Liz recently blogged on the topic of how “homeless” public companies – those that claim not to have a principal executive office in their SEC filings – may create regulatory puzzles. Keith Bishop recently blogged a couple of specific examples of those puzzles under California law:
The designation of a corporation’s principal executive offices, of course, is one factor in determining whether a publicly held corporation is subject to California’s board quota laws. Cal. Corp. Code §§ 301.3, 301.4, 2115.5 & 2115.6. In addition, a domestic or foreign corporation required to file an annual statement of information (Form SI-550) must disclose the address of its principal executive office (no “s”). Cal. Corp. Code §§ 1502(a)(5) & 2117(a)(3).
Those corporations that have decided that they have no principal executive office may want to revisit their bylaws. Some corporate bylaws provide impose advance notice requirements on shareholders wishing either to submit a proposal for a shareholder vote or to nominate candidate(s) for election to the board. Often these provisions require that the notice be received at the corporation’s principal executive offices within a specified timeframe before the meeting. This is problematical if the corporation is taking the position that no such office exists in its filings with the Securities and Exchange Commission.
I know all the cool kids only want to exist in cyberspace or the metaverse or whatever this week’s variation on cloud cuckoo land is, but I think it’s kind of preposterous that the SEC permits companies to get away with offering securities without providing a physical address, particularly since they almost certainly have one. In that regard, this Olshan blog notes that “securities law commentators have suggested that the term “principal executive offices” would mean the place where the CEO and most other executive officers work most of the time.”
It’s no secret that rule amendments to enhance cybersecurity disclosure are on the SEC’s agenda, but in a speech yesterday at Northwestern Law School’s annual Securities Regulation Institute, SEC Chair Gary Gensler provided a little more color as to what public companies might expect to see in a rule proposal. Here’s an excerpt:
Disclosure regimes evolve over the decades. Cybersecurity is an emerging risk with which public issuers increasingly must contend. Thus, I’ve asked staff to make recommendations for the Commission’s consideration around companies’ cybersecurity practices and cyber risk disclosures. This may include their practices with respect to cybersecurity governance, strategy, and risk management.
A lot of issuers already provide cyber risk disclosure to investors. I think companies and investors alike would benefit if this information were presented in a consistent, comparable, and decision-useful manner.
In addition, I’ve asked staff to make recommendations around whether and how to update companies’ disclosures to investors when cyber events have occurred.
Make no mistake: Public companies already have certain obligations when it comes to cybersecurity disclosures. If customer data is stolen, if a company paid ransomware, that may be material to investors. As recent cases show, failure to make accurate disclosures of cybersecurity incidents and risks can result in enforcement actions.
Chair Gensler’s speech also addressed cybersecurity regulatory initiatives addressing broker-dealers, investment advisors, mutual funds and other participants in the financial sector – as well as service providers to those businesses.
The inaugural post on Goodwin’s new Public Company Advisory Blog shares some helpful tools on navigating the legal and practical aspects of the earnings release process. This 18-page Earnings Release Compliance Guide provides an overview of the legal issues that companies need to keep in mind when preparing their earnings releases, as well as guidance on dealing with potential problem areas. For example, this excerpt addresses the use of KPIs:
– Review key performance measures/indicators (KPIs) for consistency across quarters and other disclosure documents.
– KPIs are used by management to manage or evaluate the performance of the business. Certain KPIs may not meet the definition of a non-GAAP financial measure and thus may not be subject to Regulation G or Item 10(e) of Regulation S-K. Nevertheless, you need to consider what additional information may be necessary to provide adequate context for an investor to understand the KPI metric presented. In this regard, the SEC generally expects the following disclosures to accompany any KPI metric:
– a clear definition of the metric and how it is calculated,
– a statement indicating the reasons why the metric provides useful information to investors, and
– a statement indicating how management uses the metric in managing or monitoring the performance of the business
This publication is accompanied by a 6-page Earnings Release Compliance Checklist that provides a bullet-point summary of many of the topics covered in more depth in the Guide.
This Woodruff Sawyer blog lays out 20 questions that a prospective director should ask before agreeing to join a corporate board. Each question is accompanied by an explanation of why it’s important. Here’s an example:
What skill sets are represented on the board?
A diversity of skills and experience among board members is one of the best ways to ensure that the board can address unexpected issues. Does the board you are considering have this? If everyone on a board has a similar background—everyone has a technical or finance background, for instance—the board is less likely to be able to proactively identify new risks or recognize innovative solutions and strategies.
Consider, too, the advantage of having at least one board member who has the skill set to be the director who will deal with difficult legal situations, such as an internal investigation or thorny litigation. A board that has no one capable of making independent legal judgments is a board that is at risk for blindly agreeing to do whatever outside counsel tells them to do.
I’ve previously blogged about some of the uncertainties involved in how to account for digital assets. In light of those uncertainties & Bitcoin’s volatility, it’s not surprising that companies with investments in Bitcoin or other digital assets might want to present non-GAAP financial data that backs out the impact of swings in the value of those assets on their financial results.
Yeah, well good luck with that, because the Corp Fin Staff apparently is having none of it. Here’s an excerpt from this Bloomberg Tax article detailing the back & forth between the Staff and MicroStrategy on that company’s unsuccessful efforts to back out Bitcoin from its non-GAAP income statement:
For the quarter ending Sept. 30, 2021, MicroStrategy reported a net loss of $36.1 million. Adding back in its share-based compensation expense and the impairment of its digital assets made the company’s unofficial, or non-GAAP, income flip to $18.6 million, its filing shows. MicroStrategy did not immediately respond to a request for comment.
The company told the SEC it used non-GAAP measures to give investors a fuller picture of its finances. If the company only showed declines in value, it would give “an incomplete assessment” of its Bitcoin holdings that would be “less meaningful to management or investors” in light of the company’s strategy to acquire and hold Bitcoin. “We further believe that the inclusion of bitcoin non-cash impairment losses may otherwise distract from our investors’ analysis of the operating results of our enterprise software analytics business,” the company wrote.
The SEC disagreed. In a letter dated Dec. 3, the market regulator told MicroStrategy it objected to the adjustment and told the company to remove it from future filings. In its Dec. 16 response, MicroStrategy said it would comply.
Speaking of Bitcoin, as a very bitter Cleveland Browns fan, I admit that this report brightened my day just a little.
On Friday, Corp Fin & IM announced that companies should no longer provide paper “courtesy copies” of filings unless the Staff requests them. This announcement is one of those things that really dates me – because I remember when what we called “courtesy packages” were absolutely de rigueur.
As I recall, there were always multiple courtesy packages for Securities Act filings – one for the legal reviewer, one for the accountant, and usually one for the branch chief – and they always included clean & marked copies of your filing, a copy of your comment response letter, and any new or revised exhibits.
Back in the paper filing days, you usually provided courtesy packages with each amendment to your registration statement in order to help expedite the review process. But in the days before Rule 430A*, they actually played a critical role in getting a registration statement declared effective before the market opened. That’s because you had to get the filing package into the reviewer’s hands as soon possible after you dropped the filing package off at the SEC file desk so that they could see the pricing information, verify any changes made in response to last minute comments, and declare your registration statement effective.
Over time, as the SEC moved from paper to electronic filings, I’d still offer to Fed Ex courtesy packages to the reviewer. The usual response was along the lines of “We aren’t supposed to ask for courtesy copies, but that would be really helpful.” Now, the Staff says you shouldn’t provide courtesy copies unless they ask for them. . . Jeez, am I really getting sentimental about courtesy packages! It sure looks like it.
*Yes, there really was a time before Rule 430A when you had to drop pricing information into a pre-effective amendment that you hand delivered to the SEC first thing in the morning on the day you wanted to start trading your IPO. But that was almost 35 years ago, which is why this particular old man called out William Butler Yeats – not Cormac McCarthy & the Coen Brothers – in the title of this blog.
The January – February issue of the Deal Lawyers newsletter was just posted and sent to the printer. Articles include:
– Delaware Supreme Court Upholds Advance Waiver of Statutory Appraisal Rights
– SPACs and the Implications for D&O Insurance
– Purchase Price Adjustments in Technology Deals
Remember that, as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers 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 – 4th 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 newsletter, anyone who has access to DealLawyers.com will be able to gain access to the 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 newsletter including how to access the issues online.
We’re kicking off 2022 in a big way, with three important webcasts for our members next week (thanks to each & every one of you for renewing)! Not only will these 60-minute programs deliver essential & practical info from “All-Star” lineups – if you attend the live program, you also can make the most of your time by requesting CLE credit. Join us at 2pm Eastern:
– Tuesday, January 11th for the program, “Universal Proxy: Preparing for the New Regime” – Goodwin Proctor’s Sean Donohue, Gibson Dunn & Crutcher’s Eduardo Gallardo, Sidley Austin’s Kai Liekefett and Hogan Lovells’ Tiffany Posil will discuss whether the SEC’s recent adoption of rules mandating the use of universal proxies will change the game when it comes to proxy contests and what companies should do in advance of the August 31, 2022 compliance date. We are making this DealLawyers.com webcast available as a bonus to members of TheCorporateCounsel.net.
– Wednesday, January 12th for the program, “Rule 10b5-1 & Buybacks: Practical Impacts of SEC’s Proposals” – Skadden’s Brian Breheny, Davis Polk’s Ning Chiu, WilmerHale’s Meredith Cross, Broadridge’s Keir Gumbs, and Morrison & Foerster & TheCorporateCounsel.net’s Dave Lynn will be highlighting significant aspects of the SEC’s recent proposals to amend the rules governing insider trading plans and corporate stock repurchases, including what companies can & should do before the SEC finalizes the amendments.
– Thursday, January 13th for the program, “ISS Forecast for the 2022 Proxy Season” – Davis Polk’s Ning Chiu and Gunster’s Bob Lamm will join Marc Goldstein of ISS to provide insight on ISS’s latest policy updates, how companies can help themselves with disclosures, and predictions for the biggest issues we’ll all be grappling with this proxy season.
In addition to these three webcasts next week, we have a number of other great programs lined up across our sites – and even more in the queue. If you’re a member, you are able (and encouraged) to attend programs on the sites you subscribe to, at no charge. If you’re not yet a member, subscribe now! The webcast cost for non-members is $595. If you haven’t done so already, you can renew or sign up by emailing sales@ccrcorp.com – or call us at 800.737.1271.
To get CLE credit for each of these webcasts, you just need to submit your state and license number for the applicable program, via the link on that webcast flyer page, and complete the prompts during the live program.
A company called Hygienic Dress League issued a press release earlier this week announcing that it was planning to raise capital through a Reg A+ offering. You’re probably thinking that there’s nothing particularly newsworthy about that, right? Well, check out this excerpt from the press release, which explains that while HDL is legally a corporation, it’s actually an art form:
Hygienic Dress League (HDL), a legally registered corporation as a new and original form of art, today announced they have filed an application with the Securities and Exchange Commission (“SEC”) for Regulation A+ exemption to issue securities. Today, HDL filed for a Tier 2 offering that, if approved, would allow for the issuance of up to $75 million of securities in a 12-month period. This would permit members of the public, subject to conditions, to participate in the offering. HDL believes this application is the first of its kind before the SEC.
Founded in 2007 in Detroit by Steve and Dorota Coy, husband and wife visual artists, HDL explores aspects of the human condition and contemporary society while challenging reality, truth, and belief systems through the framework of corporate activities. Thus far, HDL’s vision and exhibitions have manifested as TV commercials, public installations, fleeting out-of-home projections, and in augmented reality. HDL’s guerilla marketing and urban interventions have been experienced in 19 cities from nine countries across three continents.
At one point, the press release quotes one of HDL’s co-founders as saying that if the offering moves forward, “it will push the boundaries of art and finance, showing how the two merge and interact with each other. The goal is for people to ponder the nature of corporations, our concepts of value, and other seemingly permanent structures of our world.”
So, what is this new and original art form offering? NFTs, of course:
The first-of-its kind planned offering for participants will be for 600k non-fungible token (NFT) securities. Concurrently, HDL has begun minting NFTs representing “employees.” Each block of shares will come with its own unique NFT employee. After the planned offering, interested parties will be able to purchase certain HDL NFTs separately from NFT shares with the opportunity to sell them on open secondary markets.
I visited the SEC’s website and the only thing on file for HDL as of Thursday afternoon was a Form D for a $500K private placement. I suppose that, despite the press release, they made the filing for the Reg A offering confidentially. That’s a shame, because I’m dying to see this one. For now, we’re going to have to content ourselves with exploring the wonders of the company’s testing the waters website. As you’ll discover if you pay that site a visit, that’s not nothin’.
I do have one disclosure-related concern about this deal. I’m not sure that HDL can back up its claims to being a new and original form of art that’s pushing the boundaries of art & finance. That’s because anyone who read WeWork’s IPO registration statement or followed the bizarre aftermath of that aborted deal knows that that Adam & the gang were way ahead of HDL in turning a corporation into a piece of conceptual art.
Last September, Liz blogged about the SEC’s decision to solicit comments on proposed upgrades to the way filers accessed the EDGAR system & the way in which filer accounts are managed. The comment period expired on December 1, 2021, but it doesn’t look like changes to the EDGAR access process are imminent. That’s because on Wednesday, the SEC announced that Chair Gensler had “asked the staff to consider how the agency might address concerns articulated by commenters” on the proposed changes.
I checked out the SEC’s website, and commenters – many of whom are affiliated with third party filer support companies – expressed a number of concerns about the proposed changes. In particular, several commenters noted that the SEC’s proposal to alter the authentication scheme from an SEC-managed form-based login to the government-wide Login.gov single sign-on could cause significant problems for filers. This excerpt from DFIN’s letter is fairly representative of those concerns:
Our main concern relates to the use of Login.gov with multi-factor authentication. This approach is not an efficient option for system-to-system authentication, the most common submission method used by the majority of filers today. We recognize the Commission’s goal of providing additional security, however the proposed access through Login.gov will pose an added burden on filers as described herein.
We believe that eliminating the server-to-server submission process would introduce significant negative impacts to the reporting environment that healthy capital markets depend on, as well as significantly increase the burden to the SEC to support filers throughout the submission process.
Another common theme among the letters submitted to the SEC was a request to extend the comment period beyond its December 1, 2021 expiration date. While the SEC didn’t formally extend the deadline in its announcement, it did make it clear that the Staff “would seek additional information and engage in a dialogue regarding concerns raised by commenters, which may include consideration of further approaches to EDGAR access improvements.”
