One of Karl Marx’s most famous quotes comes fromThe 18th Brumaire of Louis Napoleon, in which the father of modern socialism & failed game show contestant wrote that historical entities appear twice, “first as tragedy, then as farce.” I thought of that quote when I read this article about the rebirth of former consumer tech & electronics retailer RadioShack as – I’m not kidding – a cryptocurrency company. This excerpt says that RadioShack’s bizarre reincarnation is based on the supposed continuing power of its brand:
Although the RadioShack electronics retail chain essentially crumbled following bankruptcy filings in 2015 and 2017, the name has survived for 100 years. In a bid to make RadioShack relevant for another 100 years, the brand’s new owner is making a play for one of the hottest, and most controversial, emerging business sectors in the world — cryptocurrency.
Seeking to capitalize on RadioShack’s global brand name, Miami-based owner Retail Ecommerce Ventures is propelling RadioShack (once based in Fort Worth) into the promising yet murky territory of cryptocurrency. Cryptocurrency is digital currency built on a technology platform known as blockchain; bitcoin is perhaps the best-known type of cryptocurrency. In November, the size of the global cryptocurrency market surpassed $3 trillion.
I wasn’t making the connection between RadioShack’s brand & cryptocurrency success, so I visited the website in search of some more information. I found plenty of it, but nothing that altered my first impression that the idea of leveraging RadioShack’s brand in the crypto space is a stretch. Here’s an excerpt from the RadioShack website’s explanation of the thinking behind this grand strategy:
Despite its pullback in the last 10 years, the brand is resolutely embedded in the global consciousness – ripe to be pivoted to lead the way for blockchain tech to mainstream adoption by other large brands. Remember, there is a real generational gap between the average crypto buyer (in some countries like India, it’s as low as age 24) and the average corporate, decision making, global CEO who averages age 68.
This demographic difference creates a substantial psychological barrier to crypto adoption. The older generation simply doesn’t trust the new-fangled ideas of the Bitcoin youth. Even worse, research finds that adults who are especially authoritarian, intelligent, and well-read (i.e. the CEO’s that RadioShack seeks to woo), have an even lower estimation of the younger age bracket.
The need for a bridge between the CEOs who control the world’s corporations and the new world of cryptocurrencies will most likely come in the form of a well-known, century-old brand.
RadioShack is perfect.
Perfect for what you ask? Well, the article explains that the concept is to get folks to exchange other cryptocurrencies for a new RADIO cryptocurrency token on RadioShack’s decentralized finance platform. The rest of the RadioShack’s new website tries to explain the business plan, but it does so by using the kind of now familiar crypto gibberish that just screams “run away!” to a Luddite like me. Here’s a representative sample:
The overall tokenomics philosophy follows the proprietary Nash-Equilibrium Token Defense (NETD) formula that was originally developed for the Atlas USV protocol by the common co-founders of Atlas USV and RadioShack DeFi
I suspect this kind of language may have the same off-putting effect on the company’s target audience – i.e., 68-year-old CEOs who run the world – that it had on me. Those old guys have nearly a decade on me, so if I can’t make heads or tails of why this is such a great idea, my guess is that they aren’t going to get it either.
According to a recent Audit Analytics report, 2020 saw the lowest percentage of financial restatement disclosures (Big R & Little r) in the 20 years that Audit Analytics has been monitoring those disclosures. The report says that restatements have been declining for each of the past six years. In 2020, just 4.9% of companies restated previous financial statements, compared to 6.8% in 2019 and 17.0% at the peak in 2006. This excerpt discusses the most common reasons for restatements last year:
Revenue recognition was the most frequently cited issue in financial restatements for the third year in a row. Coinciding with the new revenue recognition standard that became effective in 2018, revenue recognition supplanted debt and equity securities issues as the most frequently cited issue in financial restatements.
The second most frequently cited issue of 2019 – cash flow classification – fell outside the top five in 2020. Cash flow classification had been a top-five issue every year since 2008. This was replaced by general expense recognition, which returned to the top five for the first time since 2016.
Debt and equity securities, liability and accrual recognition, and tax matters round out the top five most frequently cited issues in 2020’s financial restatements. Debt and equity securities and tax matters have each been among the top five issues for at least the past decade. Liability and accrual recognition has been among the top five since 2017.
The report includes a bunch of other details about 2020 restatements, included the mix between reissuance (Big R) and revision (Little r) restatements, the average length of time required to restate financials and the average days restated. It’s pretty much a sure thing that next year’s report is going to look very different from this year’s – as a result of the multiple rounds of SPAC restatements occurring this year, Audit Analytics expects a record number of disclosed restatements in 2021.
Most of us can name a few folks whose influence, early in our career, affected the direction of our path. For me, one of those people was Bert Ranum. Bert was (and is) a wise counselor with a strong sense of business & interpersonal practicalities and a thorough knowledge of securities law. Bert’s clients – which included many smaller public companies in the life science space – were often dealing with unique legal issues, raising capital for R&D efforts, and doing whatever they could to get products to market and keep their business going. That was a whole lot more interesting to me than the churn of private equity acquisitions that many of my peers had been sucked into – although I know many people find those deals exciting for their own reasons.
In 2010, after nearly 30 years practicing in Minnesota, Bert picked up his practice and moved to Gainesville, Florida so that his wife – a scientist – could accept a long-awaited career opportunity with the university there. Bert stayed with our firm and wanted to start a Florida office to serve the local biotech community, as well as maintain his existing clients by traveling back to the Midwest on a monthly basis. It was just a few years later, when we weren’t seeing Bert as regularly, that my colleagues & I started to notice changes in his speech. In 2016, he was diagnosed with ALS.
Bert recently published a book called “Clinical Trial: An ALS Memoir of Science, Hope and Love” – which is an account of reestablishing his career in Florida in support of his wife, Laura, as well as his journey with ALS. By a miraculous coincidence, Laura is not just any scientist: she is one of the top in her field, worldwide, for studying neurological conditions – including, specifically, the genetic mutation that causes Bert’s ALS. Here’s Bert’s summary about that aspect of his book, from the Hennepin County Bar Association:
I may be the luckiest ALS patient alive, if you can call someone lucky with a disease that generally causes death three to five years after diagnosis. I’m lucky because my wife, Laura, is an internationally respected scientist who knows more about my particular disease than almost anyone in the world. Her connections resulted in my participation in a clinical trial at Johns Hopkins for a new drug targeting the specific genetic mutation that I have. That may be why I am doing well over five years from diagnosis, still walking, swimming, playing guitar badly, talking slowly and generally enjoying life. Or it may be the paleo diet that we started years ago, or the metformin that I’m taking based on Laura’s research, or the regular exercise we’re getting or the no stress lifestyle that I’ve adopted. I write about all this in the Memoir.
What also may be of interest to this crowd is that Bert’s book details:
– What it was like to take the Florida Bar Exam at age 51
– Overcoming the fear of “starting over”
– Putting your career goals second to support your spouse’s opportunity
– Negotiating a “package deal” with a spouse’s employer that includes introductions to the business community
– How to handle your ego when things don’t go as planned
Here’s one of the concluding passages from the book, and something I’m keeping in mind as we head into a new year:
When we first moved to Florida, I worked hard to be a successful lawyer and spent a fair amount of time worrying about billable hours, client relationships, and income. A significant part of my ego was based upon being a good and successful lawyer. ALS forced me to reevaluate that, and it crumbled quickly under examination.
As you often hear from people reflecting on a life well-lived, Bert notes that it’s the relationships – with his family most of all, but also with colleagues and friends – that have delivered a meaningful life.
That brings me back to the direction that my own path has taken so far. After a pretty enjoyable stint in private practice, I thought that what I’d enjoy most about joining TheCorporateCounsel.net would be sharing analysis of interesting securities & corporate governance issues (and I do enjoy that, because I’m a nerd). But I’ve learned over the past 5 years that it’s the ability to connect with all of the smart, funny and helpful people in our securities & corporate governance community that really make this gig enjoyable. It’s an honor to work with our fantastic CCRcorp team, and to gain insights from everyone who emails with comments, suggestions and – my favorite – personal anecdotes. Thank you to everyone who contributes to our sites and events, and thanks to Bert for alerting me to his book, the proceeds of which go to ALS research.
– Liz Dunshee
Programming note: This blog will be off tomorrow, returning in 2022. Happy New Year!
Last week, the SEC announced that electronic vehicle company Nikola had settled the Commission’s fraud proceedings against it for $125 million. The SEC is establishing a fund to distribute penalties to harmed investors. This is the company that is most well-known for its then-CEO tweeting a video of its truck prototype cruising at a high speed. Then, a short-seller published a report claiming that the truck was just rolling down a hill.
According to the 13-page order, the SEC is holding the company responsible for misleading statements by its founder and former CEO & Executive Chair, Trevor Milton. The company got some credit for its agreement to continuing to cooperate with the ongoing litigation against Milton. Here’s the company’s press release about the settlement – which emphasizes that the company neither admits nor denies the SEC’s findings and that it’s seeking reimbursement from Milton for costs & damages.
This “D&O Diary” blog from Kevin LaCroix recaps interesting takeaways from the settlement:
The most attention-grabbing aspect of this settlement is its size. This settlement involves some serious money, which obviously speaks to the seriousness of the allegations. There are several other interesting features of this settlement, as well.
The first is that the SEC alleged not only misrepresentations against Milton, but also alleged misrepresentations by Nikola itself, apart from those attributed to Milton. The second is that the SEC alleged that many of the misrepresentations were made in Tweets and in other social media communications. These allegations are a reminder that social media communications can be the source of securities law liability. In that regard, it is worth highlighting the fact that the among the allegations the SEC made was the allegation that Nikola had insufficient controls or procedures for monitoring Milton’s social media use, which underscores that, given the risk of securities law liability arising from social media use, companies have responsibility to control and manage their executives’ social media communications.
Another feature of this settlement that is interesting to me is that the settlement involves a company that became publicly traded during the same time frame as the alleged misconduct through a merger with a SPAC. The fact that the alleged misrepresentations were made both before and after the SPAC merger highlights the risks involved with communications by companies that are going to go public through a SPAC merger or that have just become public as a result of a SPAC merger. These risks draw attention to a misperception that may be widespread that the rules and best practices that apply in connection with traditional IPOs don’t apply to SPAC transactions; the allegations here underscore the danger with this misperception. The fact that the alleged misrepresentations continued after the merger highlight concerns that at least some companies that go public through a SPAC merger may not be ready for the burdens, responsibilities, and obligations that go with a public listing.
The statement in Nikola’s press release about its intent to try to seek recoupment from Milton for its costs and expenses is also interesting. This effort is a claim against a former director and officer of the company. Though it is a kind of D&O claim, it is not one that the typical D&O insurance policy would cover, as it would represent the prototypical “entity vs. insured” claim for which coverage is precluded under the policy.
By the same token, the $125 million that Nikola has agreed to pay in the settlement likely would not be covered under the company’s D&O insurance policy; most D&O insurance policies exclude from the definition of insured loss “fines, penalties, and matters deemed uninsurable under applicable law.” However, the company’s defense costs (as well those of Milton) potentially could be covered under the company’s D&O insurance program.
One final note about the settlement amount, and that is that the $125 million settlement is by far the largest amount the SEC has recovered in a SPAC-related enforcement action.
Kevin predicts that this may just be the beginning of the SEC flexing its enforcement power against companies that went public via a SPAC. This is in addition to the spate of private securities litigation against post-merger SPACs. In blogs here and here, Kevin wrote about complaints against two other post-SPAC EV manufacturers, just in the past week!
Dave blogged earlier this month about the SEC’s final rules under the Holding Foreign Companies Accountable Act – and last week, about the continued scrutiny of disclosures by China-based companies. Meanwhile, this CNN article reports that China is also planning to make it harder for their local companies to go public in other countries.
According to this Financial Times article, this regulatory intervention could cause US IPOs of China-based companies to drop off a cliff. US exchanges are looking to replace that absence with listings from other Asian countries, and that pipeline is growing.
The article identifies some Singapore- and India-based companies that could debut here – but predicts it will be an uphill battle to land anything on the scale of Chinese giants like Alibaba. As I blogged yesterday, the NYSE wants to offer more complimentary products & services in order to entice companies to list there and succeed.
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.
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.
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.
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.
