As Dave Lynn notes in this Morrison & Foerster blog, the SEC’s Division of Trading & Markets has granted no-action relief to a site that helps start-ups raise funds. In this blog, Steve Quinlivan of Leonard Street notes:
TheFundersClub.com operates a really cool website. The publicly available page advertises “The best way to invest in startups. Insider access to pre-vetted startups. Low minimum investment sizes. Free membership. Join today.” Another publicly available page states “Investments are made in venture funds set up for the startups, and therefore, the minimum check sizes are 10-20 times smaller than typical angel investments – $1K-$5K typically, vs. $25K-$100K.” It’s a little hard to tell though whether the site is operational or in test mode, but I wasn’t going to part with money to find out. Footnote 19 to the incoming SEC letter says the first multi-company fund has closed, though, and single fund companies are possible.
You would almost think it was illegal, but the SEC just issued a no-action letter. A little further clicking indicates you have to certify you are an accredited investor before working your way into the site.
The no-action letter doesn’t address general solicitation issues, but instead addresses whether the TheFundersClub.com is a broker dealer. They don’t earn commissions on the sale of securities, but apparently do take a carried interest. The carried interest only pays out if a fund returns its capital contributions. They also don’t propose to take a management fee. The SEC apparently blesses the argument that TheFundersClub.com only receives money if they are successful in creating value. Or otherwise stated, traditional investment adviser compensation is not transaction based compensation earned by a broker-dealer.
With the JOBS Act having its first birthday tomorrow, crowdfunding remains a popular topic for the mass media and bloggers alike. Here is a sampling of pieces from over the past few months:
A few months ago, a Forbes columnist touted the “Whistleblower Forensic Opportunity Trust,” which is his RocketHub crowdfunding site seeking investors to support financial fraud whistleblowers.
What Might a Crowdfunding Ad Look Like?
More than a year ago, I blogged about the ability of federal agencies to remove comment letters that are offensive or otherwise problematic from their websites. As noted in this Bloomberg article from way back when, the SEC did so when it removed a comment letter that touted a “can’t miss investment” in its JOB’s Act comment portal. Here’s an excerpt from that removed comment letter:
Make 100 times your investment in 1-to-3 years and 1,000 times by holding
for 3-to-10 years by ending the Energy Industry and starting a Free Energy Era with
economy-changing proprietary advancements. Also, save total bubble losses from all
energy and energy-related investments.
Last month, the SEC’s Division of Investment Management issued this guidance in an effort to clarify when mutual funds must file social media messaging with the SEC. The guidance provides 5 categories of communications that IM doesn’t believe needs to be filed – and examples of communications that do. [Not that it really matters, but why does IM bury the SEC logo on the bottom of its guidance? Probably just my pet peeve but it seems to be easily mistaken for a law firm memo.]
At the time, I thought Corp Fin might weigh in with its own social media guidance soon – particularly due to widespread criticism in the wake of news that Netflix had received a Wells Notice from the Division of Enforcement (see my own blog on this topic – and Prof. Joe Grundfest’s amicus curiae brief).
The answer is “yes, sort of.” Yesterday, the SEC issued this Section 21(a) Report of Investigation stating that Enforcement has decided not to go after Netflix – mostly because its 2008 “corporate use of website” guidance may not have been sufficiently clear about how it applies to social media (given that social media exploded onto the scene more recently). More importantly, the Report clarifies that the SEC’s ’08 framework is sufficiently flexible to accommodate new “push” technologies like Facebook and Twitter – so that companies should continue to apply their own facts against whether they have created a “recognized channel of distribution” using that framework.
Even though the SEC’s press release touts the new report as a greenlight for companies – the press release’s title is “SEC Says Social Media OK for Company Announcements If Investors Are Alerted” – I’m dubious that companies and their advisors will see it that way. For starters, the new guidance comes from an Enforcement report (here’s an explanation of what a Section 21(a) report is) – perhaps not the best vehicle to encourage new practices. [Not surprisingly, many mass media reporters were fooled by the SEC’s title and report that the SEC has “new” disclosure rules.]
And it doesn’t get into the nitty gritty like IM’s new guidance does. Given the slow adoption rate of social media by IR, finance and governance professionals – compared to the rest of the world – I’m not convinced this will be enough to get folks moving (for example, see this blog by Blank Rome’s Yelena Barychev; this blog by Leonard Street’s Steve Quinlivan and this Cooley news brief from Cydney Posner).
It will be interesting to compare what is said at the ABA meeting later this week – and compare that against what Dominic Jones & I say during this Shareholder Services Association webcast next week. I’ll report back (here’s a preview from Dominic, his first blog in 18 months – the dude is back!)…
Checklist: Social Media Business Case for Investor & Analyst Engagement
Every proxy season there are a few new social media developments that are unique. During the ’12 proxy season, for example, Yahoo! filed this additional soliciting material that includes a video – not just the transcript – in the filing as part of its coverage of strategic, governance and other initiatives.
Meanwhile, another embattled company – Chesapeake Energy – filed this additional soliciting material that disclosed the release of these two so-called “contextual tweets”:
– Tweet 1) Fact: 41% of S&P 500 companies have split the Chairman and CEO positions and only 21% have truly independent chairmen.
– Tweet 2) Companies that have recently split CEO/Chairman roles: Apple, Gannett, Avon, Moody’s. Only 21% of S&P 500 have truly independent Chairmen.
I imagine the purpose of filing these tweets was to ensure that all communications potentially relating to a solicitation are included as a 14A filing – but I’m not sure the content of these tweets rise to the level of a solicitation. One of those “better be safe than sorry” filings perhaps. What is your take?
Lastly, near the end of this additional soliciting material filed by Web.com, the company filed various tweets and Facebook postings relating to an earnings call. I haven’t checked the circumstances as to why additional soliciting material was filed in connection with an earnings call. I assume a solicitation was also in progress…
A while back, Dominic Jones shared this useful tweet that says “Can CEO tweets move markets? Decide for yourself” and links to a chart. Check it out. And this article notes that fraudsters now utilize Twitter to find victims…
5th Say-on-Pay Failure of the Year
As noted in its Form 8-K, Vermillion is the 5th company holding its annual meeting in 2013 to fail to gain majority support for its say-on-pay (44% support) – although the company’s recent annual meeting was for 2012. Hat tip to Karla Bos of ING Funds for pointing this out!
In this podcast, Dave Lynn and Marty Dunn discuss the one-year anniversary Jumpstart Our Business Startups (JOBS) Act. The topics covered include:
– Title I’s confidential review and testing the waters provisions for emerging growth companies
– Status of the repeal of the prohibition on general solicitation and general advertising in Rule 506
– Prospects for crowdfunding and Regulation A+ exemptions
– Favorite jobs
Recommendations from the SEC’s Advisory Committee on Small & Emerging Companies
Last week, these recommendations from the SEC’s Advisory Committee on Small & Emerging Companies were posted:
Transcript: “What the Top Compensation Consultants Are NOW Telling Compensation Committees”
We have posted the transcript for our recent CompensationStandards.com webcast: “What the Top Compensation Consultants Are NOW Telling Compensation Committees.”
This WSJ article explains the latest in the ongoing case of the Big 4 being trapped between US regulators and the China state secrecy laws. Here’s an excerpt from the article:
An international tug of war over Chinese audit files has been dragged into a Hong Kong court this week. The outcome could be crucial for multinational companies with big China operations, and for Chinese companies listed overseas.
U.S. authorities have been battling for access to files prepared by audit firms when they work in China on companies listed overseas. The big, international audit firms say it is against Chinese law to hand over the files. Chinese and U.S. regulators are at a stalemate over the issue. Now, a similar problem is before a Hong Kong court that began hearing a dispute between Ernst & Young and the city’s Securities and Futures Commission on Wednesday.
In another case, as noted in this Accounting Age blog and related to what I have blogged about before, Deloitte is arguing that the SEC is trying to “leapfrog” over the Supreme Court’s Morrison decision by serving a subpoena on the US lawyer for Deloitte’s Shanghai affiliate in an attempt to obtain the work papers for a Chinese company. And see this WSJ article about a novel remedy out of Delaware, in which a judge gave a court-appointed official the power to seize company assets needed to buy back the investor’s shares for far more than their current price. I wonder how they will enforce the put option judgment if they cannot reach most of the assets…
Mary Jo White’s nomination to be the 31st Chair of the SEC was approved last week by the Senate Banking Committee, in a vote of 21 to 1, and as noted in this article, her nomination goes on to the full Senate for consideration at some point soon after the Easter recess. With the possibility of a new Chair arriving soon, the question inevitably arises as to what will (or should) top the Corp Fin rulemaking agenda? In her testimony before the Senate Banking Committee earlier this month, Mary Jo White said that she would work with the staff and the Commissioners “to finish, in as timely and smart a way as possible, the rulemaking mandates contained in the Dodd-Frank Act and JOBS Act.” This pledge may be no easy task to carry out, given the stalemate that has developed over many of these rules in the past couple of years. Nonetheless, here is my assessment of what the priorities might (or should) be for the “first 100 days”:
1. Title II of the JOBS Act – As the first example of why the SEC’s priorities shouldn’t necessarily follow a “first in, first out” order, it seems that the Commission should try to resolve its differences over the implementation of Title II of the JOBS Act and permit general solicitation and general advertising in Rule 506 and Rule 144A offerings. With the first anniversary of the JOBS Act coming up next Friday, we have already see a significant amount of the momentum from the enactment of that legislation slip away, and some bold steps to move the rulemaking forward might help to reignite the excitement around the potential of the JOBS Act and demonstrate that the SEC is interested in advancing capital formation with appropriate protections. I don’t think anyone could have guessed that Title II, given its straight-forward, bi-partisan directive, would still be sitting unimplemented over one year after the enactment of the JOBS Act. (See our January-February 2013 issue of The Corporate Counsel for some of the issues standing in the way of Title II’s implementation).
2. Section 926 of the Dodd-Frank Act – Section 926 directed the SEC to adopt bad actor disqualification provisions for Rule 506 offerings, and this rulemaking has become inextricably linked to the Title II of the JOBS Act rulemaking (and rightfully so). The SEC proposed the rules back in May 2011, and while there are certainly some considerable implementation issues as highlighted in the comments received on the proposal, it is high time to get this rulemaking done so the Title II rulemaking can now proceed.
3. Titles III and IV of the JOBS Act – At this stage, it is unlikely that the SEC could adopt rules for the crowdfunding and Regulation A+ exemptions contemplated by the JOBS Act during 2013, but it would be important to at least propose these rulemakings with the hope of adopting rules by early in 2014. The need for creative efforts to spur capital formation is no less now than when the JOBS Act was enacted last year, so moving these forward (even if Title IV doesn’t have a missed implementation deadline) is critical to rebuilding some of the lost JOBS Act momentum.
4. Other Dodd-Frank Compensation Rules – The “final four” Dodd-Frank rulemakings – CEO pay ratio, hedging, pay versus performance and clawback – should remain on the agenda (to the extent still required as legislative efforts unfold), but not with the same sense of urgency as the three priorities identified above. As we have noted in a number of publications recently, the world is moving on without the need for these rules to compel action or disclosure about such action. ISS’s 2013 policy focus on hedging and pledging is prompting issuers to revisit this issue, and disclosure is abounding in proxy statements this year about anti-pledging policies. Issuers have come up with “actually paid” measures to better demonstrate pay for performance, and clawbacks have become a fixture at many companies over the past several years as a result of shareholder expectations. On the topic of CEO pay ratio, is anyone really asking for this now?
5. Other Important Areas – The press of the Congressionally-mandated business of the Commission shouldn’t completely overshadow some important initiatives that the Corp Fin Staff has been looking at for some time, including proxy plumbing (particularly the role of proxy advisory firms), disclosure reform, Securities Offering Reform 2.0, Regulation AB II, beneficial ownership reporting, and countless other projects. These projects need to get the support and respect that they deserve, and progress toward proposals needs to be made even if the JOBS Act and Dodd-Frank rulemakings also must be completed in short order.
The law firm of Faruqi & Faruqi LLP, which has been by far the most active firm filing the new breed of proxy statement disclosure lawsuits since this time last year (over 30 now at this point), recently published a detailed piece on developments in Say-on-Pay 2.0 litigation. If you haven’t spent much time reading the materials filed in these lawsuits to date, this piece describes the arguments that have been advanced on both sides and some of the results to date (as well as mounting a defense of these lawsuits in general). The piece concludes:
The current dismissive attitude regarding the say-on-pay vote due to its advisory nature essentially pilfers from shareholders the ability to signal their content or discontent with executive pay practices, thus making the vote far less likely to lead to potentially necessary and constructive pay reforms. Indeed, the Delaware Court of Chancery has held that “[t]he strengthening of shareholder interest in monitoring the activities of officers and directors only further emphasizes the importance of the shareholder franchise as the bedrock foundation upon which the legitimacy of directorial power rests.” State of Wisconsin Inv. Bd. v. Peerless Sys. Corp., No. 17637, 2000 Del. Ch. LEXIS 170 (Del. Ch. Dec. 4, 2000). Thus, shareholders must not be deprived of their right to cast an informed vote on a company’s executive compensation.
The peripheral legal attacks described in this article (claims that the vote is non-binding and thus related information is immaterial, federal law preempts the allegations and that portions of the information are publicly disclosed) are likely nothing more than legal red herrings, unlikely to affect the outcome of a given case. In the end, the relevant legal question will be whether or not the information is material.
Class Action Suits Against Auditors Go Global
While on the topic of getting sued, this recent Reuters article about the global trend toward suing auditors noted that while lawsuits against auditors have been on the decline in the United States as court rulings – especially the 2008 U.S. Supreme Court decision in Stoneridge Investment Partners v Scientific-Atlanta – have made it more difficult to sue a company’s auditors, lawsuits against auditors have been on the rise in other countries. At the same time that the U.S. has significantly raised the bar on class action lawsuits, the number of countries allowing class action lawsuits around the world has grown to more than twenty, thereby facilitating the filing of more lawsuits against auditors globally.
More on our “Proxy Season Blog”
We continue to post new items regularly on our “Proxy Season 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:
– Investors Demand CEO Face Time
– 2013 Shareholder Proposal Campaigns Shaping Up: Board Issues & Shareholder Rights
– Seattle Times Live Tweets Microsoft’s Annual Meeting
– AARP Survey May Influence Efforts to Alter ERISA Rules Affecting E-Proxy
– National Fuel Sues Harvard Law Project Over Proof of Ownership (And Then Proposal Withdrawn)
The PCAOB announced that, at a meeting scheduled for later today, they will consider a proposal for the reorganization of auditing standards. The PCAOB plans to reorganize the patchwork of auditing standards “into a topical structure with a single integrated numbering system, along with certain implementing amendments to its rules and standards.” Ultimately the goal is to present auditing standards in a logical order that follows the audit process.
Division of Trading and Markets Issues Rule 15a-6 FAQs
The Division of Trading & Markets recently published a set of Frequently Asked Questions addressing issues under Exchange Act Rule 15a-6, which provides conditional exemptions from broker-dealer registration requirements for foreign broker-dealers that engage in certain activities involving U.S. investors. Among the topics covered in these Frequently Asked Questions are the delivery of confirmations and account statements directly to U.S. counterparties, the distribution of research to U.S. institutional investors, and the application of the Seven- and Nine-Firms letters to chaperoning arrangements with non-affiliated broker-dealers.
More on our “Proxy Season Blog”
We continue to post new items regularly on our “Proxy Season 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:
– Examining Hewlett-Packard’s Proposed Proxy Access Rights
– Corp Fin Denies Disney Right to Exclude Proxy Access Proposal
– Detailed Examination of 2012 Shareholder Proposals and Proxy Contests
– SHRM Drops Controversial Proposal for Human Capital Proxy Disclosure
– A Case to Exclude the Triennial Say-on-Pay Shareholder Proposal
With proxy season in full swing and the recommendations of proxy advisory firms a focus of everyone’s attention, the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness recently released its Best Practices and Core Principles for the Development, Dispensation and Receipt of Proxy Advice. The report focuses on the respective roles of the proxy advisory firms, public companies and investment portfolio manager organizations in the proxy advice process. The report notes that while proxy advisory firms play a growing role in the corporate governance process, their transparency in developing and recommending voting policies has not increased. The guidelines provided in the report address not only best practices for the proxy advisors and the investors that use their services, but also best practices for the public companies that interact with proxy advisors through both the engagement process and when retaining the advisors to provide services with regard to governance matters.
Common Financial Reporting Issues for Smaller Companies
Corp Fin has released a set of slides from the Forums on Auditing in the Small Business Environment hosted by the PCAOB in December 2012 that focus on a sampling of issues that the Staff of Corp Fin frequently encounters when reviewing filings for smaller public companies. Some of the key issues identified in the slides were:
– Reverse mergers
– Disclosure controls and procedures, internal control over financial reporting and certifications
– Equity transactions
– Stock compensation
– Embedded conversion options and freestanding warrants
– Deferred tax valuation allowances
– Items 4.01 and 4.02 of Form 8-K
– Audit Reports
– Smaller reporting company status
More on our “Proxy Season Blog”
We continue to post new items regularly on our “Proxy Season 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:
– Shareholder Rights Project’s Plans for ’13
– A Director Takes a Stand at Overseas Shipholding Group
– Delaware Compels Annual Meeting Without Audited Financials
– Animal Rights Group to Mount Proxy Contest
– UK Stakeholder Group Seeks Feedback on Engagement
Here’s news from Wachtell Lipton’s David Katz, Warren Stern & Kim Goldberg culled from this memo:
Reaffirming that the advisory “say-on-pay” vote required by the Dodd-Frank Act cannot be used to attack directors’ executive compensation decisions, the United States District Court for the District of Delaware recently dismissed a derivative complaint brought after a negative say-on-pay vote. The court, applying Delaware law, found that the plaintiff had not pleaded facts sufficient to show that demand would have been futile, or to state a claim upon which relief could be granted. Raul v. Rynd, C.A. No. 11-560-LPS (D. Del. March 14, 2013).
The complaint was filed in 2011, and was one of a number of similar lawsuits filed after Dodd-Frank’s requirement for advisory votes on compensation came into effect. The plaintiff challenged the board’s compensation decisions, alleging that increased compensation in a year when the company posted a net operating loss and negative shareholder return violated the company’s pay-for-performance philosophy and rendered the company’s compensation disclosures in its proxy statement misleading. The plaintiff asserted that the negative shareholder advisory vote rebutted the presumption of business judgment surrounding the board’s compensation decisions.
In dismissing the complaint, the court found that the plaintiff “misconstrue[d] the effect of the shareholder vote” and “mischaracterize[d]” the compensation plan, holding that the plaintiff’s allegations based on the advisory vote “fail to recognize the[] realities of Dodd-Frank” — namely, that the Act “explicitly prohibits construing the shareholder vote as ‘overruling’ the Board’s compensation decision” or altering directors’ fiduciary duties. The court further noted that the plaintiff’s “selective” characterization of the company’s compensation philosophy as “pay for performance” excluded the other goals discussed in the company’s proxy statement.
The Raul decision reinforces the Dodd-Frank Act’s bar on attempts to use the advisory shareholder vote to overrule directors’ business judgment on matters of executive compensation. The decision recognizes that directors should be permitted to determine appropriate compensation for executives in accordance with their company’s overall compensation philosophy — including such motivations as attracting, retaining, and incentivizing executives — without fear that they will be subject to liability should shareholders express disagreement with those judgments through an advisory say-on-pay vote.
Swiss to Vote Again on Executive Pay: Mandatory Pay Ratio Cap!
In the US, the corporate world is worried about disclosing pay ratios. In Switzerland, they are looking to cap CEO pay compared to the lowest paid employee at no more than 12:1. Here’s news from this excerpt of a WSJ article:
Switzerland is expected to vote later this year on a proposal to place further limits on executive pay, the latest effort to govern corporate compensation in a country that recently approved some of the world’s strictest say-on-pay rules. The Young Socialists, the youth wing of the left-leaning Social Democratic Party of Switzerland, have collected more than 100,000 signatures–the threshold needed to call a vote–in support of a referendum to limit executive salaries to 12 times those of a company’s lowest-paid employee. The campaign, dubbed the 1:12 Initiative for Fair Pay, is named for the organizers’ belief that no one in a company should earn more in one month than the lowest-paid employee makes in a year.
On Thursday, the Council of States, Switzerland’s upper house, will debate what recommendation it should give on the initiative, which voters are expected to consider in September or November. Two other government bodies have already recommended a rejection of the pay proposal.
The referendum will be the second time Swiss voters have been asked to weigh in on the country’s corporate-pay structure this year. This month they overwhelmingly approved the Minder Initiative, named for its creator, businessman and politician Thomas Minder, and also known as the “Rip-Off Initiative.” The plan allows the government to draft sweeping controls on compensation, such as requiring a binding shareholder vote on pay, as well as fines and jail time for violations.
And, as noted in this Reuters article, the Germans have started on work on their own set of new rules to rein in excessive pay…
More on our “Proxy Season Blog”
We continue to post new items regularly on our “Proxy Season 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:
– Toronto Stock Exchange Mandates Annual Board Elections; Proposes Majority Vote Standard
– Checklist: Annual Meeting Location & Venue Considerations
– Is Your General Counsel an “Executive Officer”? Not Necessarily
– Binding Bylaw Proposals for Independent Chairman by Norges Bank
– US Proxy Season Review: ESG Proposals
I can’t profess to read all the proxies being filed – not the way that Mark Borges remarkably does when he analyzes their pay disclosures in his blog – but here are a handful I have peeked at:
We have posted the transcript for our recent webcast: “Conduct of the Annual Meeting.”
My Final Four picks are Michigan over Michigan State in the final, with Wisconsin and Miami also in the Final Four. No #1 seeds make it that far…
More on Annual Meeting Conduct
Supplementing our recent webcast on the topic, in this podcast, Carl Hagberg, an Independent Inspector of Elections and Editor of The Shareholder Service Optimizer, provides his thoughts about the conduct of the annual meeting, including:
– What is your biggest concern about tabulation issues for this proxy season?
– What should companies say – and do – at the annual meeting if the vote looks close?
– How should companies handle adjournments?
Survey Results: Voting Options for Registered Shareholders
It is our understanding that the SEC has asked transfer agents (and others that deal with registered shareholders) to ensure that – if their phone and Internet voting applications have a “vote with management” button – they must also have a “vote against management” button. [You may recall that I have blogged, Broadridge will eliminate the “vote with…” button, encourage beneficial holders to vote on individual items, and indicate that if the holder clicks on “submit” without selecting any items individually, proxies and vote instructions will be cast in accordance with board recommendations.]
Here are survey results about the state of preparedness for the record holder side of this development:
1. At this time, our company intends to deal with registered shareholders by:
– Including both “vote with” and “vote against” management buttons – 3%
– Not including either “vote with” and “vote against” management buttons – 33%
– Including just the “vote with” button (but not the “vote against” button) – 0%
– Doing whatever our transfer agent (or whomever handles our registered holders) tells us – 40%
– Not sure at this time – 24%
