Speaking of word choices, it turns out that there’s a magical incantation for better IPO pricing, and this Mayer Brown blog reports that a recent study says it’s “ESG”:

Alessandro Fenili and Carlo Raimondo, in their study and paper ESG and the Pricing of IPOs: Does Sustainability Matter, find a significant relationship between a discussion of ESG related issues and IPO pricing. They performed textual analyses of 783 US IPOs completed during the period from 2012 through 2019 across various industries.

Given investor interest in sustainability and ESG in their investment decisions, the study focuses on the amount of information about sustainability disclosed by IPO issuers. In order to assess IPO disclosures, the study considered a list of words that were associated with ESG topics. Then, they performed textual and other analyses on the IPO prospectuses. A large increase in the number of ESG “words” in the IPO prospectuses was found to lead to reduced information asymmetry (investors have better information on which to base their investment decision regarding the IPO issuer’s ESG focus) and to less IPO underpricing.

The blog says that the study provides evidence of a strong association between ESG disclosure during an IPO and less IPO underpricing and more accurate evaluation by investors of the IPO issuer’s valuation.

Wow, so that’s all it takes? I bet there are a lot of unicorns feeling kind of silly now about wasting their time writing founders letters and over-the-top mission statements for their S-1s. I’m not sure how everyone will use these findings, but I’ve spent enough time working with investment banks to be pretty confident in my prediction that the next coal mining or fracking company prospectus you pick up will be chock full of ESG-related jargon. If you don’t believe me, just remember, these are the folks who turned cab dispatchers and commercial real estate businesses into tech companies through the power of bankerspeak.

Once again, the English philosopher Bishop Berkeley nailed it several centuries ago – “to be is to be perceived.”

– John Jenkins

Here’s the scenario: a company moved to Canada and changed its name, and when it did so, it mistakenly changed its CIK number with the SEC. As a quick trip to the Edgar page on the SEC’s website will inform you, that “Central Index Key” number is used to identify corporations and individual people who have filed disclosure with the SEC. You aren’t supposed to change your CIK for a name or address change, but hey, what’s the worst that could happen? How about the SEC instituting a Section 12(j) proceeding seeking to involuntarily deregister your securities:

On September 22, 2020, the Commission issued an order instituting an administrative proceeding (“OIP”) against STRATABASE under Section 12(j) of the Securities Exchange Act of 1934.1 The OIP alleged that STRATABASE had violated periodic reporting requirements and sought to determine, based on those allegations, whether it was “necessary and appropriate for the protection of investors to suspend . . . or revoke the registration” of STRATABASE’s securities.

On June 21, 2021, the Division of Enforcement moved to dismiss this proceeding. The Division states that, on June 9, 2021, it spoke with counsel for Strata Power Corporation, the successor to STRATABASE. The Division states that it subsequently confirmed the following representations made during that conversation by counsel for Strata Power Corporation: (i) that when STRATABASE changed its name after moving to Canada in 2004, it also inadvertently changed CIK numbers; and (ii) that Strata Power Corporation was up to date in its periodic filings at the time that this proceeding was instituted and remains current.

Fortunately, the SEC granted the Division’s motion to dismiss, but can you imagine being the poor lawyer who received notice of the institution of this proceeding?

– John Jenkins

We’re regularly posting new podcasts for members. In this 11-minute podcast, Jolie Yang – Corporate Counsel at Coinbase – talks with me about her journey from BigLaw to Fintech. We discuss:

1. How it feels coming from established BigLaw firms to a high-profile, newly public company where things might move more quickly and processes might still be getting worked out

2. Advice for other in-house folks whose companies might be considering going public via a direct listing

3. What’s it like being a securities lawyer in an industry that’s innovating and disrupting the very definition of “securities”

4. One thing that more “traditional” securities lawyers would benefit from understanding about crypto and fintech

– Liz Dunshee

Lynn predicted several months ago that this would be the year that the SEC would surpass the $1 billion mark for lifetime awards under its whistleblower program. That happened on Wednesday, when the SEC announced its second-highest award in the history of the program – $110 million! – along with a $4 million award.

The SEC’s press release recaps how many payouts there have been since the whistleblower program started – and where the money comes from:

The SEC has awarded approximately $1 billion to 207 individuals since issuing its first award in 2012. All payments are made out of an investor protection fund established by Congress that is financed entirely through monetary sanctions paid to the SEC by securities law violators. No money has been taken or withheld from harmed investors to pay whistleblower awards. Whistleblowers may be eligible for an award when they voluntarily provide the SEC with original, timely, and credible information that leads to a successful enforcement action. Whistleblower awards can range from 10-30% of the money collected when the monetary sanctions exceed $1 million.

This Compliance Week article says that over $500 million has been awarded this fiscal year alone, on top of $175 in fiscal 2020! The Commission is on a roll, and as this Arnold & Porter memo explains, Chair Gensler has signaled that he may unwind the limitations on whistleblower awards that were put in place during the prior administration. I blogged when those rules were adopted that they were somewhat controversial.

The biggest award ever happened in October last year, in the amount of $114 million. Of course, we never know for sure who these payments are made to or what allegations are involved, but the order says that the big winner here contributed significant independent information that raised a strong inference of securities law violations, and suffered significant hardships because of it. I blogged earlier this year about what companies can do to prepare for the possibility of a whistleblower.

– Liz Dunshee

The transcript from our recent webcast – “Newly Public: Building Reporting & Governance Functions” – is now available to our members. This webcast was full of practical tips for anyone preparing for or recently emerging from an IPO – or considering a move to a company that’s preparing to go public. Fenwick’s Dave Bell, National Vision’s Jared Brandman, Vontier’s Courtney Kamlet and DocuSign’s Trâm Phi discussed:

1. IPO Backstories

2. Why Advance IPO Planning is Required

3. Identifying Responsibilities

4. Setting Cost Expectations

5. Engaging Service Providers

6. Setting Timetables

7. Establishing Director Relationships & Expectations

8. Determining Your Disclosure Style

9. Cultural Transition

10. How Outside Counsel & Peers Can Help

– Liz Dunshee

SEC Chair Gary Gensler testified yesterday before the Senate Committee on Banking, Housing and Urban Affairs. Here are his prepared remarks – and here’s the 2-hour C-SPAN video.

Chair Gensler covered human capital disclosures as well as cybersecurity, climate risk, SPACs, China-based companies, Rule 10b5-1, crypto and more. As regular readers of this blog know, Chair Gensler has initiated projects on all of those topics and various remarks have suggested that he is in the “cryptocurrency is a security” camp.

Yesterday’s testimony reinforces the expectation that we’ll see proposed rulemaking for additional human capital disclosure, on top of the incremental disclosure requirements that were adopted late last year. What are companies doing so far in response to those 2020 amendments? This DFIN memo highlights recent Form 10-K disclosure from three companies about the specific topics of employee turnover & talent management. Here are some takeaways from the samples:

– ConocoPhillips included an employee demographics table. It showed the percentage of male & female employees, and the percentage of “person of color” and non-POC employees, in the categories of all employees, all leadership, top leadership and junior leadership. The company committed to publicly disclose its next Consolidated EEO-1 Report (which is now available on the company’s Diversity & Inclusion page).

– Cummins disclosed that its Board “recast our Compensation Committee as the Talent Management & Compensation Committee to reflect the Board’s commitment to overseeing and providing guidance to our leadership team in this important work.

– Signet Jewelers also added “Human Capital Management” to the title of its Compensation Committee, and described the board’s oversight role on those activities.

At our “Proxy Disclosure & Executive Compensation Conferences” – coming up virtually on October 13th – 15th – we’ll be covering new expectations for human capital management and diversity & inclusion, Form 10-K disclosures, and how to effectively share your progress. Check out the full agenda – 17 panels over 3 days. Register today so that you’re armed with these insights as you head into the 2022 proxy season! Members of our sites can attend for a discounted rate!

– Liz Dunshee

The Aspen Institute recently published a 34-page collection of essays that explore whether & how adding “employee directors” to boards would allow for better decision-making about corporate risks & opportunities. Doug Chia authored one of the six included essays and shared excerpts from each one. From Doug’s blog:

Expanding Diversity in the Boardroom by Adding Worker Voice

By David Berger (Partner, Wilson Sonsini)

How times have changed. Now that cracks are appearing in the ideology of shareholder primacy, it is time to reconsider the potential benefits from having some directors chosen by employees. Several studies have shown that employee representation on board provides for better performance on a variety of ESG measures, including climate policy, community support and job security (but interestingly not necessarily higher wages). Simply put, the empirical evidence does not support the grave concerns raised about having employees represented on boards, while the most current studies show that adding employees to the board furthers many of the ESG goals that are broadly supported today, including by such organizations as the Business Roundtable.

Director Perspectives: The Value of Worker Voice

By Michelle Greene (President Emeritus and Board Member, Long-Term Stock Exchange)

Workers have valuable perspectives to inform decision-making, reduce risk, and identify untapped opportunity. This perspective is particularly valuable to U.S. boards, which often lack consistent ways of hearing it. As societal and worker expectations evolve, U.S. companies must ensure that the worker voice is heard loud and clear as part of the boardroom conversation, including potentially by making worker-representatives members of the board.

Reimagining Board Committees to Accommodate Worker Voice

By Doug Chia

Demands for worker voice are on the rise, and if trends continue, boards could soon be challenged to accommodate worker voice more formally in corporate governance. Rather than being caught flat-footed, boards can start reimagining now. Looking at their own committees would be a good place for boards to start.

Those Who Work are Labor Investors: Recognizing the Two Core Constituencies of Capitalist Firms

By Isabelle Ferreras (Senior Tenured Fellow, Belgium National Fund for Scientific Research)

Firms are political entities with key economic dimensions, whose very existence is made possible by the joint investment of labor and capital. But despite the fact they would not operate without the former, firms currently only recognize the rights of the latter, those who contribute financial capital, via the structuring of capital investment in the corporate structure which is given a monopoly of the – political – rights to govern the firm. Labor investors should be recognized as the forgotten constituency of the firm, and as such, should be afforded the same rights in its government. Corporate law should require that labor investors, as capital investors, benefit from at least the same rights as those enjoyed by capital investors, and have thus a defining role in strategic corporate decisions.

Why (and How) Workers Should Be Represented on U.S. Corporate Boards

By Lenore Palladino (Assistant Professor of Economics and Public Policy, University of Massachusetts Amherst and Fellow at Roosevelt Institute)

Workers are crucial stakeholders for the success of large corporations, the drivers of the U.S. economy. The economic model of shareholder primacy, in which shareholders (through financial intermediaries) solely elect directors to corporate boards, does not reflect the institutional factors that contribute to innovative enterprises and does not accurately reflect the role of shareholders in 21st century corporations. There is growing consensus that shareholder primacy should be replaced with a stakeholder theory of the corporation; one key element is to include worker representatives on U.S. corporate boards. Though such a policy reform will only be effective if it is enacted along with other reforms to U.S. industrial relations, and certainly faces political headwinds, worker representation on corporate boards is a key policy that can encourage innovation and sustainable prosperity in the 21st century.

From Shareholder Primacy to a Dual Majority Board

By Julie Battilana (Joseph C. Wilson Professor of Business Administration at Harvard Business School) & Isabelle Ferreras (Senior Tenured Fellow, Belgium National Fund for Scientific Research)

Measured either normatively or through contribution to productive processes, labor investors are not the “junior partner” of capital. They are an equal constituency of the firm, in need of enfranchisement and a coequal role in making its main decisions, including the selection of the CEO and strategic choices that will affect labor as much as capital investors and their respective returns on investment. Labor investors ought to have “the collective right to validate or veto these decisions.” All workers should not only be able to vote for union representation to bargain over wages and working conditions that concern the entire industry, but also should be able to choose their representatives at the firm level so that they can participate in decision making about the life of the firm such as the choice of the CEO, what product and market strategies it should pursue, what to prioritize in times of crisis, and how profits are shared.

– Liz Dunshee

The mandatory compliance date has arrived for the MD&A and financial disclosure rules that the SEC adopted late last year. Tune in tomorrow for the webcast – “MD&A and Financial Disclosures: What To Do Now” – to hear Sidley’s Sonia Barros, Skadden’s Raquel Fox, E&Y’s Mark Kronforst, Morrison & Forester & TheCorporateCounsel.net’s Dave Lynn, and Shearman & Stearling’s Lona Nallengara, all experienced former Corp Fin Staffers, continue the discussion from our January webcast of the many issues to watch out for when updating your disclosures.

If you attend the live version of this 60-minute program, CLE credit will be available. You just need to submit your state and license number and complete the prompts during the program.

We also acknowledge our oversight in scheduling the live program on Yom Kippur and profusely apologize. As always, the audio archive will be available shortly after the program airs, and the transcript will be available within 2-3 weeks. We respect and care for our Jewish community members and will not schedule future programs on this important holiday.

Programming Note: This blog will be off tomorrow in honor of the holiday; returning Friday.

– Liz Dunshee

You can still register for our popular conferences – the “Proxy Disclosure & 18th Annual Executive Compensation Conferences” – to be held virtually Wednesday, October 13th – Friday, October 15th. We’ll be covering the changing expectations from investors and other stakeholders – with practical guidance on how to use the annual reporting season to your advantage.

For more details, check out the agenda – 17 panels over 3 days. Our speakers are fantastic and this is truly a “can’t miss” event for anyone involved with proxy disclosures, corporate governance, and executive pay.

Conference attendees will not only get access to our unique & valuable course materials (coming soon) – we’ll also be making video archives and transcripts available after the conference, so that you can refer back to all of the practical nuggets when you’re grappling with your executive pay decisions, disclosures and engagements. Plus, our live, interactive format gives you a chance to earn CLE credit and ask real-time questions.

Register today! As an added benefit to our members, this year we are offering a discounted conference rate to those who have a paid subscription to any one of our sites.

– Liz Dunshee

Dave blogged last month about SEC Chair Gary Gensler publicly committing to protect investors from fraud in the crypto space – a signal that he would be open to the SEC playing a greater regulatory role in the world of digital assets. Last week, the CLO of Coinbase – the largest US crypto exchange – blogged that the company had received a Wells notice from the Staff about its crypto lending program. Coinbase’s CEO also took to Twitter about the exchange.

As we explain in our “SEC Enforcement” Handbook, a Wells notice is a statement by the Enforcement Division that they’ve reached a preliminary conclusion to recommend an enforcement action – but a majority of Commissioners still have to approve to institute the proceeding. Absent an extension, the Staff has 180 days after sending the Wells notice to decide whether to recommend enforcement to the Commissioners.

Some companies don’t disclose their receipt of a Wells notice, they wait until there’s an enforcement action. So it’s interesting here that Coinbase made the whole thing public right away. In a predictable argument that the regulatory crowd would say is against their own interests, crypto fans seem to be siding with the company in wanting the SEC to step away.

The company seems startled by the notice because it had been “proactively engaging with the SEC” about this product, which would allow Coinbase to lend out USD Coin (a stablecoin) from deposited funds in exchange for interest, a portion of which is paid to the depositors. Now, the SEC is saying it will bring an enforcement action if Coinbase offers the product without registration.

The Staff is taking the position that Coinbase’s “Lend” product may be a security that cannot be offered without registration or an exemption. Anne Lipton’s blog explains how the common law has developed to a point where the SEC is performing the test under both Howey and Reeves – and this blog from Adam Levitin analyzes how those tests apply to Lend. In short, he concludes that Lend fits one or both of the tests that define whether something is a “security.” Former SEC Enforcement Staffer John Reed Stark also took that stance in a popular LinkedIn post.

Yet, there could be a path out. Matt Levine pointed out that Section 3(a)(2) of the Securities Act – and the four-part Reeves test – could allow Lend to avoid regulation as a security. The catch is that Coinbase would then be subject to banking regulations, which it probably doesn’t want.

– Liz Dunshee