On Friday, the SEC announced a sharp decline in the number of Enforcement actions during fiscal year 2024, which ended on September 30. The SEC notes:
The Securities and Exchange Commission today announced that it filed 583 total enforcement actions in fiscal year 2024 while obtaining orders for $8.2 billion in financial remedies, the highest amount in SEC history.
The 583 enforcement actions represent a 26 percent decline in total enforcement actions compared to fiscal year 2023. Of those cases, the Commission filed 431 “stand-alone” actions, which was 14 percent less than in the prior fiscal year; 93 “follow-on” administrative proceedings seeking to bar or suspend individuals from certain functions in the securities markets based on criminal convictions, civil injunctions, or other orders, which was 43 percent less than the prior fiscal year; and 59 actions against issuers who were allegedly delinquent in making required filings with the SEC, which represented a decrease of 51 percent.
The $8.2 billion in financial remedies consisted of $6.1 billion in disgorgement and prejudgment interest, also the highest amount on record, and $2.1 billion in civil penalties, the second-highest amount on record. Approximately 56 percent of the $8.2 billion financial remedies ordered is attributable to a monetary judgment obtained following the SEC’s jury trial win against Terraform Labs and Do Kwon, who were charged with one of the largest securities frauds in U.S. history.
The FY2024 results are surprising because we have been experiencing a very active Enforcement environment over the past four years. By comparison, last year the SEC announced a three percent increase in the number of actions brought in FY2023 as compared to FY2022, and in 2022 the agency announced a nine percent increase in actions over the prior fiscal year.
Yesterday, the SEC announced that Gary Gensler — the Commission’s 33rd Chair — will step down effective on Inauguration Day (January 20th). As noted in the SEC’s press release, Chair Gensler led the agency through a robust rulemaking agenda that was focused on enhancing efficiency, resiliency, and integrity in our capital markets. The press release reviews a number of the Commission’s most significant accomplishments during Chair Gensler’s tenure — many of which he highlighted during his remarks at PLI’s 56th Annual Institute on Securities Regulation.
I particularly loved Chair Gensler’s commentary on public service that I shared in the blog on Monday. He reiterated in his press release that “the staff comprises true public servants. It has been an honor of a lifetime to serve with them on behalf of everyday Americans and ensure that our capital markets remain the best in the world.”
His bio at the end of the press release reminded me that his comments on the value of public service are especially noteworthy given his significant and varied experience in public service. In addition to his tenure as SEC Chair, he also served as Chair of the U.S. Commodity Futures Trading Commission, senior advisor to U.S. Senator Paul Sarbanes in writing the Sarbanes-Oxley Act and undersecretary of the Treasury for Domestic Finance and assistant secretary of the Treasury from 1997-2001.
This Free Writings & Perspectives blog from Mayer Brown discusses the IPO landscape for 2025 — highlighting insights from a panel at PLI’s 56th Annual Institute on Securities Regulation. And I’m happy to say that things are generally looking up (with some caveats).
The outlook for IPOs in 2025 appears generally positive, with several key indicators suggesting a robust environment for equity issuance. IPO volumes have surged to nearly $30 billion this year to date, a significant increase from $18 billion last year, with 60 IPOs priced year to date, marking a 130% increase. Broader market indices are up around 25%, indicating a healthier market overall.
Notably, the focus has shifted from the MAG-7 stocks to a broader cohort of companies benefiting from the market uptick. As companies prepare for their public debut, there is an expectation that they will do so when they are more scaled, leading to larger IPO sizes in terms of dollars raised.
Looking ahead, the panel anticipates that IPO volumes could grow to $40 billion in 2025, with 80-85 new listings expected, driven by a more favorable macroeconomic backdrop and potential interest rate cuts.
While these improvements are promising, we have not returned to the average IPO levels of the past 15 years. Many companies are optimizing operations in private markets, leading to increased private capital activity. This trend allows firms to stay private longer, which could impact the number of IPOs in 2025.
At the industry level, the panel noted the following trends:
In the technology sector, there has been a notable shift in focus to the “Rule of 40,” which combines revenue growth and profit margins. Previously, the emphasis was heavily on top-line growth, often prioritizing revenue increases of 60% or more, even at the expense of profitability. Now, investors are seeking a more balanced approach, favoring companies that demonstrate sustainable growth (around 30%) alongside a reasonable profit margin (at least 10%), with many aiming for breakeven or better. This evolution reflects a broader understanding of long-term value creation.
In the artificial intelligence sector, enthusiasm remains high, with investors eager for companies that show strong potential in this transformative field.
The life sciences sector is stabilizing, with IPO activity cautious as companies enter the public market at earlier stages, particularly those with Phase 1 or 2 candidates.
Conversely, the retail sector faces challenges, with fewer profitable companies going public due to economic headwinds, including inflation and decreased consumer spending.
For more on the current state of the capital markets, financing alternatives, IPO readiness and recent developments impacting public offerings, tune in at 2 pm ET on Thursday, December 12, for our “Capital Markets: The Latest Developments” webcast featuring White & Case’s Maia Gez, Mayer Brown’s Anna Pinedo, Cooley’s Rich Segal and Gunderson Dettmer’s Andy Thorpe. Save the webcast to your calendar using links on the webcast landing page so you don’t miss it. (And, if you do, don’t panic! We always post replays — eligible for on-demand CLE credit — and transcripts after our programs.)
In their latest “Understanding Activism with John & J.T.” podcast, John and J.T. Ho were joined by Dan McDermott. Dan is a senior vice president at strategic communications firm ICR, and is also an adjunct professor at the University of Pennsylvania Law School, where he teaches one of the nation’s few law school courses on shareholder activism. Dan’s recent article on the hidden costs of short attacks – which I blogged about on DealLawyers.com last month – formed the basis for their discussion.
Topics covered during this 30-minute podcast included:
– Differences between the objectives of an activist short seller and a traditional activist
– Common themes or “red flags” that activist short sellers look for in targeting companies
– How an activist short attack unfolds and typical company responses
– Use of “wolf pack” tactics & other collaborative efforts between activist short sellers
– The need to include the possibility of short attacks in company’s activist preparedness efforts
– How strategies for responding to short attacks differ from responses to traditional activism
– How often short attacks lead to traditional activism
– How companies prepare to respond effectively to short attacks
– Impact of recent SEC enforcement activity on short attack strategy
– Lessons from law school course on activism
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. They’re continuing to record new podcasts, and I have found them very engaging and filled with practical insights! Stay tuned for more!
As Liz shared, Nasdaq posted a proposed rule change back in August to modify the delisting process in Nasdaq Rules 5810 and 5815 for stocks that fail to regain compliance with the exchange’s bid price requirement — or fall out of compliance again one year after effecting a reverse stock split. The proposal presents risk — of being relegated to trading on OTC markets — especially to publicly traded AI and biotech startups. In October, the SEC extended the time period for action on the proposal, and yesterday, the day before the Commission was required to take action, an order was posted instituting proceedings under Section 19(b)(2)(B) of the Exchange Act.
What does that mean? It means the Commission is providing Nasdaq with notice of potential grounds for disapproval and soliciting additional comment on specific areas of concern — with a new deadline for those additional comments (21 days after publication in the Federal Register) and rebuttals (35 days after publication in the Federal Register). It does not indicate that the Commission has reached any conclusions, but it notes the institution of proceedings is appropriate in light of the legal and policy issues raised by the proposed rule change. As Dave noted in a blog about a recent NYSE proposal, these orders are pretty unusual.
In terms of further input, the order asks, in particular, that commenters “address whether the proposal includes sufficient data and analysis to support a conclusion that the proposal is consistent with the requirements of Section 6(b)(5) of the Exchange Act” — which requires “that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest.”
Beginning on page 8, the order reviews the comments received to date, which it says were generally supportive, although some said the proposal didn’t go far enough and at least one commentator expressed concern that the amendments could incentivize market manipulative trading strategies and negatively impact access to capital for a segment of Nasdaq-listed small companies, including biotech.
As John blogged last week, in National Center for Public Policy Research v. SEC, (5th Cir.; 11/24), the 5th Circuit rejected a conservative advocacy group’s challenge to the legality of the SEC’s Rule 14a-8 no-action letter process. Since Kroger ultimately included the proposal in its proxy statement, the Court found the claim was moot, but nonetheless ruled that the SEC’s no-action process under Rule 14a-8 did not involve a formal SEC order subject to judicial review under the Administrative Procedure Act.
Over on the Business Law Prof Blog (which has a new home, by the way, for those who follow directly), Tulane Prof Ann Lipton pointed to the dissent — from the panel’s only GOP nominee, Judge Jones — and said the panel’s decision may not be the final word because, if the full Court took up the case after a petition for rehearing en banc, Judge Jones’s dissent may be “a template for how the full Fifth Circuit would view the matter.” And while the dissent’s position “threatens to scramble the 14a-8 process,” that shake up may be “in a manner that the incoming Trump Administration would find amenable.”
Judge Jones argued that no-action letters are final orders because they constrain agency – SEC – discretion in a particular way, namely, they limit the SEC’s ability to bring an enforcement action. And, further, she claimed that the SEC conceded that if they are final orders, they are arbitrary and capricious as a matter of law, because they do not state their reasoning.
Now, assuming the entire Fifth Circuit agrees, the upshot, as I understand it, is that the SEC would be required to offer more detailed reasoning in each and every no-action letter it issues under 14a-8. That would be incredibly burdensome for the staff. … If the Fifth Circuit functionally mandates that the SEC either not act at all, or act with a full explication of its reasons, I assume that the Trump SEC would choose not to act at all in most cases.
Ann notes the below in her discussion — which is a good reminder that the no-action process may be in for a procedural shakeup under the Trump Administration regardless of any potential twists and turns in this case.
Check out John’s latest “Timely Takes” Podcast featuring Orrick’s J.T. Ho & his monthly update on securities & governance developments. In this installment, J.T. reviews:
“Right to cure” shareholder proposals
ISS ESG updates governance factors and opens data verification window
Staff guidance on clawback checkboxes
Institutional Investor Survey Data on CAMs
Implications of FASB ASU on Disaggregation of income and expense items
As always, if you have insights on a securities law, capital markets or corporate governance issue, trend or development that you’d like to share in a podcast, we’d love to hear from you. You can email me at mervine@ccrcorp.com or John at john@thecorporatecounsel.net.
On Friday, Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement, joined PLI’s 56th Annual Institute on Securities Regulation to deliver prepared remarks and answer questions. His speech echoed some themes from Chair Gensler’s speech, including that the “rules of the road” can’t just cover fraud. Acting Director Wadhwa remarked that failures to comply with the securities laws caused by negligence also erode trust in our financial markets.
WilmerHale’s Stephanie Avakian noted how difficult it can be to lead the Division through a time of transition, especially when there is a change of political party, and asked Acting Director Wadhwa what guidance he is giving Enforcement Staff and what they are trying to get done in this time.
Acting Director Wadhwa responded that the SEC’s mission remains the same and the Division’s focus on that mission is the same as it was prior to November 5. The vast majority of the Staff is long-tenured employees who have been through multiple administration changes, including political parties, and know what to do, since the Staff doesn’t change much administration over administration. But for newly hired Staff members who are going through this for the first time, the advice is to keep doing what they’re doing.
Acting Director Wadhwa noted that no one has asked the Division to put pencils down or take a breather until Inauguration Day — they remain focused on the mission and doing the work in their control and that the work continues with the same degree of urgency.
On that front, he noted that the Division was incredibly busy over the summer and that the base of work did not slow down in October as it sometimes does. He noted that October 2024 was the busiest first month of the fiscal year in over two decades.
When asked about the Division’s focus areas over the last four years, particularly concerning disclosure controls, cyber disclosures and ESG matters, Acting Director Wadhwa noted that the Division’s recent actions in these areas have relied on existing securities laws, rules and regulations applied to financial reporting and other public statements and the agency will continue to pursue similar securities law violations regardless of the subject matter of the statements.
Last week, the Supreme Court heard oral arguments in NVIDIA Corp. v. E. Ohman J:or Fonder AB. As a reminder, here’s the factual background from the SCOTUS Blog:
NVIDIA, the world’s most valuable company, sells computer graphics processing chips designed primarily for use in video games, which it sells to manufacturers of game devices. As it happens, NVIDIA’s chips also are useful for mining cryptocurrency, and in 2017 many crypto miners started to buy NVIDIA chips for that purpose. As that use increased, NVIDIA’s chip sales increased. But in 2018, when the price of bitcoin went through a period of sharp decline, reducing the incentive for crypto mining, NVIDIA’s sales declined.
Shareholders responded by filing the proposed class action here, alleging that NVIDIA executives (including CEO Jensen Huang) made false and misleading statements about the extent to which use in crypto mining was propping up NVIDIA’s chip sales. The U.S. Court of Appeals for the 9th Circuit allowed the action to proceed, and the Supreme Court agreed to review the matter.
As John previewed months ago when SCOTUS granted cert, the case involves the PSLRA’s pleading requirements for allegations of falsity and scienter.
If the case alleges a false or misleading statement, [under the PSLRA, the complaint] must not only specify the reasons why each statement is believed to be misleading but also “state with particularity all facts on which that belief is formed.” Moreover, the complaint also must “state with particularity facts” that “giv[e] rise to a strong inference that the defendant acted with the required state of mind.” That “strong inference” standard is notably higher than the normal standard for a complaint.
The company argues that when the theory of “scienter” (the securities law standard of intent – a Latin term that means something like “with knowledge”) is that internal company documents contradict public statements, the PSLRA’s requirements of particularity mean that the plaintiff has to allege the contents of those internal documents. … The shareholders do not have any documents or statements that directly show any reason to think Huang knew what share of sales were made to crypto miners … [r]ather, they rely on an expert report.
This follow-up SCOTUS Blog describes the Justices’ reactions during oral argument. Chief Justice Roberts and Justice Kavanaugh seem to be of the view that Congress intended the PSLRA to limit exactly this type of suit and worry that “the lower court’s decision would permit shareholders, ‘any time a stock price falls,’ to ‘get past a motion to dismiss’ by simply providing a vague expert report.” On the other hand, Justice Jackson addressed the substance of the dispute at this stage, noting, “‘plaintiffs … actually have the evidence in order to plead their case,’ while she opined that the standards in fact don’t ‘require that they have the documents,’ and indeed couldn’t ‘understand how they could have the documents when discovery hasn’t occurred yet.’” A number of the other Justices seemed to question why “such a fact-specific dispute warranted the court’s attention.” In fact, NVIDIA’s counsel “got the same line from justices spanning ‘both sides of the aisle,’ if you will: Elena Kagan, Amy Coney Barrett, and Neil Gorsuch.”
If the Supreme Court decides to rule on the two questions presented in NVIDIA’s petition, the decision could significantly impact future adjudication of motions to dismiss securities fraud claims. But oral argument revealed that the questions NVIDIA presented may, in fact, be more case-specific than observers, and the Court itself, anticipated. The Justices’ questioning suggests that many of them view the questions presented as seeking fact-intensive “error correction” of the Ninth Circuit’s analysis, which the Court is generally reluctant to perform. …
[T]he Court’s ruling in this case is unlikely to be the sea change that some commentators predicted, and that the Court may opt instead for a more limited ruling or an outright dismissal of the petition. If the Court does decide the case, its questioning suggests that the opinion could cast doubt on—or expressly disavow—the bright-line rules advanced by NVIDIA.
2024 has been a busy year for the PCAOB, with audit quality issues front and center. On the heels of the BF Borgers scandal, continuing high levels of audit quality issues identified in PCAOB inspection reports, and renewed Congressional scrutiny of the PCAOB’s performance of its oversight function, the SEC has approved several new PCAOB rules focusing on audit quality, auditors’ responsibilities and liabilities, and the use of AI and other tech tools in the audit process. Join us tomorrow for the webcast – “Audit Quality: Lessons from BF Borgers and Other Recent Developments” – to hear Deloitte’s William Calder, Maynard Nexsen’s Bob Dow, and Nonlinear Analytics’ Olga Usvyatsky discuss what corporate attorneys need to know about the latest audit-quality developments to advise their client(s) on financial reporting and corporate governance matters.
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