Nasdaq is proposing to adopt alternative initial and continued listing requirements for SPACs listing on the Nasdaq Global Market. Nasdaq notes in its proposal that, historically, SPACs chose to list on the Nasdaq Capital Market instead of the Nasdaq Global Market, in part, because it had lower fees and lower initial distribution requirements; however, nothing in NASDAQ’s rules prohibits a SPAC from listing on the Nasdaq Global Market. The SEC’s recent actions on SPAC accounting have prompted some SPACs to seek to list on the Nasdaq Global Market, because, as a result of recent accounting changes, the SPACs no longer have sufficient equity to qualify for initial listing on the Nasdaq Capital Market.
The focus of the Nasdaq rule proposal is on Listing Rules 5405 and 5450, which require all companies (including SPACs) listing on the Nasdaq Global Market to have at least 400 round lot holders for initial listing and 400 total holders for continued listing, respectively. Nasdaq proposes to adopt alternative listing requirements that would allow SPACs to initially list their primary equity security (other than an ADR) on the Nasdaq Global Market with at least 300 round lot holders, and remain listed if they have at least 300 public stockholders, provided that they meet certain additional requirements for initial and continued listing. Nasdaq also proposes to adopt continued listing standards for SPACs that initially listed under the proposed alternative standard and align them with the proposed initial listing standards.
While we certainly had a lot to be thankful for over the Thanksgiving holiday, we also received the disturbing news that a new variant of COVID-19 named Omicron could dash our hopes for a return to “normal” anytime soon. I am beginning to question what “normal” is, and obviously the concept of “new normal” takes on a whole new meaning if we have to embrace another round of public health measures to combat the latest variant as we approach two full years into this global pandemic.
Among the many things that have not been normal throughout this pandemic has been the amount of whistleblower complaints. In this Cooley memo, a huge spike in whistleblower claims is noted on both sides of the Atlantic. In the US, the SEC reported that it paid out more in whistleblower awards in fiscal year 2021 than in all prior years combined since the whistleblower program began in 2011, while the trend in Europe was similar, with two notable whistleblower protection charities there reporting an increase of up to 40% in the number of whistleblowing complaints in 2020-21 when compared to previous years.
The memo notes:
COVID-19 itself is a major contributor to these growing whistleblower numbers. With many employees working from home, they may feel less connected to their employers and colleagues and more inclined to reach out to the authorities without first raising allegations to their employer (for example, by way of the confidential whistleblowing hotline maintained by the Financial Conduct Authority in the UK). In addition, whistleblowers may also find it easier to anonymously collect information relevant to their complaints when they have access to these materials from home.
We have been closely following the trends in whistleblower activity and you can expect a webcast on this topic early next year. Stay tuned for the announcement!
In this latest Deep Dive with Dave Podcast, Keir Gumbs from Broadridge Financial Solutions joins me to discuss the ins and outs of Staff Legal Bulletin No. 14L. As the shareholder proposal season goes into full swing, we talk about the Staff’s change to the approach on the “ordinary business” basis for exclusion and other notable guidance from the latest Staff Legal Bulletin.
The FBI issued a warning notification earlier this month that cyber-criminals were targeting companies engaged in significant financial transactions. Here’s the summary:
The FBI assesses ransomware actors are very likely using significant financial events, such as mergers and acquisitions, to target and leverage victim companies for ransomware infections. Prior to an attack, ransomware actors research publicly available information, such as a victim’s stock valuation, as well as material nonpublic information. If victims do not pay a ransom quickly, ransomware actors will threaten to disclose this information publicly, causing potential investor backlash.
This Dechert report on the FBI’s action says that companies engaging in IPOs or significant M&A transactions should not postpone security fixes their transactions are completed. Companies with major financial events on the horizon should be be particularly attentive to cybersecurity vulnerabilities, “including monitoring underground forums for stolen credentials.” The report says that the time period following closing of a merger is also perilous, and that cybersecurity processes and procedures should be aligned before the deal closes in order to reduce the risk.
Non-fungible tokens, or NFTs, are the latest craze to sweep the crypto world. This Foley blog provides a legal checklist for parties who may be interested in creating a platform for monetizing artworks or other items through nonfungible tokens. Here’s an excerpt with some of the specific items that entrepreneurs need to keep in mind:
– Formation: You’ll need to form a corporate entity before launching a marketplace. This will offer your business the most substantial liability protection, greater ability and credibility when seeking financing from external sources.
– Conduct Code: Most NFTs, given the predominance of user-generated content and transactions in NFT marketplaces, include an extra layer of legal restrictions in the form of codes of conduct to govern interactions on the platform.
– Smart Contracts: The unique digital creation must be independently identifiable, with ownership transferable within the smart contract. Creators should design-in the economics of trading: How much for a primary sale, how much for secondary sales, royalties, transaction costs and other features of the aftermarket to enable trading, with funds flowing to the appropriate parties by design.
– Platform Terms of Service: NFT marketplaces must have essential documents such as Terms of Service, which govern the relationship between the NFT marketplace operator and customers, and between the buyers and sellers of the NFTs featured on the platform. A well-thought-out terms of service agreement can help protect your organization from various legal issues and generally have provisions limiting the company’s overall liability.
There are lots more where these came from, but I’ve got to admit, I’m still scratching my head about NFTs. After all, what’s the long-term investment value of “ownership” of a piece of digital art that a prankster can grab simply by right clicking?
When last we checked-in on The Wu-Tang Clan, the US Attorney for the EDNY had just announced the sale of the group’s “Once Upon a Time in Shaolin” album to an unidentified buyer. Now, the NYT reports that the details of that transaction have been made public. By now, it won’t come as any surprise for those of you who’ve been following our reporting on The Wu-Tang Clan that there’s a crypto connection:
PleasrDAO, which took possession of the album on Sept. 10 and is keeping it in a “vault” somewhere in New York City, has decided to come forward, to celebrate its trophy and announce its goal to ultimately, somehow, make the album more widely available for fans to hear — if, that is, it can convince RZA, the Wu-Tang’s leader, and his fellow producer Cilvaringz to allow it.
PleasrDAO’s Jamis Johnson described the purchase as appealing to the group’s interest in acquiring signature items of digital culture, as well as to a wider mission that it shares with many cryptocurrency champions: prying artistic creations from an exploitative, antiquated economic system and offering the promise of a fairer one. “This album at its inception was a kind of protest against rent-seeking middlemen, people who are taking a cut away from the artist,” Mr. Johnson said in a video interview from his apartment in Brooklyn. “Crypto very much shares that same ethos.”
Although “Once Upon a Time” predates the recent craze for NFTs — “nonfungible tokens,” or digital items created using blockchain computer code, preventing them from being duplicated and allowing their provenance to be tracked — the group’s goal of recapturing the value of artistic scarcity in the digital age has led it to become seen as a kind of precursor. “The album itself is kind of the O.G. NFT,” said Mr. Johnson, 34, who was proudly sporting a Wu-Tang T-shirt.
For those of you who aren’t Wikipedia userscrypto-savants like me, a DAO is a “decentralized autonomous organization,” which means “an organization represented by rules encoded as a computer program that is transparent, controlled by the organization members and not influenced by a central government. A DAO’s financial transaction record and program rules are maintained on a blockchain.” Yeah, that really didn’t clear things up for me – and neither did a visit to PleasrDAO’s website. But whatever they are, DAOs are definitely tres chic. That’s because the SEC issued a 21(a) report addressing the DAO structure in 2017, & as Dave recently blogged, the agency just brought an enforcement action against another DAO earlier this month.
Anyway, the New York Times says that PleasrDAO wants to release the album in some fashion to the public, but first they’ll need RZA & Cilveringz to sign-off on whatever they’re planning, because they inherited the contractual restrictions imposed on the original buyer, fraudster Martin Shkreli, which prohibit a public release of the album until 2103. Cilveringz is apparently game, but so far there’s no word from RZA, which means that the DAO’s plan to release the O.G. NFT that it acquired from the DOJ may be DOA.
We’re taking a break from blogging for the rest of the week. Happy Thanksgiving!
According to Cornerstone Research’s recent report on SEC enforcement activity, the number of actions against public companies declined during fiscal 2021. That marks the second year in a row that the number enforcement actions targeting public companies declined. Here are some of the highlights:
– The SEC filing 53 enforcement proceedings against public companies or their subsidiaries in fiscal 2021, nine fewer than in fiscal 2020 and the lowest level since fiscal 2014. The number of fiscal 2021 filings was 32% lower than the average over the past five fiscal years.
– Reporting and disclosure violations were the primary allegations in 51% of the cases filed during fiscal 2021. FCPA actions accounted for only 8% of the cases – the lowest level on record.
– The SEC noted cooperation in 58% of public company settlements in 2021, which is consistent with prior year averages. The median monetary settlement was $1 million, significantly below the $4 million median average for fiscal years 2012-2020.
– The number of settlements requiring admissions has declined from five in fiscal 2019 to two in fiscal 2020 and bottomed out at zero in fiscal 2021.
In evaluating the report’s conclusions, it’s worth noting – as the report points out – that a decline in enforcement actions against public companies is consistent with trends seen in prior years when there was a transition in SEC Chairs.
If you’re looking for a primer on how not to implement disclosure controls & procedures surrounding the disclosure of executive perks and stock pledges, be sure to check out this settled enforcement proceeding that the SEC announced yesterday. This excerpt from the SEC’s press release summarizes the proceeding:
The Securities and Exchange Commission today announced that Texas-based oilfield services company ProPetro Holding Corp. and its founder and former CEO Dale Redman have agreed to settle charges that they failed to properly disclose some of Redman’s executive perks and two stock pledges.
The SEC’s order finds that Redman caused ProPetro to incur $380,594 worth of personal and travel expenses unrelated to the performance of his duties as CEO. He also failed to disclose to company personnel that he had pledged all of his ProPetro stock in two private real estate transactions. During the same period, ProPetro failed to properly disclose $47,591 in additional, authorized perks it paid to Redman. As a result of these failures, the company issued public filings that included material misstatements regarding executive perks and stock ownership, and failed to accurately record Redman’s perks in its books and records.
While the defendants neither admitted nor denied the allegations made by the SEC, they consented to a C&D and the former CEO agreed to pay a $195,046 penalty. But in order to understand the alleged shortcomings in the company’s disclosure controls & procedures surrounding perks and pledges, you need to check out what the SEC claimed in its Order Instituting Proceedings. Highlights include:
– The CEO had a 50% ownership interest in a company that owned an airplane that he used for business travel. It sent invoices to the company for his flights, which the CEO initialed for approval and passed on to the accounts payable supervisor in the same manner as all other vendor invoices.
– Despite a policy prohibiting personal use of company credit cards, the CEO and his family made over $125,000 of personal charges that were not reimbursed and were not disclosed in the company’s proxy statement.
– The CEO pledged stock without obtaining prior board authorization, and subsequently obtained board approval of a negative pledge arrangement with another bank that prohibited him from disposing of the stock. He did not inform the board of the earlier pledge, nor did the company disclose either pledge in its proxy statements for several years.
How did all of this (and more) get missed? Part of the answer appears to be a lax approach to handling D&O questionnaires. Here are paragraphs 24 & 25 from the SEC’s Order:
24. On January 27, 2017, approximately one week after the close on the loan for his first ranch with its associated stock pledge, Redman completed his “D&O Questionnaire” for the disclosures in the company’s Form S-1 Registration Statement. Redman completed and signed the 2017 D&O Questionnaire, but left the line item for pledged shares blank. In 2018, Redman did not complete a D&O Questionnaire at all. On January 21, 2019, Redman completed the D&O Questionnaire but did not submit Schedule B, “Security Ownership and Recent Transactions in Company Securities,” which should have described his ProPetro equity ownership including his stock pledges.
25. Redman also did not identify in his D&O Questionnaires any of his personal trips on the Aviation Co. Learjet, the personal charges he made on the corporate credit card, or the additional perquisites authorized by the company. In his 2017 D&O Questionnaire, Redman included some perquisites for his company car, but failed to include any of the additional perquisites detailed above. In 2018, Redman failed to complete a D&O Questionnaire. On January 21, 2019, although Redman included some perquisites in his D&O Questionnaire, he did not disclose the personal air travel, any of the personal credit card charges reimbursed by the company that year or the various previously authorized perquisites detailed above.
The good news for the company was that the SEC lauded its cooperation. The bad news for the company’s executives was that in order to get that pat on the back, the board replaced them with an entirely new management team.
Last week, the SEC approved an amendment clarifying the definition of “votes cast” in Section 312.07 of the NYSE’s Listed Company Manual (Liz blogged about the proposal last month). The amendment eliminates a disparity that previously existed in the treatment of abstentions under the laws of many states and the NYSE’s treatment of them in determining whether a particular action has been authorized by a majority of the votes cast by shareholders. This excerpt from Arnold & Porter’s memo on the amendment explains the NYSE’s action and its consequences:
The NYSE has historically advised companies that abstentions should be treated as votes cast for purposes of Section 312.07, such that a proposal would be deemed approved only if the votes in favor exceed the aggregate of the votes cast against plus abstentions (i.e., giving abstentions the effect of a vote against). The corporate laws of many states, however, including Delaware, allow companies to specify in their governing documents that votes cast for purposes of a shareholder vote include yes and no votes (but not abstentions), such that a proposal succeeds if the votes in favor exceed the votes against. Consistent with those state laws, many public companies have bylaws indicating that abstentions are not treated as votes cast.
The NYSE has amended Section 312.07 to provide that a company must determine whether a proposal has been approved by a majority of the votes cast for purposes of Section 312.07 in accordance with its own governing documents and any applicable state law, which would permit a company to disregard abstentions if its governing documents and any applicable state law so provide. In its proposal, the NYSE noted that this is consistent with Nasdaq’s approach. The NYSE also noted that the amendment will help ensure that shareholders properly understand the implications of choosing to abstain on a proposal subject to approval under NYSE rules.
The rules requiring principles-based disclosure of material information about human capital management practices have been in place for a little over a year now, and this Gibson Dunn memo takes a look at what companies have been saying in response to the requirement. The firm surveyed 10-K filings from 451 members of the S&P 500, and found that disclosure practices varied pretty widely, “with no uniformity in their depth and breadth.” That makes disclosures difficult to compare, which is one reason why more prescriptive disclosure requirements are likely on the way.
Despite the challenges, the firm was able to group common areas of disclosure within a handful of categories: workforce composition and demographics; recruiting, training & succession; employee compensation; health & safety; culture & engagement; COVID-19; and HCM governance & organizational practices. This excerpt discusses diversity and inclusion disclosure practices, which was the most common type of workforce composition disclosure:
This was the most common type of disclosure, with 82% of companies including a qualitative discussion regarding the company’s commitment to diversity, equity, and inclusion. The depth of these disclosures varied, ranging from generic statements expressing the company’s support of diversity in the workforce to detailed examples of actions taken to support underrepresented groups and increase the diversity of the company’s workforce. Many companies also included a quantitative breakdown of the gender or racial representation of the company’s workforce: 41% included statistics on gender and 35% included statistics on race.
Most companies provided these statistics in relation to their workforce as a whole, while a subset (21%) included separate statistics for different classes of employees (e.g., managerial, vice president and above, etc.) and/or for their boards of directors. Some companies also included numerical goals for gender or racial representation—either in terms of overall representation, promotions, or hiring—even if they did not provide current workforce diversity statistics.
In addition to discussing the types of disclosures that companies made, the memo also looks at disclosure practices within specific industries, including finance, tech, manufacturing, travel, retail and others. It also looks at how companies formatted their disclosures, the comments the Staff provided, and makes some recommendations for actions companies should take going forward.
