Earlier this year – which already feels like a lifetime ago – I blogged about an enforcement action that alleged a public company had overstated its “artificial intelligence” capabilities. Although it appears a lot has changed in terms of the SEC enforcement environment, it’s still important for AI-related disclosures to be carefully reviewed for accuracy – for two reasons.
First, securities regulations do still exist. It’s too early to tell whether enforcement activity will in fact dwindle to record lows, and even if it does, you’ll have to contend with a statute of limitations that may extend into an administration with different priorities. Second, and arguably more relevant right now, class action lawsuits aren’t going away. This blog from Kevin LaCroix at the D&O Diary says that there were 15 AI-related securities suits filed in 2024 – and four so far this year. The blog summarizes the two latest actions – which were both filed earlier this month and relate to statements made in 2023-2025. Kevin notes:
Over the last couple of years, investors have shown a willingness to pay a premium for the shares of companies that appear positioned to capitalize on rise of AI. The share prices of AI-connected companies have (at least until recently) soared. These financial market features create incentives for companies to try to portray themselves as poised to capitalize on the advent of AI. However, when projected AI benefits fail to materialize, company share prices decline, investors are disappointed, and, as these two new lawsuits demonstrate, securities class action lawsuits can follow.
In both of these new lawsuits, the defendant companies allegedly attempted to project themselves as being in a position to benefit from the rise of AI, allegedly setting investors up for later disappointment when reality fell short. The shareholder plaintiffs in both of these actions allege that the companies overstated their AI capabilities or prospects, in a demonstration of what has been called “AI-washing.”
These (lightly edited) excerpts from Kevin’s blog give more color on the statements underlying the plaintiffs’ claims:
The first securities lawsuit alleges that during from May 2023 to February 25, 2025, the Company, in order to project financial growth and stability, made statements to investors concerning its launch of its digital ad platform and its use of “cutting-edge AI technologies” to match advertisements to mobile games and to allow its customers to expand into web-based marketing and e-commerce support financial growth. Throughout the period, the company reported impressive financial results, outlooks, and guidance.
…
The complaint alleges that during the class period the defendants “continually touted the new and improved ad platform and cutting-edge AI technologies as the main reason why the Company has seen exponential growth since 2022. In actuality, the Company used manipulative practices that forced unwanted apps on customers via a ‘backdoor installation scheme’ in order to erroneously inflate installation numbers, and in turn, profit numbers.”
And for the second complaint:
According to the subsequently filed securities complaint, during the period July 2024 to February 5, 2025, the Company projected favorable growth in its smartphone segment and for the Company as a whole, among other things, saying that it expected that the rise of AI would “ignite a transformative smartphone upgrade cycle,” and that the Company was in the early stages of this “multi-year trend,” and that the Company was “well-positioned to capitalize on it.”
However, on February 5, 2025, the Company reported disappointing results for its fiscal first quarter and lowered its guidance for the second quarter, citing a “competitive landscape” that had “intensified.” According to the securities complaint, the Company’s share price declined 24% on this news.
…
The complaint alleges that the during the class period, the defendants made misrepresentations or failed to disclose that “its long-standing relationship with Apple, its largest customer, did not guarantee that Apple would maintain its business with the Company for its anticipated iPhone launch. Additionally, Defendants oversold the Company’s position and ability to capitalize on AI in the smartphone upgrade cycle.” The complaint alleges that the Company’s statements “absent these material facts” caused investors to purchase the company’s securities at “artificially inflated prices.”
As you can see, when it comes to AI-related opportunities, “anything you say can and will be held against you.” Business folks are understandably excited to talk about this stuff, which is all the more reason for securities counsel to pressure-test these disclosures before they’re publicly released.
Earlier this week, the SEC announced a new “Small Entity Compliance Guide” to assist in complying with the upcoming transition to EDGAR Next. The guide not only sheds light on key topics (for small businesses & beyond) – it also serves as a timely reminder that the March 24th transition date for EDGAR Next is rapidly approaching!
As we’ve previously shared, existing filers will be able to enroll through a transition period ending September 12th. But that doesn’t mean you can put this off until August – especially if you have directors who sit on other companies’ boards. You should coordinate with those companies now, so that nobody ends up inadvertently locked out of an insider’s account on the eve of a Form 4 deadline. And remember that if you have new-filer directors joining your board after March 24th, you’ll need to be ready to follow the new process for them right off the bat.
We’re posting memos in our “EDGAR” Practice Area. Additionally, mark your calendar for our Section16.net webcast – “How to Prepare for EDGAR Next” – which is happening this upcoming Tuesday, March 18th at 1:30 p.m. ET. If you aren’t already a Section16.net member and want access to this webcast and our other helpful resources, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. You can sign up by credit card online. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
Dave and I are having a blast with our new “Mentorship Matters” podcast, where we share our thoughts on mentorship, career paths, and how to succeed as a corporate and securities lawyer. In our latest 30-minute episode, we interviewed Brad Kern, who is Managing Director and Associate General Counsel at Wells Fargo, where he heads up the securities law practice.
In addition to his substantive expertise, Brad has been committed to mentorship throughout his career. He led the inaugural career and development month for Wells Fargo’s entire Legal Department and has participated in many leadership and mentorship activities during his 12 years practicing as in-house counsel, as well as while he was in private practice at the firm formerly known as Shearman & Sterling. We discussed:
1. Brad’s career path and what he’s learned along the way
2. Key features of Wells Fargo’s mentorship and career development program, and the process for establishing the program
3. Observations on successful mentorship relationships in the in-house and private practice environments
4. Recommendations for creating or enhancing mentorship opportunities
5. Mentorship and training expectations that in-house teams have for outside counsel
6. How new technologies might affect client expectations on outside counsel staffing and training
Thank you to everyone who has been listening to the podcast and providing feedback! We’re excited to unveil other guests in the months to come. If you have a topic that your think we should cover or guest who you think would be great for the podcast, feel free to contact Dave or me by LinkedIn or email.
Yesterday, in another signal that the SEC is focusing on capital raising right now, the Corp Fin Staff released a batch of updates to Compliance & Disclosure Interpretations that relate to the simplified exempt offering framework adopted by the SEC way back in 2020. Better late than never!
In total, there are 24 interpretations that have been revised / withdrawn / newly issued. Here are a few of the topics addressed:
– Reg A draft offering statements
– Use of Reg D by foreign issuers
– Reg D definitions
– Application of general solicitation rules to “angel networks” and “demo days”
– Crowdfunding communications and advertising
Here’s the big ole’ line-item list of affected CDIs:
Two of the new CDIs issued yesterday provide very welcome guidance on what the Corp Fin Staff views as an acceptable process for verifying “accredited investor” status in a Rule 506(c) offering, which could make these “general solicitation” offerings much more usable. Specifically, the Staff added questions 256.35 and 256.36.
CDI 256.35 clarifies that the list of verification methods in Rule 506(c)(2)(ii) is “non-exclusive and non-mandatory.” The CDI cites back to the Commission’s 2020 adopting release for the exempt offering simplification rules, as well as the 2013 Reg D updates for a discussion of what will qualify as reasonable steps to verify that purchasers are accredited. This is a facts & circumstances analysis – the CDI and the 2013 release say that these factors are among those that the issuer should consider:
– the nature of the purchaser and the type of accredited investor that the purchaser claims to be;
– the amount and type of information that the issuer has about the purchaser; and
– the nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering, and the terms of the offering, such as a minimum investment amount.
CDI 256.36 addresses how minimum investment amounts can factor into the “reasonable steps to verify” requirement. This new CDI is based on a Latham & Watkins no-action letter that also was issued yesterday, which goes into more detail about relevant conditions that – when they accompany a minimum investment amount – would increase the likelihood that a purchaser is accredited and evidence reasonable steps to verify. Here’s the incoming letter with background on the interpretive request – and here’s an excerpt from the Staff’s response:
We agree that a high minimum investment amount is a relevant factor in verifying accredited investor status. As you note, the Commission stated that “if the terms of the offering require a high minimum investment amount and a purchaser is able to meet those terms, then the likelihood of that purchaser satisfying the definition of accredited investor may be sufficiently high such that, absent any facts that indicate that the purchaser is not an accredited investor, it may be reasonable for the issuer to take fewer steps to verify or, in certain cases, no additional steps to verify accredited investor status other than to confirm that the purchaser’s cash investment is not being financed by a third party.” Securities Act Release No. 9415 (July 10, 2013).
We also note your representation that the minimum investment amount would be accompanied by written representations, from the purchaser, as to: (1) their accreditation (under Rule 501(a)(5) or (a)(6) if they are a natural person, or under Rule 501(a)(3), (7), (8), (9) or (12) if they are a legal entity), and (2) the fact that the purchaser’s minimum investment amount (and, for purchasers that are legal entities accredited solely from the accredited investor status of all of their equity owners, the minimum investment amount of each of the purchaser’s equity owners) is not financed in whole or in part by any third party for the specific purpose of making the particular investment in the issuer.
In addition, we note your representation that the issuer would have no actual knowledge of any facts that indicate: that any purchaser is not an accredited investor; or that the minimum investment amount of any purchaser (and, for purchasers that are legal entities accredited solely from the accredited investor status of all of their equity owners, the minimum investment amount of any such equity owner) is financed in whole or in part by any third-party for the specific purpose of making the particular investment in the issuer.
Yesterday, the SEC approved a change to Nasdaq’s initial listing standards that will raise the bar for the liquidity requirements that apply to IPO listings and OTC uplistings in connection with a public offering. Meredith blogged about Nasdaq’s initial proposal back in December, which was subsequently amended to clarify a few details. Here’s what the rule will mean for IPOs:
First, the Exchange proposes to modify Nasdaq Listing Rules 5405(b) and 5505(b) to provide that a company listing in connection with an IPO, including through the issuance of American Depository Receipts, must satisfy the applicable Market Value of Unrestricted Publicly Held Shares requirement for each initial listing standard for primary equity securities with the proceeds of that offering.
Under the amended listing standards, previously issued shares that are registered for resale will no longer count in demonstrating liquidity. Nasdaq stated that it has observed that the companies that meet the applicable Market Value of Unrestricted Publicly Held Shares requirement through an IPO by including Resale Shares have experienced higher volatility on the date of listing than those of similarly situated companies that meet the requirement with only the proceeds from the offering – and that the Resale Shares may not contribute to liquidity to the same degree as the shares sold in the offering.
Here’s more detail on the change for companies uplisting from the OTC:
Secondly, with respect to a company uplisting from the OTC market, the Exchange proposes to modify the alternative to the ADV Requirement in Nasdaq Listing Rules 5405(a)(4) and 5505(a)(5). As revised, a company relying on this alternative will be required to satisfy the applicable Market Value of Unrestricted Publicly Held Shares requirement with only the proceeds from the offering. As a result, the Exchange also proposes to modify Nasdaq Listing Rules 5405(a)(4) and 5505(a)(5) to increase the size of the required public offering for this alternative to the ADV Requirement from $4 million to $5 million for Nasdaq Capital Market applicants and $8 million for Nasdaq Global Market applicants to align with the minimum Market Value of Unrestricted Publicly Held Shares requirement for each market.18 If the company qualifies under a standard other than the income standard, the minimum raise instead will have to satisfy the Market Value of Unrestricted Publicly Held Shares requirement of the applicable standard.
Nasdaq indicated that the proposed changes will become operative 30 days after approval by the Commission. The Commission has approved the proposal on an accelerated basis – although people are also free to continue to submit comments for a limited additional time.
For companies that are considering IPOs this year, capital structure is an important consideration. The “Investor Coalition for Equal Votes” – which was launched a few years ago to stop “unrestrained dual-class structures” as companies go public – recently released a 23-page report that summarizes the voting policies on dual-class structures of 31 of the world’s largest investors.
The report covers policies of asset owners & managers as they stood going into 2025. Although it remains to be seen whether recent Staff guidance will affect investor positions on this topic or the consequences they say they’ll impose, the report can give you a sense of investor sentiment for purposes of marketing a deal and long-term planning. Here’s an excerpt:
Although a spectrum of approaches is taken – from votes against ‘dual-class enabling’ directors at every company board they sit on, to expressing support for “one-share, one-vote” proposals – what is clear is that institutional investors have strong views on this issue. It is also the case that many investors are strengthening their lines over time, as well as using other escalation activities such as co-filing shareholder resolutions (including on class-by-class disclosure) and statements at Annual General Meetings (AGMs) and other meetings.
The report says that some investors are also beginning to vote against capital resolutions (e.g., share buybacks & issuances) at companies that have dual-class share structures. In addition to covering investors policies, ICEV also summarizes the policies of proxy advisors and global investor groups. Here in the U.S., the Council of Institutional Investors has made no secret of its preference for “one share, one vote” capital structures.
As I’ve shared on the Proxy Season Blog, despite investor disdain, proposals to eliminate dual-class share structures almost always face a steep uphill battle. However, that may not be a bad thing, because dual-class companies also tend to outperform single-class companies over the long term.
The SEC has designated a longer period for action on two NYSE proposals – one of which would affect certain companies initially listing on the exchange, and the other of which would affect companies facing delisting. Here’s more detail:
1. The first extension relates to calculation of initial distribution standards on a worldwide basis for non-U.S. companies. Meredith first blogged about the proposal last fall. In November, it was amended and restated. The Commission has received no comments and has extended the time period for approving or disapproving the proposed rule change, as amended, until May 8th. If approved, Section 102.01 of the NYSE Listed Company Manual would be amended to provide that the distribution standards therein will be calculated on a worldwide basis when listing a company from outside North America and such company (i) is listing in connection with its initial public offering, and (ii) is not listed on any other regulated stock exchange.
2. The other extension relates to a proposal to provide that the Exchange won’t review a compliance plan submitted by a domestic or non-U.S. listed company that is determined to be below compliance with a continued listing standard unless the company has paid in full all outstanding listing or annual fees due to the Exchange and will immediately commence suspension and delisting procedures in accordance with Section 804.00 of the Manual if such fees are not paid in full by the plan submission deadline; or (2) with respect to any unpaid fees that have become due and payable since the commencement of its plan period, will immediately commence suspension and delisting procedures in accordance with Section 804.00 of the Manual if such fees are not paid in full at the time of any required periodic review of such plan. The Commission has designated June 13th as the date by which it will either approve or disapprove the proposed rule change. If you’re facing delisting and also behind on your fees, you’ve got a few more months to find that money…
Yesterday on DealLawyers.com, John shared the latest episode of our “Understanding Activism with John & J.T.” podcast, which is available to members of DealLawyers.com. This time, J.T. Ho and John were joined by Garrett Muzikowski, Managing Director, M&A, Activism & Governance Advisory at FTI Consulting. They spoke with Garrett about recent developments and trends in activism.
Topics covered during this 20-minute podcast include:
– The rise of new activists
– The potential for a rise in private equity “white knight” investors
– Trends in activist demands
– Trends in timing of activist approaches
This podcast series is intended to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. John & J.T. continue to record new podcasts, and they’re full of practical and engaging insights from true experts – so stay tuned!
If you aren’t already a DealLawyers.com member and want access to this podcast series and our other helpful M&A, Delaware law, and activism resources, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. You can sign up by credit card online. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
Yesterday, the SEC issued this 5-page final rule to eliminate the delegated authority that had permitted the Director of the SEC’s Division of Enforcement to issue formal orders of investigation. I blogged last month about a policy-level precursor to this change – and its impact on SEC investigative procedures. Here’s more detail from the final rule:
The Commission delegated authority to issue formal orders of investigation to the Director on August 11, 2009. “Delegation of Authority to Director of Division of Enforcement,” 74 FR 40068-01 (Aug. 11, 2009). The delegation was made effective for a one-year period, ending on August 11, 2010, to allow Commission review of the Division’s exercise of formal order authority. On August 16, 2010, the Commission amended its rules to extend the Director’s delegated authority to issue formal orders of investigation beyond the one-year period. “Delegation of Authority to the Director of Its Division of Enforcement,” 75 FR 49820-01 (Aug. 16, 2010); see also 17 CFR 200.30-4(a)(13).
The amendment will delete this delegation provision, 17 CFR 200.30-4(a)(13), to more closely align the Commission’s use of its investigative resources with Commission priorities.
As noted in the rule, a formal order of investigation is needed in order to authorize specifically designated enforcement staff to exercise the Commission’s statutory power to subpoena witnesses and take certain other actions.
You may be wondering why the SEC skipped issuing this amendment as a proposal and went straight to the final rule. The rule states that no notice and comment period is needed to delete the delegated authority because the amendment relates solely to agency organization, procedure, and practice. Accordingly, the amendment is final and will become effective upon publication in the Federal Register.