Lots of interesting stuff in this Proskauer memo analyzing market practices & trends for US-listed IPOs in 2017. Here are some of the highlights:
– In 2017, the average base deal size was $285 million and the median base deal size was $141 million, compared to $214 million and $116 million in 2016, respectively.
– 70% of EGCs included two rather than three years of audited financial statements (a 32% increase since 2013) and 56% of EGCs included only two years of selected financial statements (a 21% increase since 2013). Only 4% of EGCs included five years of selected financial statements in 2017, compared to 29% in 2013.
– Outside of 2014, IPOs in 2017 had the fastest time from the first confidential submission or filing with the SEC to pricing; the average number of days to pricing was 135 and the median was 103. In 2016, the average time from first submission/filing to pricing was 220 days.
– Since 2014, there has been a 41% decrease in the average number of first-round SEC comments and 37% decrease in the median number of comments.
– Approximately 30% of issuers went public with multiple classes of common stock in 2017 as compared to 18% of issuers in 2016. Almost 68% of these issuers provided for unequal voting rights among classes.
There’s plenty more where that came from – including information on “hot button” comments and data on pre-IPO private placements.
Insider Trading: Another Equifax “Guesser” in the Hot Seat
We previously blogged about the SEC’s filing of insider trading charges against a former Equifax executive who sold the company’s shares based on his correct guess that the company had experienced a massive data breach.
Last week, the SEC filed an insider trading complaint against another former Equifax employee, and this excerpt from the SEC’s press release indicates that the agency’s “insider guessing” theory features prominently in this new proceeding as well:
In a complaint filed in federal court in Atlanta today, the SEC charged that Equifax software engineering manager Sudhakar Reddy Bonthu traded on confidential information he received while creating a website for consumers impacted by a data breach.
According to the complaint, Bonthu was told the work was being done for an unnamed potential client, but based on information he received, he concluded that Equifax itself was the victim of the breach. The SEC alleges that Bonthu violated company policy when he traded on the non-public information by purchasing Equifax put options. Less than a week later, after Equifax publicly announced the data breach and its stock declined nearly 14 percent, Bonthu sold the put options and netted more than $75,000, a return of more than 3,500 percent on his initial investment.
As we noted in a prior blog, the SEC lost a case in 2010 premised on an insider guessing theory, so it will be interesting to see how the theory stands up as these actions move forward.
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One of the many infuriating airline industry “innovations” over the past several years has been the practice of charging an additional fee for a priority boarding slot. So, I was a little surprised that two prominent law professors recently suggested applying a variation of this priority access model to corporate disclosures:
In our recent article, Making a Market for Corporate Disclosure, we argue that the under-disclosure concern could be addressed in a far broader way by constructing a well-regulated market for tiered access to corporate disclosure. We contemplate a transparent market for early-access rights to corporate information. In this market, firms could sell access to information that they soon would release to the public.
For example, when they have new information that they are willing to share with the public, firms could offer a well-advertised early peek—say, starting at 11:00 a.m.—to anyone willing to pay the market price for it. So long as firms had to make any selectively released disclosure products with material information available to the public by, say, 1:00 p.m., market supply of and demand for those products could generate improved public disclosure. All the while, the current floors of mandatory disclosure need not be changed.
Law professors love ideas like this (anybody up for legalizing insider trading?), but I dunno guys – I’m not sure there’s any aspect of the airline industry that I’d suggest anybody use as a model for anything.
Poll: Paying for Disclosure
Please take a moment to participate in our anonymous poll:
Last week, the WSJ reported that some companies may have found another way to be “creative” when it comes to reporting their results – and it’s attracted interest from SEC Enforcement. Here’s an excerpt:
Enforcement officials at the Securities and Exchange Commission have sent queries to at least 10 companies, asking the firms to provide information about accounting adjustments that could push their reported earnings per share higher, one person familiar with the matter said.
The queries follow the release of an academic paper that found evidence of companies nudging up earnings results. The academic research found the number “4” appeared at an abnormally low rate in the tenths place of companies’ earnings per share. Reporting that figure as “5” or higher allows a firm to round up its earnings per share another cent. For instance, a company with earnings of 55.4 cents a share would round to 55 cents a share, while a company with earnings of 55.5 cents a share would round to 56 cents.
What’s kind of puzzling is how long it’s taken for this alleged practice to draw attention from regulators. Warren Buffett actually raised this issue – and cited the study referenced in the WSJ article – at the 2010 Berkshire-Hathaway annual meeting.
Board Oversight: Updating Caremark for the #MeToo Era?
We’ve previously blogged about the increasing focus on the board’s oversight responsibilities in the area of sexual harassment. This Cleary Gottlieb blog suggests that the principles underlying Delaware’s Caremark doctrine might well provide the basis for an expanded concept of what’s required of corporate boards in the #MeToo era. This excerpt explains:
Chancellor Allen anticipates today’s business challenge for directors by expressly premising his holding on moral considerations: “one wonders on what moral basis might shareholders attack a good faith business decision of a director as ‘unreasonable’ or ‘irrational’” (emphasis added). That is not to say that the Caremark opinion suggests that moral failures should be a basis for director liability.
Rather, the Caremark opinion suggests that the standard for director liability should in some way reflect the moral issues at stake: asking whether there is a moral basis for the courts to hold directors liable for not ferreting out an obscure compliance failure that results in a modest financial penalty is also by implication asking whether there is a moral basis for the courts to not hold directors liable for turning a blind eye to issues of great political, social or cultural consequence.
For those who consider social issues as being beyond the responsibility of corporate boards, the blog cautions that Caremark’s “duty of attention” may provide the moral basis for judging directors based on how they deal with these issues.
Cybersecurity: What to Think About When Buying Cyber Insurance
Earlier this year, we blogged about efforts by some of the nation’s largest companies to get into the cyber insurance game. Now this Wachtell memo has some advice for those on the buy side about what they should consider when shopping for coverage. This excerpt addresses coverage for “preexisting conditions”:
Companies should understand whether a policy will restrict coverage for breaches stemming from conditions existing at the time the policy is purchased. While sometimes explicit, such limitations can also be implicated through the use of a “retroactive date” for the start of coverage. As some cyber events are caused by a latent, sometimes long-existing, vulnerability in a company’s infrastructure, this type of carveout could result in a significant gap in coverage.
Other topics include coverage of third party claims, the need to ensure that policy provisions are consistent with cyber-incident response plans, & coverage for data under the control of third parties.
Yesterday, in Lucia v. SEC, the SCOTUS held that the SEC’s appointment process for its ALJs violated the Appointments Clause of the U.S. Constitution. As this excerpt from the opinion’s syllabus notes, the Court’s decision was based primarily on its earlier decision in Freytag v. Commissioner, 501 U. S. 868 (1991), which held that Tax Court “special trial judges” were “officers of the United States” for purposes of the Appointments Clause:
Freytag’s analysis decides this case. The Commission’s ALJs, like the Tax Court’s STJs, hold a continuing office established by law. SEC ALJs “receive[ ] a career appointment,” to a position created by statute. And they exercise the same “significant discretion” when carrying out the same “important functions” as STJs do. Both sets of officials have all the authority needed to ensure fair and orderly adversarial hearings – indeed, nearly all the tools of federal trial judges.
The Trump Administration’s decision to “switch sides” in this case & support the argument that the SEC’s ALJs were unconstitutionally appointed might suggest that the case was decided along partisan lines. But that’s not what happened. Justice Kagan delivered the Court’s opinion, and the Chief Justice and Justices Thomas, Kennedy, Alito & Gorsuch joined in the opinion. Justice Breyer also concurred – in part – in the Court’s decision. Justices Ginsburg, Sotomayor & Breyer (in part) dissented. We’re posting memos in our “SEC Enforcement” Practice Area.
What About Prior ALJ Decisions?
As we’ve previously blogged, some have suggested that the decision to invalidate the SEC’s appointment process for its ALJs might call into question the validity of prior decisions. The Lucia Supreme Court didn’t speak to that issue directly, but if you’re interested in reading tea leaves, check out this excerpt from Justice Kagan’s opinion:
This Court has held that “one who makes a timely challenge to the constitutional validity of the appointment of an officer who adjudicates his case” is entitled to relief. Ryder v. United States, 515 U. S. 177, 182–183 (1995). Lucia made just such a timely challenge: He contested the validity of Judge Elliot’s appointment before the Commission, and continued pressing that claim in the Court of Appeals and this Court.
That emphasis on a “timely challenge” suggests that parties who didn’t make a timely objection to the ALJ’s authority in their particular case may be out of luck if they try to challenge a decision now. Or maybe not – look, I mostly played softball in law school, so don’t expect profound insights on SCOTUS opinions from me.
SEC to Consider Proposed Changes to “Smaller Reporting Company” Definition
According to this “Sunshine Act” notice, the SEC will consider adopting proposed amendments to the definition of the term “smaller reporting company” at an open meeting to be held next Thursday, June 28th. Other items of interest on the agenda include:
– Consideration of a proposed rule amendment that would mandate the use of “Inline XRBL” – which allows filers to embed XRBL data in filings – in operating company financial statement information and mutual fund risk/return summaries.
– Whether to propose amendments to the SEC’s whistleblower rules.
Let’s say you’ve filed a registration statement & one of your directors – we’ll call him “David Dennison,” for absolutely no reason in particular – signed the document through an attorney-in-fact. Is there a possibility that the now famous “he didn’t sign it” defense could call into question the validity of David’s signature?
This Olshan blog says that if you’ve properly complied with the requirements applicable to powers of attorney, there’s no reason to be troubled by the fact that one or more signatories executed the registration statement through an attorney-in-fact:
Proper powers of attorney should cover the specific filing being made by the company and any and all amendments to that filing, as well as all other documents in connection with the filing. The power of attorney, though electronically filed with a typed conformed signature in the document, should be manually executed by the officer or director and the original should be saved for at least five years.
If the power of attorney is in the Signatures section in Part II of the registration statement (with an appropriate reference thereto in the exhibits index), the manually executed original should be saved for five years, and all amendments to the registration statement manually signed by the attorney-in-fact on behalf of the officer or director should likewise be saved.
There are many valid business reasons to utilize a power of attorney and there is no legal reason why a corporate officer or director should not be deemed to have signed a registration statement in reliance upon a valid power of attorney.
Of course, if David subsequently says that the registration statement is “fake news,” that might be another kettle of fish. . .
Should You File That Shelf Now or Later?
Check out this Bass Berry blog if you’re trying to decide whether you should file a shelf S-3 now or wait until you’re planning to do a deal. For non-WKSI’s, the answer is usually easy – since your S-3 won’t automatically go effective, you can’t be sure that you won’t be delayed when you need it unless you get it on file & effective now.
The answer for a WKSI issuer is a little more complicated – and the blog lays out the pros & cons. Here’s an excerpt addressing one of the big reasons that even a WKSI might want to get a registration statement on file before a deal is imminent:
Given the fact that filing a registration statement has the potential to trigger financial statement filing requirements (such as the potential need to file retrospectively revised financials in connection with a change in business segments, the occurrence of discontinued operations, or probable or completed significant acquisitions or dispositions), filing a registration statement on a clear day at a time when such filing does not trigger financial statement filing requirements may prove beneficial in comparison to waiting to file a registration statement at the time of a future public offering when such financial statement filing requirements could be triggered.
Cons include the need to incur the costs associated with registration and the potential adverse effect on the stock price due to the perception that the company is signaling the market that a deal is coming.
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While accounting departments throughout the nation may be pulling their hair out in an effort to get ready for FASB’s new lease accounting standard, this FEI article says that Wall Street analysts don’t seem to care very much about the new standard. Here’s an excerpt:
Despite the increasing drumbeat of concern regarding implementation of new lease accounting rules from financial preparers, there is palpable ambivalence from at least one major consumer of the new disclosures: Wall Street research analysts. Few, if any, analysts have questioned financial executives about their lease plans during the Q&A sessions of recent earning calls, where a majority of the accounting discussions revolved around revenue recognition issues.
And even once implementation begins in earnest as the 2019 deadline grows nearer, equity analysts admit they see fewer ramifications on their buy/sell decisions and models. “Revenue recognition affects all companies, while with leasing you may have some very specific industries and companies that are impacted significantly. From an equity analysis perspective we expect the lease accounting changes to be less complex,” says Zhen Deng, a senior analyst with CFR.”
This must be very encouraging news for those of you who just spent part of your holiday weekend dealing with some aspect of preparing for the new standard. As a colleague once said to me when a merger agreement I worked all weekend on got tossed into the garbage because the seller decided not to move forward, “Hey, at least it’s appreciated.”
Sell-Side Analysts: Still “Lake Wobegon U” Grads?
Speaking of securities analysts, remember former SEC Chair Arthur Levitt’s famous crack about them? “I worry that investors are being influenced too much by analysts whose evaluations read like they graduated from the Lake Woebegon [sic] School of Securities Analysis – the one that boasts that all its securities are above average.”
Levitt made those comments in a 1999 speech – and despite all of the water that’s gone under the bridge since then, this Marketwatch article says that Lake Wobegon U is still cranking out securities analysts:
There are no companies in the benchmark S&P 500 with majority “sell,” or equivalent, ratings among analysts. For the S&P 500, there are actually 505 stocks because five of the companies in the index have two classes of common stocks. Among the 505 stocks, analysts have majority buy ratings on 266.
For example, there are still 47 analysts who cover Amazon.com Inc. AMZN, -0.12% and 45 rate the stock “buy.”
There’s exactly one S&P 500 stock for which 50% of analysts rate the shares a sell: News Corp.’s class B shares NWS, +0.00% But it turns out that only two analysts cover the class B shares, while 13 analysts cover the class A shares NWSA, -0.06% For class A, four of the analysts rate the shares a buy, with eight neutral ratings and one sell rating.
The article says the same thing that many were saying back in the ’90s – read these reports for the valuable information they provide on companies & industries, but don’t rely on them for recommendations.
A member points out that it should be “Lake Wobegon,” and not – as Arthur Levitt & I originally spelled it – “Lake Woebegon.” I’ve learned my lesson, and that’s the last time I’ll ever rely on a former SEC Chair for spelling advice!
Analysts: From Russia with Guts
So is there any place where analysts call ’em as they see ’em? It turns out that the answer is yes, and it’s in the unlikeliest of places – Vladimir Putin’s Russia. This “FT Alphaville” blog tells the story of a brave man named Alex Fak, who until recently served as the head of research at Russia’s Sberbank. Here’s an excerpt:
Fak – who worked at the FT on a three-month fellowship in 2004 – was asked to resign after publishing a report that opined state gas monopoly Gazprom was ignoring its bottom line and benefiting its top contractors, including companies owned by Putin’s friends.
“Gazprom’s investment program,” which is seeing it spend $93.4bn on mega-projects like the Power of Siberia gas pipeline to China, Nord Stream-2 to Germany, and Turkish Stream, Fak and Anna Kotelkina wrote, “can best be understood as a way to employ the company’s entrenched contractors at the expense of shareholders.”
Fak went on to argue that Gazprom had abandoned other, cheaper capex projects that would have limited contractors’ ability to profit. If Gazprom were to be reformed after a recent government reshuffle and broken up into its components, Fak estimated, it would be worth $185bn – three times its current share price.
The blog says that Fak’s not the first analyst to be punished by a Russian bank for calling out inefficient state companies whose CEOs are “well connected.” Would a U.S. bank do the same? With all the Lake Wobegon U grads out there, it seems unlikely that we’ll ever know.
Broc recently blogged about the rough sledding that GE experienced when it went to shareholders for ratification of its appointment of KPMG – “no” votes represented more than 35% of the votes cast on the proposal at this year’s annual meeting. However, this “Audit Analytics” blog says that the GE result didn’t even manage to crack the ‘Top 3’ no-vote getters for the three years ended December 31, 2017.
For the record, the blog says that the biggest (almost) losers were:
In 2017, 15 companies received more than 20% of votes against ratification. In addition to Planet Fitness, Consolidated-Tomoka Land and Kulicke & Soffa Industries, each received more than 36% of votes against auditor ratification.
Auditor Ratification: So What Happened Next?
I’m sure you’re curious about what our biggest (almost) losers did in response to their high percentage of ‘no’ votes on auditor ratification proposals. I checked the SEC’s Edgar, and the short answer is – nothing. There were no changes in audit firms in response to the votes. In fact, neither of the other two companies referenced by Audit Analytics as having received more than 36% ‘no’ votes in 2017 changed audit firms either.
Of course, these are non-binding votes, because otherwise they’d violate Sarbanes-Oxley’s requirement that the audit committee call the shots on independent auditors. Still, a big no vote sends a pretty strong message – but I guess the bottom line is that “a win’s a win.”
UK shareholders don’t appear as reluctant to pull the plug on auditors as their counterparts here in the US. In fact, this article says nearly 80% of the shareholders of SIG plc, a British construction supplier & FTSE 250 component, voted against the ratification of its auditor – and the firm was fired that same day.
Fake SEC Filings: Rockwell Medical’s Alternative Realities
Last week, Liz sent an email to Broc & me asking if we’d been following the “dueling 8-Ks” from Rockwell Medical. I’d glanced at Matt Levine’s column about it, but it was when she characterized the situation as a “fake filing, but from the inside” that I realized we needed to say something about it here.
If there’s one thing we love on this blog, it’s “fake SEC filings.” But as Liz pointed out, this fake filing is a little different. This excerpt from Matt Levine’s second column about this company’s competing realities summarizes the situation:
We talked yesterday about the mysterious doings at Rockwell Medical Inc., where the universe has split into two alternate realities, in one of which (which I called RMTI-A) the board of directors has fired the chief executive officer, and in the other one (which I called RMTI-B) it absolutely has not, and in fact the directors are themselves in trouble for doing some unspecified bad things. Both sides raced to file dueling 8-Ks explaining their side of the story, leaving investors to try to figure out who is really in charge, the CEO or the board.
Here’s RMTI-A’s Form 8-K – and here’s the RMTI-B’s Form 8-K. This is a strange brew even in a “post-truth” era – but believe it or not, the plot got even thicker. That’s because the company’s largest shareholder amended its 13D to disclose a letter supporting the board’s decision to fire the CEO – and calling for the scalp of the CFO, who the letter claims helped the CEO make his 8-K filing.
The board of RMTI-A then formally terminated the CFO and issued a press release updating shareholders about the week’s festivities. The whole mess has apparently ended up in the lap of some poor state judge in Michigan – who promptly sent both sides to their respective corners & gave them 21 days to try to work things out.
Most of the attention on the Dodd-Frank reform bill that President Trump signed last Friday has focused on the law’s impact on financial institutions – but this Duane Morris blog points out that there’s something in the new law for other companies as well. In particular, the legislation expands the class of companies that are eligible to use Reg A+ to include already public companies. This excerpt explains:
The President today signed the “Economic Growth, Regulatory Relief and Consumer Protection Act.” Most of the bill is centered around easing some Dodd-Frank restrictions as they apply to smaller banks. But buried in Section 508, called “Improving Access to Capital,” Congress adopted a major change to Regulation A+.
Previously, the Reg A+ rules required, in Section 251(b)(2), that a company cannot use Reg A+ if it is subject to the SEC reporting requirements under Section 13 or 15(d) of the Securities Exchange Act immediately prior to the offering. This includes, for example, every company listed on a national exchange such as Nasdaq or the NYSE and many companies that trade over-the-counter. The new law reverses that and orders the SEC to change the rules to permit reporting companies to utilize Reg A+.
Along the same lines, the new statute also provides that companies can satisfy their Reg A+ periodic reporting obligations through the filing of the Exchange Act reports mandated for other reporting companies.
Stinson Leonard Street’s Steve Qunilivan also points out that there’s good news for private companies too – the new law relaxes some of the requirements under Rule 701:
Section 507 of the bill directs the SEC to increase Rule 701’s threshold for providing additional disclosures to employees from aggregate sales of $5,000,000 during any 12-month period to $10,000,000. In addition, the threshold is to be inflation adjusted every five years.
Reg A+’s expansion may turn out to be bigger news than you might think. A lot of questions have been raised about the efficacy of the JOBS Act’s efforts to rejuvenate Reg A – but this recent study reviews experience under the new regime & suggests that those efforts appear to be working. Here’s an except:
Not only has the use of Regulation A grown exponentially, but the exemption may now rival or even surpass its previously more popular predecessor, Regulation D’s Rule 506. Regulation A+ is an example of Congress using its legislative powers to take something that was structurally flawed and problematic and making it into a regulation that, while still having some flaws, now appears to be more appealing to emerging growth and start-up companies.
But the study also says that success has brought its own problems:
By the same token, Regulation A+ is not an unqualified success. The considerable increase in the use of Regulation A has surfaced potential problems such as the increased exposure of this option to “lay” investors; i.e. investors with modest income, modest net worth, and little to no financial sophistication. While these are the investors that Regulation A actively seeks, there are concerns about how issuers, regulators and the market as a whole will react if/when these investors suffer significant losses in this private equity startup company space.
SEC Commissioner Nominees: Another Senate Banking Staffer?
Want to become an SEC Commissioner? You’d better have the Senate Banking Committee on your resume. According to this WSJ article, the Committee’s chief counsel, Elad Roisman, may be the choice to fill the slot of departing Commissioner Mike Piwowar:
The White House is considering nominating a top aide to the Senate Banking Committee chairman for a GOP opening on the Securities and Exchange Commission, according to people familiar with the matter. Elad Roisman, the chief counsel to the banking panel led by Mike Crapo (R., Idaho), is a top contender to succeed Michael Piwowar at the top U.S. markets regulator, these people said. Mr. Piwowar plans to leave the SEC by July.
The article points out that Roisman – who’s only 37 years old – would join a long list of former Banking Committee staffers who have gone on to serve as SEC Commissioners – including Piwowar and current SEC commissioners Kara Stein & Hester Peirce. The logic being – if you work for the Senate Banking Committee, your Senate confirmation hearings are likely to be smooth…
This “Audit Analytics” blog reviews its recent survey of 17 years of auditor opinions containing “going concern” qualifications. Not surprisingly, going concern opinions peaked in 2009 – a total of 3,551 were issued for financial statements covering that year. But since then, they’ve been on a steady decline, with only 1,970 issued for 2016 financials.
That seems like good news, but it’s complicated by the fact that attrition played a large role in the decline between 2015 and 2016. However, the number of first time going concerns is estimated to be 467, which would be the 6th consecutive year in which that number was under 600.
The survey’s most troubling conclusion is that once a company finds itself slapped with a going concern opinion,it’s becoming increasingly difficult for them to dig out from under it:
The number of companies that improved well enough to shed their going concern status is tied for the second lowest population of companies that recovered during the 16 years analyzed. This very low number of improving companies indicates that many companies with going concerns are still experiencing difficulties and are unable to improve enough to rid the going concern status.
Crowdfunding: More Bang for Your Buck
One of the problems with crowdfunding under Regulation CF is that you don’t get a lot of bang for your buck – issuers can only raise $1 million per year. But this recent blog from Andrew Abramowitz highlights a potential workaround for companies looking to raise more money – a simultaneous Regulation CF & Rule 506(c) offering. Here’s an excerpt:
One might think that a way to do this would be to conduct a traditional private placement under Rule 506(b), which has no dollar limit, alongside the Regulation CF offering. However, this is a poor fit because of so-called “integration” issues. Regulation CF permits general solicitation, subject to limits, while Rule 506(b) by definition prohibits the “blast-it-out” approach, so efforts to spread the word on the Regulation CF offering could be deemed to be improper promotion of the Rule 506(b) offering.
A better fit would be another exemption arising out of the JOBS Act: a Rule 506(c) offering to all accredited investors, with no dollar limitation, which can be offered through the same portals that are required for Regulation CF offerings. Because general solicitation is permitted under both exemptions, there is not the same integration issue as with Rule 506(b).
By combining Regulation CF and Rule 506(c) in an offering via a web portal, companies can raise essentially any amount needed. The portal would steer non-accredited investors to the Regulation CF bucket, and accredited investors would invest under Rule 506(c). This allows companies to allow for small increment investments in situations where it doesn’t want to limit its shareholder base to accredited investors, while not being constrained meaningfully by the offering dollar limit.
Companies opting for this approach need to pay close attention to the respective rules for each exemption – particularly those imposing restrictions on communications outside the portal during a Regulation CF offering.
Yahoo! & Loss Contingencies: The Shoe That Didn’t Drop
As a follow-up to last month’s blog about the Yahoo! enforcement proceeding, here’s a recent memo from Locke Lord’s Stan Keller discussing an issue that the SEC didn’t raise in the Yahoo! case:
The SEC’s Yahoo enforcement action did not address the failure of Yahoo’s financial statements to include disclosure (and possibly an accrual) under Accounting Standards Codification 450-20 for the potential loss contingencies resulting from the 2014 data breach. Not much imagination typically is required to foresee the potential for significant liabilities arising from a massive cyberbreach and therefore the importance of considering the financial statement implications of that breach among other required disclosures.
Stan contrasts the Yahoo! proceeding with the SEC’s 2017 enforcement action against General Motors – where ASC 450 was specifically referenced. In both cases, the loss contingencies involved unasserted claims that, under ASC 450-20, required an assessment concerning whether claims were “probable” and, if so, whether a material loss was “reasonably possible.” If this test is met, disclosure is required, and the estimated range of loss must be quantified if an estimate can be made. Any loss that is probable and can be estimated must also be accrued as a charge to the income statement.
The SEC may not have brought ASC 450 up in the Yahoo! case, but let’s face it – that seems to have been a pretty target rich environment, so we probably shouldn’t read too much into that. Companies considering disclosure issues around data breaches would be smart to keep ASC 450’s requirements in mind.
I’ve been impressed by the FTC’s use of its “Competition Matters” blog to provide antitrust guidance – and I’ve wondered why the SEC was so. . . well. . . “stodgy” in its approach to this kind of thing. Then this press release with the headline “The SEC Has an Opportunity You Won’t Want to Miss: Act Now!” hit my inbox with the following news (also see this WSJ article):
Check out the SEC’s Office of Investor Education and Advocacy’s mock initial coin offering (ICO) website that touts an all too good to be true investment opportunity. But please don’t expect the SEC to fly you anywhere exotic—because the offer isn’t real.
The SEC set up a website, HoweyCoins.com, that mimics a bogus coin offering to educate investors about what to look for before they invest in a scam. Anyone who clicks on “Buy Coins Now” will be led instead to investor education tools and tips from the SEC and other financial regulators.
So I clicked on the link, and I’ve got to say it’s about the most out-of-character thing I’ve ever seen the SEC do – right down to having the Chief Counsel of the SEC’s “Office of Investor Education & Advocacy” portray HoweyCoins.com’s fraudster-in-chief.
I don’t know that I’d put this on the same level with Andy Kaufman’s stuff when it comes to performance art, but it’s pretty good for government work!
“The Crypto Deals. . . Have Lots of Fraud. . . Deep in the Heart of Texas”
The SEC’s fraud warnings about coin deals seem pretty timely. For instance, this Jones Day memo says that Texas blue sky regulators went hunting for fraud in crypto deals – and found a whole bunch of it. Here’s the intro:
As the price of bitcoin rose to unprecedented levels in 2017, regulators began focusing more enforcement resources on cryptocurrency offerings, both at the federal and state levels. At the state level, the Texas State Securities Board (“TSSB”) has led the way. In late 2017, the TSSB quietly launched an investigation into cryptocurrency offerings being made to Texas investors.
The TSSB announced the results of that investigation last month, indicating that it had found widespread fraud in cryptocurrency offerings. As a result of that investigation, the TSSB has brought nine enforcement actions over a span of less than six months. Given the growing investment in cryptocurrencies, we expect to see continued use of enforcement actions by the TSSB and other state regulators as one of the principal tools to regulate this growing market.
We’ve previously blogged about how the blue sky cops are on the crypto beat – and The Lone Star State’s experience suggests that bad guys are not in short supply.
ICOs: Are They or Aren’t They?
The SEC didn’t come up with the name “HoweyCoins.com” out of thin air. Ever since it issued its 21(a) Report on ICOs last summer, the SEC has made it clear that it thinks tokens are “securities” under the “Howey test.” Now, John Reed Stark reports that the first court test of this position is underway in a federal district court in Brooklyn. The issue is being contested in the context of a criminal proceeding in which the defendant has filed a motion to dismiss based on, among other things, an argument that the tokens he sold were not securities. The SEC has also brought civil charges in the case.
Oral arguments on the motion to dismiss were held last week – and the blog provides a link to the transcript. As for the outcome, John says it’s a slam dunk: “The SEC and DOJ will win. Easily. Quickly. Handily.”
