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!
To date, the DExit movement has mostly been “all hat and no cattle,” but that changed yesterday, when Andreessen Horowitz, one of Silicon Valley’s biggest names, announced that it was leaving Delaware, and recommended that others follow its lead:
It used to be a no-brainer: start a company, incorporate in Delaware. That is no longer the case due to recent actions by the Court of Chancery, which have injected an unprecedented level of subjectivity into judicial decisions, undermining the court’s reputation for unbiased expertise. This has introduced legal uncertainty into what was widely considered the gold standard of U.S. corporate law. In contrast, Nevada has taken significant steps in establishing a technical, non-ideological forum for resolving business disputes. We have therefore decided to move the state of incorporation of our primary business, AH Capital Management, from Delaware to Nevada, which has historically been a business friendly state with fair and balanced regulatory policies.
We could have made this move quietly, but we think it’s important for our stakeholders, and for the broader tech and VC communities, to understand why we’ve reached this decision. For founders considering a similar move, there is often a reluctance to leave Delaware, based in part on concerns for how investors will react. As the largest VC firm in the country, we hope that our decision signals to our portfolio companies, as well as to prospective portfolio companies, that such concerns may be overblown. While we will continue to fund companies incorporated in Delaware, we believe Nevada is a viable alternative and may make sense for many founders.
The statement goes on to make a tendentious argument in favor of abandoning Delaware for Nevada’s supposedly greener corporate pastures. But the merits of Andreessen Horowitz’s argument don’t really matter. What matters is that a16z is moving, and it’s sounding the clarion call for others to do so as well.
I’ve argued that the real threat to Delaware’s dominance isn’t a mass exodus of public companies, but the possibility that the Andreessen Horowitzs of the world might decide that other jurisdictions offered them a greater ability to control their post-IPO portfolio companies than Delaware does. Andreessen Horowitz’s move is the first example of this, but given the firm’s prominence, it’s unlikely to be the last. The 21st Century’s “race to the bottom” has officially begun.
We’ve previously blogged about some of the big picture issues associated with the use of AI tools in the boardroom, but this Debevoise memo focuses more narrowly on the use of AI to draft minutes, and what companies should consider when deciding whether to use AI tools for that purpose.
The memo discusses, among other things, confidentiality and cybersecurity concerns, state law notice and consent requirements that come into play when meetings are recorded, privilege issues, and implications for document retention policies. In his recent D&O Diary blog on this topic, Kevin LaCroix highlights another topic for consideration:
I have a particular concern here, and that has to do with the kinds of allegations plaintiffs’ lawyers raise in “duty to monitor” type cases. The plaintiffs lawyers will use books and records requests to obtain board minutes and will scour the records to see the extent to which the minutes show that the board discussed a “mission critical” topic.
The risk is that the minutes do not show the topic being discussed, allowing the plaintiffs’ lawyers to make the argument that “the board didn’t even discuss” the critical topic. The possibility of overly terse board minutes omit discussion of key topics is always present. I fear that with AI-generated minutes this risk is increased. Even if humans review the minutes, they may not spot the omission (as it is always harder to spot an omission than an error). This type of litigation risk highlights the need for heightened vigilance with respect to board use of AI tools.
Kevin cautions that all decisions concerning the use of AI tools in the boardroom should be informed by the need to ensure that boards are in the appropriate position to defend themselves in the event they face a subsequent lawsuit. As for me, when it comes to using AI to draft minutes, I think I’m aligned with the analog version of Bartleby the Scrivener – “I prefer not to.”
Check out our latest “Timely Takes” Podcast featuring Cleary’s J.T. Ho & his monthly update on securities & governance developments. In this installment, J.T. reviews:
– The SEC’s “Executive Compensation” Roundtable
– Director Interlocks Study
– PwC Board Study
– DEI Executive Order Updates
– DExit Scorecard Study
This month’s podcast includes a “bonus round” featuring J.T.’s thoughts on potential disclosure implications of the Iran conflict.
As always, if you have insights on a securities law, capital markets or corporate governance issue, trend or development that you’d like to share in a podcast, we’d love to hear from you. You can email me and/or Meredith at john@thecorporatecounsel.net or mervine@ccrcorp.com.
The PCAOB recently issued a new Audit Focus report on engagement acceptance by accounting firms. Like most PCAOB publications targeted toward auditors, this one is also worth reading by public company audit committees and their advisors. The report covers a variety of issues that auditors should consider before accepting particular engagements. This excerpt lays out questions that auditors should consider in connection with any new engagement:
– Were there any recent changes in ownership, company management, the board of directors, or the composition of the audit committee related to the prospective engagement? What were the reasons for the changes?
– What are the qualifications of the company’s current management team and the audit committee associated with the prospective engagement, and do these qualifications enable them to execute their roles and responsibilities effectively?
– Has the audit firm considered any previous restatements or material weaknesses (e.g., nature of restatements, nature of deficiencies, whether they are long-standing, etc.)?
– Were there any risk factors that indicate that company management and those charged with governance lack integrity?
– Has the audit firm thoroughly considered whether its personnel are free from any obligation to, or interest in, the prospective engagement, company management, or the company’s owners?
– Is the audit firm independent or will the audit firm be able to become independent for the audit and professional engagement period?
– Does the audit firm have sufficient knowledge and experience or appropriate access to subject matter experts, including relevant industry expertise, to undertake the work?
– Was the company’s management or audit committee aware of any improper activities conducted by the former auditor during interim reviews or annual audits, including activities related to the supervision of the audit or to the engagement quality review?
– Was the company’s management or audit committee aware of any illegal acts identified by the predecessor auditor and not reported to the U.S. Securities and Exchange Commission or any other relevant regulators?
The report also addresses inquiries that an audit firm must make if a company is changing auditors and reviews certain responsibilities of successor auditors. Audit committees and their advisors likely will find the report helpful in identifying potential areas of concern to a new auditor in connection with its engagement and in developing strategies to address those concerns.
Last week, in Hanna v. Paradise and Skillz Inc., (Del. Ch.; 7/25), the Delaware Chancery Court refused to dismiss insider trading allegations against corporate insiders arising out of their sales of company stock in a public offering conducted during a blackout period. mandated by the company’s insider trading policy. The plaintiff alleges that the company failed to disclose material negative information about its performance of which the board was aware until after the offering, which permitted insiders to sell their shares in the offering at an inflated price.
This case doesn’t involve a 10b-5 claim; instead, it’s a so-called “Brophy claim” alleging that the defendants’ actions involved a breach of fiduciary duty. The lawsuit was filed as a derivative action, so this decision focuses on issues like demand futility and director independence and does not address the substance of the plaintiff’s allegations. Chancellor McCormick declined to dismiss the case, so the possibility exists that she may address some of the more interesting issues raised by the case in subsequent proceedings.
Even if the Chancellor doesn’t address those issues, the case gives me an excuse to plug our upcoming “Securities Offerings During Blackout Periods” webcast – which I assure you will focus on the substantive issues surrounding a decision to move forward with a public offering during a blackout period.
We’ve put together a timely and topical agenda and assembled a terrific group of speakers for our “Proxy Disclosure & 22nd Annual Executive Compensation Conferences” to be held on October 21-22 at The Virgin Hotels in Las Vegas. Sure, I’m in full salesman mode here, but you don’t have to take my word for it when it comes to the quality of our speakers – just look at the SEC’s recent Executive Compensation Disclosure Roundtable, where our speakers were featured onevery panel!
If you follow our blogs, you know that there’s a lot going on in the world of securities regulation and corporate governance. The SEC is taking a hard look at executive comp disclosure requirements, DEI disclosure practices continue to evolve, and we’ve seen numerous important developments in activist strategies and tactics, shareholder proposals, and Delaware law during the first half of the year. You can’t afford to miss out on the critical guidance on these and other topics that our speakers will provide at our Conferences.
Register now to take advantage of our “Early Bird” rate – a 20% discount on the single in-person attendee fee. That rate expires on July 25th, which is just over two weeks from now, so 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.
The SEC released the agenda for the upcoming meeting of its Small Business Advisory Committee, and the topic of finders is front and center. Here’s what the agenda item “Deep Dive on Finders” will address:
In 2020, the Commission proposed, but did not finalize, a limited, conditional exemption from broker registration for “finders” who assist companies with raising capital in private markets from accredited investors. In an ongoing effort to promote small business capital formation, including access to capital for founders who are building businesses outside of prominent entrepreneurial hubs or without robust capital-raising networks, the Committee will explore issues surrounding “finders.”
To facilitate discussion and deepen the Committee’s understanding of “finders” and provide historical regulatory context, members will hear from SEC staff in the Division of Trading and Markets who will provide an overview of the 2020 proposal and share certain feedback from commentors. Thereafter, the Committee will have the opportunity to learn more about the role of “finders” and possible regulatory solutions from industry practitioners. As part of this discussion, the Committee will explore potential principles, frameworks, conditions and safeguards that could permit certain “finders” to engage in limited capital-raising activities.
The agenda also provides for continuing the discussion of Regulation A that began at the Committee’s May 6th meeting.
Earlier this year, Commissioner Mark Uyeda indicated that a review of filer classifications and scaled disclosure requirements would be on the SEC’s agenda. Last month, the Society for Corporate Governance submitted this 8-page letter to SEC Chairman Paul Atkins with suggestions on modifying and scaling disclosures for small- and mid-cap public companies.
If you represent smaller companies, you’ll probably find a lot to like in the Society’s letter. This excerpt lays out suggested changes to 10-K & 10-Q disclosure requirements for SRCs:
Form 10-K/10-Q-Related Simplifications: We respectfully request that the Commission:
– remove the requirement that SRCs’ audit reports include disclosure regarding critical accounting matters that an auditor identifies during the course of the audit, consistent with the treatment for EGCs.
– remove the requirement for all SRCs to provide an auditor attestation of internal control over financial reporting under Sarbanes-Oxley Act Section 404(b), which results from categorizing all SRCs as non-accelerated filers.
– revise Item 408(a) of Regulation S-K to exempt EGCs and SRCs from the requirement to provide quarterly disclosure regarding director and officer entrance into or termination of a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement.
– revise the Rule 12b-25 deadlines and provide that, in the event of a filed Form 12b-25, an EGC or SRC may file their late Form 10-K or Form 10-Q within 30 days or 15 days, respectively, of the original due date (as opposed to 15 and five days, respectively).
The Society letter also suggests updating SRC thresholds and aligning filer statuses using a combination of public float and annual revenue based on the EGC annual revenue threshold. This would result in the two categories of filers:
– Registrants with a public float of less than $2 billion or annual revenues below $1.235 billion would qualify as both an SRC and non-accelerated filer (thereby aligning the two categories).
– Registrants with a public float of $2 billion or more and annual revenues of $1.235 billion or more would be large accelerated filers (and, therefore, will lose SRC status).
Other topics addressed in the Society’s letter include simplification of proxy and executive comp disclosures and Section 16 and Form 144 reporting. An appendix to the Society’s letter includes a chart detailing each of its proposals.
