It turns out that 2021 wasn’t just a banner year for IPOs, but a banner year for IPOs with dual class capital structures. This analysis covering 1980-2021 dual class IPOs says that nearly 32% of last year’s issuers had at least two classes of stock. That’s a record, and represents a huge jump from 2020, where only 20% of deals had dual class structures. Not surprisingly, it’s the tech sector that’s leading the charge – over 46% of 2021’s tech IPOs had these capital structures.
One of Karl Marx’s most famous quotes comes fromThe 18th Brumaire of Louis Napoleon, in which the father of modern socialism & failed game show contestant wrote that historical entities appear twice, “first as tragedy, then as farce.” I thought of that quote when I read this article about the rebirth of former consumer tech & electronics retailer RadioShack as – I’m not kidding – a cryptocurrency company. This excerpt says that RadioShack’s bizarre reincarnation is based on the supposed continuing power of its brand:
Although the RadioShack electronics retail chain essentially crumbled following bankruptcy filings in 2015 and 2017, the name has survived for 100 years. In a bid to make RadioShack relevant for another 100 years, the brand’s new owner is making a play for one of the hottest, and most controversial, emerging business sectors in the world — cryptocurrency.
Seeking to capitalize on RadioShack’s global brand name, Miami-based owner Retail Ecommerce Ventures is propelling RadioShack (once based in Fort Worth) into the promising yet murky territory of cryptocurrency. Cryptocurrency is digital currency built on a technology platform known as blockchain; bitcoin is perhaps the best-known type of cryptocurrency. In November, the size of the global cryptocurrency market surpassed $3 trillion.
I wasn’t making the connection between RadioShack’s brand & cryptocurrency success, so I visited the website in search of some more information. I found plenty of it, but nothing that altered my first impression that the idea of leveraging RadioShack’s brand in the crypto space is a stretch. Here’s an excerpt from the RadioShack website’s explanation of the thinking behind this grand strategy:
Despite its pullback in the last 10 years, the brand is resolutely embedded in the global consciousness – ripe to be pivoted to lead the way for blockchain tech to mainstream adoption by other large brands. Remember, there is a real generational gap between the average crypto buyer (in some countries like India, it’s as low as age 24) and the average corporate, decision making, global CEO who averages age 68.
This demographic difference creates a substantial psychological barrier to crypto adoption. The older generation simply doesn’t trust the new-fangled ideas of the Bitcoin youth. Even worse, research finds that adults who are especially authoritarian, intelligent, and well-read (i.e. the CEO’s that RadioShack seeks to woo), have an even lower estimation of the younger age bracket.
The need for a bridge between the CEOs who control the world’s corporations and the new world of cryptocurrencies will most likely come in the form of a well-known, century-old brand.
RadioShack is perfect.
Perfect for what you ask? Well, the article explains that the concept is to get folks to exchange other cryptocurrencies for a new RADIO cryptocurrency token on RadioShack’s decentralized finance platform. The rest of the RadioShack’s new website tries to explain the business plan, but it does so by using the kind of now familiar crypto gibberish that just screams “run away!” to a Luddite like me. Here’s a representative sample:
The overall tokenomics philosophy follows the proprietary Nash-Equilibrium Token Defense (NETD) formula that was originally developed for the Atlas USV protocol by the common co-founders of Atlas USV and RadioShack DeFi
I suspect this kind of language may have the same off-putting effect on the company’s target audience – i.e., 68-year-old CEOs who run the world – that it had on me. Those old guys have nearly a decade on me, so if I can’t make heads or tails of why this is such a great idea, my guess is that they aren’t going to get it either.
According to a recent Audit Analytics report, 2020 saw the lowest percentage of financial restatement disclosures (Big R & Little r) in the 20 years that Audit Analytics has been monitoring those disclosures. The report says that restatements have been declining for each of the past six years. In 2020, just 4.9% of companies restated previous financial statements, compared to 6.8% in 2019 and 17.0% at the peak in 2006. This excerpt discusses the most common reasons for restatements last year:
Revenue recognition was the most frequently cited issue in financial restatements for the third year in a row. Coinciding with the new revenue recognition standard that became effective in 2018, revenue recognition supplanted debt and equity securities issues as the most frequently cited issue in financial restatements.
The second most frequently cited issue of 2019 – cash flow classification – fell outside the top five in 2020. Cash flow classification had been a top-five issue every year since 2008. This was replaced by general expense recognition, which returned to the top five for the first time since 2016.
Debt and equity securities, liability and accrual recognition, and tax matters round out the top five most frequently cited issues in 2020’s financial restatements. Debt and equity securities and tax matters have each been among the top five issues for at least the past decade. Liability and accrual recognition has been among the top five since 2017.
The report includes a bunch of other details about 2020 restatements, included the mix between reissuance (Big R) and revision (Little r) restatements, the average length of time required to restate financials and the average days restated. It’s pretty much a sure thing that next year’s report is going to look very different from this year’s – as a result of the multiple rounds of SPAC restatements occurring this year, Audit Analytics expects a record number of disclosed restatements in 2021.
Earlier this week, BlackRock issued its 2022 Proxy Voting Guidelines. For the first time, the Guidelines establish a percentage target for the number of diverse board members at U.S. companies. This excerpt describes the new policy:
We expect boards to be comprised of a diverse selection of individuals who bring their personal and professional experiences to bear in order to create a constructive debate of a variety of views and opinions in the boardroom. We are interested in diversity in the board room as a means to promoting diversity of thought and avoiding “group think”.
We ask boards to disclose how diversity is considered in board composition, including demographic factors such as gender, race, ethnicity, and age; as well as professional characteristics, such as a director’s industry experience, specialist areas of expertise, and geographic location.
We assess a board’s diversity in the context of a company’s domicile, business model, and strategy. We believe boards should aspire to 30% diversity of membership and encourage companies to have at least two directors on their board who identify as female and at least one who identifies as a member of an underrepresented group.
BlackRock defines members of an underrepresented group to include, without limitation, “individuals who identify as Black or African American, Hispanic or Latinx, Asian, Native American or Alaska Native, or Native Hawaiian or Pacific Islander; individuals who identify as LGBTQ+; individuals who identify as underrepresented based on national, Indigenous, religious, or cultural identity; individuals with disabilities; and veterans.”
While the policy speaks in aspirational terms, keep in mind that lack of board diversity was the top reason that BlackRock withheld votes from directors in 2021, accounting for 61% of negative votes.
BlackRock’s update of its voting policies was part of a broader policy update – check out Emily’s blog on CompensationStandards.com and Lawrence’s blog on PracticalESG.com for more on some of the important changes to BlackRock’s policies.
A new study from Notre Dame & Ohio U business school professors finds that the SEC’s demanding disclosure regime for auditor terminations is useless when it comes to determining the likelihood of restatements. Here’s an excerpt from an article on the study:
While most seasoned investors realize that companies tend to be cagey about their reasons for firing auditors, the research finds the disclosures are useless to an extreme. “Opaque Auditor Dismissal Disclosures: What Does Timing Reveal that Disclosures Do Not?” is forthcoming in the Journal of Accounting and Public Policy from Jeffrey Burks, the Thomas and Therese Grojean Family Associate Professor of Accountancy in Notre Dame’s Mendoza College of Business, and Jennifer Sustersic Stevens of Ohio University.
In a sample of some 1,400 auditor firings, company revelations of disagreements with the auditor or other auditor concerns exhibit no systematic ability to forecast whether the company will restate its financial statements.
“The lack of predictive ability suggests that companies’ decisions to disclose such auditor concerns are so inconsistent and uncommon — even though the regulation requires their disclosure — that no predictive power results,” said Burks, who researches financial accounting and misstatements.
The authors say that investors should focus on the timing of the dismissal rather than 8-K disclosure, because companies that fire auditors after the second quarter have a roughly 40% greater chance of a future restatement. A WSJ article on the study quotes one commentator as saying that the problem is the disclosure rules’ focus on disagreements with auditors, and that accounting firms “try hard to avoid differences of opinion escalating to the point that they have to be reported.”
Instead of tweaking disclosure rules, the study’s authors say that the PCAOB & SEC should inquire about the reasons for changes in auditors during the examination and comment letter process and cite Blue Wave Group’s extremely frank response to a 2010 SEC comment about its disclosures concerning a change in auditors as an example of the kind of disclosure such an inquiry might elicit.
Yesterday, the SEC issued proposed amendments to Rule 10b5-1 and related rules imposing new conditions & disclosure requirements for 10b5-1 plans and securities transactions by companies and insiders. Here’s a copy of the163-page proposing release & the two-page fact sheet on the proposed rules. The SEC’s press release also provides a good summary of the proposal:
The proposed amendments to Rule 10b5-1 would update the requirements for the affirmative defense, including imposing a cooling off period before trading could commence under a plan, prohibiting overlapping trading plans, and limiting single-trade plans to one trading plan per twelve month period. In addition, the proposed rules would require directors and officers to furnish written certifications that they are not aware of any material nonpublic information when they enter into the plans and expand the existing good faith requirement for trading under Rule 10b5-1 plans.
The amendments also would elicit more comprehensive disclosure about issuers’ policies and procedures related to insider trading and their practices around the timing of options grants and the release of material nonpublic information. A new table would report any options granted within 14 days of the release of material nonpublic information and the market price of the underlying securities the trading day before and the trading day after the disclosure of the material non-public information. Insiders that report on Forms 4 or 5 would have to indicate via a new checkbox whether the reported transactions were made pursuant to a Rule 10b5-1(c) or other trading plan. Finally, gifts of securities that were previously permitted to be reported on Form 5 would be required to be reported on Form 4.
For the most part, the proposed changes to Rule 10b5-1 track the recommendations made by the SEC’s Investor Advisory Committee, but the proposal does not include Form 8-K & proxy disclosure requirements relating to corporate & insider 10b5-1 plans that the IAC advocated. The portions of the proposed rules addressing disclosure of the timing of option grants follow up on the Staff’s recent guidance on accounting for “spring loaded” awards. Finally, in what’s become a very unusual event in recent years, the commissioners unanimously voted to approve the issuance of the rule proposal.
At yesterday’s open meeting, the SEC also issued proposed rules addressing disclosure requirements for issuer repurchases. Here’s the 101-page proposing release along with the two-page fact sheet. This excerpt from the SEC’s press release summarizes the proposal:
The proposed rules would require an issuer to provide a new Form SR before the end of the first business day following the day the issuer executes a share repurchase. Form SR would require disclosure identifying the class of securities purchased, the total amount purchased, the average price paid, as well as the aggregate total amount purchased on the open market in reliance on the safe harbor in Exchange Act Rule 10b-18 or pursuant to a plan that is intended to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c).
The proposed amendments also would enhance existing periodic disclosure requirements regarding repurchases of an issuer’s equity securities. Specifically, the proposed amendments would require an issuer to disclose: the objective or rationale for the share repurchases and the process or criteria used to determine the repurchase amounts; any policies and procedures relating to purchases and sales of the issuer’s securities by its officers and directors during a repurchase program, including any restriction on such transactions; and whether the issuer is making its repurchases pursuant to a plan that it intends to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c) and/or the conditions of the Exchange Act Rule 10b-18 non-exclusive safe harbor.
SEC Chair Gary Gensler mentioned that buybacks were on the SEC’s agenda when he discussed his desire to make changes to Rule 10b5-1, but the release notes that some of the disclosure proposals date back to the 2016 Reg S-K concept release. As Broc pointed out at the time, footnote 625 of that release noted that Australia required next day disclosure of buybacks. Well, G’day America! because it looks like that requirement may be heading your way.
Unlike the Rule 10b5-1 proposal, this one prompted a dissent from Commissioner Peirce (here’s her statement) and Commissioner Roisman (here’s his statement). Speaking of statements, the SEC acted on the PCAOB’s budget and proposed rule amendments on securities-based swaps & money market funds yesterday as well, and every commissioner issued a statement on every action. If you subscribe for updates from the SEC’s website, you already noticed this, because your inbox started exploding early yesterday afternoon.
As noted above, in a rather striking departure from the SEC’s recent rulemaking decisions, the commissioners unanimously voted in favor of the Rule 10b5-1 rule proposal. Despite the commissioners’ unanimity, I think there are still some things to take issue with in terms of the substance of the proposal. In an earlier blog, Liz cited comments from a number of in-house lawyers suggesting that some Rule 10b5-1 reforms – like a mandatory 120-day cooling off period – may represent a solution in search of a problem.
On that point, I think a recent back & forth between Commissioner Lee and three Democratic senators is kind of illuminating. Earlier this year, when Commissioner Lee was serving as Acting Chair, the senators sent her a letter on Rule 10b5-1 issues. Among other things, the senators asked for a response to the following question: “how many enforcement actions has the agency taken with regard to 10b5-1 plans in the past five years? Please provide a list and summary of all such actions.”
In her response, the best that Commissioner Lee apparently could come up with was a list of actions in which “public charging documents mention Rule 10b5-1 plans.” [Emphasis added.] This list included six actions, none of which directly addressed violations of the rules governing 10b5-1 plans themselves. Instead – with the exception of one action in which internal controls were at issue – these charging documents simply noted that during the pendency of the conduct in question, one of the alleged bad guys made sales under a 10b5-1 plan.
It’s an open secret that academic commentators think Rule 10b5-1 is a scam, and their concerns about the rule are cited liberally in the proposing release. But Commissioner Lee’s inability to cite a single enforcement action where a 10b5-1 plan was front & center suggests that either the SEC has been asleep at the switch for quite some time or – just maybe – Rule 10b5-1 generally works as intended.
I’ve read some of the academic commentary on Rule 10b5-1 plans, and their critique usually boils down to “the evidence irrefutably demonstrates that insiders with 10b5-1 plans outperformed other investors, so there’s obviously something fishy going on here.” I don’t necessarily agree with that generalization, particularly since 10b5-1 plans are adopted during window periods and, under most insider trading policies, must be pre-cleared by counsel.
The SEC seems to have relied heavily on a recent Stanford study in deciding to propose a mandatory cooling off period. But that study itself acknowledges that it’s the first one to attempt to empirically address the relationship between the length of cooling off periods & “red flags” relating to the avoidance of losses. A single non-peer reviewed study seems like a slender reed upon which to base a key component of a rule proposal.
I don’t think all of the proposed changes are a bad idea, but the cooling off period seems unreasonably long & the certification requirement is something that only a bureaucrat could love. On the other hand, I think that multiple plans are potentially abusive and that ensuring that the good faith requirement applies not only to the establishment, but also to the operation, of a 10b5-1 plan is an appropriate change. But what I mostly think is that the debate on 10b5-1 reform has been too heavily weighted toward the academic side, and that there’s a need for those with real world experience in working with these plans to weigh in. I hope they’ll do so during the comment process.
Not that I’m crying any crocodile tears for short sellers, but 2021 hasn’t been the greatest of years for them. The meme stock crowd handed short sellers their lunch last winter, and the gravity defying rise of the stock market for most of the year hasn’t made for many other big scores – well, aside from shorting SPACs, of course. Now, according to this Bloomberg report, the year may be getting even worse for short sellers. That’s because the DOJ has launched a large-scale investigation into short selling by hedge funds and research firms:
The U.S. Justice Department has launched an expansive criminal investigation into short selling by hedge funds and research firms, scrutinizing their symbiotic relationships and hunting for signs that they improperly coordinated trades or broke other laws to profit, according to people familiar with the matter. The probe, run by the department’s fraud section with federal prosecutors in Los Angeles, is digging into how hedge funds tap into research and set up their bets, especially in the run-up to publication of reports that move stocks.
Authorities are prying into financial relationships between hedge funds and researchers, and hunting for signs that money managers sought to engineer startling stock drops or engaged in other abuses, such as insider trading, said two of the people, asking not to be named because the inquiries are confidential.
Underscoring the inquiry’s sweep, federal investigators are examining trading in at least several dozen stocks, including well-known short targets such as Luckin Coffee Inc., Banc of California Inc., Mallinckrodt Plc and GSX Techedu Inc. And they’re scrutinizing the involvement of about a dozen or more firms — though it’s not clear which ones, if any, may emerge as targets of the probe. Toronto-based Anson Funds and anonymous researcher Marcus Aurelius Value are among firms involved in the inquiry, the people said. Other prominent firms that circulated research on stocks under scrutiny include Carson Block’s Muddy Waters Capital and Andrew Left’s Citron Research.
As Liz blogged recently, short reports can do long-lasting damage to companies, although those reports also have helped uncover some pretty massive frauds. However, short selling remains one of the market’s murkiest corners, and some pretty shady conduct involving the authors of short reports has been brought to light. Now that the DOJ’s on the case, things could get very interesting.
