A recent WSJ article reported that regulators worldwide – including the SEC & DOJ – are starting to take an interest in Binance, which is the world’s biggest cryptocurrency exchange (and fastest growing financial exchange in terms of users). The wrinkle is that the company denies having any head office or formal address that would subject it to local regulations. According to the article, the company also aspires to eventually go public here.
Although Binance’s CEO says that the company is setting up local offices in undisclosed locations to appease certain regulators, it wouldn’t be the first “fully remote” company to undertake an IPO. John blogged a few months ago about two companies that cleared registration with no headquarters identified on the Form S-1.
As more companies inevitably do this – and as the “homeless” companies get more mature – we’re probably going to start to see regulatory gaps. For example, Rule 14a-8(e)(2) says that shareholder proposals must be received at the “principal executive offices” – does this now mean the CEO’s home address? We’ll look forward to hearing from all the trailblazers out there – and eventually, maybe the SEC Staff – about how to handle these new puzzles.
– Liz Dunshee
I blogged earlier this month that Nasdaq’s annual listing fees are increasing January 1st. Now, the NYSE is following suit. The SEC posted this notice of a proposed NYSE rule change that would amend Chapter 9 of the Listed Company Manual to simplify & increase listing fees, as follows:
1. Initial Listing Fees – Replace the per share & one-time fee structure with a flat fee of $295k (which is the current maximum initial listing fee and what a “substantial majority” of recently listed issuers have paid). There would also be a corresponding amendment to apportion this fee, for issuers structured as an UPREIT. If approved, this change would be effective immediately.
2. Annual Listing Fees – Increase the fee from $0.00113 per share to $0.00117 per share and increase the minimum annual fee from $71k to $74k for the primary class of shares. If approved, this change would apply for the 2022 year.
3. SPAC Annual Listing Fees – Replace separate fees for common shares & warrants (which are subject to an aggregate annual limit of $85k) with a flat annual fee of $85k that would cover both common shares and warrants. The NYSE says that most Acquisition Companies currently pay the maximum annual fee of $85k, so this change would have minimal impact and would be easier to implement. If approved, this change would be effective immediately.
Comments are due 21 days after publication of the proposal in the Federal Register – here’s the form.
– Liz Dunshee
In addition to the proposed changes to NYSE listing fees, the SEC also posted notice of a proposed NYSE rule change to Section 907.00 of the Listed Company Manual. Companies that list on the Exchange after the rule is approved by the Commission will be eligible to sign up for an expanded list of “complimentary products & services” for 4 years after listing, which include:
– Market Intelligence – Replacing the current offering of “market surveillance,” in light of the fact that the NYSE’s contracted service providers now provide additional info to track investor views and how they change over time
– Web-hosting & Web-casting – Combining two separate services, since the NYSE’s service providers now aggregate them as a single option
– Board of Directors Platform
– Virtual Event Platform
– ESG Tools
– News Distribution Products & Services
If approved, the rule change also would give companies more flexibility to select different levels of services – subject to a maximum overall value of services used. Eligible new listings & eligible transfers with a global market cap of $400 million or more can get:
Products & services with a maximum combined value of approximately $125k annually, consisting of: (i) web-hosting & web-casting, (ii) news distribution, and (iii) a selection among market intelligence, market analytics, board of directors platform, virtual event platform, or ESG products & services.
Companies below a $400 million market cap are limited to:
(i) web-hosting & web-casting, (ii) market analytics, and (iii) news distribution.
The Exchange would extend its existing complimentary whistleblower hotline services from 24 to 48 months for all new listings.
For currently listed companies, the “Tier One” group – companies with more than 270 million shares outstanding – can get (i) web-hosting & web-casting, and (ii) a selection from the other services, up to an annual value of $75k. Tier Two is too complicated for this blog.
Comments are due 21 days after publication in the Federal Register – here’s the form.
– Liz Dunshee
This recent “SEC Institute” blog highlights an example disclosure (pg. 44) from a company that transitioned to sequential quarterly analysis in its MD&A. It’s worth bookmarking if you’re considering making this switch in the future, and your filing for Q1 could be a logical time to do it.
Looking ahead to your Form 10-K, members of our site should also flip through the transcript from our recent webcast, “MD&A and Financial Disclosures: What To Do Now.” Sonia Barros, Raquel Fox, Partner, Mark Kronforst, Dave Lynn, Partner and Lona Nallengara – all very accomplished former SEC Staffers and current practitioners – discussed what to do now that the mandatory compliance date has arrived for the SEC’s amended MD&A rules. Our 102-page “MD&A Handbook” is also a great resource as questions arise.
– Liz Dunshee
I recently recorded an illuminating conversation with Cas Sydorowitz – the Global Head of Georgeson – and Hannah Orowitz – the Senior Managing Director and Head of US ESG for Georgeson. In the 39-minute episode, we discuss:
1. Expectations for the 2022 AGM season in the US, particularly considering the surprises we saw during the 2021 proxy and annual meeting season
2. Early trends for shareholder proposals
3. Changes in voting behaviour of traditional investors – and what they are most likely to focus on
4. Whether the record-breaking level of negotiated proposals in the 2021 season is the ‘new normal’
5. How the new SEC guidance on Rule 14a-8 will impact shareholder proposals during the 2022 proxy season and beyond
6. What impact COP26 and the formation of the International Sustainability Standards Board may have on companies in 2022
7. Following COP26, there was a rapid uptake of asset managers signing The Net Zero Asset Managers Initiative, which includes BlackRock, Vanguard, States Street and at least 220 others. What might that mean for 2022?
8. Predictions for activism in 2022, in light of environmental issues playing a role in a successful proxy contest, and activists’ cooperation with NGO proponents (e.g., Ceres and As You Sow)
9. Other parting thoughts and advice
– Liz Dunshee
I’ve blogged a few times about the impact that retail investors could begin to have on proxy voting – here’s a write-up from last spring about how increasing retail involvement could make voting outcomes less predictable, particularly if they take on a “gaming” aspect akin to the meme-stock frenzy. Now, investors’ wait for an easy way to actually do this is over: the new “iconik” app will encourage users to crowdsource their voting power, along with offering commission-free trading. The app’s website includes this “voting agreement & revocable proxy,” along with this summary of what the founders hope to accomplish:
– On iconik, people run campaigns to help make changes at publicly traded companies. Campaigns can be about almost anything, from better corporate governance to increasing share value (and everything in-between).
– Simply purchase shares and delegate your voting rights to the campaign organizer. You will always own the shares, but now those voting rights are going towards something that matters.
Because fractional shares may not include voting rights, shareholders who want maximum voting power need to buy individual stocks. So, that could prevent this from taking off in force. But as I wrote a few months ago, many retail investors today feel like they’re more likely to vote and care about E&S issues. iconik’s CEO was inspired by the meme stock rally, and he’s banking on the possibility that retail investors are willing to sacrifice diversification for influence.
This DealBook article notes that the platform launched with two active campaigns. One is targeting Meta (Facebook) – to shut down hate speech on the platform. The other is going after JPMorgan Chase – to stop lending to fossil fuel companies.
iconik likely isn’t going to be the only game in town here when it comes to crowdsourcing voting activities. In late summer, I noted that Robinhood acquired Say Technologies, which appeared to be a play into the voting & engagement space. Stay tuned.
– Liz Dunshee
I blogged yesterday about the SEC’s proposed amendments to the Rule 10b5-1 safe harbor. Orrick’s JT Ho, Carolyn Frantz and Soo Hwang kindly provided this guest post to outline what steps companies should consider taking right now, in light of this proposal:
Earlier this week, the SEC proposed amendments – subject to a 45-day comment period – to add new conditions to the availability of an affirmative defense under Rule 10b5-1 and add new disclosure requirements regarding insider trading policies and procedures of issuers as well as the timing of stock option grants. Many of the proposed amendments, such as a statutory cooling-off period for 10b5-1 plans, were expected and aligned with the recommendations issued by the Investor Advisory Committee in September 2021.
However, the proposed amendments requiring that companies publicly disclose their “insider trading policies and procedures,” as well as the timing of stock option grants to directors and officers, were not as widely expected. We expect that companies will likely wait for the SEC’s final rules before formally modifying their 10b5-1 guidelines, though they would be well advised to brief their treasury departments and individuals using those plans about the potential changes now. Outside of 10b5-1-specific issues, however, we believe there are several steps companies should take now in advance of potential required disclosure, including:
• Reviewing and updating their insider trading policies;
• Creating or reviewing formal written insider trading procedures; and
• Reviewing stock option grant timing practices, or creating stock option grant timing policies.
Potential Updates to Insider Trading Policies
The SEC’s proposed amendments do not precisely specify what types of information about company insider trading policies would need to be disclosed, though indications are that significant detail will be expected. The proposed rule contemplates that companies would provide detailed information to allow investors to assess the sufficiency of insider trading policies and procedures. Elaborating, the SEC explained:
“For example investors may find useful, to the extent it is included in the issuer’s relevant policies and procedures, information on the issuer’s process for analyzing whether directors, officers, employees, or the issuer itself when conducting an open-market share repurchase have material nonpublic information; the issuer’s process for documenting such analyses and approving requests to purchase or sell its securities; or how the issuer enforces compliance with any such policies and procedures it may have. Furthermore, the disclosure under proposed Item 408 could address not only policies and procedures that apply to the purchase and sale of the registrant’s securities, but also other dispositions of the issuer’s securities where material nonpublic information could be misused such as, for example, through gifts of such securities.”
Given the complexity and importance of insider trading policies, we believe companies should begin reviewing their policies before they must be described in SEC filings. Aside from 10b5-1 plan related issues, we note several issues that, in our experience, may need to be updated in company insider trading policies:
• Preclearance procedures – upcoming public and investor scrutiny may result in companies wishing to adopt preclearance procedures, or expand the scope of individuals covered by them, and may also occasion a reevaluation of issues like the length of time after pre-clearance during which a trade may be made.
• Scope of insider trading definitions – Especially in light of the SEC’s recent insider trading complaint against an employee of a biopharmaceutical company for trading in the stock of a competing company about which the employee did not have direct information, many companies are updating their definitions of insider trading.
• Gifts – some insider trading policies do not have clear guidance for whether, and when, gifts are subject to the policy’s restrictions. The SEC’s proposed rule specially calls out gifts as an area for disclosure.
• Definition of material non-public information (“MNPI”) – insider trading policies often include lists of examples of MNPI. Companies have recently been updating these lists to include issues of growing significance, such as cybersecurity and certain sustainability matters.
Formalization of Insider Trading Procedures
In addition to disclosure about insider trading policies themselves, the SEC’s proposed rule contemplates required disclosure about insider trading procedures. Many companies do not today have formal written procedures for insider trading. We anticipate that many companies will wish to adopt such procedures well in advance of any disclosure requirement, to provide an opportunity for multi-stakeholder review and to ensure that the procedures work well in practice before they are revealed publicly. Such procedures could include: a discussion of the availability of the insider trading policy, the type and frequency of training about that policy, the process for determining whether a potential trader possesses MNPI, the process for creating documentation about preclearance and other decisions, the process for creating and enforcing special blackout periods, the process for reporting and investigating potential violations, and principles guiding the consequences for violations.
Stock Option Grant Timing
Under the proposed rules, companies would be required to disclose in a new table any option awards to named executive officers or directors that are made within a certain timeframe within the release of material nonpublic information such as an earnings announcement. Such disclosure will likely lead to even more scrutiny regarding the timing of option grants. Companies should begin considering their practices now, and determine whether to adopt a formal policy regarding the timing of stock option grants, if they do not already have one. Such policies can help address the potential shareholder claims that can arise when stock options are granted during closed windows or just prior to the release of MNPI.
I blogged earlier this week about current focus areas for the SEC’s Office of the Chief Accountant. One of those focus areas is revenue recognition – and on the same day that Paul Munter published that year-end statement, the Enforcement Division also announced that it had charged a former NYSE-listed company and three former execs (the CFO, CAO, and Controller) with violations of the antifraud, reporting, books and records, and internal accounting control provisions of the federal securities laws. The company (which is now PE-owned) agreed to a $2 million civil penalty and a permanent injunction. The individuals are facing injunctions, disgorgement with interest, civil penalties and D&O bars.
The violations stemmed from an alleged revenue manipulation scheme and misreporting of key metrics, including adjusted EBITDA. Here’s one of the opening paragraphs in the complaint (also see this Cooley blog):
The scheme entailed entering a series of revenue adjustments to make it appear that ARA had beat, met, or come close to meeting various predetermined financial metrics, when in fact its financial performance was materially worse. Wilcox, Boucher, and Smith intentionally, recklessly, and negligently engaged in acts, practices, and courses of conduct related to those revenue adjustments that caused ARA to overstate its revenue, net income, and other financial metrics throughout this period.
Basically, according to the SEC, the defendants determined what revenue they wanted the company to have for a month or a quarter. Then, they had staff members make topside adjustments to revenue at various corporate clinic locations, until they met the predetermined number. This was at odds with the fact that the company’s internal controls called for any adjustments to be made based on actual patient payment details. The defendants allegedly applied various manipulations to arrive at their predetermined numbers, including use of a “contractual adjustments spreadsheet” as a “cookie jar” to find topside revenue when they needed it.
I don’t want to get too into the weeds because revenue recognition is complicated and I’m not an accountant, but it seems pretty obvious that it’s a no-no to decide what you want your revenue to be and then make adjustments to arrive at that figure. As I blogged just a few months ago in regards to an EPS enforcement action, the SEC really does frown upon earnings management, and it’s pretty likely that they’ll spot it.
In other news, the SEC also announced a $5 million whistleblower award this week, so there continues to be a pretty big incentive for folks who pick up on fraud to go to the Commission…
– Liz Dunshee
We’ve seen some notable numbers and stories around whistleblowers this year, including the multi-million dollar award that the SEC announced this week. While Frances Haugen and Tyler Shultz/Erika Cheung are currently top of mind, there was a time – 20 years ago! – when the world was abuzz about Sherron Watkins, who raised concerns internally at Enron and later testified before Congress about those warnings.
A recent Bloomberg article checks in on where the major Enron players are today, and reports that Watkins now teaches business ethics. Here’s a Houston news outlet with a couple of short video interviews in which Sherron shares what the company’s collapse looked like from the inside – and how it still feels like yesterday to her.
– Liz Dunshee
Dave blogged recently about the SEC’s approach to crypto enforcement – and a unique action to halt the effectiveness of a Form 10 registration statement that had been filed to register two tokens. Cornerstone Research also recently released updated data on cryto-related SEC enforcement actions through the third quarter of 2021. Here are key findings:
– In the first nine months of 2021, the SEC brought 19 enforcement actions related to cryptocurrency. Twelve were litigated in U.S. district courts, and seven were resolved within the SEC as administrative proceedings.
– Cryptocurrency enforcement activity in Q1 2021 was largely in line with the activity in Q1 2020. In Q2 2021, enforcement activity slowed down as senior positions were filled under Gensler. It bounced back in Q3 2021, with nine cryptocurrency enforcement actions.
– Since the first action in July 2013, the SEC has brought 94 cryptocurrency enforcement actions as of Sept. 30, 2021:
• 55 litigations
• 39 administrative proceedings
– Liz Dunshee
