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.
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.
