While we didn’t see a flood of Dodd-Frank Act rulemaking in the first quarter of 2012 (there was one proposed rule relating to identity theft red flags, a final rule providing exemptions for securities-based swaps discussed below, changes to the net worth standard for accredited investors, and rules regarding investment adviser performance fees), the Staff did deliver the second of four reports to Congress on the implementation of consultant recommendations, as required by Section 967(c) of the Dodd-Frank Act. The SEC Staff had engaged Boston Consulting Group to comply with Section 967(b), which directed the SEC to engage an independent consultant to conduct a broad and independent assessment of the SEC’s internal operations, structure, funding, and the agency’s relationship with SROs.
The report notes that over the past year, the Staff has conducted assessments of potential organizational improvement opportunities under an initiative called the SEC Mission Advancement Program (MAP). The report notes operational improvements in three key areas: (1) reorganizing critical internal infrastructure, such as the Division of Enforcement and the Office of Compliance Inspections and Examinations, as well as the restructuring important administrative offices; (2) analyzing a broad array of agency activities in an effort to improve efficiency and the distribution of resources to key activities, implement stronger internal controls, and improve responsiveness; and (3) identifying areas for cost improvement, resulting in projected saving of $8.3 million over the next two years. However, the report notes that, given the limited resources that the SEC has available now, future activity will be focused on only a limited number of projects.
SEC Adopts Key Exemptions for Security-Based Swaps
Last week, the SEC adopted rules which exempt transactions by clearing agencies in security-based swaps from all provisions of the 1933 Act (other than the Section 17(a) anti-fraud provisions), as well as exempt these security-based swaps from 1934 Act registration requirements and from the provisions of the Trust Indenture Act, provided that conditions specified in the rules are met. Title VII of the Dodd-Frank Act does not contain an exemption from the 1933 Act or the 1934 Act registration provisions, or from Trust Indenture Act qualification, for security-based swaps. In the SEC’s view, however, compliance by a clearing agency with the registration and qualification provisions would likely be impracticable and frustrate the purposes of Title VII, which seeks to ensure that, wherever possible and appropriate, security-based swaps are cleared. The final rules are effective April 16, 2012.
JOBS Act to be Signed Today: Time to Generally Solicit?
The Jumpstart Our Business Startups Act will be signed today at a ceremony in the Rose Garden this afternoon. While a number of key portions of the law will go into effect immediately, most notably the breaks for “emerging growth companies,” many parts of the law will require further SEC action to implement the changes. Notably, Title II’s repeal of the ban on general solicitation and general advertising in Rule 506 offerings directs the SEC to change its rules, rather than changing the rules effective upon enactment – likewise for the provisions regarding crowdfunding and Regulation A style offerings. There will no doubt be guidance forthcoming on these topics once the JOBS Act is enacted, so stay tuned.
Nothing says “Jumpstart Our Business Startups” more than crowdfunding, the seemingly new approach to raising capital over the Internet that has been the focus of much of the debate and criticism in connection with the legislative efforts that culminated in last week’s passage of the JOBS Act. In my mind, crowdfunding is not really something new, in that people have been soliciting funds from friends, family and those who share an interest for a long time (think, e.g., the March of Dimes) – this activity is now supercharged thanks to the power of the Internet and social media. As we noted in the July-August 2011 issue of The Corporate Counsel, until the JOBS Act came along, crowdfunding didn’t fit nicely into existing 1933 Act exemptions, and efforts have been underway for a few years to encourage the SEC to adopt a small offering exemption that was specifically tailored to crowdfunding.
The JOBS Act, after some debate resulting in an amendment to the crowdfunding title when the legislation was considered by the Senate, delivers on the promise of a 1933 Act exemption for crowdfunding, but with some strings attached in the name of investor protection. In particular, Title III, “Crowdfunding,” will amend Section 4 of the 1933 Act to add a new paragraph (6), which provides an exemption from registration subject to the conditions that: (1) the aggregate amount sold to all investors by the issuer, including any amount sold in reliance on the crowdfunding exemption during the 12-month period preceding the date of the transaction, is not more than $1,000,000; (2) the aggregate amount sold to any investor by the issuer, including any amount sold in reliance on the crowdfunding exemption during the 12-month period preceding the date of the transaction, does not exceed: (a) the greater of $2,000 or 5 percent of the annual income or net worth of the investor, as applicable, if either the annual income or the net worth of the investor is less than $100,000; or (b) 10 percent of the annual income or net worth of an investor, as applicable, not to exceed a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000; (3) the transaction is conducted through a registered broker-dealer or funding portal that complies with the requirements of the exemption; and (4) the issuer complies with the requirements of the exemption.
The information requirements contemplated by the exemption ― which apply to both issuers and broker-dealers/funding portals ― are relatively steep, in that they contemplate providing information about risks (including asking questions of investors about risk), information about the issuer (including financial statements with varying levels of review/audit depending on the target amount raised), information about the offering (including a target amount where the issuer doesn’t receive the funds until the target amount is reached), and even ongoing SEC reporting after the offering is completed. The legislation contemplates the adoption of a whole new regulatory scheme applicable to the “funding portals” that host crowdfunding offerings, while at the same time giving those funding portals a break from full-blown broker-dealer registration. Intermediaries involved in crowdfunding offerings (or wanting to be involved in crowdfunding offerings) will need to figure out if they want to go with a broker-dealer model, or the presumably the more lightly regulated funding portal model.
But just in case you were getting excited to go out tomorrow and raise $1 million for a hot dog stand, note that the crowdfunding exemption leaves a lot for the SEC to determine through the rulemaking process. The JOBS Act directs the SEC to adopt implementing rules within 270 days of enactment, and who knows whether the SEC will be able to meet that deadline given the wide-ranging nature of this exemption and the seemingly obvious investor protection concerns that it raises.
Crowdfunding Gets an Association
Earlier this week, a collection of over fifty companies and individuals announced the formation of the National Crowdfunding Association. The NCFA is charged with “supporting, educating and protecting the American crowdfunding industry.” It is comprised of companies and individuals, funding portals, consultants and vendors to the industry. The group is going to hold its first National Crowdfunding Conference in July. Judging from my e-mail inbox these days, they are not going to be alone in holding crowdfunding events over the next few months.
Up Next: A Crowdfunding SRO?
A group is also seeking to establish a self-regulatory organization for the crowdfunding industry, to be dubbed the “Crowdfunding Industry Self Regulating Organization.” It is unclear at this time whether this effort will be successful and whether this group would ultimately become subject to SEC oversight. It will be very interesting to watch how this crowdfunding “industry” develops following enactment of the JOBS Act and the development of the SEC’s rules.
ISS recently announced a new “feedback review board,” which is designed to be used by investors, issuers, and other interested parties who wish to communicate with ISS about its research, policies and recommendations. The feedback review board is a web-based form where “market constituents” can submit comments “regarding accuracy of research, accuracy of data, policy application and general fairness of ISS policies, research and recommendations.” This can also be a place to notify ISS about factual inaccuracies in its data or research. ISS says that it may not respond to every submission through this review board. The review board is not supposed to supplant regular channels for communicating with ISS, and it isn’t a forum for seeking answers to policy questions or interpretations or lobbying for favorable vote recommendations. It is unclear whether this will be something that issuers would really be inclined to utilize, particularly given that larger issuers usually get a chance to correct factual inaccuracies in ISS reports prior to issuance. In any event, it certainly seems like it may at least open up another avenue to vent.
More JOBS Act Fun Facts
With the signing of the JOBS Act scheduled for this Thursday, it seems like a good time to highlight some of the more promising aspects of the Act. Title IV of the Act could ultimately turn out to be one of the unsung heroes of the legislation in terms of the impact on capital formation, depending on how it gets implemented by the SEC. This portion of the JOBS Act creates a whole new exemption under Section 3(b) of the Securities Act, under which an issuer will be able to offer and sell up to $50 million in securities within a 12-month period in reliance on the exemption. The issuer can offer equity securities, debt securities, and debt securities convertible or exchangeable for equity interests (including any guarantees of such securities), and the securities sold under this exemption will be offered and sold publicly (without restrictions on the use of general solicitation or general advertising) and will not be deemed “restricted securities.” The issuer may also “test the waters” with respect to the offering prior to filing any offering statement with the SEC, subject to any additional conditions or requirements that may be imposed by the SEC. The securities will be considered “covered securities” for NSMIA purposes and not subject to state securities review if offered and sold on a national securities exchange, or the securities are offered or sold to a “qualified purchaser.”
We affectionately dubbed the legislative initiatives which served as precursors to Title IV “Regulation A+” in the May-June 2011 issue of The Corporate Counsel, noting how the new Section 3(b) exemption being contemplated was an improved version of the much-maligned and rarely used Regulation A. The reason that this new provision is relatively exciting is that it could potentially open the door again to what are effectively smaller initial public offerings up to $50 million, which we rarely see today (rather, IPOs are more often in the $100 million to $200 million range in terms of amounts raised). Much will depend on how the SEC decides to implement the exemption, as it does have strings attached like submitting an offering statement to the SEC and distributing the offering statement to investors, as well as providing periodic disclosures after the offering is completed. This provision, unlike many of the other parts of the JOBS Act, doesn’t specify any deadline for rulemaking, which unfortunately may mean that it gets back-burnered while the SEC attends to more pressing rulemakings with short deadlines.
Board Portal Developments
In this podcast, Andrew Moore of Computershare Governance Services discusses the latest developments in board portals, including:
– What are you seeing companies doing in the area of board communications? What are the major trends?
– How is Computershare’s BoardWorks different than other board portals?
– What is driving directors and companies to look to this type of solution? Are there legal and compliance issues that online services like this can address?
It seems highly likely that the Jumpstart Our Business Startups Act (some call it the “JOBS Act,” others call it the “Jumpstart Act” for short) will get signed into law this week, and many of the questions I have been getting revolve around the immediate impact of the new law on offerings.
Title I of the JOBS Act, “Reopening American Capital Markets to Emerging Growth Companies,” will be effective immediately upon enactment, so that is where most of the action will be under the JOBS Act until the SEC adopts the implementing rules required under the other titles. For a company that is contemplating an initial public offering filing in the near future and meets the generous definition of “emerging growth company” (e.g., having total annual revenue of less than $1 billion during the most recently completed fiscal year), the most immediate effect will be the availability of a process to submit a confidential draft of the registration statement to the SEC for its review, provided that the initial filing and all amendments are filed on EDGAR no later than 21 days before the date of the roadshow. Based on what has been said at recent conferences, I expect that the Staff will issue guidance very soon after enactment to describe how this confidential review process will work in practice. In terms of content of the registration statement, any company meeting the “emerging growth company” definition that is contemplating an IPO filing (or that is already in registration) will want to consider the availability of reduced financial statement requirements ― only two years of audited financial statements instead of three years, MD&A corresponding to the number of years of audited financial statements presented in the filing, and the “smaller reporting company” scaled disclosures for executive compensation (for more on the executive compensation provisions, see Mark Borges’ blog on CompensationStandards.com). While these breaks sound good, companies may still need to consider if the reduced disclosures might hurt the marketability of the offering, particularly for those companies that are already on file and have provided the more fulsome information. Under Section 107(a) of the JOBS Act, a company may forgo any exemption and instead comply with the requirements applicable to an issuer that is not an emerging growth company.
In terms of the breaks that the JOBS Act provides on permissible “test the waters” communications with QIBs and institutional accredited investors, we may not see issuers and underwriters rushing out right away to engage in those communications, particularly with respect to written communciations. Instead, the reaction might be akin to what we saw with free writing prospectuses back in 2005, where there was (and continues to be) caution about the use of written communications outside of a Section 10(a) prospectus while in IPO mode. Likewise, we may not see an immediate rush to providing research in an around the time of the IPO ― despite the fact that the research will no longer be deemed an offer under the Securities Act ― because I think it will likely take at some lead time for banks to get comfortable (if they can get there at all) with the process of providing research for IPO companies before, during and immediately after the offering, as well as the advisability of that practice from an overall marketing perspective. In any event, all of these bold new communications rules are being actively considered as we speak, and will undoubtedly change the landscape for IPOs in the long term.
It is important to note that the other capital raising provisions of the Act ― the repeal of the ban on general solicitation and general advertising in Rule 506 offerings, the new crowdfunding exemption under Securities Act Section 4 and the new Regulation A-style Section 3(b)(2) exemption ― all require SEC rulemaking to implement the changes contemplated by the Act, so we will not likely see any action on those provisions until later on this year, at the earliest.
Be on the lookout for more coverage in the upcoming issue of The Corporate Counsel.
April Fool’s Day? It is No Joke at the SEC this Year
It is hard to imagine a day when the SEC wasn’t so saddled with Congressionally-mandated rulemaking projects that folks there would actually take the time to play an April Fool’s Day prank poking fun at the SEC’s own rule proposals. Just five short years ago — in those simpler, pre-financial crisis days ― Broc noted how Chairman Cox had issued a fake press release announcing the Commission’s plans to require that publicly-listed companies disclose the pay and perks of the “top 100 people who make more than the CEO.” This was obviously poking fun at the “Katie Couric” rule that surfaced during the 2006 executive compensation rulemaking, which of course never saw the light of day.
I am afraid that in today’s post-Dodd-Frank Act world, we wouldn’t necessarily identify something like that press release as being a joke, but rather we would assume it is just another new rule pursuant to some Congressional mandate along the lines of disclosure regarding the ratio of CEO pay to median employee pay, or conflict minerals for that matter.
I was still at the SEC when this fake press release came out (but I had nothing to do with it), and I will never forget how my friend in the SEC press office called to tell me about the impending release first thing in the morning, because he was very concerned that I might have some sort of medical emergency when I saw the press release hit the wires.
Our April Eminders is Posted!
We have posted the April issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!
Members often ask what are the pressing issues being discussed down at the SEC. And those issues typically are not what people would think they would be. Sometimes they are about morale, sometimes they are about limited resources (by the way, Corp Fin is hiring accountants right now). But often they are about the types of things that folks are concerned about at their own job. The little things.
The buzz right now is that Dunkin’ Donuts has moved out of its internal location within the SEC’s HQ and replaced with an inferior tenant. And I can understand that. They didn’t have a Dunkin’ Donuts either time I worked there and I would have killed for one! Instead, they had a McDonalds and other fast-food joints that couldn’t hold a candle to the master of donuts. So far, no word of a strike or any other meaningful way to try to persuade Dunkin’ Donuts to return.
No, this is not an April Fool’s joke. A tad too early for that. Thanks to Dave for handling the blog next week as I am off for Spring Break 2012…
PCAOB’s Updated Standard-Setting Timeline
On Monday, the PCAOB updated its timeline for expected action on standard-setting projects. Here is Congressional testimony by Chair Jim Doty – and testimony from SEC Chief Accountant James Kroeker – on this topic from Wednesday (as part of a hearing on a draft bill that would amend Sarbanes-Oxley’s Section 103 to eliminate the PCAOB’s authority to mandate audit firm rotation – here’s a related Reuters article)…
As the sleepers of the STOCK Act continue to get visibility in the memos posted in our “Insider Trading” Practice Area (and this blog), hat tip to Bridgeway Software’s Blane Erwin for pointing out this excerpt from the Act (on pages 12 and 13):
Not later than 18 months after the date of enactment, the Secretary of the Senate and the Sergeant of Arms of the Senate and the Clerk of the House of Representatives shall develop systems to enable (A) electronic filing of reports… (B) public access to financial disclosure reports… (ii) allow the public to search, sort and download data contained in the reports.
As noted in this Washington Examiner article, the new software and hardware will be developed at a cool cost of $9 million ($3.2k per Congressman per year per this article). Wonder if the new system will be like the SEC’s Edgar? Take part in the anonymous poll below…
Latest Developments in Use of Supplemental Proxy Materials
In this CompensationStandards.com podcast, Jim Kroll of Towers Watson discusses the latest developments in using supplemental proxy materials for say-on-pay votes (here’s our ongoing list of supplemental materials), including:
– How many companies have filed them so far this year?
– Is the approach that companies are taking any different than last year?
– What are the pros and cons of using supplemental materials?
Poll: What Should the Name of the New Congressional Trading Database Be?
Did you know that the SEC had an internal contest to name its filing database back in the ’80s? Then Corp Fin’er Herb Scholl won that contest with his “EDGAR” entry. Now it’s your turn. Note that the suggestion of “Crotch” below is an acronym for “Congressional Recordkeeping of Trades, Changes & Hooch”:
In this podcast, Dave Lynn and Marty Dunn discuss the JOBS Act including:
– The new category of “emerging growth company” and the IPO “on-ramp” available to these companies
– The repeal of the prohibition on general solicitation and general advertising in Rule 506 private placements
– Crowdfunding
– A new Regulation A-style offering exemption for offerings up to $50 million
– Changes to the Exchange Act registration/reporting thresholds
Supreme Court Rejects Open-Ended Tolling of Section 16(b) Claims
On Monday, the US Supreme Court limited the ability to bring Section 16 short-swing profit claims years after the alleged improper trading in Credit Suisse Securities (USA) v. Simmonds. On the issue of whether equitable tolling even applies to the two-year period for bringing claims under Section 16(b), the Court split 4-4 – Chief Justice Roberts did not participate in the decision. The Court thus left that issue for another day. Nevertheless, the eight voting Justices held unanimously that, assuming the two-year period can be extended, the tolling rules articulated by the Ninth and Second Circuits impermissibly deviated from ordinary equitable tolling principles.
Alan Dye and Peter Romeo will now be able to finish their 4th Edition of the “Romeo & Dye Section 16 Treatise” as this is the first SCOTUS opinion to deal with Section 16 in decades – and is an important decision. Order your hard copy of the Treatise now so you can get your hands on a copy as soon as it’s hot off the presses…
Last week, I blogged that Congress had finally passed a watered down version of the STOCK Act. Here’s some analysis courtesy of Ken Gross and his team at Skadden Arps about how this might impact companies:
The version of the STOCK Act passed by Congress includes the provisions from the Senate’s initial version that the insider trading provisions in Section 10(b) of the ’34 Act and Rule 10b-5 apply to Congressional Members and staff, and federal executive and judicial branch officials, and that these Members, officials and employees owe a duty with respect to material, nonpublic information derived from the person’s position with the federal government.
This raises an interesting question as to the companies with whom these Members, officials and employees share the nonpublic information. Do the companies become liable if they act on such information, similar to certain “tipees” in a traditional insider trading case? We believe that the STOCK Act could indeed create liability for the company under certain circumstances that are highly fact-specific. This also raises a question as to how extensive the protection is under the Speech or Debate Clause.
The Act includes a requirement (also in the Senate’s initial version) that the Comptroller General submit a report to Congress within 12 months of the date of enactment on the role of “Political Intelligence” in financial markets. It does not include the provisions from the Senate’s initial version that would have amended the Lobbying Disclosure Act of 1995 (by adding a new category of activities, “Political Intelligence Contacts,” that would trigger registration and reporting) and the illegal gratuities statute (by broadening the scope of the statute).
Given that they do not specify an effective date or reference a date by which an implementing regulation must take effect, the insider trading provisions take effect upon the date of enactment.
SEC’s Enforcement Gives First Person Credit for Cooperation
As noted in this Gibson Dunn memo, the SEC’s Enforcement Division gave the first individual credit for cooperation in an investigation, over two years after its cooperation policy statement was announced. Note that companies have received cooperation credit before – and it’s possible that other individuals have too that weren’t publicly announced. As the Gibson Dunn memo notes, the unique facts of this investigation might limit its application to other situations…
SEC Files Rare Subpoena Enforcement Action against Wells Fargo
In this blog from David Smyth of Brooks Pierce, we learn the latest about the SEC’s Enforcement Division wielding its subpoena power to compel production…
March-April Issue: Deal Lawyers Print Newsletter
This March-April issue of the Deal Lawyers print newsletter was just sent to the printer and includes articles on:
– Assessing the Locked Box Approach to Purchase Price Adjustments
– Just Enough To Be Dangerous: An Overview of M&A Tax Basics
– Shareholder Approval of Small Private Acquisitions: Has Omnicare Been Rendered a Farce?
– Boilerplate Matters: Giving Notice
If you’re not yet a subscriber, try a no-risk trial to get a non-blurred version of this issue on a complimentary basis.
Recently, Standards & Poors posted this request for comment as it proposes to score companies as “Strong/Fair/Adequate/Weak” in the area of management & governance. Here are a few items to note:
– The reason S&P is proposing to do this is to enhance transparency. Stage One would be to evaluate “Management & Governance” and assign a score. Stage Two (to likely come later this year) would be to directly link this score to a credit rating. The ultimate objective is to take the most qualitative part of their analysis and remove any mystery.
– The Management & Governance analysis would consolidate their currently separate analyses of governance, accounting aggressiveness, operational capabilities, organizational effectiveness, risk management (ERM), and strategy. The proposed criteria does not address financial policy; that likely will come later.
– S&P analysts will base their assessments on publicly observable track records of management and boards as well as observations from meetings with management.
If S&P adopts this framework, I believe it will be the only rating agency to explicitly assess corporate governance from a credit perspective. Moody’s used to publish ratings separately on governance – but these days, that agency uses its trained governance analysts to factor governance into its “normal” ratings as it deems appropriate (ie. when governance red flags arise) rather than on a separate basis.
More on the JOBS Act
A lot of members have been asking for a copy of the JOBS Act. In our “JOBS Act” Practice Area, we have posted the House version of the bill, as well as the Senate’s amendment (thanks to Lorelei Cisne of Arnall Golden Gregory). And we have announced a May 2nd webcast – “The New World of IPOs: Dissecting the JOBS Act” – featuring the two lawyers that served on the Treasury’s IPO Task Force that led to the JOBS Act, Wilson Sonsini’s Steve Bochner and Latham & Watkin’s Joel Trotter, as well as Davis Polk’s Michael Kaplan. Tune in to learn what you need to know…
2nd Say-on-Pay Failure of the Year
As noted in its Form 8-K, International Game Technology is the second company holding its annual meeting in 2012 to fail to gain majority support for its say-on-pay with only 44% voting in favor. A list of the Form 8-Ks filed by the “failed” companies is posted in CompensationStandards.com’s “Say-on-Pay” Practice Area.
By the way, Semler Brossy is putting out these excellent weekly updates on the say-on-pay votes, summarizing all the latest voting results – including how they jibe with proxy advisor recommendations – and analysis of specific situations. Towers Watson also has put out this excellent memo analyzing the early vote results and how they indicate what is in store for the remainder of the proxy season…
Yesterday, the Senate passed the JOBS Act by a 73-26 vote with an amendment that would require web organizers of crowdfunding to register with the SEC. All other provisions of the original House version of the JOBS Act – that Dave blogged about a few weeks ago and as covered by the memos posted in our “JOBS Act” Practice Area – were all approved by the Senate without amendment. As noted in this NY Times article, “Because the Senate made several amendments to the House bill, the package will be sent back to the House to work out differences. House Republican leaders said Thursday that they expected to take up the amended bill next week and hoped to send it quickly to President Obama, who has said he will sign it.”
So it’s a done deal and I will stop my complaining about it. I know folks that work with start-ups and emerging companies are excited and deservedly so. But Congress in its haste has done some pretty awful things in this bill that we will learn about all too well in the days ahead. Hang on for a wild ride. Plenty of memos to be posted and webcasts to come…
Insider Trading: Senate Passes Watered Down STOCK Act
As noted in this NY Times article, the Senate yesterday finally passed the STOCK Act by a vote of 96-3 – accepting the changes that the House passed last month (ie. proposed regulation of “political intelligence” firms was scrapped). The article notes “The Senate majority leader, Harry Reid, Democrat of Nevada, said Republicans had blocked efforts to go to a conference to negotiate differences with the House.” And this excerpt says it all: “The bill is meant to eliminate ambiguity, though lawyers said prosecutions would still be difficult.” I’ll fall out of my chair if this law is ever enforced…
Goldman Sachs Scans Internal Emails for the Term ‘Muppet’
