With Northwestern’s Securities Regulation Institute coming up next week in San Diego, I wanted to share that our editorial team will have a strong showing again this year. Dave is reprising his role as Vice Chair of the event, Liz will be speaking on a D&O FAQ panel, and John, Meaghan & I will be there for moral support — hopefully getting to chat with many of you and absorbing the wisdom our colleagues and the other great speakers will be sharing.
Speaking of wisdom, if you’re headed to SRI, check out Meaghan’s Mentor Blog from yesterday resharing her multi-part series on networking at conferences!
On Friday, the SEC approved the rule change Nasdaq proposed in August to modify the delisting process for certain stocks that fail to regain compliance with the minimum bid price requirement. As we noted in November, it wasn’t clear that this proposed change was going to be approved. In the fall, the SEC extended the time period for action on the proposal and then instituted proceedings under Section 19(b)(2)(B) of the Exchange Act seeking additional analysis, which Nasdaq submitted in early January.
The rule change revises Nasdaq Rules 5810 and 5815 for stocks that fail to regain compliance with the exchange’s bid price requirement — or fall out of compliance again one year after effecting a reverse stock split. As we previously noted, the rule adds risk — of being relegated to trading on OTC markets — especially to publicly traded AI and biotech startups.
Here is additional detail on the changes, paraphrased from the release:
– Suspension After Second Compliance Period. When a company has a minimum bid price deficiency, Nasdaq rules provide an automatic 180-day compliance period and then — if the company notifies Nasdaq of the intent to cure the deficiency with a reverse stock split — a second, not automatic 180-day compliance period. If the deficiency is not cured in that second period, a Delisting Determination is issued, which can be appealed with a hearing request. Typically that hearing request would stay the suspension and delisting action pending the decision of the Hearings Panel, but Nasdaq Rule 5815 is being modified to provide that a request for a hearing shall not stay the trading suspension when the request is made by a company that was afforded the second 180-day period and failed to regain compliance during that time.
– Bid Price Deficiency One Year After Reverse Stock Split. Nasdaq Rule 5810 is being amended to provide that if a company’s security fails to meet the minimum bid price within one year since the company effected a reverse stock split, then the company shall not be eligible for any compliance period and a Delisting Determination will be issued immediately. This will prevent companies from remaining listed if they would have to engage in a pattern of reverse stock splits to maintain the minimum bid price.
Commenters seemed more concerned about the latter of the two changes — and the SEC’s release spends 12+ pages addressing those comments and concerns.
Side note: There are a number of other complexities to these rules and this process that apply in certain circumstances — for example, if a security has a closing bid price of $0.10 or less for 10 consecutive trading days during a bid price compliance period, if a company has effected one or more reverse stock splits in the prior two years with a cumulative ratio of 250:1 or more or if a company’s reverse stock split causes it to be out of compliance with another listing rule (another recent change). See this Cooley PubCo post for more.
This new Willkie CAPITAL LETTERS publication focuses on raising capital during blackout periods. It starts by saying that companies are “often well advised to wait until after they issue their earnings or file the related annual, quarterly or special report before accessing the capital markets.” But it acknowledges that “a self-imposed blackout period does not, as a matter of law, prevent a company from issuing securities so long as the company satisfies all disclosure obligations [and] [t]here may be compelling reasons to issue securities during a blackout period” like “uncooperative market conditions or unscheduled needs (e.g., M&A transactions).”
So what additional considerations do companies need to address if they’re seeking to raise capital at this time? The memo notes that many constituents need to be involved in the decision to move forward and vet the disclosure — including management and the board, the underwriters, both parties’ counsel and the auditors. It’s also important to understand the key drivers of the company’s performance, what data will be available when — including through closing of the offering — and whether changes are common during the quarterly close and financial statement review process. The materiality of the earnings information may also depend on whether the offering is debt or equity.
Speaking of earnings information, the memo gives tips on how to disclose, diligence and comfort “flash numbers” — i.e., pre-released financial information about a closed year or quarter to satisfy a company’s disclosure obligations in a capital raising transaction. The memo has these important compliance reminders when you’re putting out flash numbers:
Flash Numbers May Need to Be Furnished on a Form 8-K – Item 2.02 of Form 8-K requires a company to “furnish” a Form 8-K containing any material nonpublic information regarding the company’s results of operations or financial condition for a completed quarterly or annual fiscal period that the company or any person acting on its behalf discloses in a public announcement or release. SEC Exchange Act Form 8-K Compliance and Disclosure Interpretation 106.07 specifically requires a Form 8-K in the case of “preliminary” earnings disclosure for a completed quarterly period, even if some of the amounts are only estimates. An additional Form 8-K would be required when the final results are publicly disclosed or when revised amounts are publicly disclosed. While the disclosure of information in the context of an unregistered offering (e.g., a Rule 144A offering) may not constitute a “public announcement or release,” disclosure of flash numbers in a private offering memorandum may trigger required public disclosure under Regulation FD, as further described below. Therefore, a public company would be well advised to furnish an Item 2.02 Form 8-K even for disclosure in a private offering memorandum.
Don’t Forget About Regulation FD – Providing flash numbers in a prospectus or private offering memorandum may trigger required public disclosure under Regulation FD for public companies. The standard procedure is to file a Form 8-K including the flash numbers substantially simultaneously with the launch of the offering. The offering constituents should ensure that such a press release is drafted in a manner to avoid it being considered an “offer” of the securities under the U.S. federal securities laws. Private companies that have previously issued securities pursuant to Rule 144A should consider making any such results simultaneously available on their website or in the dataroom established to comply with Rule 144(d)(4) in order to remove information asymmetry as between potential investors in the new offering and existing and potential investors in the company’s existing securities.
We’ve recently posted another episode of the “Understanding Activism with John & J.T.” podcast. This time, John and J.T. Ho were joined by Jonas Kron, Chief Advocacy Officer for Trillium Asset Management. John and J.T. spoke with Jonas about how Trillium approaches the engagement process, trends in ESG activism, and how activist investors like Trillium are responding to the headwinds facing ESG activism.
Topics covered during this 33-minute podcast include:
– How Trillium decides which issues it intends to prioritize and which companies it is going to engage
– Trillium’s approach to engaging with the management of its portfolio companies
– Advice for companies when engaging with socially conscious investors like Trillium
– How Trillium works with other socially conscious investors
– Top issues for engagement by Trillium and other ESG-focused investors during the upcoming proxy season
– Investor responses to headwinds facing them on ESG and DEI initiatives
– Alternative investor approaches if Rule 14a-8 is pared back
This podcast series is intended to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. John and J.T. are continuing to record new podcasts, and they’re full of practical and engaging insights from true experts – so stay tuned!
Yesterday came the first big crypto announcement from the SEC under Acting Chair Uyeda’s leadership — the creation of a crypto task force charged with “developing a comprehensive and clear regulatory framework.” Commissioner Peirce has been tapped to lead the task force, with Richard Gabbert, Senior Advisor to the Acting Chairman, to serve as Chief of Staff, and Taylor Asher, Senior Policy Advisor to the Acting Chairman, to serve as Chief Policy Advisor.
To date, the SEC has relied primarily on enforcement actions to regulate crypto retroactively and reactively, often adopting novel and untested legal interpretations along the way. Clarity regarding who must register, and practical solutions for those seeking to register, have been elusive. The result has been confusion about what is legal, which creates an environment hostile to innovation and conducive to fraud . . .
The Task Force’s focus will be to help the Commission draw clear regulatory lines, provide realistic paths to registration, craft sensible disclosure frameworks, and deploy enforcement resources judiciously.
The release notes that the task force intends to hold roundtables for public input but, for now, interested parties can share thoughts at crypto@sec.gov.
I had initially written a blog about two other crypto developments that now seem moot, but ICYMI:
– Last week, the Third Circuit ordered the SEC to fully explain why it has failed to promulgate rules for crypto regulation.
– In the separate dispute between the SEC and Coinbase regarding the SEC’s enforcement action alleging that Coinbase operated as an unregistered broker, exchange, and clearing agency, Coinbase recently won its motion for interlocutory appeal to the Second Circuit.
As you consider any AI-related updates to your Form 10-K disclosures for calendar year 2024, take a look at this Orrick survey of AI-related comments made by the SEC Staff since 2021. The Orrick team identified 92 separate comments in letters issued to 56 companies, which were “well distributed across various industries, including technology, biopharmaceuticals and healthcare, real estate, retail, and financial services.”
Here are short excerpts on some trends they identified. Each of these is more fully explained in the article with additional examples given.
– Materiality. The SEC has advised companies to assess if discussions about AI in board meetings, earnings calls, and investor presentations suggest materiality and, if so, to provide corollary disclosures in SEC filings.
We note disclosure regarding the importance of AI to your business, including that your financial performance and growth will be driven in large part by the demand for AI workloads. Please revise your business section to more fully discuss the current state of AI and the potential obstacles to broad-based AI adoption. In addition, more fully discuss the current state of AI regulation within the United States and your other markets. Clarify what you would consider to be “unfavorable developments” with the potential to materially impact the company, as referenced on page XX.
– Immateriality. Interestingly, the SEC has also shown concern about immateriality, requesting companies to justify the inclusion of certain AI-related disclosures that do not seem material and to include examples of use cases that would be helpful for investors’ understanding.
Please tell us why you believe that the various AI-related programs in the timeline table disclosed are material enough to be included, especially considering the early stage of such programs and the lack of disclosure regarding these programs.
– Reasonable Basis. Approximately 30% of the SEC’s comments we reviewed addressed unsupported or unqualified statements.
Please revise the bullet points on page XX of the proxy statement to clarify, if true, that these are not yet products or services the company provides, and are instead areas of research or are aspirational.
– Specificity and Balance. [A]pproximately 61% of the SEC’s comments we reviewed requested that companies that have disclosed AI-related initiatives, projects, or technologies clarify how the AI is or is intended to be used in those initiatives, projects, or technologies and any attendant risks.
We further note the disclosure that broad-based AI adoption is in its early phases and that AI-adoption is likely to continue and may accelerate. Please revise your business section to provide a more balanced discussion of AI. Include, without limitation, a discussion of the potential limitations, obstacles, and uncertainties associated with AI adoption, use, and commercialization.
– Define AI. 17% of the SEC’s comments we reviewed addressed the use of AI-related terminology and definitions.
Given the nature of your business, please consider including definitions of “AI,” “generative AI,” “deep learning,” “large language models,” “neural networks,” and any other industry-specific terminology.
Please explain how your software is properly characterized as AI or machine learning, rather than as an algorithm.
– Other. 34% of the SEC’s comments we reviewed addressed other AI-related issues, such as IP, the collection and use of data implicated in AI applications, the involvement of third parties, how the AI was developed, validation of models, and disclosure inconsistencies.
Late last year, John and Cleary’s J.T. Ho recorded an “Understanding Activism with John & J.T.” podcast with Jun Frank, who serves as Global Head of Compensation & Governance Advisory for ISS-Corporate. They spoke with Jun about trends in shareholder proposals and activism.
Topics covered during this 20-minute podcast include:
Understanding shareholder proposal trends
Impact of Anti-ESG campaigns
Withdrawal rates and engagement
Corporate disclosure and governance improvements and impact on support of proposals
Proxy advisor and investor approaches to evaluating contested elections
Emerging activism trends and proxy advisor and investor responses
John and J.T. hope to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists on this podcast series. They’re continuing to record new podcasts, and I think you’ll find them filled with practical and engaging insights from true experts – so stay tuned!
Yesterday, the White House announced that President Trump has designated Commissioner Mark Uyeda as Acting Chair of the SEC. Commissioner Uyeda has served as an SEC Commissioner since June 2022 and has been with the SEC since 2006 — as SEC detailee to both the legislative and executive branches, senior Advisor to Chairman Jay Clayton, Counsel to Commissioners Michael S. Piwowar and Paul S. Atkins, and Assistant Director and Senior Special Counsel in the Division of Investment Management.
Acting Chair Uyeda will preside over a three-person Commission — presumably until Paul Atkins, who President Trump has said he will nominate as Chair, is confirmed. Reuters reports that Acting Chair Uyeda and Commissioner Peirce “are expected to kick-start a cryptocurrency policy overhaul as early as this week.” Stay tuned!
You know those little errors in the securities laws — the cross-reference to a vacated rule or typographical error — that don’t actually matter because it’s clear what it’s supposed to mean, but they bother you anyway? If you, like me, have some of those pet peeves, Chair Gensler has a parting gift for you!
On Friday afternoon, the SEC issued this final rule release to “correct errors that are technical in nature, including typographical errors and erroneous cross-references in various Commission rules and forms.” What type of corrections, you ask? Well, as an example, one of my biggest pet peeves — because I think it did cause confusion — was addressed.
Paragraph (a) of Item 5.08 of Form 8-K (Shareholder Director Nominations) was restated as follows:
(a) Where a registrant is required to include shareholder director nominees in the registrant’s proxy materials pursuant to either an applicable state or foreign law provision, or a provision in the registrant’s governing documents, then the registrant is required to disclose the date by which a nominating shareholder or nominating shareholder group must submit the notice on Schedule 14N required pursuant to § 240.14a–18.
This removes the first sentence of Item 5.08(a), which read:
If the registrant did not hold an annual meeting the previous year, or if the date of this year’s annual meeting has been changed by more than 30 calendar days from the date of the previous year’s meeting, then the registrant is required to disclose the date by which a nominating shareholder or nominating shareholder group must submit the notice on Schedule 14N (§ 240.14n–101) required pursuant to § 240.14a–11(b)(10), which date shall be a reasonable time before the registrant mails its proxy materials for the meeting.
Item 5.08 was adopted in connection with the SEC’s proxy access rules. The first sentence of Item 5.08(a) appears to be inoperative because it implements Rule 14a-11, which was vacated. However, the second sentence of Item 5.08(a) remains relevant, because it refers to Rule 14a18, which remains in effect. Rule 14a-18 applies to a company that is required, by state or foreign law or the company’s governing documents, to include shareholder director nominees in its proxy materials
So now it’s clear that an 8-K is to be filed under Item 5.08(a) within four business days after a company determines its anticipated meeting date if the company did not hold a prior year annual meeting or changed the annual meeting date by more than 30 calendar days from the previous year’s meeting AND is required to include shareholder director nominees in their proxy materials pursuant to state law, foreign law or the company’s governing documents (e.g., proxy access bylaw). This is helpful!
There were other fixes that were truly nits as well. Our more eagle-eyed members might appreciate these edits:
– Fixing the spelling of “indentures” in the heading of Item 601(b)(4) of Regulation S-K
– Replacing that errant “; and” with the appropriate period at the end of Item 5(a) of Part II of Form 10-Q
I’m curious! What’s your pet peeve error in the securities laws? Did it get fixed? Let me know at mervine@ccrcorp.com.
Join us tomorrow at 2 pm Eastern for our “ISS Policy Updates and Key Issues for 2025” webcast to hear ISS’s Marc Goldstein, Davis Polk’s Ning Chiu & Jasper Street Partners’ Rob Main discuss what transpired in 2024, ISS’s policy updates for 2025 meetings, other trends and themes expected to impact the 2025 proxy season and emerging issues for the coming year and beyond. This is one of our annual favorites you won’t want to miss!
Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. The webcast cost for non-members is $595. You can sign up by credit card online. If you need assistance, send us an email at info@ccrcorp.com – or call us at 800.737.1271.
We will apply for CLE credit in all applicable states (with the exception of SC and NE which require advance notice) for this 60-minute webcast. You must submit your state and license number prior to or during the program using this form. Attendees must participate in the live webcast and fully complete all the CLE credit survey links during the program. You will receive a CLE certificate from our CLE provider when your state issues approval; typically within 30 days of the webcast. All credits are pending state approval.
This program will also be eligible for on-demand CLE credit when the archive is posted, typically within 48 hours of the original air date. Instructions on how to qualify for on-demand CLE credit will be posted on the archive page.
