Spotify’s novel approach to the IPO process – and by that I mean, not having an IPO process – has attracted a lot of media attention. Media reports dutifully check-off all the ways that Spotify’s direct listing differs from an IPO, but the one that I find most intriguing is the absence of a lock-up to prevent insiders from selling shares for 6 months after the deal.
Bloomberg’s Matt Levine writes that if this goes well, Spotify may inspire other unicorns to emulate many of the aspects of its non-IPO – even if they opt for the traditional IPO route. This excerpt suggests that this may include leaning on the underwriters to forget about a lock-up and some other terms “near & dear” to bankers’ hearts:
More substantively, if you want to do an IPO but don’t want to lock up your existing shareholders from selling stock for three to six months afterwards, maybe you could say no to that too? Or if you want to do an IPO but don’t want to give the banks a “greenshoe” option to help them stabilize the shares? The banks will freak out about this and tell you that these are essential elements of the IPO process, and that eliminating them is risky and almost unprecedented. But if Spotify eliminated them and did fine, then why can’t you?
No lock-up? No shoe? “Oh brave new world that has such creatures in it!” Naturally, the push-back against Spotify’s assault on the citadel appears to have already started – check out the excerpt from this Forbes article:
Spotify’s direct listing with no lock-up seems to indicate that at least some of the insiders can’t wait to bail on this thing. That could mean that they don’t see a long-term future for the company (and maybe even the streaming delivery side of the music industry in general), or don’t think the prospect of an acquisition to be very high. Otherwise, they would have endured a traditional IPO along with its customary lock-up period without a blink of an eye, or at the very least imposed some sort of partial lock-up into the direct listing where only a certain percentage of stock could be sold.
So, depending on your point of view, Spotify’s non-IPO is either a bold strike at “Big IPO” or just an innovative new way for insiders to bail-out of an investment whose best days are behind it. However innovative Spotify’s approach may be, the reaction to it proves once again that “for every buyer, there’s a seller. . .”
Theranos: A Wake-Up Call for Private Companies
Unless you’ve been in a coma, by now you’re aware of the SEC’s recent enforcement action against Theranos and two of its executive officers. This recent blog from Kevin LaCroix says that the case has important lessons for unicorns:
The simple but important point that should not be lost amidst the more attention-grabbing aspects of this situation is that a private company and its executives can be held liable for violations of the federal securities laws. While there is nothing revolutionary or even new about this point, it is one that is often overlooked when distinctions are being drawn between private and publicly traded companies.
Private companies and their execs are every bit as subject to liability under the securities laws as their public company counterparts. As Co-Director of Enforcement Steve Peikin put it in the SEC’s press release announcing the proceeding, “there is no exemption from the anti-fraud provisions of the federal securities laws simply because a company is non-public, development-stage, or the subject of exuberant media attention.”
Theranos: When Unicorns “Neither Admit Nor Deny” They’ve Gone Bad
Speaking of the Theranos press release, the SEC did one of the things that it does regularly when announcing settlements that just leaves me shaking my head. The release alleges a “Massive Fraud” and says that CEO Eleanor Holmes was stripped of control for “defrauding investors” in an “elaborate, years long fraud.” Of course, several paragraphs – six but who’s counting? – after this chest thumping comes the inevitable coda:
“Theranos and Holmes neither admitted nor denied the allegations in the SEC’s complaint.”
You can count me among those who think that “neither admit nor deny” settlements are generally a good idea. But when you throw around phrases like this and accompany them with a “neither admit nor deny” settlement, you set yourself up for the inevitable question – if it was so bad, why was this all you got?
Remember when Ohio State’s then-president Gordon Gee infamously remarked that the school’s desultory 13-13 tie with Michigan in 1992 was “one of our greatest wins ever?” This isn’t quite at that level, but there’s a similar disconnect between rhetoric and reality here, and media reports like this MarketWatch article suggest that it undermines the Division of Enforcement’s credibility.
I read that somebody in Pennsylvania apparently hit the $457 million Powerball jackpot last week. That lucky individual is probably the only person in America who had a better week than the three people who the SEC announced hit its whistleblower jackpot to the tune of $83 million – the largest payday in the history of the SEC’s whistleblower program.
The SEC doesn’t disclose information that might identify a whistleblower – but according to this Reuters article, the trio earned their “WhoWantstobeaMillionaire.gov” payday for their assistance in an enforcement action involving Merrill Lynch that resulted in a $415 million settlement.
The SEC today announced its highest-ever Dodd-Frank whistleblower awards, with two whistleblowers sharing a nearly $50 million award and a third whistleblower receiving more than $33 million. The previous high was a $30 million award in 2014.
“These awards demonstrate that whistleblowers can provide the SEC with incredibly significant information that enables us to pursue and remedy serious violations that might otherwise go unnoticed,” said Jane Norberg, Chief of the SEC’s Office of the Whistleblower. “We hope that these awards encourage others with specific, high-quality information regarding securities laws violations to step forward and report it to the SEC.”
The SEC’s press release also noted that it has awarded more than $262 million to 53 whistleblowers since the program’s inception in 2012.
Be sure to check out this blog from Kevin LaCroix addressing some of the implications of these recent awards in light of the Supreme Court’s Digital Realty Trust decision. His bottom line is that these developments add fuel to the already burgeoning cottage industry in whistleblowing – and that even more whistleblowers will be encouraged to come forward.
SCOTUS: ’33 Act State Court Jurisdiction Lives!
Last week, in Cyan v. Beaver County Employees Retirement Fund, a unanimous Supreme Court held that class actions alleging claims under the Securities Act of 1933 may be heard in state court. It also held that if those claims are brought in a state court, they can’t be removed to federal court.
This Woodruff Sawyer blog notes that the Cyan decision is a big win for the plaintiffs’ bar – and bad news for IPO companies & their D&O carriers. Here’s an excerpt:
Companies that have recently gone public: buckle up. This is especially true for companies that are headquartered outside of California since California-based companies have already been living with this reality for several years.
While there have been some non-California-headquartered companies that were sued in California state courts over their S-1 filings, most of the suits brought against IPO companies in California state court have a clear California nexus.
With the ruling in Cyan, other state courts will be opening their doors for IPO-suits.
As we’ve previously blogged, California courts have been a preferred venue for plaintiffs in IPO lawsuits due to their relaxed pleading standards – which result in a lower dismissal rate than cases filed in federal court. Filing suit in a California state court also avoids application of the automatic stay in discovery that would apply to federal cases under the PSLRA.
Now it looks like IPO companies in other jurisdictions need to be prepared to be on the receiving end of Securities Act claims in plaintiff-friendly state courts as well. We’re posting the horde of memos in our “Securities Litigation” Practice Area.
Blockchain: “Solving Section 11 Tracing Problems Since ’20??”
If this Katten memo is right, then the Supreme Court’s Cyan decision may soon not be the only reason that Securities Act plaintiffs have to rejoice. It turns out that our new pal blockchain may solve the 1933 Act’s version of the “Riddle of the Sphinx” – Section 11’s tracing requirement. Here’s an excerpt:
The manner in which stock transactions are currently cleared, settled and recorded makes it impossible to trace a single share of stock once the issuer makes a second offering or other shares enter the market through, for example, the exercise of options or the lapse of share restrictions. As a result, broad swaths of stockholders are effectively barred from maintaining claims under Section 11 or Section 12(a)(2).
The application of blockchain technology to stock ledgers could result, over the ensuing years, in the gradual movement away from the masses of fungible stock held by investors indirectly through the DTC, which makes tracing currently impossible, to a system in which stock transactions for each individual share of stock are recorded in a blockchain ledger.
The only good news for potential defendants is that the shift to blockchain technology hasn’t happened yet. But once DTC implements blockchain ledgers, the most formidable impediment to Section 11 claims may well be eliminated.
Shortly after his confirmation, SEC Chair Jay Clayton promised that the agency was “open for business.” This recent memo from Orrick’s Ed Batts says that Corp Fin seems committed to making that slogan a reality. This excerpt summarizes some notable efforts to streamline the Staff’s processes:
– The most significant development is the dramatic shift in receptiveness for waivers for audited financial statements where the production may be burdensome but not clearly material to investors. Such waivers are being granted specifically with respect to financial statements in cases of marginal significance tests or where fully audited financials would involve significant cost but not necessarily provide substantial incremental useful information.
– In addition, the Staff continue to emphasize eligibility for all filers (and not just “emerging growth companies” under the JOBS Act) to take advantage of confidential preliminary registration statements for IPOs as well as follow-on offerings occurring within one year of IPO.
– The number of Staff comments issued upon review of registration statements have declined significantly, in an effort toward a speedier path to encourage use of public markets.
Cybersecurity: “Yahoo!” for Plaintiffs in Landmark Class Settlement
Over on “The D&O Diary,” Kevin LaCroix recently blogged about Yahoo’s landmark $80 million shareholder class action settlement in a case that arose out of the massive data breaches it announced in 2016. Kevin points out that although derivative suits have followed on the heels of other high-profile breaches, this settlement represents the first time that shareholder plaintiffs have really hit the jackpot in data breach litigation.
This excerpt suggests that the suit could be a preview of coming attractions:
The Yahoo settlement (assuming it is approved by the court) is the first significant data breach-related shareholder lawsuit settlement. The plaintiffs’ lawyers have now figured at least one way they can make money off of this type of litigation. Interestingly, this settlement coincidentally comes just days after the SEC released new guidance in which the agency underscored the disclosure obligations of reporting companies that have experienced data breaches. It is hard to know for sure, but it could be this milestone settlement together with the SEC’s new disclosure guidelines could mean that data breach-related shareholder litigation could be an area of increased focus for the plaintiffs’ lawyers.
Wells Fargo: When All Else Fails, Send in the Nuns!
To say that Wells Fargo’s had a bumpy ride lately is a big understatement, but it now it looks like the bank may have finally “got religion” – albeit in a rather unorthodox way. Here’s an excerpt from this CNBC report:
A group of nuns and religiously-affiliated investors said Wells Fargo & Co. has agreed to publish a review that shows the root causes of the systemic lapses in governance and risk management that have led to ongoing controversies, litigation and fines. As a result of the company’s commitment, the Interfaith Center on Corporate Responsibility will withdraw a resolution filed for the 2018 proxy calling for the review.
The engagement was spearheaded by Sister Nora Nash of the Sisters of St. Francis of Philadelphia – and the shareholder proposal had 22 other co-filers from the Interfaith Center for Corporate Responsibility, as well as the Treasurers of Rhode Island and Connecticut.
Last week, Broc blogged about the latest batch of Staff comments on revenue recognition under the new FASB standard. The folks at Audit Analytics have been pouring through companies’ SEC filings as well – and this recent blog says that there’s trouble brewing. Here’s the intro:
We have been asked several times whether or not the adoption of the new revenue recognition standard will cause an increase in the number of restatements and control failures. While it may be early to say, our review of SEC filings provides a strong indication that we will see an uptick in revenue recognition accounting failures.
Back in October, based on the analysis of Q2 filings, we found that some companies seemed to be struggling with the ASC 606 adoption. For most of the companies, the moment of truth came on December 15, 2017, the deadline to begin reporting with the new standard.
As we were working on the Q3 update, we identified a number of companies for which the controls were found to be ineffective and a material weakness was directly attributed to the lack of progress in the ASC 606 implementation.
The blog goes on to review specific disclosures by some companies that have encountered hiccups in the implementation process for the new standard.
Former SEC Chair: Securities Lawyers Need to be “Adults in the Room”
This Bloomberg article discusses former SEC Chair Mary Jo White’s comments at a recent conference. She spoke about some of the implications of the current deregulatory mood in DC – but also had some rather pointed comments about the role of lawyers in the current environment:
According to former Chair White, in a deregulatory environment, it is incumbent upon private sector lawyers to step up and be “the adults in the room.” She urged practitioners to focus on what is best in terms of disclosure and business, and not just on what is permissible. It is important to “step up the quality of lawyering” and advise as to what the optimal is, not just what the client can and cannot do.
These steps will reduce the risk of reputational loss to both client and counsel, she noted. She closed by suggesting that attorneys should follow the counsel of the late Archibald Cox, long-time law professor and Watergate special prosecutor, who urged lawyers to have the confidence to tell their clients that “’yes, the law lets you do that, but don’t do it—it’s a rotten thing to do.’”
March-April Issue: Deal Lawyers Print Newsletter
This March-April issue of the Deal Lawyers print newsletter was just posted – & also mailed – and includes articles on (try a no-risk trial):
– Tax Reform’s Impact on Private Equity & M&A
– Delaware Supreme Court Reverses Controversial Dell Appraisal Ruling
– All Merger Side Letters Must Now Be Included in HSR Filings
– California Law Provides Private Company Dissolution Alternatives
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online.
Over the past several months, media reports involving high profile sexual misconduct & abuse of power by politicians, celebrities, CEOs and other corporate leaders have brought the issue of sexual harassment to the top of the cultural agenda – and placed it prominently on the agenda of boards as well.
One of the biggest reasons that oversight of sexual harassment policies has become a priority for boards is that it’s also become a priority for shareholders. The recent experiences of the Weinstein Company, Wynn Resorts & others have demonstrated that high-profile allegations of sexual misconduct by executives can have a potentially devastating effect on shareholder value – and even threaten the viability of the business itself.
Reflecting rising investor concerns in this area, the Council of Institutional Investors has released a new report that provides boards with advice on how to mitigate the risk of sexual harassment. The report details practical steps that cover five key areas: personnel, board composition, policies and procedures, training and diversity.
Board Oversight: “Is It Just Me, Or Is It Getting Warm In Here?”
Investors aren’t just sharing friendly words of advice when it comes to board oversight of sex harassment & other corporate policies. This “Directors & Boards” article suggests that they’re increasingly seeking to hold directors accountable through fiduciary duty lawsuits alleging failures in oversight. Here’s the intro:
Directors and officers might want to start 2018 by doubling down on their oversight systems. Last year, boards and senior managers at several large corporations faced significant shareholder lawsuits over allegations they were not minding the store when their companies suffered high-profile traumas surrounding data breaches, sexual harassment and discrimination scandals or improper sales practices.
“What I’ve seen in these cases is there were a lot of red flags out there and the board just ignored them,” says Jorge Amador, an attorney representing shareholders in a case against Wells Fargo & Co. over phony customer accounts.
Of course, these oversight claims require plaintiffs to prevail under Delaware’s Caremark doctrine, which requires “bad faith” in the form of intentional dereliction of duty or conscious violations of law on the part of directors.
That’s a demanding standard. In fact, Delaware’s Supreme Court has said that Caremark may be “the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.” Still, no less a figure than Chief Justice Leo Strine recently dissented from a Delaware Supreme Court decision dismissing a Caremark claim against Duke Energy’s board – and the article also notes recent landmark settlements of oversight claims by Home Depot & 21st Century Fox.
So, in today’s rather fraught environment, it pays for directors to remember that however remote the risk may appear – breakdowns in oversight could hit them squarely in the wallet.
Tune in tomorrow for the webcast – “The SEC’s New Cybersecurity Guidance” – to hear former senior Corp Fin staffers Meredith Cross of WilmerHale, Keith Higgins of Ropes & Gray and Dave Lynn of TheCorporateCounsel.net and Jenner & Block discuss the SEC’s recent guidance on cybersecurity disclosure.
Form DRS: Gets a “Check the Box”
Yesterday, the SEC posted its updated “Edgar Filer Manual.” The most notable change is the addition of “check the box” language to the cover page of Form DRS and DRS/A. Filers of draft registration statements will now be required to check a box to indicate their status as an “Emerging Growth Company” – and to indicate whether they are opting out of the extended transition period for complying with any new or revised financial accounting standards.
Working the “Weed Beat”: Nasdaq Lists Canadian Cannabis Company
So, I was just sitting around last Sunday when Broc shot me an email with this Torys memo on Nasdaq’s decision to list Cronos, a Canadian marijuana cultivator. He reminded me that I’ve been “covering the space” – and asked me if I wanted to blog about it.
Naturally, I said yes. After all, who would turn down the chance to be TheCorporateCounsel.net’s “weed beat” reporter? Anyway, the memo says that strong governance & the fact that the company’s operations were conducted solely in jurisdictions where marijuana has been legalized likely tipped the scales in favor of a listing. Here’s an excerpt:
The listing of shares of Cronos by Nasdaq demonstrates a willingness by the exchange to accept issuers with material interests in the production and sale of cannabis in jurisdictions in which such activities are legal. Cronos has no operations or activities in the U.S. Each of Cronos’ two wholly-owned LPs and three additional LPs in which it holds a minority interest operate in compliance with the Access to Cannabis for Medical Purposes Regulations (ACMPR).
Furthermore, Cronos’ international operations are located in jurisdictions where medicinal cannabis is legalized nationally—namely, Israel and Australia. In addition, Cronos’ CEO and industry commentators have cited Cronos’ extensive work in strengthening Cronos’ corporate governance as key to achieving the Nasdaq listing.
The emphasis on the legality of Cronos’ operations doesn’t bode well for the listing chances of U.S. cultivators of “the chronic” – particularly in light of the DOJ’s recent decision to end Obama Administration policies that sheltered marijuana producers whose activities complied with state laws.
In a milestone of sorts, the first Form S-1 for a coin offering was filed last week by a company called “The Praetorian Group.” I flipped through it, and it’s . . . interesting. Here’s a take on the filing from Bloomberg’s Matt Levine:
“The Praetorian Group filed what appears to be the first initial coin offering (ICO) registering tokens with the SEC,” reports Renaissance Capital. Here is the registration statement, and I am sorry to say that it is full of firsts. For instance, this is the first time I have seen this sort of disclaimer in a prospectus for a securities offering:
To the maximum extent permitted by the applicable laws, regulations and rules the Company and/or the Distributor shall not be liable for any indirect, special, incidental, consequential, or other losses of any kind, in tort, contract, tax or otherwise (including but not limited to loss of revenue, income or profits, and loss of use or data), arising out of or in connection with any acceptance of or reliance on this Prospectus or any part thereof by you.
Nope nope nope nope nope nope nope! That is not how a prospectus works! The way a prospectus works is, you write it, and your lawyers read it and make sure it’s right, and then you deliver it to investors so that they can rely on it. That’s the whole point. You don’t just hand the investors some random scribblings and say “here’s some stuff but definitely don’t rely on it.” Come on.
Yeah. Might draw a comment on that one. The prospectus goes on to disclaim any “representation, warranty or undertaking in relation to the truth, accuracy, and completeness of any of the information set out in this Prospectus” – which is another thing I’m sure the Staff will be totally cool with.
The registration statement’s also missing a few items – like signatures, exhibits, undertakings (basically all of Part II), for starters. Thanks to Hunton & Williams’ Scott Kimpel for tipping us off to this filing!
ICOs: SEC “Drops a Dime” to Thwart Sketchy Deals
You can’t accuse the SEC of not making use of all available technologies to protect investors – even if some of those technologies originated in the 19th century. Check out the excerpt from this BTC Manager article on how the SEC is using the telephone to put the kibosh on sketchy token offerings before they hit the street:
Well, counter-intuitive as it may seem, the agency is actually showing a preference for the good old telephone over other state-of-the-art technologies to ward off shady ICOs. Before we delve into the details, let’s first take a step back and revisit the fact that the Wall Street’s main regulator has issued multiple warnings time and again urging crypto enthusiasts to steer clear of legally sketchy ICOs no matter how compelling the propositions seem.
Jay Clayton, Chairperson at the SEC, even went as far as saying that crooks were busy harnessing blockchain and the ever-expanding crypto market to pull off serious scams that are as old as the market itself is. That is, to project an asset as the “next best thing” and then selling it once a good amount of “dumb money” pours in.
So how does the SEC use the telephone to deter the bad guys in the fast-growing realm of ICOs?
Apparently, the modus operandi is pretty simple. The folks over at SEC just pick up the telephone and call up the people behind individual ICOs. And believe it or not, the strategy has paid off. According to a key SEC official, over a dozen of cryptocurrency-related companies have abandoned their plans to raise fund from investors after they were contacted by the agency over the telephone.
Score one for us Luddites. I bet they even used a landline.
Transcript: “Auctions – The Art of the Non-Price Bid Sweetener”
We have posted the transcript for the recent DealLawyers.com webcast: “Auctions – The Art of the Non-Price Bid Sweetener.”
As Broc blogged several times last year (here’s the latest), “fix-it” proposals – shareholder proposals seeking changes to proxy access bylaws – were a hot topic last proxy season. This recent blog from Cooley’s Cydney Posner says that they’re front & center again in 2018.
After much back & forth, it appeared that by the end of last proxy season the no-action letter process had charted a course that would allow proponents to avoiding exclusion of fix-it proposals on the basis of substantial implementation. As this excerpt notes, fix-it proponents are back this year, & they’re following that course:
The SEC Staff took a uniform no-action position allowing exclusion of these fix-it proposals. But the proponents were persistent and, in 2017, submitted to H&R Block a different formulation of a fix-it proposal that requested only one change — elimination of the cap on shareholder aggregation to achieve the 3% eligibility threshold, as opposed to simply raising the cap to a higher number.
This time, the Staff rejected H&R Block’s no-action request. In essence, it appears that the Staff believes that a lower cap on aggregation could “substantially implement” a higher cap, but the removal of a cap entirely is a different animal that could not be substantially implemented by the lower cap. This proxy season, the proponents have latched onto—and even expanded—the new formulation and have continued to find success in preventing exclusion.
For example, in BorgWarner (2/9/18), John Chevedden submitted a proposal requesting elimination of the cap on aggregation of shareholders to satisfy the 3% minimum ownership threshold, as well as changing the minimum number of proxy-access candidates to two, if the board size is under 12, and three if it is over 12. (The proposal doesn’t address the 12-person board.) In this instance, the company’s existing aggregation cap was 25, and the existing number of directors that could be nominated through proxy access was the greater of 20% of directors in office or two.
Chevedden & Harrington Investments submitted a similar proposal to Alaska Airlines. In both cases, the Corp Fin Staff rejected arguments that the proposals could be excluded on the basis that they had been substantially implemented.
Shareholder Proposals: About Those Airline Seats. . .
Is there anybody who doesn’t find the airlines’ unceasing efforts to shrink the seats & leg room on planes absolutely infuriating? This recent blog from UCLA’s Stephen Bainbridge flags a shareholder proposal designed to put a stop to this practice.
The proposal – which was submitted to American, Delta & United Continental by an organization called “Flyers Rights Education Fund” – calls for the companies to report on the “regulatory risk and discriminatory effects of smaller cabin seat sizes on overweight, obese, and tall passengers.” It also calls for them to address “impact of smaller cabin seat sizes on the Company’s profit margin and stock price.”
So what are the chances of this resolution prevailing? Not good. American & United Continental have already filed no-action requests with the Staff seeking to exclude these proposals under the ordinary business exception – and the blog notes that the airlines’ arguments are likely a winner:
American’s letter states that it is relying on the exemption under Rule 14a-8(i)(7) that allows exclusion of proposals that deal “with a matter relating to the company’s ordinary business operations.” The letter relies on the SEC’s Exchange Act Release No. 34-40018 (5/21/98):
The SEC stated in the 1998 Release that the policy underlying the ordinary business exclusion is based on two considerations:
– First, whether a proposal relates to “tasks that are so fundamental to management’s ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight;” and
-Second, whether a “proposal seeks to ‘micro-manage’ the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.”
The Staff has consistently agreed that proposals relating to a company’s sale and marketing of its products or services, or seeking to dictate management’s day-to-day decisions regarding the selection of products or services offered, implicate a company’s ordinary business operations and may be excluded pursuant to Rule 14a-8(i)(7).
While he too bemoans the constant shrinking of airline seats, Prof. Bainbridge concludes that American Airlines’s argument is “clearly correct.”
Brother, Can You Spare $100 Billion?
Check out this Reuters article – it says that banks are “salivating” over the opportunity to lend $100 billion to fund Broadcom’s hostile takeover of Qualcomm. Here’s an excerpt with some of the details on what would be the largest syndicated loan of all time:
Broadcom’s $100 million loan package backing its proposed $121 billion acquisition of Qualcomm, is set to become the biggest-ever syndicated loan globally if the hostile deal goes ahead.
Twelve banks are providing the financing, which is on track to beat the prior record of $75 billion issued by Brazilian/Belgian brewer AB Inbev to finance its purchase of rival SAB Miller in 2015, according to Thomson Reuters LPC data.
How’s the pricing? Well, for the most expensive piece of the commitment – a proposed 5-year, $20 billion term loan – it’s 137.5 bps over LIBOR. Since the 12-month LIBOR rate is currently hovering around 2.5%, this means Broadcom’s borrowing $100 billion at about the same rate that you’d pay for a 5-year auto loan.
According to this MarketWatch article, the number of coin offerings relying on Reg D has risen rapidly since the SEC first issued guidance on coin offerings last July – while only a single Form D was filed during the first half of 2017, that number grew to 43 during the second half of the year. The pace continues to accelerate – already this year, nearly 40 Form Ds have been filed through February 20th.
While a heightened awareness of the need to stay “on-side” with the SEC probably accounts for a significant percentage of the filings, another factor may well be the existence of a “blueprint” in the form of a “Simple Agreement for Future Tokens” that was developed last Fall. Here’s an excerpt with some of the background:
In a whitepaper published in October, Marco Santori, an attorney at Cooley and an advisor to the International Monetary Fund, and Juan Batiz-Benet and Jesse Clayburgh of blockchain developer Protocol Labs, say that public token sales, or ICOs, may be “a powerful new tool for creating decentralized communities, kickstarting network effects, incentivizing participants, providing faster liquidity to investors, and forming capital for creators.” However, these boosters warn that many token sellers run a huge risk of the SEC shutting them down if they don’t follow all the securities laws to the letter.
Most token sales have shunned U.S. investors, out of fear by the promoters that their participation would bring the SEC calling.
That’s why the whitepaper from Santori, Benet and Clayburgh proposed a new approach to structuring these deals to meet the SEC’s requirements. Their effort has been successful. Most of the ICOs filed using Form D since mid-2017 — but not all and not KodakCoin — now use this approach, called a Simple Agreement for Future Tokens, or SAFT, as their legal framework.
If the SAFT concept rings a bell, that’s probably because it’s based on Y Combinator’s “Simple Agreement for Future Equity” – otherwise known as “SAFE” – which has become a popular template for startup financing. Don’t forget our upcoming webcast: “The Latest on ICOs/Token Deals“…
One of our members alerted me to an ongoing debate about the SAFT approach centering on the white paper’s position as to the status of “genuinely functional” tokens under the Securities Act. Check out this Cardozo Blockchain Project white paper.
More on “Insider Trading – It’s Worse Than You Think?”
In our last episode, we noted that a bunch of recent studies have concluded that everything is terrible & the markets are rigged. Well, it turns out that those studies might have understated the problem. According to this MarketWatch article, the VIX is fixed too:
One of the most popular measures of volatility is being manipulated, charges one individual who submitted a letter anonymously to the SEC and CFTC.
The letter makes the claim to regulators that fake quotes for the S&P 500 index SPX, +0.04% are skewing levels of the Cboe Volatility Index VIX, +1.73% which reflects bearish and bullish options bets 30-days in the future on the S&P 500 to gauge implied stock-market volatility (see excerpt from the letter below).
“The flaw allows trading firms with sophisticated algorithms to move the VIX up or down by simply posting quotes on S&P options and without needing to physically engage in any trading or deploying any capital. This market manipulation has led to multiple billions in profits effectively taken away from institutional and retail investors and cashed in by unethical electronic option market makers.”.
The CBOE says the whistleblower’s all wet* – but a follow-up article quotes former SEC Chair Harvey Pitt as saying that “it’s quite clear” that indexes like these can be manipulated.
* In other words, “ChiX Nix Vix Fix” – I know, I know. . . I’m sorry, but it was just laying there & I couldn’t resist doing that little riff on one of the most famous newspaper headlines of all time.
Our March Eminders is Posted!
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Whether there’s life after death is one of those great unanswerable questions. . .Well, I mean except for Section 162(m)’s performance-based comp provisions – which, despite their untimely demise last December, we can say with certainty are enjoying a robust afterlife in proxy disclosures.
Over on “The Advisors’ Blog,” Broc’s already noted that the plaintiffs’ bar is keeping a watchful eye on performance-based comp proxy disclosures in the wake of tax reform’s changes. But beyond that, some high-profile companies – like Disney & John Deere – have recently filed proxy statements asking shareholders to re-approve existing compensation plans in order to comply with Section 162(m)’s 5-year shareholder re-approval requirements for performance-based comp.
If performance-based comp’s deductibility is a goner, why do that? This Debevoise memo suggests one possible reason for this portion of 162(m)’s afterlife:
Grandfathered arrangements that rely on the performance-based exception must continue to comply with the formal procedures previously applicable to performance-based compensation. For example, if an executive had a contractual right as of November 2, 2017 to receive a performance-based award in the future, the performance criteria applicable to such award may need to be re-approved by shareholders if, when the award is granted, five years have passed since the last shareholder approval.
Many tax lawyers expect that the IRS may ultimately decide not to require shareholder reapproval for grandfathered awards – but it hasn’t issued transition rules yet, and some companies may have decided that including these proposals in their proxy statements is the prudent thing to do.
Transcript: “Audit Committees in Action – The Latest Developments”
We have posted the transcript for the recent webcast: “Audit Committees in Action – The Latest Developments.”
Enforcement Penalties: Uncle Sam’s No Longer Picking Up Part of the Tab
The new tax legislation makes it tougher to deduct payments made in connection with the resolution of government enforcement actions. Under prior law, Section 162(f) of the Internal Revenue Code allowed deductions for a fairly broad category of payments. This excerpt from a recent Sidley memo provides an overview of the new regime:
Section 13306 of the Act completely repeals the prior language of Code Section 162(f) and replaces it with a general prohibition of business expense deductions for any payments made to or at the direction of a government, a governmental entity or certain nongovernmental self-regulatory entities in connection with a violation of law or an investigation involving a potential violation of law.
However, taxpayers continue to be allowed deductions for payments that they can establish “constitute restitution(including remediation of property) for damage or harm” related to the violation or potential violation of law or that were made “to come into compliance with any law which was violated or otherwise involved” in an investigation.
Nevertheless, amounts paid to reimburse the costs of investigation or litigation are not deductible as restitution or otherwise. Code Section 162(f)(2)(B). Furthermore, as a prerequisite to establishing the right to the remaining allowable deductions, the court order or settlement agreement involved must identify the amounts paid as restitution or payments made to come into compliance with applicable law. Otherwise, no deductions are allowed regardless of the
nature of the payments.
The governmental entity or SRO involved in the action also has to file an information return with the IRS specifying the amounts that are deductive. The new provisions apply to proceedings involving all federal, state & local enforcement agencies, as well as non-governmental enforcement agencies, such as SROs.
This Cleary blog has more on this topic, together some advice on negotiating settlement agreements with the government in order to preserve deductibility. One interesting suggestion – companies should consider settling civil class actions early & voluntarily repaying victims for their loss and then arguing that the repayment also satisfies any separate disgorgement obligation to a government.
