In a milestone of sorts, the first Form S-1 for a coin offering was filed last week by a company called “The Praetorian Group.” I flipped through it, and it’s . . . interesting. Here’s a take on the filing from Bloomberg’s Matt Levine:
“The Praetorian Group filed what appears to be the first initial coin offering (ICO) registering tokens with the SEC,” reports Renaissance Capital. Here is the registration statement, and I am sorry to say that it is full of firsts. For instance, this is the first time I have seen this sort of disclaimer in a prospectus for a securities offering:
To the maximum extent permitted by the applicable laws, regulations and rules the Company and/or the Distributor shall not be liable for any indirect, special, incidental, consequential, or other losses of any kind, in tort, contract, tax or otherwise (including but not limited to loss of revenue, income or profits, and loss of use or data), arising out of or in connection with any acceptance of or reliance on this Prospectus or any part thereof by you.
Nope nope nope nope nope nope nope! That is not how a prospectus works! The way a prospectus works is, you write it, and your lawyers read it and make sure it’s right, and then you deliver it to investors so that they can rely on it. That’s the whole point. You don’t just hand the investors some random scribblings and say “here’s some stuff but definitely don’t rely on it.” Come on.
Yeah. Might draw a comment on that one. The prospectus goes on to disclaim any “representation, warranty or undertaking in relation to the truth, accuracy, and completeness of any of the information set out in this Prospectus” – which is another thing I’m sure the Staff will be totally cool with.
The registration statement’s also missing a few items – like signatures, exhibits, undertakings (basically all of Part II), for starters. Thanks to Hunton & Williams’ Scott Kimpel for tipping us off to this filing!
ICOs: SEC “Drops a Dime” to Thwart Sketchy Deals
You can’t accuse the SEC of not making use of all available technologies to protect investors – even if some of those technologies originated in the 19th century. Check out the excerpt from this BTC Manager article on how the SEC is using the telephone to put the kibosh on sketchy token offerings before they hit the street:
Well, counter-intuitive as it may seem, the agency is actually showing a preference for the good old telephone over other state-of-the-art technologies to ward off shady ICOs. Before we delve into the details, let’s first take a step back and revisit the fact that the Wall Street’s main regulator has issued multiple warnings time and again urging crypto enthusiasts to steer clear of legally sketchy ICOs no matter how compelling the propositions seem.
Jay Clayton, Chairperson at the SEC, even went as far as saying that crooks were busy harnessing blockchain and the ever-expanding crypto market to pull off serious scams that are as old as the market itself is. That is, to project an asset as the “next best thing” and then selling it once a good amount of “dumb money” pours in.
So how does the SEC use the telephone to deter the bad guys in the fast-growing realm of ICOs?
Apparently, the modus operandi is pretty simple. The folks over at SEC just pick up the telephone and call up the people behind individual ICOs. And believe it or not, the strategy has paid off. According to a key SEC official, over a dozen of cryptocurrency-related companies have abandoned their plans to raise fund from investors after they were contacted by the agency over the telephone.
Score one for us Luddites. I bet they even used a landline.
Transcript: “Auctions – The Art of the Non-Price Bid Sweetener”
We have posted the transcript for the recent DealLawyers.com webcast: “Auctions – The Art of the Non-Price Bid Sweetener.”
Yesterday, the Walt Disney Company held its annual meeting – and apparently it wasn’t a smooth one. I’m not sure exactly what happened, but here is the intro of this press release from the “National Center for Public Policy Research”:
A veteran of more than 100 corporate shareholder meetings, National Center for Public Policy Research Free Enterprise Project Director Justin Danhof, Esq. is calling out the Walt Disney Company for its shameful manipulation of its annual shareholder meeting held today. Danhof says the company planted adoring fans and company employees in strategic positions in the meeting room so they could praise Disney CEO Bob Iger while blocking investors with serious issues from participating.
“I have never seen anything like the charade that Disney executives executed today. Iger and the rest of Disney’s leadership need to immediately issue a genuine apology to every investor who attended today’s meeting,” said Danhof. “Bob Iger has been called the most powerful person in Hollywood. What a joke that is. Today, he proved he couldn’t even handle a few critical questions from investors.”
Normal protocol for shareholder meetings allows for investors to address CEOs in an open question-and-answer session that follows formal business votes. At today’s meeting – held in Houston, Texas – Disney only allowed questions to be asked by individuals sitting in a few designated rows. Then, in an obvious effort to ensure those questions and comments were complimentary, they allowed members of a specific Disney fan club to enter the arena ahead of regular shareholders. Once inside, these fans occupied nearly all of the designated question-and-answer seats.
The meeting was held in Houston – and news about it got picked up by the papers everywhere (see this article). I have no idea what happened – but let me wager a guess: I would think it likely that Disney imposed a lot of restrictions on its meeting. As noted in this article, there were large protests by Disneyland employees protesting for higher wages who were denied entry. Of course, if it happened, Disney wouldn’t be the first company to plant employees in the audience to lob softballs – but this looks like a lot of hard spin to me. This organization likes to stir things up at “liberal” company meetings. Did it at Apple a few years ago…
A few days ago, the SEC’s Enforcement Division and Division of Trading and Markets issued a joint statement over cryptocurrency exchanges. The statement is the latest effort by the SEC to address potentially fraudulent or manipulative behavior in the burgeoning market for ICOs and token deals – it’s both an informational document for investors using online trading platforms and a warning to operators of those platforms that the SEC is scrutinizing their activities. We’re posting memos about this in our “Blockchain” Practice Area…
7 Ways to Sleep at Shareholder Meetings
I know I blogged about this a few years ago, but it’s own of my favorites – my 2-minute video about “7 Ways to Sleep at Shareholder Meetings”:
Recently, we’ve blogged about CII’s angst over Corp Fin’s recent no-action decision allowing AES Corp to exclude a shareholder proposal on the threshold required for investors to call a special meeting.
Since then Corp Fin has followed it’s AES approach – but with a significant twist. Here’s an excerpt from this blog by Keith Higgins (also see this Cooley blog):
More requests to exclude special meeting proposals such as the one in AES Corp have come in, and the Division’s approach remains essentially the same, recently though with a significant twist. In a letter to Capital One (2/21/18), the Division agreed that the company, which proposed to ratify its existing special meeting bylaw, could omit a shareholder proposal to lower the threshold to call a shareholder meeting from 25 percent to 10 percent, provided that the company’s proxy statement discloses:
– that the company has omitted a shareholder proposal to lower the ownership threshold for calling a special meeting,
– that the company believes a vote in favor of ratification is tantamount to a vote against a proposal lowering the threshold,
– the impact on the special meeting threshold, if any, if ratification is not received, and
– the company’s expected course of action, if ratification is not received.
The Division based its conditions on Rule 14a-9, suggesting that it believes a proxy statement with a ratification proposal that does not provide the required context in which shareholders are being asked to vote for ratification would be materially misleading.
Transcript: “The Top Compensation Consultants Speak”
We have posted the transcript for the CompensationStandards.com webcast: “The Top Compensation Consultants Speak.”
More on “The Mentor Blog”
We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:
– Who Administers Political Spending Policies?
– Energy & Utility Company Governance Issues
– E&S: Sifting Through the Raters Quagmire
– Toll-Free Numbers for Earnings Calls?
– Reg A+: Many are Called, But Few are Chosen
During this proxy season, we’ve blogged a few times about the campaign to stop companies from holding virtual-only annual meetings. As noted in this blog, some companies decided to heed the campaign and announced that they would hold a hybrid meeting instead of a virtual-only.
And this blog announced that the nuns would participate as proponents in the campaign, urging in their shareholder proposals that the topic of virtual-only meetings has become so important as a governance topic that it should no longer be considered “ordinary business” under Rule 14a-8(i)(7). Corp Fin has now issued a response to one of these no-action letter requests – this one to Comcast – and has determined that the topic is still “ordinary business.” And so Comcast can exclude the shareholder proposal…
Tomorrow’s Webcast: “Conduct of the Annual Meeting”
Tune in tomorrow for the webcast – “Conduct of the Annual Meeting” – to hear Bank of America’s Gale Chang, Nielsen’s Emily Epstein, Independent Inspector of Elections’ Carl Hagberg and Verizon Communications’ Dana Kahney discuss how to prepare for your annual shareholders meeting.
I’ve been running an executive pay conference for over 15 years now – and I’ve always been loathe to program about “pay-for-performance” because I don’t quite understand it. I’ve always been a hard worker – so I’m the type who gives “my all” in exchange for a salary. That’s all the incentive I really need.
But I certainly can be dis-incentivized. And if that happens, my reaction is to find a new job. And the memo that the United Airlines CEO recently sent to employees – described in this article – would fall into the category of things that dis-incentivized me.
First, there is the tone of the memo – aptly described in the article as tone-deaf. And then there is the subject of the memo: taking away quarterly performance bonuses from many employees (who expected them in the regular course as they hit certain benchmarks) – and instead pooling together that money to give much larger bonuses to those that win a lottery of the bonus money. To capture the essence of that, I’ll use this excerpt from the article:
It’s a curious logic, one that says: “How do we get them to improve? How about taking away their bonus?” To be followed by “heh. heh. heh.”
Can you imagine what the United CEO would say if his compensation was subject to a random drawing. I guess we’ll never know because employee backlash already led to the company shelving this horrible idea…
Comment Letters to the SEC: Having Fun…
For a diversion from your billables, probably the next best thing to reading this blog is perusing the comments submitted to the SEC on various rulemakings. It isn’t too hard to find some written from the couch. For example, in this comment letter, there are harsh words for the SEC from the Mayor of Forest Hills Borough, Pennsylvania (assuming it’s not an impersonation which might be easy to accomplish).
This blog by Steve Quinlivan gives us the latest about Corp Fin comments on revenue recognition disclosures under the FASB’s new standard – these comments were sent to Ford & Alphabet…
Tune in tomorrow for the DealLawyers.com webcast – “Activist Profiles & Playbooks” – to hear Jason Alexander of Okapi Partners, Tom Johnson of Abernathy MacGregor and Damien Park of Spotlight Advisors identify who the activists are – and what makes them tick.
SEC Approves NYSE’s “Proxy Submission” Change
Just in time for the heart of the proxy season, the SEC has approved the NYSE’s rule change – eliminating the duty of listed companies to deliver a hard copy of their proxy materials to the NYSE. Instead, the NYSE will rely on the company’s materials filed with the SEC.
As Broc blogged several times last year (here’s the latest), “fix-it” proposals – shareholder proposals seeking changes to proxy access bylaws – were a hot topic last proxy season. This recent blog from Cooley’s Cydney Posner says that they’re front & center again in 2018.
After much back & forth, it appeared that by the end of last proxy season the no-action letter process had charted a course that would allow proponents to avoiding exclusion of fix-it proposals on the basis of substantial implementation. As this excerpt notes, fix-it proponents are back this year, & they’re following that course:
The SEC Staff took a uniform no-action position allowing exclusion of these fix-it proposals. But the proponents were persistent and, in 2017, submitted to H&R Block a different formulation of a fix-it proposal that requested only one change — elimination of the cap on shareholder aggregation to achieve the 3% eligibility threshold, as opposed to simply raising the cap to a higher number.
This time, the Staff rejected H&R Block’s no-action request. In essence, it appears that the Staff believes that a lower cap on aggregation could “substantially implement” a higher cap, but the removal of a cap entirely is a different animal that could not be substantially implemented by the lower cap. This proxy season, the proponents have latched onto—and even expanded—the new formulation and have continued to find success in preventing exclusion.
For example, in BorgWarner (2/9/18), John Chevedden submitted a proposal requesting elimination of the cap on aggregation of shareholders to satisfy the 3% minimum ownership threshold, as well as changing the minimum number of proxy-access candidates to two, if the board size is under 12, and three if it is over 12. (The proposal doesn’t address the 12-person board.) In this instance, the company’s existing aggregation cap was 25, and the existing number of directors that could be nominated through proxy access was the greater of 20% of directors in office or two.
Chevedden & Harrington Investments submitted a similar proposal to Alaska Airlines. In both cases, the Corp Fin Staff rejected arguments that the proposals could be excluded on the basis that they had been substantially implemented.
Shareholder Proposals: About Those Airline Seats. . .
Is there anybody who doesn’t find the airlines’ unceasing efforts to shrink the seats & leg room on planes absolutely infuriating? This recent blog from UCLA’s Stephen Bainbridge flags a shareholder proposal designed to put a stop to this practice.
The proposal – which was submitted to American, Delta & United Continental by an organization called “Flyers Rights Education Fund” – calls for the companies to report on the “regulatory risk and discriminatory effects of smaller cabin seat sizes on overweight, obese, and tall passengers.” It also calls for them to address “impact of smaller cabin seat sizes on the Company’s profit margin and stock price.”
So what are the chances of this resolution prevailing? Not good. American & United Continental have already filed no-action requests with the Staff seeking to exclude these proposals under the ordinary business exception – and the blog notes that the airlines’ arguments are likely a winner:
American’s letter states that it is relying on the exemption under Rule 14a-8(i)(7) that allows exclusion of proposals that deal “with a matter relating to the company’s ordinary business operations.” The letter relies on the SEC’s Exchange Act Release No. 34-40018 (5/21/98):
The SEC stated in the 1998 Release that the policy underlying the ordinary business exclusion is based on two considerations:
– First, whether a proposal relates to “tasks that are so fundamental to management’s ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight;” and
-Second, whether a “proposal seeks to ‘micro-manage’ the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.”
The Staff has consistently agreed that proposals relating to a company’s sale and marketing of its products or services, or seeking to dictate management’s day-to-day decisions regarding the selection of products or services offered, implicate a company’s ordinary business operations and may be excluded pursuant to Rule 14a-8(i)(7).
While he too bemoans the constant shrinking of airline seats, Prof. Bainbridge concludes that American Airlines’s argument is “clearly correct.”
Brother, Can You Spare $100 Billion?
Check out this Reuters article – it says that banks are “salivating” over the opportunity to lend $100 billion to fund Broadcom’s hostile takeover of Qualcomm. Here’s an excerpt with some of the details on what would be the largest syndicated loan of all time:
Broadcom’s $100 million loan package backing its proposed $121 billion acquisition of Qualcomm, is set to become the biggest-ever syndicated loan globally if the hostile deal goes ahead.
Twelve banks are providing the financing, which is on track to beat the prior record of $75 billion issued by Brazilian/Belgian brewer AB Inbev to finance its purchase of rival SAB Miller in 2015, according to Thomson Reuters LPC data.
How’s the pricing? Well, for the most expensive piece of the commitment – a proposed 5-year, $20 billion term loan – it’s 137.5 bps over LIBOR. Since the 12-month LIBOR rate is currently hovering around 2.5%, this means Broadcom’s borrowing $100 billion at about the same rate that you’d pay for a 5-year auto loan.
According to this MarketWatch article, the number of coin offerings relying on Reg D has risen rapidly since the SEC first issued guidance on coin offerings last July – while only a single Form D was filed during the first half of 2017, that number grew to 43 during the second half of the year. The pace continues to accelerate – already this year, nearly 40 Form Ds have been filed through February 20th.
While a heightened awareness of the need to stay “on-side” with the SEC probably accounts for a significant percentage of the filings, another factor may well be the existence of a “blueprint” in the form of a “Simple Agreement for Future Tokens” that was developed last Fall. Here’s an excerpt with some of the background:
In a whitepaper published in October, Marco Santori, an attorney at Cooley and an advisor to the International Monetary Fund, and Juan Batiz-Benet and Jesse Clayburgh of blockchain developer Protocol Labs, say that public token sales, or ICOs, may be “a powerful new tool for creating decentralized communities, kickstarting network effects, incentivizing participants, providing faster liquidity to investors, and forming capital for creators.” However, these boosters warn that many token sellers run a huge risk of the SEC shutting them down if they don’t follow all the securities laws to the letter.
Most token sales have shunned U.S. investors, out of fear by the promoters that their participation would bring the SEC calling.
That’s why the whitepaper from Santori, Benet and Clayburgh proposed a new approach to structuring these deals to meet the SEC’s requirements. Their effort has been successful. Most of the ICOs filed using Form D since mid-2017 — but not all and not KodakCoin — now use this approach, called a Simple Agreement for Future Tokens, or SAFT, as their legal framework.
If the SAFT concept rings a bell, that’s probably because it’s based on Y Combinator’s “Simple Agreement for Future Equity” – otherwise known as “SAFE” – which has become a popular template for startup financing. Don’t forget our upcoming webcast: “The Latest on ICOs/Token Deals“…
One of our members alerted me to an ongoing debate about the SAFT approach centering on the white paper’s position as to the status of “genuinely functional” tokens under the Securities Act. Check out this Cardozo Blockchain Project white paper.
More on “Insider Trading – It’s Worse Than You Think?”
In our last episode, we noted that a bunch of recent studies have concluded that everything is terrible & the markets are rigged. Well, it turns out that those studies might have understated the problem. According to this MarketWatch article, the VIX is fixed too:
One of the most popular measures of volatility is being manipulated, charges one individual who submitted a letter anonymously to the SEC and CFTC.
The letter makes the claim to regulators that fake quotes for the S&P 500 index SPX, +0.04% are skewing levels of the Cboe Volatility Index VIX, +1.73% which reflects bearish and bullish options bets 30-days in the future on the S&P 500 to gauge implied stock-market volatility (see excerpt from the letter below).
“The flaw allows trading firms with sophisticated algorithms to move the VIX up or down by simply posting quotes on S&P options and without needing to physically engage in any trading or deploying any capital. This market manipulation has led to multiple billions in profits effectively taken away from institutional and retail investors and cashed in by unethical electronic option market makers.”.
The CBOE says the whistleblower’s all wet* – but a follow-up article quotes former SEC Chair Harvey Pitt as saying that “it’s quite clear” that indexes like these can be manipulated.
* In other words, “ChiX Nix Vix Fix” – I know, I know. . . I’m sorry, but it was just laying there & I couldn’t resist doing that little riff on one of the most famous newspaper headlines of all time.
Our March Eminders is Posted!
We have posted the March issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Whether there’s life after death is one of those great unanswerable questions. . .Well, I mean except for Section 162(m)’s performance-based comp provisions – which, despite their untimely demise last December, we can say with certainty are enjoying a robust afterlife in proxy disclosures.
Over on “The Advisors’ Blog,” Broc’s already noted that the plaintiffs’ bar is keeping a watchful eye on performance-based comp proxy disclosures in the wake of tax reform’s changes. But beyond that, some high-profile companies – like Disney & John Deere – have recently filed proxy statements asking shareholders to re-approve existing compensation plans in order to comply with Section 162(m)’s 5-year shareholder re-approval requirements for performance-based comp.
If performance-based comp’s deductibility is a goner, why do that? This Debevoise memo suggests one possible reason for this portion of 162(m)’s afterlife:
Grandfathered arrangements that rely on the performance-based exception must continue to comply with the formal procedures previously applicable to performance-based compensation. For example, if an executive had a contractual right as of November 2, 2017 to receive a performance-based award in the future, the performance criteria applicable to such award may need to be re-approved by shareholders if, when the award is granted, five years have passed since the last shareholder approval.
Many tax lawyers expect that the IRS may ultimately decide not to require shareholder reapproval for grandfathered awards – but it hasn’t issued transition rules yet, and some companies may have decided that including these proposals in their proxy statements is the prudent thing to do.
Transcript: “Audit Committees in Action – The Latest Developments”
We have posted the transcript for the recent webcast: “Audit Committees in Action – The Latest Developments.”
Enforcement Penalties: Uncle Sam’s No Longer Picking Up Part of the Tab
The new tax legislation makes it tougher to deduct payments made in connection with the resolution of government enforcement actions. Under prior law, Section 162(f) of the Internal Revenue Code allowed deductions for a fairly broad category of payments. This excerpt from a recent Sidley memo provides an overview of the new regime:
Section 13306 of the Act completely repeals the prior language of Code Section 162(f) and replaces it with a general prohibition of business expense deductions for any payments made to or at the direction of a government, a governmental entity or certain nongovernmental self-regulatory entities in connection with a violation of law or an investigation involving a potential violation of law.
However, taxpayers continue to be allowed deductions for payments that they can establish “constitute restitution(including remediation of property) for damage or harm” related to the violation or potential violation of law or that were made “to come into compliance with any law which was violated or otherwise involved” in an investigation.
Nevertheless, amounts paid to reimburse the costs of investigation or litigation are not deductible as restitution or otherwise. Code Section 162(f)(2)(B). Furthermore, as a prerequisite to establishing the right to the remaining allowable deductions, the court order or settlement agreement involved must identify the amounts paid as restitution or payments made to come into compliance with applicable law. Otherwise, no deductions are allowed regardless of the
nature of the payments.
The governmental entity or SRO involved in the action also has to file an information return with the IRS specifying the amounts that are deductive. The new provisions apply to proceedings involving all federal, state & local enforcement agencies, as well as non-governmental enforcement agencies, such as SROs.
This Cleary blog has more on this topic, together some advice on negotiating settlement agreements with the government in order to preserve deductibility. One interesting suggestion – companies should consider settling civil class actions early & voluntarily repaying victims for their loss and then arguing that the repayment also satisfies any separate disgorgement obligation to a government.
SEC Chair Jay Clayton has made invigorating the sluggish IPO market one of his top priorities. So far, the SEC’s most high-profile action on this front during his tenure has been to permit all companies – not just emerging growth companies – to make confidential filings of draft IPO registration statements.
Now, this WSJ article says that the SEC may take another step, and allow all companies, regardless of size, to “test the waters” before filing an IPO registration statement. The ability to “test the waters” was provided to EGCs as part of the JOBS Act – and this excerpt from Cydney Posner’s recent blog provides an overview of what it allows companies to do:
The testing the waters provisions in the JOBS Act significantly relaxed “gun-jumping” restrictions by permitting an EGC, and any person acting on its behalf, to engage in pre-filing communications with qualified institutional buyers and institutional accredited investors. This relaxation of the gun-jumping rules allows companies to reduce risk by gauging in advance investor interest in a potential offering.
Prior to the JOBS Act, only WKSIs could engage in similar testing-the-waters communications. “Test-the-waters” communications can be oral or written, made before or after filing a registration statement, in connection with an IPO or any other registered offering.However, the only permitted communications are those made to determine whether the specified investors might have an interest in a contemplated securities offering.
As Broc blogged at the time, allowing all companies to “test the waters” was one of a slew of recommendations aimed at improving the capital markets made by the Treasury Department last October – and you may want to check out that list for other potential “coming attractions.”
Here’s an article from MarketWatch’s Francine McKenna with more background on the SEC’s efforts to make life a little easier for IPO candidates.
Warren Buffett’s Annual Letter to Shareholders
A few days ago, Warren Buffett released his annual letter to shareholders. As usual, this went completely unnoticed by the financial press – barely 50,000 articles & blogs have been written on it to date – so I’m sure you’re hearing about this for the first time from me. There’s no need to thank me, it’s just part of the job.
Anyway, here’s a selection of some of the media reports on the Oracle of Omaha’s latest epistle:
Warren Buffett’s recent pronouncements aren’t limited to his annual letter. Berkshire Hathaway’s sitting on a pile of cash – $116 billion to be specific. Yesterday, Buffett told CNBC that Berkshire-Hathaway was more inclined to repurchase stock with its excess cash than to pay dividends.
He’s got a lot of company. Stock buybacks have long been corporate America’s favorite bit of financial engineering – and this ValueWalk article says that 2018 could be the biggest year for them ever. But despite their continuing popularity, criticism of buybacks appears to be on the rise. For instance, this Bloomberg article says that buybacks are a big contributor to the market’s recent volatility. Here’s an excerpt:
Some market watchers are adding corporate share repurchases to the list of reasons for last week’s turmoil, which already included rising interest rates, higher inflation, growing government debt, volatility-linked investment funds and Washington instability. More significantly, those pointing the finger at buybacks say continued corporate stock purchases — which, unlike some of those volatility funds, survived the brief market downturn — will make the next one far worse.
Regardless of their impact on the market, the optics of buybacks are increasingly bad – this Washington Post op-ed claims that when it comes to using the additional cash flowing in from tax reform, companies are planning to spend 30x as much on buybacks as on wage increases.
