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’
As Corp Fin Staffers have been warning folks at conferences, etc., the Office of Chief Counsel is shutting down its email address used to ask questions, submit no-action letters, etc. – cfletters@sec.gov – on April 1st. The reason is that the Staff has been getting too much spam at this email address, so it’s no longer an efficient way for them to receive communications from the public.
Going forward, you should instead use this form to ask interpretive questions – and this form to submit no-action requests. And of course, you can still call OCC to ask questions by phone (at 202.551.3500, leaving your name, phone number and a phrase describing the topic on their voicemail) or submit no-action requests by mail…
CFTC Takes Down a Comment Letter: Is That Allowed?
As noted in this ZeroHedge blog, the CFTC deleted a comment letter that was allegedly posted by a JPMorgan employee in response to a rule proposal’s request for comments (here is a Businessweek article mentioning it).
The purpose of my blog is not to delve into whether the alleged whistleblower letter was real, but rather whether a federal agency has the authority to pull comment letters posted by the public? The honest answer is “I don’t know.” I’m not aware of any legal limits on a federal agency to do this other than what Keith Bishop has just blogged – and I am not aware that the SEC ever has done so. But I definitely can envision a situation where someone posts a comment letter that is false and potentially harmful (remember this blog about forged comment letters) – and in those situations, it seems wise for the agency to act. The question remains what happens if a whistleblower posts something, how does the agency know if its real? I imagine in that case that the agency would try to do some diligence but that would be tough in a situation where the commenter is anonymous or the circumstances require some time to conduct an investigation.
Steve Quinlivan notes: Early on, when the SEC was soliciting comments on the whistleblower rules, some whistleblowers got confused and submitted their complaints in the form of comments to the whistleblower proposal. At least two that I recall. The SEC removed those comments.
PCAOB’s Auditor Rotation Roundtable: Materials Available
Today is the second day of the PCAOB’s roundtable on its vast reform project to consider mandatory auditor rotation, among other things. The PCAOB has been posting statements from the numerous participants as the roundtable unfolds. Here is an article describing the events from Day One, including former Fed Chair Volcker’s support of auditor rotation.
March Madness Continues…
I didn’t reveal my Final Four picks this year because I wanted my Michigan team to go all the way. We never get the respect we deserve, as illustrated by this photo:
Yesterday, the Senate held a vote to amend the JOBS bill that was recently approved in the House. The amendments – proffered by Senators Reed, Landrieu and Levin – would include some very basic investor protections (protections which the Obama Administration originally had called for, but more recently has become deafening silent on). The vote today was 55-44 in favor, with one abstention – and was along party lines except for Republican Senator Brown (R-Mass.) who is in a tough reelection fight and he voted for these protections. That tally fell five votes short of the 60 needed to end debate on the measure.
In a surprise move, coming after Senate Republicans killed an amendment to reauthorize the Export-Import Bank, Senate Majority Leader Harry Reid (D-NV) canceled a remaining vote on the bill and called a meeting of Senate Democrats. As noted in this article from The Hill, there is some dissension among Democrats over the bill. This WSJ article states that the bill “is now expected to clear the Senate by week’s end.”
Mike Gettelman notes: “After the JOBS (jobbed?) Act, the Securities Act of 1933 should be called the Securities Act of 2012. Lots of late colleagues turning over in their graves.”
Anatomy of Another Groovy Proxy Statement: Pfizer
So many members enjoyed my blog dissecting Prudential’s proxy statement on Monday that I decided to see what Pfizer is doing with that company’s proxy statement. It also is a fine example of how to make a proxy statement more “usable,” including:
– Overall usable design, including greater use of graphics and charts than in the past, particularly in the CD&A
– Committee reports from the Corporate Governance and Regulatory and Compliance Committees (pages 14-15), not just from the committees required to provide reports
– Excellent discussion of board leadership structure (pages 8-9; they recombined the CEO/Chair positions in December)
– Response to 2011 say-on-pay vote (page 34)
– Inclusion of CEO letter (3rd page from front)
– Use of proxy summary (page i) and CD&A executive summary (page 42)
The Latest Developments on Proxy Access Shareholder Proposals
In this podcast, Rebekah Toton of O’Melveny & Myers provides some insight into Corp Fin’s recent no-action responses on proxy access shareholder proposals, including:
– What no-action responses has the Corp Fin Staff issued so far on proxy access proposals?
– Are there more responses expected this proxy season?
– Based on what has happened, what should companies be doing now?
As I blogged last week on CompensationStandards.com’s “The Advisors’ Blog“: In our “Say-on-Pay” Practice Area, we have posted the court order issued last week in the Superior Court of California-LA that rules against the plaintiffs. We have also posted this week’s order from the US District Court for the District of Maryland dismissing the lawsuit against BioMed Realty Trust. As Mark Poerio notes in his blog:
The directors and officers of Jacobs Engineering, and their compensation consultant, have successfully challenged a complaint alleging that poor corporate financial performance made their authorization of significant pay increases for executives “unreasonable, disloyal, and not in good faith, and violated the Board’s pay-for-performance executive compensation philosophy.”
A Los Angeles Superior Court dismissed the complaint for failure to adequately allege either (1) demand futility or (2) facts sufficient to constitute their claim. Notably, the court observed that “The Dodd-Frank Act did not create any binding obligation on the Board” [through its advisory say-on-pay vote requirement], and that there was “no actionable misrepresentation alleged or culpability” alleged to support claims based on false disclosures in the company’s proxy statements.
Webcast: “What the Top Compensation Consultants Are NOW Telling Compensation Committees”
Tune in tomorrow for the CompensationStandards.com webcast – “What the Top Compensation Consultants Are NOW Telling Compensation Committees” – to hear Mike Kesner of Deloitte Consulting, Jan Koors of Pearl Meyer & Partners, Blair Jones of Semler Brossy and Eric Marquardt of Pay Governance “tell it like it is. . . and like it should be.”
Time permitting, the panel hopes to tackle all of these topics during the program:
– Weaknesses in ISS’ P4P assessment
– How ISS over values options
– Whether to consider ISS’s peer group in addition to their own
– How to best demonstrate pay/performance alignment (like Jan’s “right” pay and “right performance”)
– Rethinking severance (contracts, benefits, etc.) in a P4P world
– Whether to ‘fight’ a ISS recommendation with supplemental materials, etc.
– How and when to move away from a relative TSR program
– Whether to implement a clawback if they haven’t already
Last week, 20 members of Congress sent this letter to the SEC urging the agency to prioritize the pay disparity rulemaking. As noted in this article, Sen. Robert Menendez – the author of Section 953(b) – is leading the charge…
Poll: How Many Companies Will Receive a “Failed” Say-on-Pay Vote in ’12?
Now that we’ve already had one failed vote in 2012 – please take a moment to participate in this anonymous poll and express how you read the tea leaves for the number of failed say-on-pays to befall companies this year (last year, there were over 40 – many more than I expected, evident by how much I vastly underestimated the range of choices in last year’s poll):
