If you’re interested in a deep dive into the comments on climate change disclosure received in response to Commissioner Lee’s invitation, be sure to check out this Davis Polk memo, which provides an overview of the type of commenters who weighed-in, summarizes the most salient topics raised in comments, and discusses the SEC’s potential next steps. This excerpt lists the topics covered by commenters that the memo summarizes:
– Does the SEC have authority to mandate climate disclosures, and would doing so survive the cost-benefit analysis required for rulemaking?
– Given a perceived desire for both meaningful and comparable climate disclosures, which types of disclosure standards (e.g., general or industry-specific standards, a single global standard or multiple standards around the world and a standard drawing on existing third-party frameworks or a novel framework) should the SEC use for any mandatory climate disclosure regime?
– If the SEC mandates climate disclosures, what information should the SEC require to be disclosed?
– Should the SEC provide protection from liability, whether through a safe harbor, having climate disclosures be furnished rather than filed or by requiring disclosures on a specialized form outside of 10‑Ks and 10-Qs?
– Should climate disclosures be subject to the same level of rigor as other types of SEC disclosures, such as financial disclosures, by imposing requirements for audit or assurance or internal controls?
– If the SEC creates a new disclosure mandate, should its scope include not only public companies but also private companies and not only climate disclosures but also ESG disclosures more broadly?
The memo also includes an appendix summarizing 30 letters submitted by high-profile academics, business and government representatives, standard setters and sustainability advocates.
One of the more provocative items contained in Commissioner Lee’s invitation to provide comments on potential climate change disclosure rules was this question:
What climate-related information is available with respect to private companies, and how should the Commission’s rules address private companies’ climate disclosures, such as through exempt offerings, or its oversight of certain investment advisers and funds?
Not surprisingly, this has attracted a lot of comments – pro and con. Ann Lipton recently blogged about the response to the possibility of private company disclosure, and included excerpts from comments submitted by some high-profile players, including representatives of private equity and major investors. Check the blog out – you may find some of their views to be a bit different than you might have expected.
According to a recent study, there is an epidemic of regulatory non-compliance in crowdfunding offerings so great that the author says it calls into question the continued viability of the crowdfunding experiment. Here’s an excerpt from the abstract:
The JOBS Act of 2012 launched a number of experiments in the regulation of securities offerings. The exemption it created that allows online equity crowdfunding offerings to retail investors garnered the most attention, in part due to widespread concerns regarding the potential for fraud and abuse. More than three years after the first crowdfunding offering, no empirical analysis of compliance has been conducted that would debunk or confirm critics’ concerns. This Article plugs that gap by analyzing a sample of 362 crowdfunding offerings and evaluating compliance with some of crowdfunding regulation’s simplest, most fundamental regulatory requirements.
During the first 13 months of crowdfunding, almost half of issuers failed to file complete financial statements that met the applicable standard of review, barely one-quarter of issuers that were required to file two annual reports did so, less than 15% of issuers timely filed the final amount raised in their offering, and the only data point on Form C that was reviewed was, far more often than not, substantially inaccurate. Finally, the third-largest crowdfunding funding portal may be violating the prohibition against a funding portal’s giving advice. In short, these findings reveal a deeply embedded culture of noncompliance.
In light of the SEC’s decision last year to raise the offering limit in Regulation Crowdfunding from $1.07 million to $5 million and to liberalize the rules on investments by both accredited & non-accredited investors, these allegations are pretty alarming. They become even more alarming after taking into account projections that the global crowdfunding market will grow by nearly $200 billion over the next four years.
We’ve previously blogged about Corp Fin’s push for more disclosure about supply chain finance arrangements & FASB’s decision to study a disclosure requirement. According to this WSJ article, FASB has decided to move forward with the goal of putting together a rule proposal by the end of this year. This excerpt describes supply chain finance arrangements and some of the reasons why formal disclosure requirements are under consideration:
As part of these programs, banks typically provide funding to pay a company’s supplier of goods and services. The supplier is paid earlier, but gets less than it would have without the agreement. The company pays the amount it owes the supplier to the bank, usually later than it would have paid its supplier. The bank then keeps the difference in exchange for its services. U.S. companies currently aren’t obliged to disclose supply-chain financing arrangements in their financial filings, which can make their liquidity position appear stronger than it actually is.
The tool has come under greater scrutiny from regulators and accounting rule-makers amid its growing popularity in recent years. Greensill Capital, a U.K.-based supply-chain finance provider, in March filed for insolvency after auditors of the company’s bank arm were unable to find evidence of collateral that one of its customers used for borrowing. Supply-chain financing was also a primary contributor to the 2018 implosion of U.K. firm Carillion PLC, according to Fitch Ratings.
The scope of the potential disclosure requirement was laid out at FASB’s June 30th meeting and summarized in FASB’s most recent project update. Companies would be required to describe the overall arrangements and would use certain contractual terms (such as the buyer confirmation) as indicators that an arrangement has been established. Disclosure would be required of the key terms of the arrangement as identified by management and the amount that the buyer has confirmed has been made available for suppliers to elect to be paid early for as of the end of reporting period. A description of where that amount appears on the balance sheet would also be required.
We’ve posted the transcript for the recent DealLawyers.com webcast: “The Leveraged ESOP as an Exit Alternative.” This program covered a lot of ground about an attractive alternative to a sale for many privately held companies. Shawn Ely of Lazear Capital Partners, Steve Goodman of Lynch, Cox, Gilman & Goodman, PSC & Steve Karzmer of Calfee, Halter & Griswold LLP addressed a number of topics, including
– Overview of a Leveraged ESOP
– Tax Aspects of Leveraged ESOPs for Sellers & the Company
– Structuring and Financing an ESOP Deal
– Corporate and ERISA Fiduciary Considerations
– Restrictions and Post-Closing Obligations
Last month, Liz blogged about a hoax whistleblower email message that was making its way around public company ethics inboxes. Unfortunately, we’ve recently learned that there are at least two more of these in circulation. Here’s the first:
To Whom It May Concern:
I want to report an incident that I believe is of interest to the ethics board. It has recently come to my attention that a certain employee I work with, which I will leave nameless for the time being (referring to them as Doe), is engaged in an activity I feel is inappropriate. Doe and I both work in one of the company’s sales teams. A while back, a few of us went to grab drinks after work, and a conversation soon ensued. We were discussing work matters, and specifically our client relationships, and things of that nature, when Doe leaned over and whispered so that only I could hear that the best way to retain your clients is to keep them happy if I know what they mean. At the time, I paid no mind to it. Later that evening, while getting back to our cars, Doe and I were by ourselves. I mentioned in passing that this year was not bad considering COVIC from what we initially expected when again they said something along the lines of how they never expected a bad year because of how they take care of their clients. This time I asked what they meant. They kept saying “Cmon, you know what I mean” and stuff like that. They told me that when it comes to lon-lasting clients or important leads, they go above and beyond, making sure they are happy. I agreed with them, saying I do the same. They they said – no no, I mean really take care of them. When I probed, they said that their clients trust them to give them the best possible price, and in return they get favors. When I asked what these favors might be, they were initially coy about it, but gave me a recent example. They said they give some big client the star treatment, because that person’s wife is a deputy superintendent in the county where their kids go to school. They said it’s always good to make friends with people like that, because you never know when you will need a favor, like getting your kids into a good high school or even college, and in fact they already hit that lady up to help get their sister a job, and she said she will see what she can do. I again don’t remember exactly how I responded. I just remember feeling flabbergasted but acting like what tey told me was no big deal and saying something about how our company doesn’t appreciate us (I was trying to make them feel like I’m cool with what they told me). They agreed and said that for the most part, there aren’t that many opportunities available for us, but when they spot something, they always try to think of helping out people that can later help them.
Initially, I was thinking about going with this to HR, but I couldn’t bring myself to do that because I know it will come back to me. I also cannot just tell my boss about this because that person is close to Doe, and I guarantee they will not take my side or at least try to brush it off. I know it’s important to be a team player and support each other, but I’m pretty sure what I’m describing here is a big no-no. Worst of all, I don’t want it to reflect badly on me later on if anyone finds out. A part of me just wants to pretend I didn’t hear it, and act like nothing happened. However, after some thought, I decided to first reach out to you and hear what the committee has to say. I read the material you provided online in the code of conduct, and I realize that in order for you to see this through, I might eventually need to give you their, and maybe even my name, but for the time being, I just want to get your take on it.
Here’s the second:
To members of the anonymous hotline, The location I wrote in the report is false. About a month ago, something was brought to my attention, which I want to report. Before I go into detail, I want to make sure the committee understands I refuse to reveal my identity and choose to remain anonymous. I don’t mind giving out the name of the person I am reporting, but that is only after I am promised that no one can find out I made the claim. The person I am reporting is a long-time employee. Recently, I found out that for invoices in at least one firm, (I found out it happened multiple times) he adds a large upcharge before having us send them out. I have no idea what he claimed under that upcharge, but I’m sure of it, because a buddy of mine working in that firm in their accounting department confirms it. I did a little digging and found that the invoices are always billed to the same customer- a big company we have been working with for a long time. At first, I thought that there’s still a chance nothing fishy is going on, and maybe I’m just not aware of all the details. However, after a while that same friend told me he asked around and turns out the person taking care of these invoices on their end is always the same guy, which my friend tells me is a bad apple. He said he checked, and all invoices are paid promptly and in full- no question asked, and that he personally saw the receipts. I then did some searching on social media (Facebook and Instagram of them and their family members) and found that the our guy and his culprit are actually related somehow. I’m not sure how, as they don’t share the same last name, but I can see that they have lots of pictures with each other attending weddings, fishing, on holidays and stuff like that. I realize how serious what I’m saying is, but I’m only coming to you after making sure that I’m not implicating someone innocent here. My friend at the other firm is someone I trust completely and agreed we shouldn’t do anything so until you guys get back to me. We both decided that no matter what we will not be going to our bosses or anyone on HR on this because we know then people will know it was us that found out. Please contact me as soon as possible and let me know what happens next.
Liz gave some solid advice in her blog about what to do if one of these lands on your desk, and you may want to take another peek at it. I don’t think anybody knows for sure what the game is here, but sending out a bunch of hoax emails seems to be a pretty good way to gum up the works of corporate whistleblower programs.
As Lynn blogged a few weeks ago, the SEC recently approved Nasdaq’s rule proposal permitting direct listings with capital raises. Last week, Nasdaq filed a proposed amendment to that rule that would tweak the pricing parameters for these new listings. This excerpt from the filing summarizes the proposal:
For a Direct Listing with a Capital Raise, Nasdaq rules currently require that the actual price calculated by the Cross be at or above the lowest price and at or below the highest price of the price range established by the issuer in its effective registration statement (the “Pricing Range Limitation”). Nasdaq now proposes to modify the Pricing Range Limitation such that a Direct Listing with a Capital Raise can be executed in the Cross at a price that is at or above the price that is 20% below the lowest price and at or below the price that is 20% above the highest price of the price range established by the issuer in its effective registration statement.
In addition, Nasdaq proposes to modify the Pricing Range Limitation such that a Direct Listing with a Capital Raise can be executed in the Cross at a price above the price that is 20% above the highest price of such price range, provided that the company has certified to Nasdaq that such price would not materially change the company’s previous disclosure in its effective registration statement. Nasdaq also proposes to make related conforming changes
Comments on the proposal are due 21 days after its publication in the Federal Register.
The 4th of July is peak season for songs about America, and there are plenty to choose from. This one was Frank Sinatra’s favorite, and it’s one of mine too. Sinatra’s. . . well. . . Sinatra, but I actually prefer Paul Robeson’s version, so I’m going to give his rendition of “The House I Live In” top billing.
I sure don’t want to slight The Chairman of the Board, who sang this at many of his concerts, so here’s the original version that he recorded for a 1945 short film made as part of an effort to combat antisemitism. Whichever version you prefer – or even if it’s not your cup of tea – have a Glorious 4th!
The latest episode of “CEOs Behaving Badly” reminded me that I’ve been meaning to blog about this Stanford article, which says many emerging risks faced by companies in the social media age fall under the heading of “social risk.” According to the article, social risk is:
A loosely defined term that describes events that impair a company’s social capital. We can distinguish it from other risks in that the primary cause of damage is reputational, whereby an incident harms reputation and, subsequently, performance. In some cases, the risk event involves an interaction with the company’s products or services; in others, it is wholly unrelated to the company’s products and involves actions, decisions, or statements by a company affiliate. Either way, media attention (social or traditional) amplifies the impact, sparking a backlash that extends well beyond the directly affected parties.
The article offers up a couple of well-known incidents involving social risks – United Airlines’ heavy-handed removal of a passenger from an overbooked flight in 2017, and the fallout from “Papa John” Schnatter’s criticism of NFL player national anthem protests that same year.
The damage social risk inflicts on corporations is unpredictable – an event causing significant damage to one company might pass with little impact on another. That makes it difficult for management to gauge the impact of such an event at its outset. Furthermore, many social risk events appear immaterial from a financial standpoint. These factors make social risks difficult to identify and plan for under standard risk management frameworks. However, the article does have some specific suggestions about how companies may better position themselves to respond to these risks:
– Use knowledge of the past to inform future plans. Companies can accomplish this by examining social risk events that have impacted peer groups and related industries. By developing a comprehensive history of social risk, management and boards can understand the variety of potential risks it faces and evaluate patterns in how risk events have evolved over time.
– Conduct scenario planning to identify the highest likelihood risk events. This involves identifying events that are most likely to manifest themselves based on the company’s industry, profile, and vulnerabilities. Quantify the severity by looking at the potential impact on brand, product, suppliers, employees, and overall reputation.
– Prepare responses and identify the resources necessary to prevent or mitigate the highest likelihood risks. Consider both preventative and responsive measures, over both short-term and long-term time horizons, and develop resources, programs, and policies to protect the company on an ongoing basis.
The article highlights the fact that many social risk events have a cultural or leadership component to them, and that it is incumbent on the board to evaluate how the company’s culture and leadership may influence its risk profile in this area, and to take appropriate action if those factors are deemed to increase risk.
When it comes to short reports, the news is usually about the shortcomings of a company that’s had a target painted on its back. But a NYSE-listed REIT recently turned the tables on the author of a dubious short report. The guy published his stuff under the pseudonym “Rota Fortunae,” which those of you who paid attention in Latin class know means “The Wheel of Fortune.” Check out this recent Reuters article:
A small Texas investor who caused shares of a real estate investment trust to plunge 39 percent in a day has agreed to pay the company restitution to settle a lawsuit against him, a rare development that could embolden other companies to pursue such claims. Quinton Mathews, who published his research on companies online under the pseudonym Rota Fortunae, will pay Farmland Partners Inc (FPI.N) “a multiple” of the profits on his short bet in 2018, according to the terms of the legal settlement announced late Sunday. His research had helped wipe as much as $115 million off Farmland’s market value.
The parties declined requests for comment on the exact value of the settlement.
Mathews conceded that “many of the key statements” in a report he published on website Seeking Alpha targeting Farmland – including allegations of dubious related-party transactions and the risk of insolvency – were wrong. “I regret any harm the article and its inaccuracies caused,” Mathews said in the announcement, which was posted on Twitter and Seeking Alpha.
Given his pseudonym, I think my fellow liberal arts majors will agree that Mr. “Fortunae” may find solace from the philosopher Boethius in his time of financial distress. Anyway, the faulty research report was allegedly paid for by a hedge fund, which denies any involvement. According to the article, litigation between the company and that hedge fund is continuing.
