At this time last year, Liz noted that the SEC has issued an order to approve Nasdaq’s proposal to require a listed company conducting a reverse stock split to: (i) notify Nasdaq about certain details of the reverse stock split at least 5 business days (no later than noon ET) prior to the anticipated market effective date, and (ii) make public disclosure about the reverse stock split at least 2 business days (no later than noon ET) prior to the anticipated market effective date. In March 2024, an additional change to the rule and Company Event Notification Form was adopted to further clarify the requirements.
Last week, the SEC posted an order contemplating further changes to Nasdaq’s reverse stock split notice requirements. The order notes:
Nasdaq is now proposing to amend the deadline for a company to notify Nasdaq of a reverse stock split from 5 business days to 10 calendar days in order to conform to the requirements of SEC Rule 10b-17 of the Act.
Specifically, Rule 10b-17(a)(2) and (b) of the Act, require issuers to provide notice to FINRA (formerly the National Association of Securities Dealers, Inc.) no later than 10 calendar days prior to the date of record to participate in a stock split or reverse stock split, unless the impacted security is traded on a national securities exchange with a substantially comparable requirement to those set forth in Rule 10b-17(b)(1).
Currently, Rule 5250(e)(7) and IM-5250-3 require a company conducting a reverse stock split to notify Nasdaq about certain details of the reverse stock split by submitting a complete Company Event Notification Form and a draft of the disclosure required by Rule 5250(b)(4) at least 5 business days (no later than 12:00 p.m. ET) prior to the anticipated market effective date, which includes all the information required by Rule 10b-17 applicable to reverse stock splits.
It has come to Nasdaq’s attention that Nasdaq’s current rule may not be considered substantially comparable to the 10 calendar-day prior notice required in Rule 10b-17 of the Act. Accordingly, Nasdaq is proposing to amend the deadline for a company to notify Nasdaq of a reverse stock split from no later than 12:00 p.m. ET 5 business days to 10 calendar days prior to the anticipated market effective date of the reverse stock split to ensure that Rule 5250(e)(7) and IM-5250-3 are substantially comparable to Rule 10b-17 and, therefore, that companies are compliant with Rule 10b-17 when they give notice under those rules. Nasdaq is not amending the requirement to provide public disclosure under Rule 5250(b)(4) at least 2 business days (no later than 12:00 p.m. ET) prior to the anticipated market effective date. Nasdaq still believes that this timeframe provides sufficient notice to the public about reverse stock splits.
Got that? This proposed Nasdaq rule change is effective immediately pursuant to Section 19(b)(3)(A)(iii) of the Exchange Act and Exchange Act Rule 19b-4(f)(6). The order provides that the proposed rule change will become operative on January 30, 2025, in order to provide companies that have already planned action for a reverse stock split under the current rule’s timeframe with the ability to effect their reverse stock split under that schedule.
On Friday, Commissioner Lizárraga issued a statement indicating that he notified President Joe Biden of his intent to step down as SEC Commissioner, effective January 17, 2025. His statement notes:
For the better part of this year, my wife, Kelly, has confronted serious illness with admirable courage and a strong spirit. We are grateful for the support of colleagues, friends and family and are hopeful for her speedy and full recovery in the ensuing months.
In reflecting on the challenges that lie ahead, we have decided that it is in the best interests of our family to close this chapter in my 34-year public service journey.
Until my departure in January, I will remain fully engaged in the Commission’s ongoing work and activities.
I don’t yet know what comes next, but I do know that it has been a great honor to serve as SEC Commissioner.
Commissioner Lizárraga was sworn in on July 18, 2022. Prior to becoming SEC Commissioner, he served as Senior Adviser to House Speaker Nancy Pelosi, overseeing financial markets, small business, housing, international finance, and immigration. He also served as Speaker Pelosi’s Director of Member Services and liaison to the Congressional Hispanic Caucus and to the Latino community.
We certainly wish Commissioner Lizárraga and his family the best as they face his wife’s health challenges.
With news of Commissioner Lizárraga’s planned departure on January 17th and Chair Gensler’s planned departure at noon on January 20th, the SEC is set to look very different in less than two months, scaling back to just three Commissioners, assuming no further departures.
The SEC usually has five Commissioners who are appointed by the President with the advice and consent of the Senate. The terms for Commissioners last five years and are staggered so that one Commissioner’s term ends on June 5th of each year. The Chair and Commissioners may continue to serve up to approximately 18 months after their terms expire if they are not replaced before then. For example, Commissioner Crenshaw’s term expired in June 2024, but she continues to serve – while President Biden renominated Crenshaw for another five-year term, the vote has been delayed in the Senate Banking Committee. Commissioner Peirce’s term expires in June 2025, and in the past she has indicated that she does not intend to serve another term as an SEC Commissioner. Commissioner Uyeda’s terms expires in 2028.
Chair Gensler’s decision to exit the Commission effective at noon on Inauguration Day means that we are not likely to see the game of musical chairs that we saw at the Commission during the last change in Presidential Administration. Back then, former SEC Chair Jay Clayton departed the agency in late December, and on December 28, 2020, Elad Roisman was designated as Acting Chair. A few weeks later, on January 21, 2021, President Biden designated Allsion Herren Lee as Acting Chair, and she served until Gary Gensler was sworn in as Chair on April 17, 2021, after being nominated for the position on February 3, 2021.
In this go-round, we are likely to see President-elect Trump designate either Commissioner Peirce or Commissioner Uyeda as Acting Chair until the Senate can confirm a new SEC Chair, probably by sometime in the Spring. Over the course of the next eight weeks, we will see announcements from various members of the SEC’s Senior Staff (e.g., Directors and Office Heads) indicating their planned departures, and acting leaders will be put in place (in most cases drawing from the existing Staff) until the new Chair is sworn in.
For the most part, all of this churn means that policy initiatives will be on hold until the new Chair can set the regulatory direction for the agency. In the trenches, nothing really changes, as the Staff will continue reviewing registration statements and periodic reports and conducting Enforcement investigations, regardless of who is in charge.
Speaking from my own experience, this sort of inevitable leadership change roughly every three-and-half years is always a stressful time when serving at the SEC. Projects that you may have been working on for years go “pencils down” all of the sudden, and you may face a regulatory future that does not necessarily align with your own views and values, but you know that you have to follow the agenda set by the agency’s new leadership. I imagine that all of this uncertainty is compounded by the prospect of the DOGE, which will be led by a person that has no love lost for the SEC. As an SEC alum and longtime student of the SEC’s history, I am hoping that the agency can pull through!
On Friday, the SEC announced a sharp decline in the number of Enforcement actions during fiscal year 2024, which ended on September 30. The SEC notes:
The Securities and Exchange Commission today announced that it filed 583 total enforcement actions in fiscal year 2024 while obtaining orders for $8.2 billion in financial remedies, the highest amount in SEC history.
The 583 enforcement actions represent a 26 percent decline in total enforcement actions compared to fiscal year 2023. Of those cases, the Commission filed 431 “stand-alone” actions, which was 14 percent less than in the prior fiscal year; 93 “follow-on” administrative proceedings seeking to bar or suspend individuals from certain functions in the securities markets based on criminal convictions, civil injunctions, or other orders, which was 43 percent less than the prior fiscal year; and 59 actions against issuers who were allegedly delinquent in making required filings with the SEC, which represented a decrease of 51 percent.
The $8.2 billion in financial remedies consisted of $6.1 billion in disgorgement and prejudgment interest, also the highest amount on record, and $2.1 billion in civil penalties, the second-highest amount on record. Approximately 56 percent of the $8.2 billion financial remedies ordered is attributable to a monetary judgment obtained following the SEC’s jury trial win against Terraform Labs and Do Kwon, who were charged with one of the largest securities frauds in U.S. history.
The FY2024 results are surprising because we have been experiencing a very active Enforcement environment over the past four years. By comparison, last year the SEC announced a three percent increase in the number of actions brought in FY2023 as compared to FY2022, and in 2022 the agency announced a nine percent increase in actions over the prior fiscal year.
Yesterday, the SEC announced that Gary Gensler — the Commission’s 33rd Chair — will step down effective on Inauguration Day (January 20th). As noted in the SEC’s press release, Chair Gensler led the agency through a robust rulemaking agenda that was focused on enhancing efficiency, resiliency, and integrity in our capital markets. The press release reviews a number of the Commission’s most significant accomplishments during Chair Gensler’s tenure — many of which he highlighted during his remarks at PLI’s 56th Annual Institute on Securities Regulation.
I particularly loved Chair Gensler’s commentary on public service that I shared in the blog on Monday. He reiterated in his press release that “the staff comprises true public servants. It has been an honor of a lifetime to serve with them on behalf of everyday Americans and ensure that our capital markets remain the best in the world.”
His bio at the end of the press release reminded me that his comments on the value of public service are especially noteworthy given his significant and varied experience in public service. In addition to his tenure as SEC Chair, he also served as Chair of the U.S. Commodity Futures Trading Commission, senior advisor to U.S. Senator Paul Sarbanes in writing the Sarbanes-Oxley Act and undersecretary of the Treasury for Domestic Finance and assistant secretary of the Treasury from 1997-2001.
This Free Writings & Perspectives blog from Mayer Brown discusses the IPO landscape for 2025 — highlighting insights from a panel at PLI’s 56th Annual Institute on Securities Regulation. And I’m happy to say that things are generally looking up (with some caveats).
The outlook for IPOs in 2025 appears generally positive, with several key indicators suggesting a robust environment for equity issuance. IPO volumes have surged to nearly $30 billion this year to date, a significant increase from $18 billion last year, with 60 IPOs priced year to date, marking a 130% increase. Broader market indices are up around 25%, indicating a healthier market overall.
Notably, the focus has shifted from the MAG-7 stocks to a broader cohort of companies benefiting from the market uptick. As companies prepare for their public debut, there is an expectation that they will do so when they are more scaled, leading to larger IPO sizes in terms of dollars raised.
Looking ahead, the panel anticipates that IPO volumes could grow to $40 billion in 2025, with 80-85 new listings expected, driven by a more favorable macroeconomic backdrop and potential interest rate cuts.
While these improvements are promising, we have not returned to the average IPO levels of the past 15 years. Many companies are optimizing operations in private markets, leading to increased private capital activity. This trend allows firms to stay private longer, which could impact the number of IPOs in 2025.
At the industry level, the panel noted the following trends:
In the technology sector, there has been a notable shift in focus to the “Rule of 40,” which combines revenue growth and profit margins. Previously, the emphasis was heavily on top-line growth, often prioritizing revenue increases of 60% or more, even at the expense of profitability. Now, investors are seeking a more balanced approach, favoring companies that demonstrate sustainable growth (around 30%) alongside a reasonable profit margin (at least 10%), with many aiming for breakeven or better. This evolution reflects a broader understanding of long-term value creation.
In the artificial intelligence sector, enthusiasm remains high, with investors eager for companies that show strong potential in this transformative field.
The life sciences sector is stabilizing, with IPO activity cautious as companies enter the public market at earlier stages, particularly those with Phase 1 or 2 candidates.
Conversely, the retail sector faces challenges, with fewer profitable companies going public due to economic headwinds, including inflation and decreased consumer spending.
For more on the current state of the capital markets, financing alternatives, IPO readiness and recent developments impacting public offerings, tune in at 2 pm ET on Thursday, December 12, for our “Capital Markets: The Latest Developments” webcast featuring White & Case’s Maia Gez, Mayer Brown’s Anna Pinedo, Cooley’s Rich Segal and Gunderson Dettmer’s Andy Thorpe. Save the webcast to your calendar using links on the webcast landing page so you don’t miss it. (And, if you do, don’t panic! We always post replays — eligible for on-demand CLE credit — and transcripts after our programs.)
In their latest “Understanding Activism with John & J.T.” podcast, John and J.T. Ho were joined by Dan McDermott. Dan is a senior vice president at strategic communications firm ICR, and is also an adjunct professor at the University of Pennsylvania Law School, where he teaches one of the nation’s few law school courses on shareholder activism. Dan’s recent article on the hidden costs of short attacks – which I blogged about on DealLawyers.com last month – formed the basis for their discussion.
Topics covered during this 30-minute podcast included:
– Differences between the objectives of an activist short seller and a traditional activist
– Common themes or “red flags” that activist short sellers look for in targeting companies
– How an activist short attack unfolds and typical company responses
– Use of “wolf pack” tactics & other collaborative efforts between activist short sellers
– The need to include the possibility of short attacks in company’s activist preparedness efforts
– How strategies for responding to short attacks differ from responses to traditional activism
– How often short attacks lead to traditional activism
– How companies prepare to respond effectively to short attacks
– Impact of recent SEC enforcement activity on short attack strategy
– Lessons from law school course on activism
John and J.T.’s objective with this podcast series is to share perspectives on key issues and developments in shareholder activism from representatives of both public companies and activists. They’re continuing to record new podcasts, and I have found them very engaging and filled with practical insights! Stay tuned for more!
As Liz shared, Nasdaq posted a proposed rule change back in August to modify the delisting process in 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. The proposal presents risk — of being relegated to trading on OTC markets — especially to publicly traded AI and biotech startups. In October, the SEC extended the time period for action on the proposal, and yesterday, the day before the Commission was required to take action, an order was posted instituting proceedings under Section 19(b)(2)(B) of the Exchange Act.
What does that mean? It means the Commission is providing Nasdaq with notice of potential grounds for disapproval and soliciting additional comment on specific areas of concern — with a new deadline for those additional comments (21 days after publication in the Federal Register) and rebuttals (35 days after publication in the Federal Register). It does not indicate that the Commission has reached any conclusions, but it notes the institution of proceedings is appropriate in light of the legal and policy issues raised by the proposed rule change. As Dave noted in a blog about a recent NYSE proposal, these orders are pretty unusual.
In terms of further input, the order asks, in particular, that commenters “address whether the proposal includes sufficient data and analysis to support a conclusion that the proposal is consistent with the requirements of Section 6(b)(5) of the Exchange Act” — which requires “that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest.”
Beginning on page 8, the order reviews the comments received to date, which it says were generally supportive, although some said the proposal didn’t go far enough and at least one commentator expressed concern that the amendments could incentivize market manipulative trading strategies and negatively impact access to capital for a segment of Nasdaq-listed small companies, including biotech.
As John blogged last week, in National Center for Public Policy Research v. SEC, (5th Cir.; 11/24), the 5th Circuit rejected a conservative advocacy group’s challenge to the legality of the SEC’s Rule 14a-8 no-action letter process. Since Kroger ultimately included the proposal in its proxy statement, the Court found the claim was moot, but nonetheless ruled that the SEC’s no-action process under Rule 14a-8 did not involve a formal SEC order subject to judicial review under the Administrative Procedure Act.
Over on the Business Law Prof Blog (which has a new home, by the way, for those who follow directly), Tulane Prof Ann Lipton pointed to the dissent — from the panel’s only GOP nominee, Judge Jones — and said the panel’s decision may not be the final word because, if the full Court took up the case after a petition for rehearing en banc, Judge Jones’s dissent may be “a template for how the full Fifth Circuit would view the matter.” And while the dissent’s position “threatens to scramble the 14a-8 process,” that shake up may be “in a manner that the incoming Trump Administration would find amenable.”
Judge Jones argued that no-action letters are final orders because they constrain agency – SEC – discretion in a particular way, namely, they limit the SEC’s ability to bring an enforcement action. And, further, she claimed that the SEC conceded that if they are final orders, they are arbitrary and capricious as a matter of law, because they do not state their reasoning.
Now, assuming the entire Fifth Circuit agrees, the upshot, as I understand it, is that the SEC would be required to offer more detailed reasoning in each and every no-action letter it issues under 14a-8. That would be incredibly burdensome for the staff. … If the Fifth Circuit functionally mandates that the SEC either not act at all, or act with a full explication of its reasons, I assume that the Trump SEC would choose not to act at all in most cases.
Ann notes the below in her discussion — which is a good reminder that the no-action process may be in for a procedural shakeup under the Trump Administration regardless of any potential twists and turns in this case.
Check out John’s latest “Timely Takes” Podcast featuring Orrick’s J.T. Ho & his monthly update on securities & governance developments. In this installment, J.T. reviews:
“Right to cure” shareholder proposals
ISS ESG updates governance factors and opens data verification window
Staff guidance on clawback checkboxes
Institutional Investor Survey Data on CAMs
Implications of FASB ASU on Disaggregation of income and expense items
As always, if you have insights on a securities law, capital markets or corporate governance issue, trend or development that you’d like to share in a podcast, we’d love to hear from you. You can email me at mervine@ccrcorp.com or John at john@thecorporatecounsel.net.
