It can happen to any public company – an executive is having a one-on-one with an investor or analyst, and inadvertently discloses a tidbit of information that may be material nonpublic information. If it is, then Reg FD requires the company to promptly disclose that information to the public. But what internal procedures should companies follow in determining whether they have a Reg FD issue? That’s the topic of this Woodruff Sawyer blog, which lays out three steps that a company that finds itself in this situation should take:
1. Avoid making premature conclusions. Many times, potential Regulation FD issues are flagged by non-lawyers that were present at a meeting where the authorized speaker disclosed nonpublic information. In some cases, the issue may be flagged by the authorized speaker. Individuals may naturally jump to conclusions as to the character of disclosure. That should be avoided. Best practice for these individuals is to limit internal discussions and communications—particularly if they are in writing—regarding a potential Regulation FD disclosure issue to the particular facts and leave legal assessments to legal counsel.
2. Immediately contact legal counsel. A materiality determination will generally require, among other things, that counsel consult with other functions/departments within the company to assess whether the authorized speaker has in fact inadvertently disclosed material nonpublic information. This can take time—something the company doesn’t have much of. Remember, a company must publicly disclose material nonpublic information following an unintentional selective disclosure of that information before the later of (a) 24 hours or (b) the beginning of the next day’s trading on the New York Stock Exchange (NYSE). As a result, it is imperative that counsel have as much runway to assess the issue. If public disclosure is determined to be required, counsel will need to help to prepare that disclosure along with other internal stakeholders, which may be management, investor relations and finance.
3. Make certain that relevant internal stakeholders are involved, updated as to developments and made aware of the outcome. Ideally, a company will have already identified the team that should be involved in reviewing Regulation FD related issues before having to put up the Bat-Signal. At a minimum, that team should include in-house counsel, investor relations, and finance.
This third point is critical because if the disclosure results in stock price movements, the company may receive inquiries from analysts, investors, stock exchanges & the SEC. Since no single function will be on the receiving end of all of those inquiries, it’s important to involve all relevant internal stakeholders to ensure there are no information gaps.
After I posted this, a member reached out to us with the following comment, and it’s a good one: “Also, no one should trade until the situation is worked out. Insider trading while material information has been disclosed only selectively, creates additional issues for the traders, putative tipper(s) and the issuer.”
Twitter has been a great source of DealLawyers.com blogs this week, but the bird app also was recently involved in some litigation of interest to securities & capital markets lawyers. The 10b-5 Daily points out that last month, the 9th Circuit held that Twitter did not have a duty to update statements about its product development efforts. This excerpt summarizes the facts of the case and the Court’s decision:
In Weston Family Partnership LLP v. Twitter, 2022 WL 853252 (9th Cir. March 23, 2022), the plaintiffs alleged that Twitter had misled investors about problems with its Mobile App Promotion (MAP) product. In August 2019, Twitter announced that software bugs in the MAP product had caused the sharing of the cell phone location data of its users and that it had “fixed these issues.” Several months later, the company disclosed that software bugs continued to exist and reported a $25 million revenue shortfall.
The district court dismissed the claims. On appeal, the Ninth Circuit found that “fixed these issues” referred to no longer sharing the cell phone location data, not the software bugs. Moreover, Twitter had no duty to update investors about the progress of its MAP product and the plaintiffs had not plausibly alleged that the software bugs had materialized and impacted revenue prior to August 2019.
The Court’s language on the duty to update is likely to find its way into countless future briefs:
Plaintiffs suggest that Twitter—when faced with a setback in dealing with software bugs plaguing its MAP program—had a legal duty to disclose it to the investing public. Not so. While society may have become accustomed to being instantly in the loop about the latest news (thanks in part to Twitter), our securities laws do not impose a similar requirement. Section 10(b) and Rule 10b-5 “do not create an affirmative duty to disclose any and all material information.” Matrixx, 563 U.S. at 44.
Put another way, companies do not have an obligation to offer an instantaneous update of every internal development, especially when it involves the oft-tortuous path of product development. See Vantive, 283 F.3d at 1085 (“If the challenged statement is not false or misleading, it does not become actionable merely because it is incomplete.”). Indeed, to do so would inject instability into the securities market, as stocks may wildly gyrate based on even fleeting developments. A company must disclose a negative internal development only if its omission would make other statements materially misleading.
Stan Keller’s “Integration of Public and Private Offerings” outline has long been the go-to resource for lawyers trying to work their way through integration issues in securities transactions. Stan recently updated his outline and was kind enough to provide a copy to us, which we’ve posted in our “Integration” Practice Area. If you’re not familiar with it – well, you must be new here!
The outline focuses on SEC rules and interpretations that relate to the integration of private and public offerings and how they affect the capital formation process. Importantly, the outline also reviews the SEC’s approach to integration of offerings generally as it has evolved to date, including the major changes that became effective in March 2021. It remains a terrific resource and one you should definitely keep close at hand.
On April 14, 2022, a SPAC called Alberton Acquisition Corporation filed a Form 8-K announcing that its de-SPAC target had decided to terminate its merger agreement with the Alberton because the deal would not be completed before its April 26, 2022 “drop dead” date. The 8-K includes a somewhat elliptical reference to the fact that Alberton’s Form S-4 registration statement for the transaction hadn’t been declared effective by the SEC as of April 13, 2022. That announcement prompted an extraordinary statement from Commissioner Hester Peirce criticizing the SEC for its inaction concerning that registration statement.
Alberton’s reference to the status of the registration statement may have been elliptical, but Commissioner Peirce’s was very direct. She said that the SEC failed to act on Alberton’s acceleration request, and that its inaction had everything to do with the company’s status as a SPAC:
Commission inaction on a request for acceleration of the effective date of a registration statement is highly unusual. Rule 461(b) of the Securities Act of 1933 explains the statutory considerations for the Commission when determining to accelerate the effective date of a registration statement, lists specific situations in which the Commission “may refuse to accelerate the effective date,” and states that “it is the general policy of the Commission, upon request, . . . to permit acceleration of the effective date of the registration statement as soon as possible after the filing of appropriate amendments, if any.” Here, no Commission action has been taken, so there is no obligation to explain why the registration statement was not declared effective.
The failure to take an otherwise routine step makes sense only in the larger context of the Commission’s newfound hostility to SPAC capital formation. The SPAC completed its IPO in October 2018 with the intent to complete a business combination within 18 months. SPAC shareholders approved two extensions of that timeline prior to a merger agreement being entered into in October 2020 with SolarMax, a solar energy company with operations in China. SPAC shareholders subsequently approved two further extensions of the timeline within which to complete the business combination, resulting in the current deadline of April 26, 2022. Meanwhile, the SPAC filed eight amendments to its registration statement relating to the business combination since October 2020, including the most recent April 4, 2022 amendment.
Commissioner Peirce goes on to recount other developments on the SPAC front over the course of the past 18 months, including “most significantly,” the SEC’s decision last month to propose “sweeping rules pertaining to SPACs, including a proposed non-exclusive safe harbor under the Investment Company Act of 1940.” Among other things, that safe harbor would require a SPAC to enter into a de-SPAC agreement within 18 months of their IPO & complete the deal within 24 months following the IPO.
Alberton has been a SPAC for more than 24 months, and Commissioner Peirce speculated that, because the failure to act on the acceleration request came less than a month after the release of the SPAC proposal, “this SPAC might be a victim of the parameters of a non-exclusive safe harbor that have not yet been adopted.” Her critique also hinted at potential due process issues associated with the SEC’s action, pointing out that “[w]ithout affording some notice, the Commission cannot turn on a dime and start treating SPACs that do not meet an arbitrarily determined timeline as investment companies.” She concludes her statement by questioning the SEC’s good faith with respect to this matter:
It is not a good look for the Commission to run a SPAC through the gauntlet of addressing disclosure comments only to say, “Oh, and by the way, now you are too old to be anything other than an investment company.” We must always engage registrants in the same good faith that we expect of them. A failure to do so would undermine the credibility of this agency.
Unfortunately, it’s difficult to assess the validity of Commissioner Peirce’s allegations. The Staff comment letters and company responses haven’t been made public yet, and with eight amendments (!) to the company’s Form S-4, it’s fair to say that this deal had a lot of hair on it, regardless of the SEC’s hostility toward SPACs. Furthermore, eleventh hour comments that throw the timing of an offering off-course aren’t unheard of outside of the SPAC realm either. Nevertheless, this situation certainly raises a lot of questions about how future SPAC filings will – or will not – be processed.
In response to sanctions imposed on Russia for its unprovoked invasion of Ukraine, the Putin regime has promised to take countermeasures in an effort to make foreign investors feel some pain. This King & Spalding memo says that investors harmed by these actions may have recourse against Russia under various international treaties, assuming that a diplomatic resolution for addressing those claims cannot be achieved. This excerpt describes Russia’s treaty obligations that may give rise to claims by foreign investors:
There are currently 62 bilateral investment treaties (“BITs”) in force between Russia and key jurisdictions such as Canada, the Netherlands, Singapore, Switzerland, Turkey, the United Arab Emirates, and the United Kingdom, but not the United States. Russia is also party to several multilateral treaties that provide investment protection guarantees, most notably the Energy Charter Treaty (the “ECT”). Although Russia never ratified the ECT and sought to terminate its provisional application in 2009, the ECT contains a 20 year “survival” mechanism. This arguably means that Russia will remain bound by investment protection guarantees in the ECT until 2029.
These investment treaties provide investors and their investments in Russia with several protections, although the scope and nature of those protections will vary depending on the particular treaty, and allow affected investors to bring legal claims directly against Russia for violations of these guaranteed protections.
By now, you’re probably saying, “that’s swell, but how are investors going to collect any damage awards they receive?” The memo says that there may be way to do that:
In the likely event that Russia fails to voluntarily pay an adverse arbitral award, a foreign investor will need to enforce its award against Russian state-owned assets located outside Russia. The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (the “New York Convention”) is a multilateral treaty that requires its 169 Contracting States (which include Russia) to recognize and enforce arbitration awards rendered in other Contracting States, subject to very limited exceptions.
The memo acknowledges that enforcement will pose significant challenges, but because international sanctions regimes have frozen many billions of dollars in Russian assets, investors that can identify frozen assets belonging to certain Russian state-owned entities may be able to enforce arbitral awards against those assets.
Join us tomorrow at 2 pm eastern for the webcast – “The (Former) Corp Fin Staff Forum” – to hear former senior SEC Staff members Sonia Barros of Sidley Austin, Meredith Cross of WilmerHale LLP, Tom Kim of Gibson Dunn & Crutcher, LLP, Keir Gumbs, Chief Legal Officer, Broadridge Financial Solutions, and Dave Lynn of Morrison & Foerster and TheCorporateCounsel.net discuss recent rulemaking & other SEC initiatives and provide practical guidance about what you should be doing as a result.
If you attend the live version of this 60-minute program, CLE credit will be available. You just need to fill out this form to submit your state and license number and complete the prompts during the program.
Members of TheCorporateCounsel.net are able to attend this critical webcast at no charge. The webcast cost for non-members is $595. If you’re not yet a member, subscribe now by emailing sales@ccrcorp.com – or call us at 800.737.1271.
Yesterday, Corp Fin’s Accounting Staff issued SAB No. 121, which addresses the accounting treatment of safeguarded digital assets held by crypto platforms on behalf of customers who trade those securities digital assets. SAB 121 reflects the Staff’s view that “obligations associated with these arrangements involve unique risks and uncertainties not present in arrangements to safeguard assets that are not crypto-assets, including technological, legal, and regulatory risks and uncertainties.” Accordingly, it issued SAB 121 to provide guidance on the proper accounting treatment of those assets. This excerpt lays out the Staff’s position:
Facts: Entity A’s business includes operating a platform that allows its users to transact in crypto-assets. Entity A also provides a service where it will safeguard the platform users’ crypto-assets, including maintaining the cryptographic key information necessary to access the crypto-assets. Entity A also maintains internal recordkeeping of the amount of crypto-assets held for the benefit of each platform user. Entity A secures these crypto-assets and protects them from loss or theft, and any failure to do so exposes Entity A to significant risks, including a risk of financial loss. The platform users have the right to request that Entity A transact in the crypto-asset on the user’s behalf (e.g., to sell the crypto-asset and provide the user with the fiat currency (cash) proceeds associated with the sale) or to transfer the crypto-asset to a digital wallet for which Entity A does not maintain the cryptographic key information. However, execution and settlement of transactions involving the platform users’ crypto-assets may depend on actions taken by Entity A.
Question 1: How should Entity A account for its obligations to safeguard crypto-assets held for platform users?
Interpretive Response: The ability of Entity A’s platform users to obtain future benefits from crypto-assets in digital wallets where Entity A holds the cryptographic key information is dependent on the actions of Entity A to safeguard the assets. Those actions include securing the crypto-assets and the associated cryptographic key information and protecting them from loss, theft, or other misuse. The technological mechanisms supporting how crypto-assets are issued, held, or transferred, as well as legal uncertainties regarding holding crypto-assets for others, create significant increased risks to Entity A, including an increased risk of financial loss. Accordingly, as long as Entity A is responsible for safeguarding the crypto-assets held for its platform users, including maintaining the cryptographic key information necessary to access the crypto-assets, the staff believes that Entity A should present a liability on its balance sheet to reflect its obligation to safeguard the crypto-assets held for its platform users.
As Entity A’s loss exposure is based on the significant risks associated with safeguarding the crypto-assets held for its platform users, the staff believes it would be appropriate to measure this safeguarding liability at initial recognition and each reporting date at the fair value of the crypto-assets that Entity A is responsible for holding for its platform users. The staff also believes it would be appropriate for Entity A to recognize an asset at the same time that it recognizes the safeguarding liability, measured at initial recognition and each reporting date at the fair value of the crypto-assets held for its platform users.
SAB 121 also provides guidance on the disclosures with respect to these arrangements that would be required in the footnotes to the platform’s financial statements, and also points out that “disclosures regarding the significant risks and uncertainties associated with the entity holding crypto-assets for its platform users may also be required outside the financial statements under existing Commission rules, such as in the description of business, risk factors, or management’s discussion and analysis of financial condition and results of operation.”
In what’s become a tradition when it comes to SEC actions touching on crypto, the redoubtable crypto-evangelist Commissioner Hester Peirce (aka Crypto Mom) issued a statement expressing her displeasure with the decision to issue this guidance.
A recent article by Bloomberg Law’s Preston Brewer says that recent federal legislation banning mandatory arbitration claims in employment contracts may prompt more public companies to disclose information about these claims. This excerpt explains why that might be the case:
The new law puts a stop to the forced diversion of sexual harassment claims away from the courts. Companies will thus have to grapple with the uncertainty of potentially large judgments, including punitive damages. These potential scenarios will likely convince more and more public companies to describe the sexual harassment risk to their businesses in their SEC filings.
From a securities regulation perspective, the core determinant as to what a registered company should publicly disclose is whether the information would be material to an investor trying to make an informed investment decision. The greater the potential risk to the company, the more likely that such information needs to be disclosed in its SEC filings. The tension between this legal obligation and a company’s desire to present a positive public image is sure to increase.
Although the nature of this risk will vary from company to company, the risk isn’t simply the monetary costs of defending and paying settlements or judgments. A company may face significant reputational risks that can impair its brand and the company’s market value. Management may be distracted while defending against claims, thereby harming the business, and the greater public exposure of these court-litigated allegations (as opposed to closed-door arbitration) increases the risk that companies will lose key personnel who may be difficult to replace.
The article discusses the need for public companies to tailor risk factors to address this risk and notes out that industries with a track record of sexual harassment claims, such as tech, entertainment, & finance, may be more affected by the legislation than those in other industries.
We’ve blogged on several occasions about the phenomenon of “remote-first” public companies that claim to have no physical address. According to this Goodwin blog, however, the Staff has had its fill of these filings:
Numerous public companies have declared themselves a “remote-only” or “remote-first” company. Recently, we learned that the SEC Staff will not declare a registration statement effective unless the company provides a physical address on the cover page of its registration statement in response to the requirement to disclose the address of its principal executive offices. Based on our review of SEC comment letters, we think the Staff’s position is a result of various rules that require certain communications to be sent to a company’s principal executive offices, including Rules 14a-8 and 14d-3(a)(2)(i).
We understand that it is acceptable to the SEC Staff for a “remote-only” or “remote-first” company to provide a P.O. Box to meet the physical address requirement. We have also seen a company provide in response to an SEC Staff Comment that any stockholder communication required to be sent to its principal executive offices may be directed to its agent for service of process and such company had its related registration statement declared effective.
With apologies to all denizens of the metaverse, I have always thought this was a ridiculous position to take and I applaud the Staff’s decision. Frankly, the thing that’s surprised me most about the emergence of these allegedly homeless public companies is that the Corp Fin Staff has, at least until now, been willing to put up with this nonsense. If you enjoyed this curmudgeonly blog, stay tuned – I plan to address “you kids and your darn rock ‘n roll music” in an upcoming post. Also, get off my lawn.
