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.”
I’m sorry to disappoint those of you hoping to hear something from the SEC on its long-anticipated 13(d) reporting reform proposal, but today I’m blogging about a different set of beneficial ownership reporting rules. You probably should listen up anyway, because the proposed regs I’m talking about could be a big deal for a lot of public and private companies.
Last month, Treasury’s Financial Crimes Enforcement Network (FinCEN) proposed regulations on reporting of beneficial ownership information under the Corporate Transparency Act. These proposed regulations will create new federal filing requirements applicable to a wide range of entities (including operating companies, holding companies, LLCs and others). Here’s an excerpt from this Wilson Sonsini memo on the potential scope of the reporting requirement:
The proposed regulations would require every foreign or domestic legal entity that qualifies as a “reporting company” — FinCEN estimates that 25 million existing legal entities, plus an additional three million new legal entities each year, will meet the criteria—to file reports with FinCEN that identify the beneficial owners of the entity as well as the individuals who have filed to form or register the entity. Companies and individuals who fail to comply with or properly facilitate the reporting process (e.g., by providing inaccurate or incomplete information to reporting companies) may be subject to potential civil and criminal penalties, including potential imprisonment.
The memo provides plenty of additional details about the scope and operation of the proposed regulations, including what information is required to be reported and when filings must be made, and the exemptions that could apply to public reporting and large operating companies. The public comment period ends on February 8, 2022, and the memo says final regs are expected sometime this year.
Last May, I blogged about the rebound in stock buybacks during the 1st quarter of 2021. This S&P Global article says that among the S&P 500 at least, buybacks haven’t just rebounded – they’ve blasted off. According to the article, S&P 500 companies repurchased $234.6 billion of stock in the 3rd quarter. Not only does that that represents a 130% increase over the 3rd quarter of 2020, and an 18% increase over from the 2nd quarter of 2021, but it also shatters the old record for buybacks of $223 billion that was set during the 4th quarter of 2018. Here are some additional data points from the article:
– 309 companies reported buybacks of at least $5 million for the quarter, up from 294 in Q2 2021, and up from 190 in Q3 2020; 371 issues did some buybacks for the quarter, up from 360 in Q2 2020 and up from 290 in Q3 2020.
– Buybacks remained top heavy with the top 20 issues accounting for 53.8% of Q3 2021 buybacks, down from Q2 2021’s 55.7%, down from the dominating 77.4% in Q3 2020, and up from the pre-COVID historical average of 44.5%.
– For the 12-month September 2021 period, buybacks were $742.2 billion, a 21.8% increase from $609.4 billion in the 12-month June 2021 period, and up 30.0% from $570.8 billion in the 12-month September 2020 period.
The article also expects robust buyback activity among the S&P 500 to continue during the 4th quarter, as company use repurchases to fund equity comp plan obligations.
Over on The D&O Diary, Kevin LaCroix recently reported some good news for public companies – federal securities class action suits declined sharply last year. Here’s an excerpt with the numbers:
According to my tally, there were 210 federal court securities class action lawsuits filed in 2021, representing a 34% decline from the 320 federal court securities suit filings in 2020. (Please note that these figures reflect only federal court securities class action lawsuit filings; the filing numbers do not include state court securities class action lawsuit filings during the year.)
The 2021 securities suit filing numbers represents an even more dramatic decline compared to the annual average number of lawsuits filed during the 2017-2019 period, a period during which the number of securities lawsuits surged. The annual average number of securities suit filings during the 2017-2019 period was 405; the 210 securities suit filings in 2021 represents a decline of about 48% compared to the elevated annual average level of filings during that recent period.
Kevin says that the biggest factor in the decline in filings last year was the decline in the number of federal court merger objection class action lawsuits. Only 18 federal court merger objection class action lawsuits were filed in 2021, compared to 102 the prior year. He also cautions that the drop in merger objection filings doesn’t mean that those suits aren’t being filed, just that they’re not being filed as class actions. But even after backing out the effect of merger objection lawsuits, traditional securities class action filings during 2021 still dropped by 11.9% decline from 2020.
With corporate boards facing increasing pressure to improve diversity, this WSJ article says that training programs aimed at expanding the pool of potential director candidates are proliferating:
Law firms, universities and current directors of companies have launched new or expanded programs over the past few years to coach prospective board candidates, offering training on topics from corporate governance to committee work. Some programs are free or sponsored by companies, while others can cost thousands of dollars.
Sponsors are hoping to broaden the pool of people who are ready to fill board roles beyond former chief executives to other qualified business leaders. They also can match candidates with board openings, as companies’ boards are still largely white and male with roles often filled through professional networks of existing directors.
The article mentions a number of specific training programs, and a brief Google search led me to websites for Harvard’s program and Berkeley’s program. Neither of these are cheap – Harvard runs a one-week course that will set you back $5,500, while Berkeley’s program runs for nine months and costs $6,995. The article also discusses the NACD’s Accelerate program, which is a two-year training program that costs $5,700.
If you’re interested in seeing what other training programs are available, check out UNC Law School’s Director Diversity Initiative, which has an extensive list of organizations that promote board diversity and offer training programs for prospective directors.
The Minority Corporate Counsel Association recently released its annual report on law firm diversity, and the results aren’t terribly inspiring. Here’s an excerpt from the summary:
In assessing a decade of law firm employee demographics across more than 200 firms representing most of the AmLaw100 and the NLJ250, we found an increase in the overall share of working attorneys identifying as members of underrepresented racial and ethnic groups including multiracial, from 14% in 2010 to 20% in 2020. In 2020, 89% of partners across surveyed U.S. laws firms identified as White/Caucasian, down from over 93% in 2010. Meanwhile, representation of historically underrepresented racial and ethnic groups improved more noticeably among summer associates (from 28% in 2010 to 36% in 2020) and associates (from 21% in 2010 to 28% in 2020).
This minimal progress did not boost representation for all underrepresented racial and ethnic groups. While the share of Asian, Hispanic or Latinx, and multiracial attorneys at firms increased slightly between 2010 and 2020, there was no change in the share of associates and partners who are African American or Black. And surveyed firms reported having very few Indigenous and Native Hawaiian or Pacific Islander attorneys.
Gender disparities in representation also persist at law firms, as does low representation of other historically underrepresented groups. About 39% of all attorneys at surveyed firms are women, including 48% of associates but just 26% of partners. This year, MCCA collected data on attorneys who identify as non-binary and military veterans. In 2020, firms reported that attorneys who identified as follows: non-binary (0%), LGBTQ (4%), military veterans (less than 2%), or as having a disability (1%).
The survey notes that the problem isn’t just getting people in the door at law firms, it’s keeping them there. For instance, the survey reports that while 36% of summer associates who received full time offers were from underrepresented groups, 32% of departing associates came from those groups.
Despite the glacial rate of progress on the partnership front and the associate retention challenges that firms face, my own anecdotal experience suggests that there’s reason for optimism on law firm diversity – if for no other reason than clients have made it crystal clear that it matters to them. As a result, more and more firms are committing to initiatives like the Mansfield Rule certification process, which requires law firms to focus not just on diversity in hiring, but in ensuring that lawyers from underrepresented groups are provided advancement opportunities as well.
If you visit the litigation releases page on the SEC’s website, you’ll come away with the impression that the agency has a better record in the courts than the Harlem Globetrotters have on the court. The SEC has an impressive litigation track record, but it does lose one every now and again – including a recent high-profile defeat in an insider trading case.
You’re unlikely to find anything about this or any other SEC loss in an enforcement proceeding on its website, because the agency rarely makes a public statement about its losses. Former SEC Assistant Director of Enforcement Russ Ryan says that’s not right:
In this June 2013 Wall Street Journal op-ed titled “Mum’s the Word About SEC Defeats,” I called out the SEC for its troubling refusal to update its website when it loses or dismisses an enforcement case that it previously touted. After all, I argued, the agency routinely splashes its incendiary allegations of wrongdoing across its website and social media platforms upon filing a case – before it has proved anything – thereby instantaneously damaging the reputation and employability of the accused (and potentially tainting any future jury pool). And in cases it ultimately wins at trial, the agency typically posts a self-congratulatory announcement within hours of the verdict.
Is it too much to expect the SEC to do likewise when it loses or dismisses a case?
Of course not. It’s a matter of basic fairness and transparency. And given how infrequently the SEC loses a contested case, it’s not a heavy lift. The agency could simply post a short public statement acknowledging the outcome of the case and, better still, affix an electronic “sticker” to its previous postings about the case. Indeed, shortly after my “Mum’s the Word” op-ed appeared, the SEC actually started doing this type of thing, although the practice was inconsistently followed and the updates – when they appeared at all – sometimes weren’t posted until weeks or even months after the fact.
I think Russ Ryan makes a very solid point. We aren’t talking about the Globetrotters here, but a government agency charged with developing, implementing and overseeing disclosure standards for public companies and other market participants. They ask a lot of those they regulate, and it’s not too much to ask that they adhere to high standards of transparency when it comes to their own activities.
According to EY’s recent Global IPO Trends Report, 2021 turned out to be another terrific year for IPOs. The report says that 2021 was the most active year for US IPOs in the past 20 years, but this excerpt says that the IPO bonanza wasn’t limited to the US. Here are some of the year’s highlights, according to EY’s report:
– Year-over-year (YOY), global IPO activity was up 64% and 67% by deal numbers and proceeds, respectively. EMEIA exchanges recorded the highest growth in IPO activity among all regions (158% by number and 214% by proceeds), which reflects the pent-up demand held back as the European markets navigated Brexit and other geopolitical factors. The US continues to play a dominant role in driving this record global IPO year, while the contribution from Asia-Pacific has been steady but relatively modest as compared to 2020.
– Initial optimism on the COVID-19 vaccine rollout, rebound of global economies from their sharp declines in 2020, and ample liquidity in the financial system from government stimulus programs were among the key drivers of exceptional IPO activity in 2021. Technology-enabled, user-friendly trading platforms helped to attract new groups of retail investors. The buoyant stock markets in the US and parts of Europe, and companies wanting to take advantage of the open window, all contributed to the record IPO performance in 2021.
Despite all the good news, there are some storm clouds on the horizon. As the WSJ reported last week, there’s been a big selloff of new issues in recent weeks, and more than 2/3rds of last year’s IPOs now trading below their initial offering prices. The WSJ attributes the selloff to inflation concerns and a potential oversupply of new issues. EY’s report notes that 2022 IPOs will confront a “combination of geopolitical tensions, inflation risks, and new waves and variants of the ongoing COVID-19 pandemic that hamper full economic recovery.”
Still, EY says that despite these challenges, “relatively higher valuations and market liquidity are keeping the IPO window open” – at least for now. But it also says that companies considering an IPO are likely to face greater volatility, and that they need to be flexible and have financing alternatives available to them.
EY’s report notes that while SPAC IPOs contracted sharply during the second quarter of 2021, they rebounded toward the end of the year. Overall, the number of SPAC IPOs increased by 136% and the proceeds from those offerings increased by 97%. But SPACs face ever-increasing regulatory headwinds, and according to this Forbes article, they’re also having increasing trouble getting their de-SPAC mergers done:
In total, some 17 SPAC mergers, valued at a collective $37.2 billion, have been terminated during the final six months of 2021, compared to four worth $720 million during the six months prior, according to data provided to Forbes by financial data firm Dealogic. Just seven SPAC deals were terminated in 2020. A slew of others have been delayed into next year, a sign that they may fall through as well, says Jay Ritter, a professor at the University of Florida who specializes in IPOs.
SPACs have proven to be more resilient than I thought they’d be, but it’s hard to see how they aren’t in for some tough sledding during the upcoming year.
