Early this month, the SEC posted an order involving a company’s failure to disclose related party transactions involving family members of corporate officers. This omission highlights a trap for the unwary:
Smaller reporting companies qualify for scaled disclosure — scaled generally meaning less — but not for related-party transactions. Under Item 404 of Regulation S-K, SRCs must disclose related party transactions exceeding the lesser of $120,000 or 1% of the average of the company’s total assets at the end of the last two fiscal years, and the disclosure must cover two fiscal years, instead of one.
The company was an SRC during the period in question, and at least one of the undisclosed related party transactions involved dollar amounts below the $120,000 threshold for non-SRCs. According to the order, the relevant thresholds for the company over the covered fiscal years ranged from approximately $20,000 to $30,000, well below $120,000. This is an important reminder — especially for companies who have recently become SRCs or go in and out of SRC status — to update your policies, procedures and internal inquiries, including D&O questionnaires, if and when the lower threshold is relevant.
For other reasons, advisors of life sciences companies should read the entire order. The SEC also took issue with the company’s statements in two press releases about a screening test it developed to detect COVID-19. And the SEC wasn’t the only regulator who inquired about these statements — the FDA had also contacted the company with concerns about the language used.
With June 30th — a key date for calendar year-end public companies — just behind us, Cooley recently released a set of flowcharts to guide companies through “the statutory and regulatory requirements for entering and exiting non-accelerated, accelerated and large accelerated filer status, as well as smaller reporting company status.” This new resource starts by identifying information that users of the flowcharts should gather before working through them, including public float, annual revenue, and fiscal year information. It then addresses key questions through the following six flowcharts, which are color-coded for ease of use:
– Smaller Reporting Company – Initial Qualification and Annual Reevaluation for SRCs
– Smaller Reporting Company – Annual Reevaluation for Non-SRCs
– Non-Accelerated Filer – First Reevaluation for Non-Accelerated Filer After Becoming a Reporting Company
– Smaller Reporting Company and Non-Accelerated Filer – Annual Reevaluation for a Smaller Reporting Company and Non-Accelerated Filer
– Accelerated Filer – Annual Reevaluation
– Large Accelerated Filer – Annual Reevaluation
Join us tomorrow at 2 pm Eastern for the webcast – “Non-GAAP Developments: Enhancing Your Policies and Procedures” – to hear Honigman’s Mike Ben, Deloitte’s Pat Gilmore, Faegre Drinker’s Amy Seidel, and Covington’s Matthew Franker discuss non-GAAP developments and how you should be revamping your related disclosures, policies, procedures and controls.
Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, 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. The webcast cost for non-members is $595. 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.
We will apply for CLE credit in all applicable states (with the exception of SC and NE which require advance notice) for this 1-hour webcast. You must submit your state and license number prior to or during the program using this form. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval; typically within 30 days of the webcast. All credits are pending state approval.
As the latest in a series of reminders, the Corp Fin Staff has posted a new sample comment letter regarding the disclosure obligations of companies based in or with a majority of their operations in the People’s Republic of China. As usual, the Staff provides an explanation and a series of sample comments. The explanation notes that Corp Fin is focused on the following three key areas of disclosure regarding China-specific matters:
– Disclosure obligations under the Holding Foreign Companies Accountable Act
– “Specific and prominent disclosure” about material risks related to the role of the government of the People’s Republic of China in the operations of China-based companies
– Disclosures regarding the material impacts of certain statutes including, for example, the Uyghur Forced Labor Prevention Act (UFLPA)
The sample comments focus on Item 9C of Form 10-K (Disclosure Regarding Foreign Jurisdictions that Prevent Inspections), risk factors and MD&A. With respect to risk factors and Corp Fin’s concern about government intervention, it reminds companies that the term “control” is broadly defined in the federal securities laws:
We remind companies that there are other ways in which a government or any person can exercise control over a company beyond appointing members to the board or having formal powers under the company’s organizational documents. The federal securities laws and regulations generally define the term “control” (including the terms “controlling,” “controlled by,” and “under common control with”) more broadly. For purposes of the Commission’s rules under the Securities Act of 1933 and the Securities Exchange Act of 1934, control “means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.”
With respect to MD&A, the Staff provides the following sample comment regarding the UFLPA:
We note that you appear to conduct a portion of your operations in, or appear to rely on counterparties that conduct operations in, the Xinjiang Uyghur Autonomous Region. To the extent material, please describe how your business segments, products, lines of service, projects, or operations are impacted by the Uyghur Forced Labor Prevention Act (UFLPA), that, among other matters, prohibits the import of goods from the Xinjiang Uyghur Autonomous Region.
As Dave shared right after the SEC adopted the new share repurchase disclosure requirements, additional disclosure is right around the corner. Domestic companies will be required to comply with the new disclosure and tagging requirements in their periodic reports on Forms 10-Q and 10-K (for their fourth fiscal quarter) beginning with the first filing that covers the first full fiscal quarter that begins on or after October 1, 2023. So, a company with a December 31, 2023 fiscal year end will be required to begin complying with the new disclosure and tagging requirements in their Form 10-K for the fiscal year ending on December 31, 2023 with respect to repurchases made during the quarter ending December 31, 2023.
This recent Proskauer alert suggests some action items that companies should consider taking now, before the fourth quarter. Here are tips from the alert:
We recommend that issuers consider their planned or ongoing stock buy‑back programs with a view to the new required disclosures that will cover periods at the end of the current fiscal year. Some issuers may consider modifying their current trading plans, but others merely should ensure that their current disclosure procedures and practices are updated to satisfy the new requirements. For example:
– given the requirement to disclose the objectives of buy‑back plans, it may be prudent to ensure that relevant minutes or resolutions of the Board of Directors address that subject;
– given the requirement to disclose policies and procedures related to transactions by officers and directors, should the company’s employee stock trading policies be re‑considered?
Last fall, Dave blogged about corporate compliance programs, noting that the White House has identified corporate compliance as an Administration priority. White & Case and KPMG recently released the results of a joint benchmarking survey of 201 senior decision-makers from more than 30 countries that has tons of helpful benchmarking data on corporate compliance programs. Not surprisingly, a number of recent hot topics — like third-party risk management and cybersecurity — got a lot of attention.
This page is packed with data-heavy infographics showing key insights at-a-glance. Here are some findings:
– Respondents reported that “use of third parties” was the greatest anti-corruption risk facing their company by far (59% versus the next highest risk “pressure to meet sales targets” at 36%)
– 43% reported that they annually review the content of the company’s anti-corruption compliance program, but only 28% tested its effectiveness annually (31% do not test their anti-corruption compliance programs at a regular cadence)
– Respondents ranked cybersecurity as top of their list of compliance priorities in the next 12 months
– Employees most often cited “fear of retaliation” as their top concern about using reporting mechanisms (55% for all respondents and 75% for respondents with > $50B in revenue)
The survey results show lots of opportunities for improvement and actionable items for companies to consider. Here are a few that stood out related to the key insights above:
– Regularly testing anti-corruption programs for effectiveness
– Measuring hotline awareness and effectiveness and addressing any employee concerns about hotline integrity
– Requiring third parties to complete anti-corruption training “to ensure third parties understand their obligations under applicable laws and relevant contract clauses, and to reinforce the consequences of non-compliance”
We have memos and other resources relevant to corporate compliance posted in our “Compliance Programs” Practice Area.
As readers of this blog know, the SEC has — at least recently — made clear that it believes that most digital assets are a “security” under the Howey test. But, as Liz noted earlier this year, it has been waiting on a ruling (or settlement) in its case against Ripple Labs, where it alleged that Ripple raised over $1.3 billion through unregistered sales of its XRP cryptocurrency token. Last Thursday, a SDNY judge issued the long-awaited order, which found that XRP both was and was not a security.
The court found that Ripple’s initial sales of XRP to institutional buyers satisfied the last prong of Howey but sales through exchanges and algorithms did not. Citing statements in promotional brochures and market reports for XRP, the court distinguished the Institutional Sales from the Programmatic Sales as follows:
From Ripple’s communications, marketing campaign, and the nature of the Institutional Sales, reasonable investors would understand that Ripple would use the capital received from its Institutional Sales to improve the market for XRP and develop uses for the XRP Ledger, thereby increasing the value of XRP.
[…] Here, the record establishes that with respect to Programmatic Sales, Ripple did not make any promises or offers because Ripple did not know who was buying the XRP, and the purchasers did not know who was selling it. In fact, many Programmatic Buyers were entirely unaware of Ripple’s existence. […] There is no evidence that a reasonable Programmatic Buyer, who was generally less sophisticated as an investor, shared similar “understandings and expectations” and could parse through the multiple documents and statements that the SEC highlights, which include statements (sometimes inconsistent) across many social media platforms and news sites from a variety of Ripple speakers (with different levels of authority) over an extended eight-year period.
If you’re confused, you’re not alone. So is Twitter and Tulane securities professor Ann Lipton, who has this to say:
The purchasers may not have known they were supplying capital to Ripple, but they knew what the institutional investors knew about Ripple’s intentions. They knew Ripple was making efforts to expand the business, promote the token, and develop it as an asset. They almost certainly were motivated to buy it for that reason; Ripple made statements encouraging them to do so. That they didn’t know their particular moneys would assist that effort isn’t really …. relevant. Moreover, as I said, the cross border system depended on a liquid market for XRP – of course Ripple would promote one.
What it looks to me is going on is that the court kind of stealthily accepted defendants’ “contract” argument after all, in a way. The judge held that it was a security for the buyers who had a direct relationship with Ripple and knew where their money was going. For buyers who had no such relationship, there was no security.
She also addresses the other thing we’re all thinking:
Let’s just get out of the way that it’s perverse that sales to institutions are treated as securities because institutions are sophisticated. That’s backwards; it subverts the purpose of the securities laws (to protect less sophisticated investors) and contradicts other tests for whether assets are securities (the Reves test often weights investor sophistication against finding the presence of a security).
I should note, as Bloomberg’s Matt Levine points out in his column, that the argument “an investment contract is only an investment contract when you buy it from the issuer” is not new to crypto enthusiasts and, in fact, is a key argument made by Coinbase, but this opinion “goes way beyond” the argument Coinbase is making.
Crypto may be calling this a victory, but I’m not so sure. The SEC’s win here seems solid; Ripple’s less so. I guess we’ll have to wait a little longer for the answer to crypto. I don’t know about you, but this reminds me of The Hitchhiker’s Guide to the Galaxy, where a supercomputer takes millions of years to answer the meaning of “life, the universe and everything” and eventually responds with “42”.
Broadridge surveyed 2,000 randomly selected (self-identified) crypto market participants in Canada, the U.K., and the U.S. from March to June 2023. The goal of the survey was to better understand what holders of crypto assets think is important when purchasing a crypto asset. In a 23-page report, Broadridge summarizes the results of the survey and, as Keir Gumbs, Broadridge’s CLO, notes on LinkedIn, the report “sheds light on the activity and process on how crypto market participants track performance of digital assets, and what avenues they seek out to find that information.”
Here are two of the key findings from the report’s overview:
Long-term investment Over 65% of respondents suggested their holdings represented a long-term investment, suggesting that, contrary to popular perception, most participants are not speculators.
Additionally, 46.7% of respondents answered that their investments in the space were being used to educate themselves, indicating a “learning by doing” approach by holders.
Traditional metrics prioritized over native crypto metrics When asked about what type of disclosure information is most important in their decision making, respondents consistently selected traditional investment metrics including financials, risk and security, and information about the management team over native crypto metrics such as tokenomics and network / platform activity. While not surprising given the novelty of crypto assets, this suggests possible underappreciation of items critical to pricing and understanding the attractiveness of a crypto asset.
The study also found that studying crypto markets will continue to be important, with survey respondents signaling a persistent interest in the space despite the challenges and setbacks currently facing the industry.
In a recent WSJ OpEd, Jay Clayton, SEC chair from 2017-20, and Timothy Massad, CFTC chair from 2014-17, argue that both agencies must take steps beyond enforcement to move closer to the end goals of integrity and investor protection in crypto markets. They point to the limited utility of litigation — it won’t address critical questions like whether laws need to be adjusted for the features of tokens and how the federal government can oversee the trading of tokens, like bitcoin, that aren’t securities.
In addition to enforcement efforts, they believe the SEC and CFTC should, either directly or through an SRO, create basic standards for investor and market protections, preferably with Congress mandating them. They argue that these standards could avoid sticky classification issues that exist today, focus on major issues (like “wash trading”), address existing information asymmetry problems without requiring a rewrite of existing laws and, if an SRO was used, wouldn’t cost taxpayers anything to implement.
As the Broadridge report I blogged about above notes, “developing disclosure principles for a novel industry is not entirely a linear process.” But the data from Broadridge’s survey could be useful input if the agencies ever went down this path.
I blogged just last month about the 9th Circuit’s decision to uphold an exclusive forum bylaw that effectively extinguished a shareholder derivative suit brought under Section 14 of the Exchange Act, on the basis of allegedly misleading proxy statement disclosure. That case created a circuit split with the 7th Circuit.
Now, a federal district court in the 5th Circuit has upheld a forum selection clause at SolarWinds that kicks a Section 10(b) derivative claim to Delaware Chancery Court – which, again, does not have jurisdiction to hear that federal claim. The anti-fraud allegations stem from the company’s 2020 cyber breach.
Alison Frankel analyzes the case in this Reuters article. Here’s an excerpt, which pulls in thoughts from Tulane’s Ann Lipton:
Pitman’s SolarWinds decision breaks new ground, said law professor Ann Lipton of Tulane University, because it extends forum selection enforcement to derivative 10(b) claims.
Shareholder derivative suits accusing board members of violating Section 10(b) are rare, Lipton said, so the ruling may not foreclose many cases. (Plaintiffs lawyers filed a spate of 10(b) derivative suits in the early 2000s against directors and officers of companies engaged in stock options backdating. More recently, shareholders alleged derivative 10(b) claims against Wells Fargo executives after revelations about fake bank accounts.)
But what Pitman’s decision signals, Lipton said, is the creeping effect of forum selection clauses. Companies first adopted them to channel M&A breach-of-duty suits to Delaware so businesses would not be forced to litigate the same claims in multiple courts. Then, after the U.S. Supreme Court confirmed in 2018 that shareholders can file Securities Act suits in either state or federal court, corporations used forum selection clauses to mandate federal court jurisdiction for litigation over allegedly misleading disclosures in offering documents.
Now the clauses have become a weapon to kill Exchange Act derivative claims — whether shareholders are alleging proxy violations or, as per Pitman’s new decision, 10(b) fraud claims.
This writeup from Cooley’s Cydney Posner provides even more context. It’s worth noting that there are strong views that derivative Exchange Act claims don’t provide any remedy that isn’t already available via a direct federal claim or a derivative state law claim. For companies, the bottom line is that it’s probably worthwhile right now to have an exclusive forum bylaw…
