SEC

SEC Re-Visits Executive Compensation Clawback Rules

As expected, on October 14, 2021, the SEC re-opened the comment period on proposed rules on listing standards for the recovery of erroneously awarded executive compensation (“Clawback Rules”). The Clawback Rules would implement Section 954 of the Dodd-Frank Act and require that national securities exchanges require disclosure of policies regarding and mandating clawback of compensation under certain circumstances as a listing qualification. The proposed rules were first published in July 2015 (see HERE) and have moved around on the SEC semiannual regulatory agenda from proposed to long-term and back again for years, but finally seem to be moving forward. Although the proposed rule remains unchanged from the July 2015 version, the SEC has added a few questions for comment in its re-opening release.

Background

There are currently existing rules which require the recovery of executive compensation and disclosure of such policies. In particular, Section 304 of the Sarbanes-Oxley Act of 2002 (“SOX”) requires the CEO and CFO to reimburse

November 23, 2021

SEC Report On Meme Stocks

On October 18, 2021, the SEC released a report on the meme stock craze that caused the securities of companies like GameStop Corp. to soar to unprecedented high trading prices and volume. Commissioners Hester Peirce and Elad Roisman criticized the report as being used as an excuse to add or consider adding additional regulations in the areas of conflicts of interest, payment for order flow, off-exchange trading, and wholesale market making when, however, no causal connection between the meme stock trading and these other factors has been established. I found the report interesting for the background and discussion on the U.S. trading markets.

Market Structure

From the perspective of individual investors, the lifecycle of a stock trade starts with an investor placing an order through an account they establish with a broker-dealer. The broker-dealer then routes the order for execution to a trading center, such as a national securities exchange, an alternative trading system (“ATS”), or an off-exchange market

November 16, 2021

Public Market Listing Standards

One of the bankers that I work with often once asked me if I had written a blog with a side-by-side comparison of listing on Nasdaq vs. the OTC Markets and I realized I had not, so it went on the list and with the implementation of the new 15c2-11 rules, now seems a very good time to tackle the project. I’ve added NYSE American to the list as well.

Quantitative and Liquidity Listing Standards

Nasdaq Capital Markets

To list its securities on Nasdaq Capital Markets, a company is required to meet: (a) certain initial quantitative and qualitative requirements and (b) certain continuing quantitative and qualitative requirements. The quantitative listing thresholds for initial listing are generally higher than for continued listing, thus helping to ensure that companies have reached a sufficient level of maturity prior to listing. NASDAQ also requires listed companies to meet stringent corporate governance standards.

Requirements

Equity Standard

Market Value of

Listed Securities

Standard

Net

November 9, 2021

SEC Cracking Down on The Crypto Wild West and Other Digital Asset Updates

After a few years of relative dormancy, the SEC is once again targeting the flourishing cryptocurrency market. On August 3, 2021, SEC Chair Gary Gensler gave a speech to the Aspen Security Forum in which he referred to the cryptocurrency marketplace as the Wild West. Days later, the SEC filed its first case involving securities using DeFi technology and then a few days after that, reached a $10 million settlement with Poloniex for operating an unregistered digital asset exchange. Shortly after that, the SEC took aim at Coinbase’s planned crypto lending program causing the crypto giant to shelf the business model for the time being. SEC Commissioners are joining in, giving speeches in various forums focused on crypto and the regulatory environment.

Background

In July 2017, the world of digital assets and cryptocurrency literally became an overnight business sector for corporate and securities lawyers, shifting from the pure technology sector, when the SEC issued its Section 21(a) Report on

November 2, 2021

2021 Annual Report of Office of Advocate for Small Business Capital Formation

The Office of the Advocate for Small Business Capital Formation (“Office”) has delivered a report to Congress following the 40^th annual small business forum (“Report”). The Report includes recommendations of the Office and its annual forum participants. The forum itself featured panelists and discussions on (i) navigating ways to raise early rounds; (ii) diligence including how savvy early-stage investors build diversified portfolios; (iii) tools for emerging and smaller funds and their managers; and (iv) perspectives on smaller public companies. The forum itself had a focus on diversity, including panel speakers and discussion topics. A clear message across the board is that women- and minority-owned businesses face the biggest challenges in the capital markets.

Background

The SEC’s Office of the Advocate for Small Business Capital Formation launched in January 2019 after being created by Congress pursuant to the Small Business Advocate Act of 2016 (see HERE). One of the core tenants of the Office is recognizing that small businesses

October 26, 2021

OTCQX And OTCQB Rule Changes

In September 2021, the OTCQB and OTCQX tiers of OTC Markets instituted amendments to their rules, to, among other things, align with the market changes resulting from amended Rule 15c2-11.

The OTC Markets divide issuers into three (3) levels of quotation marketplaces: OTCQX, OTCQB and OTC Pink Open Market. The OTC Pink Open Market, which involves the highest-risk, highly speculative securities, is further divided into three tiers: Current Information, Limited Information and No Information. Companies trading on the OTCQX, OTCQB and OTC Pink tiers of OTC Markets have the option of reporting directly to OTC Markets under its Alternative Reporting Standards. The Alternative Reporting Standards are more robust for the OTCQB and OTCQX in that they require audited financial statements prepared in accordance with U.S. GAAP and audited by a PCAOB qualified auditor in the same format as would be included in SEC registration statements and reports.

Companies that report to the SEC under Regulation A and foreign companies that

October 19, 2021

Climate Disclosure Guidance

Ahead of the imminent publication of updated climate disclosure rules, the SEC has published a sample comment letter providing companies with guidance as to the regulator’s current focus and expectations under the rules. The last official SEC guidance on climate-related guidance was published in 2010; however, the SEC, and individual top brass, have been vocal about the need for updated regulations. In that regard, in March 2021, the SEC published a statement requesting public input on climate change disclosures. It is expected that either a rule proposal or temporary final rules are forthcoming. For more information on differing views following the March 2021 request for public comment, including from regulators, industry groups and individual SEC Commissioners, see HERE.

In 2010 as today, companies were and are required to report material information that can impact financial conditions and operations (see most recent amendments to MD&A disclosures: HERE). In addition to MD&A, climate-change-related disclosures, including risks and opportunities, may

October 12, 2021

A Review of FINRA’s Corporate Finance Rule

As the strongest U.S. IPO market in decades continues unabated, it seems a good time to talk about underwriter’s compensation. FINRA Rule 5110 (Corporate Financing Rule – Underwriting Terms and Arrangements) governs the compensation that may be received by an underwriter in connection with a public offering.

Rule 5110 – The “Corporate Financing Rule”

Rule 5110 regulates underwriting compensation and prohibits unfair arrangements in connection with the public offerings of securities. The Rule prohibits member firms from participating in a public offering of securities if the underwriting terms and conditions, including compensation, are unfair as defined by FINRA. The Rule requires FINRA members to make filings with FINRA disclosing information about offerings they participate in, including the amount of all compensation to be received by the firm or its principals, and affiliations and relationships that could result in the existence of a conflict of interest. As more fully described herein, underwriter’s compensation is subject to lock-up provisions.

Filing Requirements

October 5, 2021

SEC Chair Gary Gensler Testifies To Congress

On September 14, 2021, SEC Chairman Gary Gensler gave testimony to the U.S. Senate Committee on Banking, Housing and Urban Affairs highlighting the priorities of the SEC under his rule. After giving the obligatory opening statements on the size and impact of the U.S. capital markets, Gensler broke down the SEC agenda into four topics including market structure, predictive data analytics, issuers and issuer disclosure and funds and investment management.

Market Structure

Chair Gensler began his speech market structure by talking about the U.S. Treasury Market, which I found interesting mainly because I do not recall any speech or testimony by recent SEC chairpersons that focused on the topic (albeit I haven’t read them all, but I’ve read a lot!). During Covid, the Treasury Market suffered from liquidity issues prompting the SEC to consider rule and process changes, including those related to clearing, that could make the Treasury Markets more resilient and competitive. The SEC is also considering Treasury trading

September 28, 2021

Consequences Of Failing To File A Form D

I often get calls from clients or potential clients that have engaged in exempt offerings, have not filed a Form D and are wondering what the consequences might be. Taking it further, what are the consequences of not complying with the minor state blue sky requirements for any federally covered securities?

Form D – In General

A Form D is a brief fill-in-the-blank form that is filed with the SEC in connection with an offering or issuance of securities in reliance on the exemptions from the Securities Act of 1933 (“Securities Act”) registration requirements found in Regulation D. The offering exemptions in Regulation D consist of Rules 504, 506(b) and 506(c) (see HERE).

A Form D is a notice filing. Rule 503 of Regulation D, which was last amended in November 2016, requires that a company relying on Rules 504 or 506 must file a Form D, notice of sales, with the SEC for each new offering

September 21, 2021

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SEC

SEC Re-Visits Executive Compensation Clawback Rules

Public Market Listing Standards

SEC Cracking Down on The Crypto Wild West and Other Digital Asset Updates

2021 Annual Report of Office of Advocate for Small Business Capital Formation

OTCQX And OTCQB Rule Changes

A Review of FINRA’s Corporate Finance Rule

SEC Chair Gary Gensler Testifies To Congress

Consequences Of Failing To File A Form D

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