In early September, SEC Commissioner Mark Uyeda spoke at the Korea Blockchain Week in Seoul, South Korea. According to a recent CoinDesk article, he suggested at the event that the SEC should create a registration statement form tailored to digital assets.
The agency’s current form, the primary application companies must fill out to register securities in the U.S., does not do justice to digital assets and other unusual financial products, Uyeda said. The regulator has not done enough for digital asset products looking to register in the country, he said. … Uyeda noted that the regulator can work with crypto companies to figure out what parts should be added or removed from the present version.
When asked about crypto during the “Dialogue with the Director” at the ABA Business Law Section Fall Meeting, Corp Fin Director Erk Gerding noted that he didn’t have any further information on Commissioner Uyeda’s comments. But, noting that the largely principles-based nature of existing forms and rules work for issuers and instruments across many industries, including crypto asset securities, he suggested that anyone considering registering a particular asset with the SEC should talk to the Staff or take the plunge and submit a filing. He said the Staff will have crypto experts in the Division work through questions with advisors and issuers on how particular rules and disclosure items apply in their particular circumstances.
Speaking of crypto and the divided Commission, FOX Business journalist Eleanor Terrett shared Monday on X that the full five-member Commission is preparing to testify in front of the House Financial Services Committee next Tuesday, which she says will be the first time all the Commissioners have testified together since 2019. Chair Gensler will testify the following day, and her follow up post reports the Committee will hold a hearing called, ‘Dazed and Confused: Breaking Down the SEC’s Politicized Approach to Digital Assets.’
Here’s something I shared on Monday on DealLawyers.com:
During the ABA Business Law Section’s “Dialogue with the Director” last Friday, Corp Fin Director Erik Gerding noted that Corp Fin staff has noticed a slight uptick in SPAC IPOs and shared some helpful thoughts on the disclosure review process now that the SPAC disclosure rules are effective. I’ve tried to paraphrase some of the key takeaways below (subject to the SEC’s standard disclaimer — and my own disclaimer that these are summaries based on my notes from Director Gerding’s oral comments):
– The SEC expects DRS submissions to be substantially complete when submitted. Nothing new; just a reminder.
– The filings complying with the new rules are lengthy, which may impact disclosure review timing. Plan accordingly.
– Some filers have elected to voluntarily comply with the new rules even if they don’t apply (for example, when the filing could be governed by the old rules because the filer had submitted filings prior to the effective date of the new rules on July 1). In that case, the Disclosure Review Program staff will treat the filing as if the new rules apply and comment accordingly.
– When dealing with a “SPAC on top” structure, Corp Fin staff may permit the de-SPAC filing to be submitted as a DRS by relying on the co-registrant’s DRS eligibility where the rules require a co-registrant. This is because the de-SPAC is the functional equivalent of the target’s IPO.
Director Gerding also acknowledged that technical EDGAR issues continue with respect to co-registrants, but Monday afternoon the SEC announced the adoption of updates to Volume II of the Filer Manual to reflect, among other things, that EDGAR will be updated to permit SPACs to identify target companies in a de-SPAC as co-registrants on Form DRS and DRS/A. It looks like EDGAR Release 24.3 was rolled out that day with the announcement.
At the same time, the SEC updated these FAQs on Voluntary Submission of Draft Registration Statements to revise old question 19 on de-SPACs & co-registrant status, which now reads:
(19) Question:
If a registrant uses the confidential submission process to submit a draft registration statement in connection with a de-SPAC transaction, when should it include any co-registrant’s CIK and related submission information in the EDGAR Filing Interface?
Answer:
In EDGAR Release 24.3, EDGAR was enhanced to allow co-registrants on draft registration statement submissions. See Section 7.2.1 Accessing the EDGARLink Online Submission of the EDGAR Filer Manual. The primary registrant must include the co-registrant’s CIK and related submission information in EDGAR when it submits the draft registration statement. See Section 7.3.3.1 Entering Submission Information of the EDGAR Filer Manual. The draft registration statement must also contain the information required by the applicable registration statement form, including required information about the target company. Co-registrants do not need to separately submit the draft registration statements or related correspondence in EDGAR.
Last week, the SEC announced settled enforcement proceedings arising out of allegedly misleading IPO disclosures about a biotechnology company’s overall market potential, revenue prospects, and customer pipeline for the company’s only commercially available product. Without admitting or denying the SEC’s findings, the company consented to an order to cease and desist from future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act (which do not require proof of scienter) and agreed to pay a $30 million civil penalty to resolve the charges. Here’s an excerpt from the SEC’s press release:
According to the SEC’s order, Zymergen claimed that it had a $1 billion electronics display market opportunity for Hyaline, but the estimate was based on flawed and unreasonable assumptions that included product markets that were poor fits for Hyaline’s technical characteristics and unsupported premium pricing.
The SEC’s order also finds that Zymergen provided misleading revenue forecasts to research analysts that far exceeded internal estimates.
Additionally, the order finds that Zymergen misled investors during its first public earnings call by misrepresenting the status of Hyaline’s customer pipeline while omitting significant technical and commercial problems facing the product.
As hinted at above, the order takes issue with inconsistencies between the public statements and projections used and concerns raised internally. The order alleges that the company’s sales team had or used different market assumptions and revenue projections and was aware of “adverse facts” regarding customer orders that were omitted in the earnings call response. For example:
The $1 billion [market opportunity] figure was misleading because it included product markets that the sales team was not targeting and/or that were poor fits for Hyaline’s technical characteristics. Specifically, the estimate included the rigid-touch-sensors market and fingerprint-on-display market, which together comprised over 99 percent of the $1 billion market opportunity figure provided in the Form S-1.
No member of Zymergen’s sales team reviewed this assumption, nor did the information provided by the sales team support the inclusion of these markets. In fact, the sales team knew that past attempts to sell Hyaline in these markets had already failed after customers found Hyaline was either too expensive, unnecessary, or both. Thus, Hyaline’s customer pipeline maintained by the sales team did not list any customer that was testing the product for either the rigid-touch-sensors market or the fingerprint-on-display market as of the end of 2020. Despite this information, Zymergen included these markets in the $1 billion figure provided to investors.
The SEC’s press release focuses on these market potential numbers — where the internal estimate was “approximately $42 million to $100 million—or approximately 5 to 10 percent of the $1 billion market opportunity for 2020 presented in the Form S-1.” The press release has this reminder:
“Pre-revenue and early-stage companies that seek to tap the capital markets must do so with reasonable estimates of their market potential,” said Monique C. Winkler, Director of the SEC’s San Francisco Regional Office. “Today’s order finds that Zymergen failed to satisfy this obligation when it misled investors with what amounted to unsupported hype.”
While relevant to all companies, as the quote notes, it’s particularly important for pre-revenue and early-stage companies to carefully consider their market opportunity statements and for all involved to understand, agree and disclose what markets are included, or excluded, from the estimates and the assumptions involved.
Last week, the SEC posted this notice & request for comment for a proposed NYSE rule change that would amend Section 102.01 of the NYSE Listed Company Manual, which sets forth the minimum stockholder and trading volume initial listing requirements for companies seeking to list under the “domestic” initial listing standards.
A note included in Section 102.01B (under the heading “Calculations under the Distribution Criteria”) provides that, when considering a listing application from a company organized under the laws of Canada, Mexico or the United States (“North America”), the Exchange will include all North American holders and North American trading volume in applying the minimum stockholder and trading volume requirements of Section 102.01A. Notwithstanding the foregoing, the note included in Section 102.01B also provides that, in connection with the listing of any issuer from outside North America, the Exchange will have the discretion, but will not be required, to consider holders and trading volume in the company’s home country market or primary trading market outside the United States in determining whether a company is qualified for listing under Section 102.01, provided such market is a regulated stock exchange.
The Exchange proposes to amend the note in Section 102.01B under the heading “Calculations under the Distribution Criteria” to provide that, when considering a listing application from a company regardless of whether the company is domestic or foreign, the Exchange will include all holders on a global basis and worldwide trading volume in applying the minimum stockholder and trading volume requirements of Section 102.01A. As the discretion provided with respect to the inclusion of non-U.S. holders and trading volume in the current rule would no longer be relevant if there was no geographic limitation on the inclusion of holders or trading volume in meeting the standards, the Exchange proposes to delete from the note the discussion of how that discretion is currently applied.
This is a highly technical change, but NYSE says it will make a difference to non-U.S. companies conducting their initial public offerings in the United States … and NYSE’s ability to compete with Nasdaq:
It has been the Exchange’s experience in recent years that non-U.S. companies conducting their initial public offerings in the United States will often seek to sell a significant portion of the offering in the company’s home market rather than in the United States. Such companies and their underwriters have sometimes had difficulty placing shares with a sufficient number of investors in North America to meet the Exchange’s domestic distribution standards and, in some instances, companies have been unable to list on the Exchange because of the restrictions imposed by the current NYSE rule.
In some cases, this means that these companies are lost to the U.S. capital markets, but in other cases these companies are able to list on the Nasdaq Stock Market (“Nasdaq”), as Nasdaq’s distribution requirements do not include a limitation comparable to that included in the NYSE’s rule. The Exchange believes that the proposed rule change will enable it to compete more effectively for the listing of non-U.S. companies, as the rule change would remove a significant competitive disadvantage faced by the Exchange in competing with Nasdaq for the listing of these companies.
In addition to the competitive benefits described above, the Exchange believes that the current rule reflects an understanding of the functioning of the trading market for non-U.S. companies that is inconsistent with the current reality. … Given the ease of transfer of securities between different countries in the contemporary securities markets, there is no reason why the holders of a listed company’s securities outside of North America cannot be active real time participants in the trading market in the United States and that foreign holders should be viewed as less valuable as a source of liquidity in that market.
In the latest Timely Takes Podcast, I speak with Paul Hodgson, Senior Advisor to ESG data analytics firm ESGAUGE (and freelance writer and researcher for ICCR and Ceres), to review data on S&P 500 governance trends during the 2024 proxy season. During this 22-minute podcast, we discuss:
– Trends in the use of mandatory director retirement policies at S&P 500 companies
– How the S&P 500 is considering diversity in director recruitment
– Trends in board leadership
– Demand for new directors with current or former CEO experience
Last week, the SEC announced settled charges against Keurig Dr Pepper Inc. for allegedly inaccurate statements about the recyclability of its K-Cup pods. Keurig agreed to pay $1.5 million in civil penalties.
According to the SEC’s order, in annual reports for fiscal years 2019 and 2020, Keurig stated that its testing with recycling facilities “validate[d] that [K-Cup pods] can be effectively recycled.” But Keurig did not disclose that two of the largest recycling companies in the United States had expressed significant concerns to Keurig regarding the commercial feasibility of curbside recycling of K-Cup pods at that time and indicated that they did not presently intend to accept them for recycling.
In fiscal year 2019, sales of K-Cup pods comprised a significant percentage of net sales of Keurig’s coffee systems business segment, and research earlier conducted by a Keurig subsidiary indicated that environmental concerns were a significant factor that certain consumers considered, among others, when deciding whether to purchase a Keurig brewing system.
The Commission both misreads Keurig’s statement and overreacts to its own misreading. The pods were recyclable: Keurig chose a type of plastic that was recyclable and ran tests to show that the pods could be recycled. That claim is all Keurig’s statements reasonably should be read to say. Branding Keurig’s Forms 10-K as incomplete or inaccurate because Keurig did not also disclose that two recycling companies “did not presently intend to accept pods” for “commercial feasibility” reasons misreads Keurig’s statement that the pods could be recycled as an implicit assertion that the pods would be recycled.
This reading, however, places far too much weight on the word “effectively.” In the Commission’s view, the pods cannot be “effectively” recycled because two recycling companies were uninclined to accept them for curbside recycling.
She also points out that the order doesn’t claim Keurig’s statements were material and says the charges — brought only under Section 13(a) and Rule 13a-1, which require the filing of “complete and accurate” annual reports — were somewhat unique:
[T]he Order nowhere states that [the statements] were material. The closest the Order comes to addressing materiality is a statement that “sales of pods comprised a significant percentage of net sales of Keurig’s coffee systems business segment” in 2019, which appears in the same paragraph with the statement that “[c]onsumer research conducted by Keurig Green Mountain in 2016 indicated that, for certain consumers, environmental concerns were a significant factor, among others, considered when deciding whether to purchase a Keurig brewing system.” … That some consumers thought, among other factors, about environmental factors does not mean that the recyclability of pods was material to investors.
Rarely does the Commission bring standalone Section 13(a) and Rule 13a-1 charges. Telling to me is the absence of other charges—such as charges under Exchange Act Section 10(b) and Rule 10b-5, Securities Act Section 17(a), or even under Exchange Act Rule 12b-20, which requires issuers to add to their statements or reports such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading. I do not believe that Keurig’s recyclability statements support such charges because I do not think that they are false or misleading, which means there is no basis for Section 13(a) and Rule 13a-1 charges either.
That doesn’t mean this enforcement action is a one-off event. It’s somewhat reminiscent of charges against Fiat-Chrysler under Exchange Act Section 13(a) and Rule 12b-20. And it probably won’t be the last of its kind. WilmerHale’s Keeping Current blog says:
Notwithstanding Peirce’s dissent, the SEC’s action highlights the importance of ensuring disclosures are complete and not misleading due to the omission of adverse information known to the company. While this is the case for all disclosures and is nothing new, the context in which this action arises serves as an important reminder of the SEC’s continued focus on environmental and social disclosures and the agency’s willingness to look outside of SEC filings [e.g., sustainability reports] for additional context surrounding such disclosures.
This timing is interesting. Remember the SEC Division of Enforcement’s “Climate and ESG Task Force” focused on identifying material gaps or misstatements in companies’ ESG disclosures? Apparently, that task force is no more. As reported by Bloomberg:
The Securities and Exchange Commission shut down its Enforcement Division’s Climate and ESG Task Force within the past few months, an agency spokesperson told Bloomberg Law Thursday.
The agency launched the group in March 2021 under then-Acting SEC Chair Allison Lee with nearly two dozen staffers, who helped on the task force as they continued other jobs. SEC Chair Gary Gensler continued the group when he arrived at the agency in April 2021. The group went on to help with cases against Bank of New York Mellon Corp., Goldman Sachs Group Inc., Brazilian miner Vale SA and others.
That doesn’t mean that enforcement related to ESG misstatements isn’t still high on the Division’s watch list (clearly). The agency’s spokesperson also said that “the strategy has been effective, and the expertise developed by the task force now resides across the Division.”
In their latest “Understanding Activism with John & J.T.” podcast, John and his co-host J.T. Ho were joined by Dan Scorpio, head of M&A and Activism for H/Advisors Abernathy, to discuss what to do – and not do – when an activist comes knocking. Topics covered during this 22-minute podcast include:
– Why companies need more than good results to respond effectively to activism
– Why management teams shouldn’t assume an activist’s message won’t resonate with shareholders
– Common mistakes companies make in responding to activism and what they should do instead
– How universal proxy has changed proxy fights and overall strategies
– The role of social and digital media in making the case to retail investors
– Strategies for engaging index funds and other “passive” investors
– What makes an effective internal and external team for responding to activism
– The importance of offering solutions instead of attacking activists
John and J.T.’s objective with this podcast series is to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. I think you’ll find these podcasts filled with practical and engaging insights from true experts – so stay tuned!
Yesterday, the SEC posted a settlement of an administrative action relating to a bribery scandal that has been the topic of shareholder derivative litigation and DOJ enforcement (with the politician who was involved now serving a 20-year prison sentence). In its bite at the apple, the Commission’s enforcement claims were based on:
– False & misleading statements – that the company acted properly and ethically with respect to its political contributions
– Failing to disclose related-party transactions – because the company made payments to a 501(c)(4) that, while appearing independent on paper, was controlled by company executives
– Inadequate disclosure controls & procedures – the company’s accounting records did not correctly describe the payments as illegal or reflect them as related party transactions
The company settled the SEC’s claims for $100 million. While this situation was egregious, it’s a reminder that if “crisis communications” aren’t accurate, they can end up deepening the crisis – a violation of “Dave’s First Law of Holes.” Check out my blog from last year about reducing risks associated with corporate political spending.
I shared a few trends last month about newly filed insider trading policies. This Gibson Dunn blog adds observations from the 49 S&P 500 companies that were required to comply with the new “Exhibit 19” requirement as of June 30th (remember that for calendar-year companies, the new exhibit is first required with the Form 10-K to be filed in spring 2025). Here are 12 key takeaways:
1. Who’s Subject to the Policy: In addition to covering all company directors & personnel, and their family members, 82% expressly state that they apply to legal entities whose transactions are controlled or influenced by company personnel.
2. Gifts: 61% prohibit gifts when an insider as MNPI and/or apply the blackout & pre-clearance restrictions to gifts, and 8% restrict gifts only if the donor has reason to believe the donee will sell while the donor has MNPI. Of the policies that do not apply gift restrictions to all employees, a majority restrict gifts only for certain covered persons that are subject to additional restrictions, such as blackout periods and/or pre-clearance procedures.
3. Options: 69% exempt exercises of options when there is no associated sale on the market; however, exercises of options where there is a sale of some or a portion of shares delivered upon exercise (e.g., cashless broker exercise) are typically treated like any other sale.
4. Other Equity Awards: 59% exempt vesting and settlement of equity awards, such as RSUs and restricted stock, and 51% of the policies specifically provide that withholding of shares for tax purposes (i.e., net share settlement) is exempt.
5. Shadow Trading: 82% prohibit trading in the securities of another company when the person is aware of MNPI about such company that was learned in the course of or as a result of the covered person’s employment or relationship with the company. The remainder of the policies apply the prohibition more broadly to trading in the securities of another company while aware of MNPI about that company, without specifically addressing how the information was learned.
6. Who’s Subject to Blackouts/Windows: 88% subject directors, executive officers and a designated subset of employees to regular quarterly blackout periods, with a few policies applying two different blackout periods to different groups of employees.
7. Blackout Dates: The start date of the quarterly blackout periods ranges from quarter end to four weeks or more prior to quarter end. Under almost half of the policies (45%), the quarterly blackout periods start approximately two weeks prior to quarter end, 14% start the blackout periods three to four weeks prior to quarter end, and 18% start four weeks or more prior to quarter end. A significant majority of the policies (76%) end the quarterly blackout periods one to two full trading days after the release of earnings, with more policies ending after one trading day (51%) than two trading days (24%).
8. Pre-Clearance: For 65% of the policies, the preclearance persons are a subset of the persons subject to blackout periods, while for a minority of the policies (29%), they are the same as the persons subject to the blackout periods.
9. Other Prohibited/Discouraged Transactions: All of the policies prohibit or otherwise restrict certain types of transactions regardless of whether they involve actual insider trading. The most common prohibitions addressed: hedging transactions (96%);[8] speculative transactions (96%); pledging securities as collateral for a loan (90%); and trading on margin or holding securities in margin accounts (82%). A significant majority of the policies do not specifically address standing or limit orders or short-term trading, but of the ones that do, a significant majority take the approach of discouraging such transactions rather than strictly prohibiting them. Even where standing or limit orders are not strictly prohibited, some policies require that such orders be cancelled if the person becomes aware of MNPI (or prior to the start of a blackout period, if applicable).
10. Rule 10b5-1 Plans: All of the policies address the availability of Rule 10b5-1 plans. 71% describe the specified conditions under the SEC rules for a plan to qualify as a Rule 10b5-1 plan, although some do so in a more streamlined manner than others. Of these policies, a majority include Rule 10b5-1 plan requirements within the body of the policy, a minority do so in an appendix and one company filed the plan guidelines as a separate exhibit. 29% do not describe the specified conditions under Rule 10b5-1, but provide a general statement regarding the affirmative defense and refer covered persons to the officer administering the policy.
11. Company Transactions: Item 408(b) of Regulation S-K requires a public company to disclose whether it has adopted insider trading policies and procedures governing transactions in company securities by the company itself, and, if so, to file the policies and procedures, or if not, to explain why. Of the 23 S&P 500 companies subject to Item 408(b) that filed a Form 10-K and proxy statement prior to June 30, 2024, 78% did not address insider trading policies or procedures governing companies’ transactions in their own securities. Of the ones that did, most included a brief sentence or two about the company’s policy of complying with applicable laws in trading in its own securities. Only one company in our surveyed group filed a company repurchase policy as a separate exhibit.
12. Exhibit Filing: 88% of the companies filed only a single insider trading policy and no other related policies or documents (even where they referenced other related policies in their insider trading policy).
The blog notes that it’s still appropriate for specific provisions to vary from company to company. But when it comes to key policy terms that your insiders might ask about, it helps to understand “what’s market.” Make sure to check out our “Insider Trading” Practice Area for additional practical guidance.
This topic is also on the agenda at our “2024 Proxy Disclosure & Executive Compensation Conferences” – which are less than a month away! We’ll be sharing reminders for your next Form 10-K as well as practice pointers & trends. If you can’t make it to the Conferences in person, we also offer a virtual option. Register today by visiting our online store or by calling us at 800-737-1271.
