordingly, it is the Division’s view that participants in Liquid Staking Activities do not need to register with the Commission transactions under the Securities Act, or fall within one of the Securities Act’s exemptions from registration in connection with these Liquid Staking Activities.
It also is the Division’s view that the offer and sale of Staking Receipt Tokens, in the manner and under the circumstances described in this statement, do not involve the offer and sale of securities within the meaning of Section 2(a)(1) of the Securities Act or Section 3(a)(10) of the Exchange Act, unless the deposited Covered Crypto Assets are part of or subject to an investment contract.
Accordingly, Liquid Staking Providers involved in the process of minting, issuing and redeeming Staking Receipt Tokens, as described in this statement, as well as persons involved in secondary market offers and sales of Staking Receipt Tokens, do not need to register those transactions with the Commission under the Securities Act or fall within one of the Securities Act’s exemptions from registration, unless the deposited Covered Crypto Assets are part of or subject to an investment contract.
I’m not going to pretend that this stuff about “Liquid Staking” and “Staking Receipt Tokens” is anything other than complete gibberish to me, but just in case some of you are also a bit mystified, I did a little digging to see if I could figure out what Corp Fin is talking about. Here’s what I gleaned from Coinbase’s discussion of the topic on its website. “Protocol Staking” is essentially a way of delegating your crypto to a blockchain network to help the network validate and process crypto transactions. In return for being such a standup crypto bro, you get rewarded with additional crypto.
One of the problems with traditional Protocol Staking activities is that you can’t necessarily get your crypto out of the pool on demand. According to this discussion on Chainlink, Liquid Staking addresses this by issuing a new token that represents a claim on the underlying staked crypto asset and that can be traded or otherwise monetized the same way the underlying asset could be.
Anyway, this is the stuff that Corp Fin seems to be talking about, and to the extent laid out in the statement, they’re cool with it. That’s not the case with Commissioner Crenshaw, who issued a statement criticizing Corp Fin’s action and suggesting the SEC’s understanding of how Liquid Staking actually works in practice might be on a par with mine.
Public companies were required to file their insider trading policies as exhibits to their Form 10-K filings for the first time during the 2024 annual reporting season, and this Debevoise memo provides some insights about what the policies filed by 60 of those issuers – including 30 of the S&P 500 – had to say about key terms. In recent years, the SEC has become increasingly skeptical about gifts of securities by insiders, and this excerpt from the memo says that companies appear to be taking that skepticism into account in their insider trading policies:
92% of policies impose some restrictions on the gifting of issuer securities, although the specific restrictions vary. Of those, 77% apply these restrictions to all covered persons prohibiting them from gifting issuer securities while in possession of MNPI or applying window periods or pre-clearance procedures to gifts of securities. Further, a small number of insider trading policies (3%) explicitly prohibit gifting of issuer securities when the donor knows or has reason to believe the donee will sell the securities while the donor has MNPI. For policies that do not restrict gifts for all covered persons, the restrictions typically apply to Section 16 officers and directors.
The memo also addresses practices concerning the persons subject to insider trading policies, the inclusion of issuer transactions within the scope of the policy, prohibited transactions, blackout periods and trading windows, the use of Rule 10b5-1 plans, treatment of shadow trading, and preclearance procedures.
We receive quite a few Regulation FD-related questions on our Q&A Forum. Over the years, we’ve posted several quick surveys on Reg FD issues, but when we checked recently, we were surprised to find that we last addressed Reg FD in a quick survey back in 2017, so I think it’s fair to say that we’re overdue for an updated survey on Reg FD.
Our new quick survey seeks input from our members about a range of Reg FD-related practices, including the use and public disclosure of formal Reg FD policies, whether those policies specify how information is to be disseminated, practices regarding meetings between senior executives and analysts, use of corporate websites for Reg FD compliance, Reg FD training practices and public live-streaming of the annual meeting. Please take a moment to participate in this brief, anonymous survey!
Figma’s prospectus for last week’s blockbuster IPO had a lot of features in common with other recent IPOs, including a founder’s letter, lots of graphics, and multiple classes of stock. However, one of those classes of stock was not like the others. Here’s an excerpt from the prospectus’s description of Figma’s “blockchain common stock”:
Following this offering, our Board of Directors will be authorized, subject to limitations prescribed by Delaware law, to issue blockchain common stock in one or more series, to establish from time to time the number of shares to be included in each series and to fix the form, designation, powers, preferences, and rights of the shares of each series and any of its qualifications, limitations, or restrictions, in each case without further vote or action by our stockholders. Our Board of Directors can also increase or decrease the number of shares of any series of blockchain common stock, but not below the number of shares of that series then outstanding, without any further vote or action by our stockholders.
The number of authorized shares of our blockchain common stock may be increased or decreased (but not below the number of shares thereof then outstanding) by a vote of the holders of stock entitled to vote thereon, without a separate vote of the holders of the blockchain common stock, irrespective of the provisions of Section 242(b)(2) of the DGCL, unless a separate vote of the holders of one or more series is required pursuant to the terms of any applicable certificate of designation. Our Board of Directors may use the undesignated blockchain common stock to issue common stock, or rights or options thereto, in the form of blockchain-based tokens.
Liz noted in Friday’s blog that SEC Chairman Paul Atkins said that the agency was open to working with companies that wanted to “tokenize” securities or engage in other types of innovation. But what’s in it for the companies themselves – why would a hot commodity like Figma want to authorize a class of blockchain common stock?
Well, this excerpt from Tekedia’s article on the Figma IPO explains that tokenization of securities has a lot to recommend it if you’re looking to attract retail investors to a pricy stock or facilitate more efficient trading and settlement:
Tokenized equities, issued on a blockchain, could enable fractional ownership of Figma’s stock, lowering barriers for retail investors. This democratizes access to high-value stocks, traditionally reserved for institutional or high-net-worth investors. Blockchain-based shares could reduce settlement times and intermediary costs compared to traditional stock exchanges, leveraging smart contracts for automation and transparency.
The article also notes that Figma mentioned the possibility of using tokenized shares for employee compensation, which suggests that it may align with tech industry trends toward using crypto-based incentives to attract talent.
It’s one thing for an issuer to authorize a class of tokenized common stock, but as Commissioner Hester Peirce observed in a recent speech, things get more complicated once tokenized securities are distributed to the public – particularly if somebody other than the issuer of the securities is doing the tokenizing:
Market participants who distribute, purchase, and trade tokenized securities also should consider the nature of these securities and the resulting securities laws implications. For example, depending on the particular facts and circumstances, a token could be a “receipt for a security,” which is itself a security but is distinct from the underlying security held by the distributor of the token.
Alternatively, a token that does not provide the holder with legal and beneficial ownership of the underlying security could be a “security-based swap” that cannot be traded off exchange by retail persons. While blockchain-based tokenization is new, the process of issuing an instrument representing a security is not. The same legal requirements apply to on- and off-chain versions of these instruments.
This Skadden memo digs into some of the legal issues implicated by tokenization by third party distributors, including possible compliance challenges under the Investment Company Act, the potential need for distributors to register as broker-dealers, the possibility that the trading platform for tokenized securities might be a securities exchange, the need to comply with SEC & CFTC rules on swaps, as well as the potential applicability of anti-money laundering and know your customer regulations. So, while the SEC is willing to work with people on the issues associated with tokenization, there appears to be no shortage of issues to work through.
If one of your clients is considering joining a public company board, or if you work with a company that’s looking to add a new director, this Bryan Cave memo offers some helpful advice to prospective directors and companies about some of the areas that should be investigated during the due diligence process. Here’s the intro:
Retired senior executives often receive, or seek out, public company directorships as the next step in their journeys. Before accepting, they should carefully evaluate key areas to make sure they are prepared for the responsibilities and potential risks. Likewise, companies should consider assembling relevant briefing materials for potential candidates to streamline the process, potentially along with an NDA if they intend to share any confidential information, including by making directors or the auditors available for discussions.
Candidates should also be prepared to share relevant information with the company, or its search consultant, including consents to background checks and questionnaires.
Specific areas of inquiry for director candidates include legal and fiduciary duties, company health and reputation, board dynamics and governance, company strategy and outlook, board compensation, and time commitment, skills and experience fit. Topics for companies to explore include biographical data, independence and related party transactions, competitive overlaps, potential conflicts of interest, and legal and regulatory matters.
On Friday, the SEC announced that its Crypto Task Force was hitting the road to get input from people across the country in order to assist it in its efforts to establish a regulatory scheme for digital assets. The SEC’s website has a page devoted to the task force’s road trip, and here’s what it has to say about what it’s hoping to accomplish:
Following five insightful roundtables in Washington D.C. and hundreds of written submissions from industry participants across the country, the SEC’s Crypto Task Force is hitting the road and coordinating opportunities for additional stakeholders to meet with Commissioner Hester Peirce, who leads the Crypto Task Force.
The Crypto Task Force wants to hear from those who weren’t able to travel for the roundtables, and from voices that may have been historically underrepresented in other policymaking efforts. The Crypto Task Force is acutely aware that any regulatory framework will have far-reaching impact, so it wants to ensure that outreach is as comprehensive as possible.
Commissioner Peirce and members of the task force will be visiting several cities in the coming months, and they are particularly interested in hearing from representatives of crypto-related projects that have 10 or fewer employees and are less than two years old.
The page has information on the dates and locations of the various roundtables, as well as instructions on how to make a request to participate in the dialogue. Regrettably, there’s nothing in there about how to purchase tour merchandise. I also think the SEC missed an opportunity by not kicking off its announcement of the task force’s road trip with a classic intro like “It’s 106 miles to Chicago, we have a full tank of gas, half a packet of cigarettes, it’s dark and we’re wearing sunglasses… HIT IT!”
Speaking of SEC task forces, the agency also announced late Friday that it had established a task force to “spearhead the agency’s efforts to enhance innovation and efficiency in its operations through the responsible use of AI.” Valerie Szczepanik, the Director of the SEC’s Office of the Strategic Hub for Innovation and Financial Technology, has been named the SEC’s Chief AI Officer and will lead the task force.
A little over 10 years ago, the SEC adopted major changes in Regulation A in an effort to increase the viability of that exemption. A recent DLA Piper blog took a look at an SEC report issued earlier this year on the past decade’s experience with the revamped Regulation A. The blog says that the results are underwhelming, to say the least:
The SEC’s report on Regulation A covers offerings from June 19, 2015 (the date when the 2015 Reg A amendments went into effect) through December 31, 2024. During that time 1,618 total offerings were filed, which requires a publicly available disclosure, but only 1,426 were qualified by the SEC. This means nearly 15% of the filings did not complete the SEC review process, with most unqualified offerings subsequently abandoned despite being publicly announced. Of the offerings that were qualified, only 817 offerings reported raising money, meaning slightly over 50% of all attempted Regulation A offerings raised nothing, despite the cost of preparing and filing a detailed disclosure document with the SEC.
The blog says that even those companies that did raise money successfully under Reg A didn’t get close to the amount of funding they sought. According to the SEC’s report, the average qualified offering sought just under $20 million but raised only $11.5 million, while the median qualified offering aimed for $10 million and raised just $2.3 million. In light of those results, it’s not surprising that, as the blog points out, most issuers prefer Reg D:
Standing back, in the aggregate companies raised $9.4 billion through Reg A offerings over nearly a decade, for an average of less than $1 billion per year. To put that number into context, in just the year 2019, companies raised $1.5 trillion through just Rule 506(b) (not Section 4(a)(2), Rule 504, Rule 506(c) or other private structures).
The SEC’s Small Business Advisory Committee has been spending a lot of time on Reg A in recent months, and the results of the past decade suggest that a lot more time and attention will need to be devoted to Reg A if the SEC really wants to make it a viable alternative.
We’ve recently posted another episode of our “Understanding Activism with John & J.T.” podcast. This time, J.T. Ho and I were joined by Evercore’s Gloria Lin. We spoke with Gloria on a range of topics relating to the current activism environment. Topics covered during this 34-minute podcast include:
– Current activism environment and key campaign themes
– Evolving activist tactics
– Timing and number of activist settlements
– Director characteristics being targeted by activists
– Key lessons that you have learned from recent proxy fights
– Influence of macroeconomic conditions on recent activist campaigns
– Potential impact of recent events in the Middle East on activism trends
– Tips for vulnerable companies on how to prepare for activism today
This podcast series is intended to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. We continue to record new podcasts, and they’re full of practical and engaging insights from true experts – so stay tuned!
