Remember way back in March 2020 when the SEC announced that employees at its DC headquarters would begin to work remotely due to the pandemic? Like many of us, they’re still remote – and last week an announcement on the Coronavirus page of the SEC’s website said that they’re going to stay remote until at least January 3, 2022.
On the one hand, I guess it’s a hopeful sign that the SEC thinks it will eventually be January 2022, but on the other hand, this is just another piece of evidence that today’s date is Wednesday, March 571, 2020.
Some commenters have suggested that one of the advantages of a direct listing might be the ability to insulate companies & other potential IPO defendants from Section 11 liability by making it impossible to satisfy the statutory requirement to trace the shares purchased to those sold in the offering. Last year, a California federal court rejected that argument and the 9th Circuit has affirmed the lower court’s ruling.
Section 11 provides that if the registration statement for a security contains an untrue statement or omission, any person acquiring “such security” may bring an action against the parties enumerated in the statute. Courts have generally interpreted the “such security” language to mean the securities issued under the particular registration statement, and have thus imposed an obligation on plaintiffs to “trace” their securities to those issued in the offering.
In Pirani v. Slack Technologies, (9th Cir.; 9/21), the 9th Circuit observed that the case involved an issue of first impression – “what does ‘such security’ mean under Section 11 in the context of a direct listing, where only one registration statement exists, and where registered and unregistered securities are offered to the public at the same time, based on the existence of that one registration statement?” It concluded that the term encompassed both the securities that were registered in connection with the direct listing and those that were unregistered:
Slack’s unregistered shares sold in a direct listing are “such securities” within the meaning of Section 11 because their public sale cannot occur without the only operative registration in existence. Any person who acquired Slack shares through its direct listing could do so only because of the effectiveness of its registration statement. Because this case involves only one registration statement, it does not present the traceability problem identified by this court in cases with successive registrations. . . All of Slack’s shares sold in this direct listing, whether labeled as registered or unregistered, can be traced to that one registration.
In her Twitter thread about the decision, Prof. Ann Lipton suggests that the case could have implications for Section 11 claims that go beyond direct listings. For instance, she says that “the same logic could equally be applied to companies that release shares from lockup early; those shares, too, are only trading on the exchange because of the earlier-filed registration statement.”
A few months ago, I blogged about a recent study suggesting that there was an epidemic of non-compliance when it came to crowdfunded offerings. So, maybe it isn’t surprising that in its first Regulation Crowdfunding enforcement proceeding, the SEC’s Division of Enforcement targeted not only alleged fraudsters, but a crowdfunding portal that the SEC claims ignored “red flags” and otherwise failed to comply with its obligations to protect investors. Here’s an excerpt from the SEC’s press release:
According to the SEC’s complaint, Robert Shumake, alongside associates Nicole Birch and Willard Jackson, conducted fraudulent and unregistered crowdfunding offerings through two cannabis and hemp companies, Transatlantic Real Estate LLC and 420 Real Estate LLC. Shumake, with assistance from Birch and Jackson, allegedly hid his involvement in the offerings from the public out of concern that his prior criminal conviction could deter prospective investors. The complaint alleges that Shumake and Birch raised $1,020,100 from retail investors through Transatlantic Real Estate, and Shumake and Jackson raised $888,180 through 420 Real Estate. Shumake, Birch, and Jackson allegedly diverted investor funds for personal use rather than using the funds for the purposes disclosed to investors.
As alleged, TruCrowd Inc., a registered funding portal, and its CEO, Vincent Petrescu, hosted the Transatlantic Real Estate and 420 Real Estate offerings on TruCrowd’s platform. Petrescu allegedly failed to address red flags including Shumake’s criminal history and involvement in the crowdfunding offerings, and otherwise failed to reduce the risk of fraud to investors.
In its complaint filed with a Michigan federal court, the SEC contends that portal’s alleged shortcomings violated Section 4A(a)(5) of the Securities Act and Rule 301(c)(2) thereunder, which obligates an intermediary to deny access to its platform if the intermediary “has a reasonable basis for believing that the issuer or the offering presents the potential for fraud or otherwise raises concerns about investor protection.”
The boom in SPAC IPOs has left hundreds of newly-public buyers flush with cash and chasing De-SPAC mergers before the clock strikes midnight – but competition for deals is fierce and regulators are ramping up their scrutiny of SPAC deals. Tune in tomorrow for the DealLawyers.com webcast – “Navigating De-SPACs in Heavy Seas” – to hear Erin Cahill of PwC, Bill Demers of POINT BioPharma, Reid Hooper of Cooley and Jay Knight of Bass Berry discuss the key issues facing SPACs as they seek to complete their de-SPAC transactions in this challenging environment.
Yes, you read that correctly – this is a webcast hosted by DealLawyers.com, but we’re also offering it without any additional charge as a bonus for our TheCorporateCounsel.net members!
If you attend the live version of this 60-minute program, CLE credit will be available. You just need to submit your state and license number and complete the prompts during the program.
In what may be the least surprising finding by a study since the one that concluded that people are happier on the weekend, researchers recently found that more narcissistic CEOs like to “go big or go home” when it comes to M&A. Here’s an excerpt:
We find that highly narcissistic CEOs spend more money on corporate acquisitions than less narcissistic CEOs and that highly narcissistic CEOs favor size over quantity when making corporate acquisitions. Furthermore, we find that such irrational focus on size over quantity is penalized by the stock market. Our findings are based on UK non-financial firms and contribute to the existing literature by investigating preferences of narcissistic CEOs in the corporate acquisition arena and the stock market’s reactions to such preferences.
I guess one question you might have is exactly how these folks decided how narcissistic a particular CEO was? It turns out the answer is based on three little words – “I, me, mine.” The primary indicator that the study used for narcissism was how many times the CEO used first person singular pronouns in quarterly earnings conferences.
Speaking of word choices, it turns out that there’s a magical incantation for better IPO pricing, and this Mayer Brown blog reports that a recent study says it’s “ESG”:
Alessandro Fenili and Carlo Raimondo, in their study and paper ESG and the Pricing of IPOs: Does Sustainability Matter, find a significant relationship between a discussion of ESG related issues and IPO pricing. They performed textual analyses of 783 US IPOs completed during the period from 2012 through 2019 across various industries.
Given investor interest in sustainability and ESG in their investment decisions, the study focuses on the amount of information about sustainability disclosed by IPO issuers. In order to assess IPO disclosures, the study considered a list of words that were associated with ESG topics. Then, they performed textual and other analyses on the IPO prospectuses. A large increase in the number of ESG “words” in the IPO prospectuses was found to lead to reduced information asymmetry (investors have better information on which to base their investment decision regarding the IPO issuer’s ESG focus) and to less IPO underpricing.
The blog says that the study provides evidence of a strong association between ESG disclosure during an IPO and less IPO underpricing and more accurate evaluation by investors of the IPO issuer’s valuation.
Wow, so that’s all it takes? I bet there are a lot of unicorns feeling kind of silly now about wasting their time writing founders letters and over-the-top mission statements for their S-1s. I’m not sure how everyone will use these findings, but I’ve spent enough time working with investment banks to be pretty confident in my prediction that the next coal mining or fracking company prospectus you pick up will be chock full of ESG-related jargon. If you don’t believe me, just remember, these are the folks who turned cab dispatchers and commercial real estate businesses into tech companies through the power of bankerspeak.
Once again, the English philosopher Bishop Berkeley nailed it several centuries ago – “to be is to be perceived.”
Here’s the scenario: a company moved to Canada and changed its name, and when it did so, it mistakenly changed its CIK number with the SEC. As a quick trip to the Edgar page on the SEC’s website will inform you, that “Central Index Key” number is used to identify corporations and individual people who have filed disclosure with the SEC. You aren’t supposed to change your CIK for a name or address change, but hey, what’s the worst that could happen? How about the SEC instituting a Section 12(j) proceeding seeking to involuntarily deregister your securities:
On September 22, 2020, the Commission issued an order instituting an administrative proceeding (“OIP”) against STRATABASE under Section 12(j) of the Securities Exchange Act of 1934.1 The OIP alleged that STRATABASE had violated periodic reporting requirements and sought to determine, based on those allegations, whether it was “necessary and appropriate for the protection of investors to suspend . . . or revoke the registration” of STRATABASE’s securities.
On June 21, 2021, the Division of Enforcement moved to dismiss this proceeding. The Division states that, on June 9, 2021, it spoke with counsel for Strata Power Corporation, the successor to STRATABASE. The Division states that it subsequently confirmed the following representations made during that conversation by counsel for Strata Power Corporation: (i) that when STRATABASE changed its name after moving to Canada in 2004, it also inadvertently changed CIK numbers; and (ii) that Strata Power Corporation was up to date in its periodic filings at the time that this proceeding was instituted and remains current.
Fortunately, the SEC granted the Division’s motion to dismiss, but can you imagine being the poor lawyer who received notice of the institution of this proceeding?
If you’re old enough to remember the original version of “Stark Trek,” you probably recall an episode called “The Trouble with Tribbles.” The plot involved a somewhat sketchy interstellar trader who arrived selling purring little fluff-balls known as “tribbles.” These creatures were adorable and soothing, and everybody on the crew loved them. The only problem was that they bred uncontrollably and their sheer numbers quickly threatened to overwhelm the entire starship.
It seems to me that plot of this 50+ year old Star Trek episode – which my wife says I’m a dork for using in this blog – actually isn’t a bad analogy for the potential consequences of the retail investor boom over the past year. Like tribbles, retail investors usually are considered pretty cuddly by company management, but when the size of the retail base explodes, all sorts of complications can arise. This recent WSJ article detailing the travails of companies that found themselves on the receiving end of Robinhood’s “free stock” promotion is a good example of some of those complications. Here’s an excerpt with a hair-raising tale from a small cap issuer about just how much Robinhood’s promo cost it:
One company pushing back is Florida-based drugmaker Catalyst Pharmaceuticals Inc., which says Robinhood’s program cost it more than $200,000 last year and could be even more expensive this year. “Catalyst has become aware that Robinhood has been giving away shares of Catalyst’s common stock at no charge as part of its promotional program,” Catalyst Chief Executive Patrick McEnany wrote in a June comment letter to the Securities and Exchange Commission. “Catalyst believes that there are likely numerous companies facing this same issue, and that the costs of distributing materials to small stockholders under these circumstances is onerous and unreasonable.”
To put this into perspective, Catalyst only had about $120 million in revenues last year, so you can see why they’d gag on Robinhood sticking them with an additional $200,000 in mailing costs. Not to pat ourselves on the back, but Liz flagged the issue of potentially alarming rises in proxy distribution costs on our “Proxy Season Blog” more than a year ago. She also recently blogged about the NYSE’s rule change that will no long require issuers to bear fees associated with shareholders who only hold shares due to broker promos.
It appears that this issue may at least be on its way to being managed, but I think there’s reason to believe that the unprecedented influx of retail investors over the past year means that the problem of higher proxy distribution costs isn’t the only “trouble with tribbles” that public companies are going to have to deal with in the near future. What do I mean by that? Well, a couple of concerns come to mind. . .
There’s been a lot of press recently about shareholder perks being offered by companies as a means of engaging with their retail shareholders. Some companies, like Berkshire Hathaway, have been doing this kind of thing for quite some time. In theory, it sounds like a great idea – and there’s certainly evidence that retail engagement efforts can pay off big time for some companies. But listen, I’ve been there, and these things don’t always work out as planned.
I’ve blogged about how meme stocks like AMC have made efforts to cultivate relationships with retail investors by offering up various goodies, and this IR Magazine article says that other companies are engaging in similar efforts. I wish them well, but I’ve worked with a lot of consumer products companies over the years, and I can tell you from experience that these plans sometimes go awry.
I’ll give you a quick example. One company that I worked with owned a variety of well-known consumer-oriented brands, and also actively cultivated retail shareholders. One of the things they used to do was place a plastic bucket filled with product samples under each seat in the auditorium where their annual meeting was held. In one sense, their efforts were very successful, because lots of retail shareholders showed up at each year’s meeting looking for their goodies. On the other hand, things got progressively more out of hand with each passing year.
How out of hand? Many retail shareholders (who fit the stereotype of retirees with time on their hands) would arrive at the meeting early, scarf up their buckets of goodies, and then keep an eagle eye on the auditorium. As the meeting progressed, several would periodically race around to the empty chairs and snag the unclaimed buckets that had been placed under them, and things really picked up steam after it adjourned. I’ve got to admit, it was pretty impressive – I’ve never seen 75-year old people move with such stealth & speed. Ultimately, the scuffling for buckets became unruly enough that company ended the practice. If I recall correctly, they abandoned it the year that the blue-haired buccaneers made off with every single bucket of goodies that had been placed under the directors’ chairs.
I could tell a few other stories about how efforts to cultivate retail shareholders got out of hand, and having spoken to other lawyers who’ve also worked with companies that appeal to retail investors, I know that my experiences aren’t unusual. But I think the key thing to remember here is this – all of our stories took place before retail investors multiplied like tribbles. Today, you’ve got a bunch of companies with an outsized retail investor presence. That’s going to make all of these engagement efforts tougher to manage and potentially more likely to go off the rails – perhaps spectacularly.
Earlier this summer, Lynn blogged about a company that had to adjourn its annual meeting due to the absence of a quorum. That company was Oragenics, and it reconvened its adjourned meeting on August 23rd. Believe it or not, the company had to adjourn it yet again. Here’s an excerpt from its press release:
Oragenics, Inc. (NYSE American: OGEN) Oragenics, Inc. (“Oragenics” or the “Company”) today announced the Company’s reconvened annual meeting of shareholders, on August 23, 2021 at 4:00 p.m. was adjourned due to a lack of quorum. The Company intends to seek approval for the proposals submitted to its shareholders at a new postponed annual meeting date when practicable. The new annual meeting date will be established by the Company and a new record date, will be set in conjunction therewith; the former record date of May 5, 2021, is no longer valid.
So now, the company will try for a third time to hold an annual meeting, although this time it gets to incur all of the costs associated with establishing a new record date, filing a new proxy statement and soliciting shareholders all over again. I don’t think it’s coincidental that Oragenics reportedly has only about 8% institutional ownership.
Earlier this year, proxy solicitors warned that the decision by TD Ameritrade and other brokerage firms to no longer exercise discretionary voting authority for their accounts would increase the hurdles that companies with large numbers of retail investors would face in obtaining a quorum. Oragenics is an extreme example of that, but even the mightiest of the meme stocks, AMC, abandoned a proposal to increase its authorized number of shares due to concerns about getting enough votes.
The basic problem is that, historically, retail shareholders haven’t voted unless companies solicited them like crazy. Some think that may change with the rise of millennial investors. But it’s fair to say that the jury’s still out on that, and if companies with a bunch of new retail investors want to make sure those shares are represented “in person or by proxy,” they better be prepared to spend some of the money they’ll no longer be giving to Robinhood. Otherwise, Oragenics-like quorum nightmares could become a lot more common.
