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SEC Re-Opens Comments On The Use Of Universal Proxy Cards

On April 16, 2021, the SEC voted to reopen the comment period on the proposed rules for the use of Universal proxy cards in all non-exempt solicitations for contested director elections. The original rules were proposed on October 16, 2016 (see HERE) with no activity since. However, it is not surprising that the comment period re-opened, and it is not as a result of the new administration. The SEC’s Spring and Fall 2020 semi-annual regulatory agendas and plans for rulemaking both included universal proxies as action items in the final rule stage. Prior to that, the topic had sat in the long-term action category for years.

In light of the several years since the original proposing release, change in corporate governance environment, proliferation of virtual shareholder meetings, and rule amendments related to proxy advisory firms (see HERE) and shareholder proposals in the proxy process (see HERE), the SEC believed it prudent to re-open a public comment period.

SEC Chair Gary Gensler Testifies To Congress

On May 6, 2021, new SEC Chair Gary Gensler made his debut, giving testimony to the House Financial Services Committee. Although Mr. Gensler is not new to regulatory leadership – he was head of the Commodity Futures Trading Commission (CFTC) – and as such, his style is certainly not new to capital markets participants, the testimony was nonetheless very enlightening of the mindset of the new SEC regime. The purpose of the testimony was particularly related to the market volatility in January, including GameStop and AMC, and reactions to that trading frenzy including Robinhood’s temporary trading restrictions, but over four hours, touched on much more.

From thirty thousand feet, Gensler attributes the January volatility to an intersection of finance and technology. On a more granular level, he highlights: (i) gamification and user experience; (ii) payment for order flow; (iii) equity market structure; (iv) short selling and market transparency; (v) social media; (vi) market plumbing – i.e., clearance and settlement; and

ESG Disclosures – A Continued Discussion

In a series of blogs, I have been discussing the barrage of environmental, social and governance (ESG) related activity and focus by capital markets regulators and participants. Former SEC Chair Jay Clayton did not support overarching ESG disclosure requirements. However, new acting SEC Chair Allison Herron Lee has made a dramatic change in SEC policy, appointing a senior policy advisor for climate and ESG; the SEC Division of Corporation Finance (“Corp Fin”) announced it will scrutinize climate change disclosures; the SEC has formed an enforcement task force focused on climate and ESG issues; the Division of Examinations’ 2021 examination priorities included an introduction about how this year’s priorities have an “enhanced focus” on climate and ESG-related risks; almost every fund and major institutional investor has published statements on ESG initiatives; a Chief Sustainability Officer is a common c-suite position; independent auditors are being retained to attest on ESG disclosures; and enhanced ESG disclosure regulations are most assuredly forthcoming.

ESG Investing and Ratings

As I mentioned in the last blog in this series on ESG, back in September 2019, when I first wrote about environmental, social and governance (ESG) matters (see HERE), and through summer 2020 when the SEC led by Chair Jay Clayton was issuing warnings about making ESG metric induced investment decisions, I was certain ESG would remain outside the SEC’s regulatory focus.

Enter Chair Allison Herron Lee and in a slew of activity over the past few months, the SEC appointed a senior policy advisor for climate and ESG; the SEC Division of Corporation Finance (“Corp Fin”) announced it will scrutinize climate change disclosures; the SEC has formed an enforcement task force focused on climate and ESG issues; the Division of Examinations’ 2021 examination priorities included an introduction about how this year’s priorities have an “enhanced focus” on climate and ESG-related risks; almost every fund and major institutional investor has published statements on ESG initiatives; a Chief Sustainability

SEC Final Rule Changes For Exempt Offerings – Part 5

On November 2, 2020, the SEC adopted final rule changes to harmonize, simplify and improve the exempt offering framework. The new rules go into effect on March 14, 2021. The 388-page rule release provides a comprehensive overhaul to the exempt offering and integration rules worthy of in-depth discussion. As such, like the proposed rules, I am breaking it down over a series of blogs with this final blog discussing the changes to Regulation Crowdfunding. The first blog in the series discussed the new integration rules (see HERE). The second blog in the series covered offering communications (see HERE). The third blog focuses on amendments to Rule 504, Rule 506(b) and 506(c) of Regulation D (see HERE). The fourth blog in the series reviews the changes to Regulation A (see HERE).

Current Exemption Framework

The Securities Act of 1933 (“Securities Act”) requires that every offer and sale of securities either be registered with the SEC or exempt

SEC Final Rule Changes For Exempt Offerings – Part 2

On November 2, 2020, the SEC adopted final rule changes to harmonize, simplify and improve the exempt offering framework. The new rules go into effect on March 14, 2021. The 388-page rule release provides a comprehensive overhaul to the exempt offering and integration rules worthy of in-depth discussion. As such, like the proposed rules, I am breaking it down over a series of blogs with this second blog discussing offering communications including new rules related to demo days and generic testing the waters. The first blog in the series discussed the new integration rules (see HERE).

Background

The Securities Act of 1933 (“Securities Act”) requires that every offer and sale of securities either be registered with the SEC or exempt from registration. The purpose of registration is to provide investors with full and fair disclosure of material information so that they are able to make their own informed investment and voting decisions.

Offering exemptions are found in Sections 3

SEC Final Rule Changes For Exempt Offerings – Part 1

On November 2, 2020, the SEC adopted final rule changes to harmonize, simplify and improve the exempt offering framework. The SEC had originally issued a concept release and request for public comment on the subject in June 2019 (see HERE). For my five-part blog series on the proposed rules, see HERE, HERE, HERE, HERE and HERE. The new rules go into effect on March 14, 2021.

The 388-page rule release provides a comprehensive overhaul to the exempt offering and integration rules worthy of in-depth discussion. As such, like the proposed rules, I will break it down over a series of blogs, with this first blog focusing on integration.

Current Exemption Framework

As I’ve written about many times, the Securities Act of 1933 (“Securities Act”) requires that every offer and sale of securities either be registered with the SEC or exempt from registration. The purpose of registration is to provide investors with full and fair disclosure

Audit Committees – NYSE American

Like Nasdaq, I’ve written several times about the NYSE American listing requirements including the general listing requirements (see HERE) and annual compliance guidelines (see HERE). As an aside, although the Nasdaq recently enacted significant changes to its initial listing standards, the NYSE American has not done the same and no such changes are currently anticipated. I suspect that the NYSE American will see a large uptick in new company applicants as a result.

I recently drilled down on audit committee requirements and director independence standards for Nasdaq and in this and the next blog, I will do the same for the NYSE American. As required by SEC Rule 10A-3, all exchange listed companies are required to have an audit committee consisting of independent directors. NYSE American Company Guide Rule 803 delineates the requirements independent directors and audit committees. Rule 803 complies with SEC Rule 10A-3 related to audit committees for companies listed on a national securities exchange.

SEC Amendments To Rules Governing Proxy Advisory Firms

In a year of numerous regulatory amendments and proposals, Covid, newsworthy capital markets events, and endless related topics, and with only one blog a week, this one is a little behind, but with proxy season looming, it is timely nonetheless. In July 2020, the SEC adopted controversial final amendments to the rules governing proxy advisory firms. The proposed rules were published in November 2019 (see HERE). The final rules modified the proposed rules quite a bit to add more flexibility for proxy advisory businesses in complying with the underlying objectives of the rules.

The final rules, together with the amendments to Rule 14a-8 governing shareholder proposals in the proxy process, which were adopted in September 2020 (see HERE), will see a change in the landscape of this year’s proxy season for the first time in decades. However, certain aspects of the new rules are not required to be complied with until December 1, 2021.

The SEC has

Finders – Part 2

Following the SEC’s proposed conditional exemption for finders (see HERE), the topic of finders has been front and center. New York has recently adopted a new finder’s exemption, joining California and Texas, who were early in creating exemptions for intra-state offerings. Also, a question that has arisen several times recently is whether an unregistered person can assist a U.S. company in capital raising transactions outside the U.S. under Regulation S. This blog, the second in a three-part series, will discuss finders in the Regulation S context.

Regulation S

It is very clear that a person residing in the U.S. must be licensed to act as a finder and receive transaction-based compensation, regardless of where the investor is located. The SEC sent a poignant reminder of that when, in December 2015, it filed a series of enforcement proceedings against U.S. immigration lawyers for violating the broker-dealer registration rules by accepting commissions in connection with introducing investors to projects relying

SEC Modernizes Auditor Independence Rules

On October 16, 2020, the SEC adopted amendments to codify and modernize certain aspects of the auditor independence framework. The rule proposal was published in December 2019 (see HERE).

The current audit independence rules were created in 2000 and amended in 2003 in response to the financial crisis facilitated by the downfall of Enron, WorldCom and auditing giant Arthur Andersen, and despite evolving circumstances have remained unchanged since that time. The regulatory structure lays out governing principles and describes certain specific financial, employment, business, and non-audit service relationships that would cause an auditor not to be independent. Like most SEC rules, the auditor independence rules require an examination of all relevant facts and circumstances. Under Rule 2-01(b), an auditor is not independent if that auditor, in light of all facts and circumstances, could not reasonably be capable of exercising objective and impartial judgment on all issues encompassed within the audit duties. Rule 2-01(c) provides a non-exclusive list

SEC Proposes Amendments To Rule 144

I’ve been at this for a long time and although some things do not change, the securities industry has been a roller coaster of change from rule amendments to guidance, to interpretation, and nuances big and small that can have tidal wave effects for market participants. On December 22, 2020, the SEC proposed amendments to Rule 144 which would eliminate tacking of a holding period upon the conversion or exchange of a market adjustable security that is not traded on a national securities exchange. The proposed rule also updates the Form 144 filing requirements to mandate electronic filings, eliminate the requirement to file a Form 144 with respect to sales of securities issued by companies that are not subject to Exchange Act reporting, and amend the Form 144 filing deadline to coincide with the Form 4 filing deadline.

The last amendments to Rule 144 were in 2008 reducing the holding periods to six months for reporting issuers and one year

Intellectual Property And Technology Risks – International Business Operations

In December 2019, the SEC Division of Corporation Finance issued CF Disclosure Guidance: Topic No. 8 providing guidance related to the disclosure of intellectual property and technology risks associated with international business operations.

The global and technologically interconnected nature of today’s business environment exposes companies to a wide array of evolving risks, which they must individually examine to determine proper disclosures using a principles-based approach. A company is required to conduct a continuing analysis on the materiality of risks in the ever-changing technological landscape to ensure proper reporting of risks. To assist management in making these determinations, the SEC has issued additional guidance.

The guidance, which is grounded in materiality and a principles-based approach, is meant to supplement prior guidance on technology and cybersecurity matters including the February 2018 SEC statement on public company cybersecurity disclosures (see my blog HERE); Director Hinman’s speech at the 18th Annual Institute on Securities Regulation in Europe in March, 2019; the SEC

OTCQB And OTCQX Rule Changes

Effective October 1, 2020, the OTCQB and OTCQX tiers of OTC Markets have instituted amendments to their rules, including an increase in fees.

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 Current Information 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.

As an aside, companies that report to the SEC under Regulation A and foreign companies that

SEC Adopts Amendments To Management Discussion And Analysis

It has been a very busy year for SEC rule making, guidance, executive actions and all matters capital markets. Continuing its ongoing disclosure effectiveness initiative on November 19, 2020, the SEC adopted amendments to the disclosures in Item 303 of Regulation S-K – Management’s Discussion & Analysis of Financial Conditions and Operations (MD&A). The proposed rule had been released on January 30, 2020 (see HERE). Like all recent disclosure effectiveness rule amendments and proposals, the rule changes are meant to modernize and take a more principles-based approach to disclosure requirements. In addition, the rule changes are intended to reduce repetition and disclosure of information that is not material.

The new rules eliminate Item 301 – Selected Financial Data – and amend Items 302(a) – Supplementary Financial Information and Item 303 – MD&A. In particular, the final rules revise Item 302(a) to replace the current tabular disclosure with a principles-based approach and revise MD&A to: (i) to

Updated Guidance On Confidential Treatment In SEC filings

In March 2019, the SEC adopted amendments to Regulation S-K as required by the Fixing America’s Surface Transportation Act (“FAST Act”) (see HERE). Among other changes, the amendments allow companies to redact confidential information from most exhibits without filing a confidential treatment request (“CTR”), including omitting schedules and exhibits to exhibits. Likewise, the amendments allow a company to redact information that is both (i) not material, and (ii) competitively harmful if disclosed without the need for a confidential treatment request. The enacted amendment only applies to material agreement exhibits under Item 601(b)(10) and not to other categories of exhibits, which would rarely contain competitively harmful information.

After the rule change, the SEC streamlined its procedures for granting CTR’s and for applying for extended confidential treatment on previously granted orders. The amendments to the CTR process became effective April 2, 2019. See HERE for a summary of confidential treatment requests. In December 2019, the SEC issued new guidance on confidential

The recent amendments to Items 101, 103 and 105 of Regulation S-K (see HERE) went into effect on November 9, 2020, raising many questions as to the transition to the new requirements. In response to what I am sure were many inquiries to the Division of Corporation Finance, the SEC has issued three transitional FAQs.

The amendments made changes to Item 101 – description of business, Item 103 – legal proceedings, and Item 105 – Risk Factors of Regulation S-K.

FAQ – Form S-3 Prospectus Supplement

The first question relates to the impact on Form S-3 and in particular the current use of prospectus supplements for an S-3 that went into effect prior to November 9, 2020. In general, a Form S-3 is used as a shelf registration statement and a company files a prospectus supplement each time it takes shares down off that shelf (see HERE).

The prospectus supplement must meet the requirements of Securities Act Rule

SEC Proposed Conditional Exemption For Finders

Over the years I have written many times about exemptions to the broker-dealer registration requirements for entities and individuals that assist companies in fundraising and related services (see, for example: HERE). Finally, after years of advocating for SEC guidance on the topic, the SEC has proposed a conditional exemption for finders assisting small businesses in capital raising. The proposed exemption will allow for the use of finders to assist small businesses in raising capital from accredited investors.

In its press release announcing the proposal, SEC Chair Clayton acknowledged the need for guidance, stating, “[T]here has been significant uncertainty for years, however, about finders’ regulatory status, leading to many calls for Commission action, including from small business advocates, SEC advisory committees and the Department of the Treasury. If adopted, the proposed relief will bring clarity to finders’ regulatory status in a tailored manner that addresses the capital formation needs of certain smaller issuers while preserving investor protections.”

Separately, New York

SEC Adopts Amendments To Tighten Shareholder Proposals

Following a tense period of debate and comments, on September 23, 2020, the SEC adopted amendments to Rule 14a-8 governing shareholder proposals in the proxy process. The proposed rule was published almost a year before in November 2019 (see HERE). The amendment increases the ownership threshold requirements required for shareholders to submit and re-submit proposals to be included in a company’s proxy statement. The ownership thresholds were last amended in 1998 and the resubmission rules have been in place since 1954. The new rules represent significant changes to a shareholder’s rights to include matters on a company’s proxy statement.

Shareholder proposals, and the process for including or excluding such proposals in a company’s proxy statement, have been the subject of debate for years. The rules have not been amended in decades and during that time, shareholder activism has shifted. Main Street investors tend to invest more through mutual funds and ETF’s, and most shareholder proposals come from

SEC Adopts Amendments To Business Descriptions, Risk Factors And Legal Proceedings

Just eight months following the rule proposal (see HERE), on August 26, 2020, the SEC adopted final amendments to Item 101 – description of business, Item 103 – legal proceedings, and Item 105 – Risk Factors of Regulation S-K. The amendments make a more principles-based approach to business descriptions and risk factors, recognizing the significant changes in business models since the rule was adopted 30 years ago. The amendments to disclosures related to legal proceedings continue the current prescriptive approach. In addition, the rule changes are intended to improve the readability of disclosure documents, as well as discourage repetition and disclosure of information that is not material.

The Item 101 and Item 103 amendments only apply to domestic companies and foreign private issuer that elect to file using domestic company forms. The forms generally used by foreign private issuers (F-1, F-3, 20-F, etc.) do not have references to Items 101 and 103 of Regulation S-K but rather refer

Covid-19 Disclosures – Not Just Speculation Anymore

Now that the market can review and dissect two quarters of Covid-related disclosures and reporting companies are gearing up for third-quarter reporting, Covid disclosures are no longer pure speculation. Following the two official guidelines released by the SEC (Disclosure Guidance Topic No. 9A which supplemented the previously issued Topic No. 9), a new CD&I issued on Covid-19 executive employment benefits, and numerous unofficial statements and speeches on the topic, the investment community and reporting companies are navigating the areas that require the most attention and thoughtful disclosure. Not surprisingly, the areas requiring the greatest consideration are management, discussion and analysis (including human capital disclosures and forecasting), risk factors, and internal controls over financial reporting.

Covid-19 “Benefits” – SEC Issues New C&DI

On September 21, 2020, the SEC issued a new compliance and disclosure interpretation (C&DI) related to the reporting of compensation perks or benefits. In particular, the SEC stated that:

In reporting compensation for periods affected by Covid-19,

New CDI On Mining Company Disclosures

In the 4th quarter of 2018, the SEC finalized amendments to the disclosure requirements for mining companies under the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”). See HERE. In addition to providing better information to investors about a company’s mining properties, the amendments were intended to more closely align the SEC rules with industry and global regulatory practices and standards as set out in by the Committee for Reserves International Reporting Standards (CRIRSCO). The amendments rescinded Industry Guide 7 and consolidated the disclosure requirements for registrants with material mining operations in a new subpart of Regulation S-K.

The final amendments require companies with mining operations to disclose information concerning their mineral resources and mineral reserves. Disclosures on mineral resource estimates were previously only allowed in limited circumstances. The rule amendments provided for a two-year transition period with compliance beginning in the first fiscal year on or after January 1, 2021.

SEC Proposed To Modernize Auditor Independence Rules

As is usual, there are times where I find there are fewer current events to write about in the world of capital markets and I go back to the basics of this regulatory regime I find so fascinating, and others where I have 30 current topics in my writing queue and then a global pandemic occurs adding daily new topics to my list and poof! – six months goes by. Although they were bumped down the list, many of the proposed and completed regulatory changes, and other events, that were on the list remain worthy of attention.

In December 2019, the SEC proposed amendments to codify and modernize certain aspects of the auditor independence framework. The current audit independence rules were created in 2000 and amended in 2003 in response to the financial crisis facilitated by the downfall of Enron, WorldCom and auditing giant Arthur Andersen, and despite evolving circumstances have remained unchanged since that time. The new rules

The SEC Has Adopted Final Amendments To Rule 15C2-11; Major Change For OTC Markets Companies

Despite an unusual abundance of comments and push-back, on September 16, 2020, one year after issuing proposed rules (see HERE), the SEC has adopted final rules amending Securities Exchange Act (“Exchange Act”) Rule 15c2-11. The primary purpose of the rule amendment is to enhance retail protection where there is little or no current and publicly available information about a company and as such, it is difficult for an investor or other market participant to evaluate the company and the risks involved in purchasing or selling its securities. The SEC believes the final amendments will preserve the integrity of the OTC market, and promote capital formation for issuers that provide current and publicly available information to investors.

From a high level, the amended rule will require that a company have current and publicly available information as a precondition for a broker-dealer to either initiate or continue to quote its securities; will narrow reliance on certain of the rules

NYSE Continues To Struggle With Direct Listing Rule Changes

Late last year, around the same time that the SEC approved Nasdaq rule changes related to direct listings on the Nasdaq Global Market and Nasdaq Capital Market (see HERE), the SEC rejected proposed amendments by the NYSE big board which would allow a company to issue new shares and directly raise capital in conjunction with a direct listing process. Nasdaq had previously updated its direct listing rules for listing on the Market Global Select Market (see HERE).

The NYSE did not give up and in August of this year, after two more proposed amendments, the SEC finally approved new NYSE direct listing rules that allow companies to sell newly issued primary shares on its own behalf into the opening trade in a direct listing process. However, after receiving a notice of intent to petition to prevent the rule change, the SEC has stayed the approval until further notice. Still pushing forward, on September 4, the NYSE filed

SEC Adopts Amendments To Accredited Investor Definition

The much anticipated amendments to the accredited investor definition and definition of qualified institutional buyer under Rule 144A were adopted by the SEC on August 26, 2020. The amendments come almost five years after the SEC published a report on the definition of “accredited investors” ( see HERE) and nine months after it published the proposed amendments (see HERE). The rule changes also took into account the input and comment letters received in response to the SEC’s concept release and request for public comment on ways to simplify, harmonize and improve the exempt offering framework (see HERE).

As a whole industry insiders, including myself, are pleased with the rule changes and believe it will open up private investment opportunities to a wider class of sophisticated investors, while still maintaining investor protections. As the SEC pointed out historically, individual investors who do not meet specific income or net worth tests, regardless of their financial sophistication, have been denied

Nasdaq Rule Amendments 2020

In addition to the temporary rule changes and relief that Nasdaq has provided this year for companies affected by Covid-19 (see HERE and HERE), the exchange has enacted various rule amendments with varying degrees of impact and materiality.

In particular, over the last year Nasdaq has amended its delisting process for low-priced securities, updated its definition of a family member for the purpose of determining director independence and has clarified the term “closing price” for purposes of the 20% rule. This blog discusses each of these amendments.

Delisting Process

In April 2020, the SEC approved Nasdaq rule changes to the delisting process for certain securities that fall below the minimum price for continued listing. The rule change modifies the delisting process for securities with a bid price at or below $0.10 for ten consecutive trading days during any bid-price compliance period and for securities that have had one or more reverse stock splits with a cumulative ratio of

A COVID IPO

On June 25, 2020, SEC Chair Jay Clayton gave testimony before the Investor Protection, Entrepreneurship and Capital Markets Subcommittee of the U.S. House Committee on Financial Services on the topic of capital markets and emergency lending in the Covid-19 era. The next day, on June 26, Chair Clayton, William Hinman, Director of the Division of Corporation Finance, Dalia Blass, Director of the Division of Investment Management and Brett Redfearn, Director of the Division of Trading and Markets issued a public statement on the same topic but expanded to include efforts to ensure the orderly function of U.S. capital markets.

Chair Clayton Testimony

Chair Clayton breaks down his testimony over five topics including: (i) market monitoring and regulatory coordination; (ii) guidance and targeted assistance and relief; (iii) investor protection, education and outreach efforts; (iv) ongoing mission-oriented work; and (v) the SEC’s fiscal-year 2021 budget request.

Market Monitoring and Regulatory Coordination

Despite the extraordinary volumes and volatility we have seen in the

SEC Spring 2020 Regulatory Agenda

In July 2020, the SEC published its latest version of its semiannual regulatory agenda and plans for rulemaking with the U.S. Office of Information and Regulatory Affairs. The Office of Information and Regulatory Affairs, which is an executive office of the President, publishes a Unified Agenda of Regulatory and Deregulatory Actions (“Agenda”) with actions that 60 departments, administrative agencies and commissions plan to issue in the near and long term. The Agenda is published twice a year, and for several years I have blogged about each publication.

Like the prior Agendas, the spring 2020 Agenda is broken down by (i) “Pre-rule Stage”; (ii) Proposed Rule Stage; (iii) Final Rule Stage; and (iv) Long-term Actions. The Proposed and Final Rule Stages are intended to be completed within the next 12 months and Long-term Actions are anything beyond that. The number of items to be completed in a 12-month time frame has decreased to 42 items as compared to 47 on the

SEC Final Amendments On Disclosures For Registered Debt Offerings

Writing a blog once a week during a time when almost daily events are publish-worthy means that some topics will be delayed, at least temporarily. Back in March, the SEC adopted final amendments to simplify disclosure requirements applicable to registered debt offerings for guarantors and issuers of guaranteed securities, as well as for affiliates whose securities collateralize a company’s securities. The proposed rule changes were published in the summer of 2018 (see HERE).

The amendments apply to Rules 3-10 and 3-16 of Regulation S-X and are aimed at making the disclosures easier to understand and to reduce the cost of compliance for companies. The SEC also created a new Article 13 in Regulation S-X, renumbered Rules 3-10 and 3-16 to Rules 13-01 and 13-02, and made conforming changes to related rules in Regulations S-K and S-X and Securities Act and Exchange Act forms.

As stated in the SEC press release on the new rules, the amended rules focus on

SEC Statements On Capital Markets Amid Covid-19

Chair Clayton Testimony

Market Monitoring and Regulatory Coordination

Despite the extraordinary volumes and volatility we have seen

SEC Further Comments On Emerging Markets

On April 21, 2020, the SEC Chairman Jay Clayton and a group of senior SEC and PCAOB officials issued a joint statement warning about the risks of investing in emerging markets, especially China, including companies from those markets that are accessing the U.S. capital markets. On July 9, 2020, the SEC held an Emerging Markets Roundtable where Chair Clayton reiterated his concerns about emerging market investment risks. Previously, in December 2018, Chair Clayton, SEC Chief Accountant Wes Bricker and PCAOB Chairman William D. Duhnke III issued a similar cautionary statement, also focusing on China (see HERE).

SEC and PCAOB Joint Statement

On April 21, 2020, SEC Chair Clayton, SEC Chief Accountant Sagar Teotia, SEC Division of Corporation Finance Director William Hinman, SEC Division of Investment Management Director Dalia Blass, and PCAOB Chairman William D. Duhnke III issued a joint public statement warning of the significant disclosure, financial and reporting risks of investing in emerging markets, and the limited remedies

SEC Adopts Amendments To Accelerated And Large Accelerated Filer Definitions

In March, 2020 the SEC adopted amendments to the definitions of an “accelerated filer” and “large accelerated filer.” The amendments were adopted largely as proposed in May 2019 (see HERE).

A company that is classified as an accelerated or large accelerated filer is subject to, among other things, the requirement that its outside auditor attest to, and report on, management’s assessment of the effectiveness of the issuer’s internal control over financial reporting (ICFR) as required by Section 404(b) of the Sarbanes-Oxley Act (SOX). The JOBS Act exempted emerging growth companies (EGCs) from this requirement. Moreover, historically the definition of a smaller reporting company (SRC) was set such that an SRC could never be an accelerated or large accelerated filer, and as such would never be subject to Section 404(b) of SOX.

In June 2018, the SEC amended the definition of an SRC to include companies with less than a $250 million public float (increased

Proposed 2021 U.S. Budget

In February, the Office of Management and Budget released the proposed fiscal 2021 United States government budget. The beginning of the Budget contains a message from President Trump delineating a list of key priorities of the administration including better trade deals, preserving peace through strength, overcoming the opioid crisis, regulation relief and American energy independence. The budget has some notable aspects that directly relate to the capital markets and its participants.

SEC

As the federal government has been doing for all agencies, the 2021 Budget seeks to eliminate agency reserve funds. Specifically regarding the SEC, the Budget cuts the SEC reserve by $50 million. The reduction in reserve fund is thought to increase overall accountability as the SEC would need to go to Congress to ask for additional funds if needed, with an explanation, instead of just accessing a reserve account. Reserve fund cuts are sent to the U.S. Treasury for deficit reduction.

However, the Budget also increases the

Disclosures Related To COVID-19 – SEC Updates

Last week the SEC Office of the Chief Accountant (OCA) made a public statement on the importance of high-quality financial reporting for investors in light of Covid-19 on the same day that the Division of Corporation Finance issued an updated Disclosure Guidance Topic No. 9A on operations, liquidity, and capital resources disclosures related to the virus. Disclosure Guidance Topic No. 9A supplements the previously issued Topic No. 9 (see HERE) and follows the SEC’s virtual Investor Advisory Committee (“IAC”) meeting where investors testified as to additional information that should be relayed to the capital markets by public companies (see HERE).

OCA Statement on Financial Reporting

On April 3, 2020, the SEC Office of the Chief Accountant (OCA) made its first public statement on the importance of high-quality financial reporting for investors in light of Covid-19. At that time, many companies were in the process of preparing Q1 results and reports. Now that Q2 is coming to a

SEC Proposed Rule Changes For Exempt Offerings – Part 5

On March 4, 2020, the SEC published proposed rule changes to harmonize, simplify and improve the exempt offering framework. The SEC had originally issued a concept release and request for public comment on the subject in June 2019 (see HERE). The proposed rule changes indicate that the SEC has been listening to capital markets participants and is supporting increased access to private offerings for both businesses and a larger class of investors. Together with the proposed amendments to the accredited investor definition (see HERE), the new rules could have as much of an impact on the capital markets as the JOBS Act has had since its enactment in 2012.

The 341-page rule release provides a comprehensive overhaul to the exempt offering and integration rules worthy of in-depth discussion. I have been breaking the information down into a series of blogs, with this fifth and final blog focusing on amendments to Regulation Crowdfunding.

To review the first blog

SEC Proposed Rule Changes For Exempt Offerings – Part 4

The 341-page rule release provides a comprehensive overhaul to the exempt offering and integration rules worthy of in-depth discussion. I have been breaking the information down into a series of blogs, with this fourth blog focusing on amendments to Regulation A other than integration and offering communications which

Disclosures Related To Covid-19 – What Investors Want To Know

I’ve written several times about the need for Covid-19 disclosures including public statements by Chair Clayton and William Hinman, the Director of the Division of Corporation Finance and the SEC Division of Corporation Finance Disclosure Guidance Topic No. 9 regarding the SEC’s current views on disclosures that companies should consider with respect to COVID-19. For my summary blog on the topic, see HERE.

As I’ve previously mentioned, my personal thought is that although there are many reasons why disclosure is important, it is especially important now to support investor confidence, activity in our markets and capital raising efforts. If investors are kept informed of the impact of COVID-19 on companies, see that these companies are continuing on and meeting their requirements and that the markets haven’t just fallen into Neverland, they will continue to invest through the trading of securities, and direct investments through PIPE transactions. Further on the broader economic level, transparency and information will bolster confidence on

SEC Proposed Rule Changes For Exempt Offerings – Part 3

The 341-page rule release provides a comprehensive overhaul to the exempt offering and integration rules worthy of in-depth discussion. I have been breaking the information down into a series of blogs, with this third blog focusing on amendments to Rule 504, Rule 506(b) and 506(c) of Regulation D other

SEC Publishes FAQ On COVID-19 Effect On S-3 Registration Statements

The SEC has issued FAQ on Covid-19 issues, including the impact on S-3 shelf registration statements. The SEC issued 4 questions and answers consisting of one question related to disclosure and three questions related to S-3 shelf registrations.

SEC FAQ

Disclosure

Confirming prior guidance, the SEC FAQ sets forth the required disclosures in the Form 8-K or 6-K filed by a company to take advantage of a Covid-19 extension for the filing of periodic reports. In particular, in the Form 8-K or Form 6-K, the company must disclose (i) that it is relying on the COVID-19 Order (for more information on the Order, see HERE); (ii) a brief description of the reasons why the company could not file the subject report, schedule or form on a timely basis; (iii) the estimated date by which the report, schedule or form is expected to be filed; and (iv) a company-specific risk factor or factors explaining the impact, if material, of

SEC Enacts Temporary Expedited Crowdfunding Rules

Following the April 2, 2020 virtual meeting of the SEC Small Business Capital Formation Advisory Committee in which the Committee urged the SEC to ease crowdfunding restrictions to allow established small businesses to quickly access potential investors (see HERE), the SEC has provided temporary, conditional expedited crowdfunding access to small businesses. The temporary rules are intended to expedite the offering process for smaller, previously established companies directly or indirectly affected by Covid-19 that are seeking to meet their funding needs through the offer and sale of securities pursuant to Regulation Crowdfunding.

The temporary rules will provide eligible companies with relief from certain rules with respect to the timing of a company’s offering and the financial statements required. To take advantage of the temporary rules, a company must meet enhanced eligibility requirements and provide clear, prominent disclosure to investors about its reliance on the relief. The relief will apply to offerings launched between May 4, 2020 and August 31,

SEC Proposed Rule Changes For Exempt Offerings – Part 2

The 341-page rule release provides a comprehensive overhaul to the exempt offering and integration rules worthy of in-depth discussion. As such, I will break it down over a series of blogs, with the second blog in the series which focuses on offering communications, the new demo day exemption, and

NYSE, Nasdaq And OTC Markets Offer Relief For Listed Companies Due To COVID-19

In addition to the SEC, the various trading markets, including the Nasdaq, NYSE and OTC Markets are providing relief to trading companies that are facing unprecedented challenges as a result of the worldwide COVID-19 crisis.

NYSE

The NYSE has taken a more formal approach to relief for listed companies. On March 20, 2020 and again on April 6, 2020 the NYSE filed a notice and immediate effectiveness of proposed rule changes to provide relief from the continued listing market cap requirements and certain shareholder approval requirements.

Recognizing the extremely high level of market volatility as a result of the COVID-19 crisis, the NYSE has temporarily suspended until June 30, 2020 its continued listing requirement that companies must maintain an average global market capitalization over a consecutive 30-trading-day period of at least $15 million. Likewise, the NYSE is suspending the requirement that a listed company maintain a minimum trading price of $1.00 or more over a consecutive 30-trading-day period,

Disclosures Related To COVID-19

The SEC has been reiterating the need for robust disclosures related to the impact of COVID-19 on publicly reporting companies. In the last few weeks I have written about some of the guidance issued by the SEC including Disclosure Guidance Topic No. 9. Since that time the SEC has continued to issue guidance in the form of public statements. This blog will summarize the SEC guidance and statements on disclosures up to date, and include a sample risk factor for inclusion in SEC reports.

Public Statement by Chair Jay Clayton and Director of the Division of Corporation Finance, William Hinman

On April 8, 2020, SEC Chairman Jay Clayton and William Hinman, the Director of the Division of Corporation Finance, issued a joint public statement on the importance of disclosure during the COVID-19 crisis.

Before I get into summarizing the statement, my personal thought is that although there are many reasons why disclosure is important, including the basic premise that the

Small Business Advocate Urges Capital Raising Relief

On March 4, 2020, the SEC published proposed rule changes to harmonize, simplify and improve the exempt offering framework. The proposed rule changes indicate that the SEC has been listening to capital markets participants and is supporting increased access to private offerings for both businesses and a larger class of investors. Together with the proposed amendments to the accredited investor definition (see HERE), the new rules could have as much of an impact on the capital markets as the JOBS Act has had since its enactment in 2012.

I’ve written a five-part series detailing the rule changes, the first of which can be read HERE. My plan to publish the five parts in five consecutive weeks was derailed by the coronavirus and more time-sensitive articles on relief for SEC filers and disclosure guidance, but will resume in weeks that do not have more pressing Covid-19 topics.

On April 2, 2020, the SEC Small Business Capital Formation Advisory Committee

Conditional Relief For Persons Affected By Coronavirus

As the whole world faces unprecedented personal and business challenges, our duty to continue to run our businesses, meet regulatory filing obligations and support our capital markets continues unabated. While we stay inside and practice social distancing, we also need to work each day navigating the new normal. Thankfully many in the capital markets, including our firm, were already set up to continue without any interruption, working virtually in our homes relying on the same technology we have relied on for years.

We all need to remember that the panic selling frenzy will end. Emotions with even out and the daily good news that comes with the bad (for example, the number of cases in China is falling dramatically; some drugs are working to help and the FDA is speeding up review times for others; early signs China’s economy is starting to recover already; scientists around the world are making breakthroughs on a vaccine; etc.) will begin to quell the

SEC Proposed Rule Changes For Exempt Offerings – Part 1

The June concept release sought public comments on: (i) whether the exemptive framework as a whole is effective for both companies and investors; (ii) ways to improve, harmonize and streamline the exemptions; (iii) whether there are gaps in the regulations making it difficult for smaller companies to raise capital;

SEC Small Business Advocate Releases First Annual Report

The SEC’s Office of Small Business Advocate 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 are job creators, generators of economic opportunity and fundamental to the growth of the country, a drum I often beat. The Office recently issued its first annual report (“Annual Report”).

The Office has the following functions: (i) assist small businesses (privately held or public with a market cap of less than $250 million) and their investors in resolving problems with the SEC or self-regulatory organizations; (ii) identify and propose regulatory changes that would benefit small businesses and their investors; (iii) identify problems small businesses have in securing capital; (iv) analyzing the potential impact of regulatory changes on small businesses and their investors; (v) conducting outreach programs; (vi) identify unique challenges for minority-owned businesses; and (vii) consult with the Investor

Hester Peirce Proposal For Treatment Of Cryptocurrency

SEC Commissioner Hester M. Peirce, nicknamed “Crypto Mom,” has made a proposal for the temporary deregulation of digital assets to advance innovation and allow for unimpeded decentralization of blockchain networks. Ms. Peirce made the proposal in a speech on February 6, 2020.

The world of digital assets and cryptocurrency literally became an overnight business sector for corporate and securities lawyers, shifting from the pure technology sector with the SEC’s announcement that a cryptocurrency is a security in its Section 21(a) Report on the DAO investigation. Since then, there has been a multitude of enforcement proceedings, repeated disseminations of new guidance and many speeches by some of the top brass at the SEC, each evolving the regulatory landscape. Although I wasn’t focused on digital assets before that, upon reading the DAO report, I wasn’t surprised. It seemed clear to me that the capital raising efforts through cryptocurrencies were investment contracts within the meaning of SEC v.

SEC Proposes Additional Disclosures For Resource Extraction Companies

In December 2019, the SEC proposed rules that would require resource extraction companies to disclose payments made to foreign governments or the U.S. federal government for the commercial development of oil, natural gas, or minerals. The proposed rules have an interesting history. In 2012 the SEC adopted similar disclosure rules that were ultimately vacated by the U.S. District Court. In 2016 the SEC adopted new rules which were disapproved by a joint resolution of Congress. However, the statutory mandate in the Dodd-Frank Act requiring the SEC to adopt these rules requiring the disclosure remains in place and as such, the SEC is now taking its third pass at it.

The proposed rules would require domestic and foreign resource extraction companies to file a Form SD on an annual basis that includes information about payments related to the commercial development of oil, natural gas, or minerals that are made to a foreign government or the U.S. federal government.

Proposed Rule

The

OTCQB And OTC Pink Rule Changes

In December 2019 the OTC Markets updated its Pink Disclosure Guidelines and Attorney Letter Agreement and Guidelines. The Pink disclosure guidelines and attorney letter apply to companies that elect to report directly to OTC Markets pursuant to its Alternative Reporting Standard. Furthermore, in January 2020 OTC Markets amended the OTCQB standards related to the disclosure of convertible debt and notification procedures for companies undergoing a change in control. The OTCQB also updated its criteria for determining independence of directors, and added additional transfer agent requirements for Canadian Companies.

SEC Proposes Amendments To MD&A Disclosures

Continuing its disclosure effectiveness initiative, on January 30, 2020, the SEC proposed amendments to Management’s Discussion & Analysis of Financial Conditions and Operations (MD&A) required by Item 303 of Regulation S-K. In addition, to eliminate duplicative disclosures, the SEC also proposed to eliminate Item 301 – Selected Financial Data and Item 302 – Supplementary Financial Information. Like all recent disclosure effectiveness rule amendments and proposals, the rule changes are meant to modernize and take a more principles based approach to disclosure requirements. In addition, the proposed rule changes are intended to reduce repetition and disclosure of information that is not material.

On the same day the SEC issued an Interpretive Release on MD&A. A week earlier the SEC issued three new compliance and disclosure interpretations on the subject.

Among the proposed changes, the new rule would add a new Item 303(a) to state the principal objectives of MD&A, replace the specific requirement to disclose off-balance-sheet arrangements with

SEC Fall 2019 Regulatory Agenda

In late 2019, the SEC published its latest version of its semiannual regulatory agenda and plans for rulemaking with the U.S. Office of Information and Regulatory Affairs. The Office of Information and Regulatory Affairs, which is an executive office of the President, publishes a Unified Agenda of Regulatory and Deregulatory Actions (“Agenda”) with actions that 60 departments, administrative agencies and commissions plan to issue in the near and long term. The Agenda is published twice a year, and for several years I have blogged about each publication.

Like the prior Agendas, the spring 2019 Agenda is broken down by (i) “Pre-rule Stage”; (ii) Proposed Rule Stage; (iii) Final Rule Stage; and (iv) Long-term Actions. The Proposed and Final Rule Stages are intended to be completed within the next 12 months and Long-term Actions are anything beyond that. The number of items to be completed in a 12-month time frame has increased with 47 items as compared to 40 on the

SEC Proposes Amendments To The Accredited Investor Definition

Four years after issuing its report on the definition of “accredited investors” in December 2015, the SEC has published a proposed rule amendment to the definition. See HERE for my blog on the SEC’s report. The amendments were anticipated following an in-depth discussion on the definition contained in the SEC’s Concept Release on Private Offerings published in July 2019 (see HERE)

As a whole industry insiders, including myself, are pleased with the proposal and believe it will open up private investment opportunities to a wider class of sophisticated investors, while still maintaining investor protections. In the rule amendment release the SEC cites numerous comment letters suggesting and supporting many of the proposed amendments including one from the Crowdfunding Professionals Association (CfPA), Legislative & Regulatory Affairs Division, a committee I sit on and for which I participated in the preparation of the comment letter.

The current test for individual accredited investors is a bright line income or net

OTCQX Rule Changes

Effective December 12, 2019, the OTC Markets has implemented changes to the initial and continued quotation requirements for companies listed on the OTCQX. The amendments (i) allow certain qualifying companies to use their regular securities counsel for a letter of introduction in place of an OTCQX sponsor; (ii) establish procedures for a company effecting a change of control; (iii) enhance corporate governance requirements, refine the definition of an “independent director,” and provide for a phase in for compliance with these new provisions; (iv) require Canadian companies to utilize a transfer agent participating in the Transfer Agent Verified Shares Program by April 1, 2020, and (iv) require U.S. companies to disclose all convertible debt. The last rule changes were implemented in May, 2019 – see HERE.

Amended Rules for U.S. Companies

OTC Sponsor

An SEC reporting company with a class of securities that has been publicly traded for at least one year may submit a written application to

Division of Enforcement 2019 Annual Report

As my firm does not practice in the enforcement arena, it is not an area I always write about, but this year I found a few trends that are interesting. In particular, just by following published enforcement matters on the SEC’s website, I’ve noticed a large uptick in actions to suspend the trading in, or otherwise take action against, micro- and small-cap companies, especially delinquent filers. I’ve also noticed a large uptick of actions against smaller public and private companies that use misleading means to raise capital from retail investors, and the concurrent use of unlicensed broker-dealers. Of course, there have always been a significant number of actions involving cryptocurrencies. In light of my own observations, I decided to review and report on the SEC’s view of its actions.

As an aside, before discussing the report, I note that the Government Accountability Office (GAO) has raised concerns about the quality of record keeping and documentation maintained by the

Drill Down On NASDAQ Audit Committee Requirements

I’ve written several times about Nasdaq listing requirements including the general listing requirements (see HERE) and the significant listing standards changes enacted in August of this year (see HERE). This blog will drill down on audit committees which are part of the corporate governance requirements for listed companies. Nasdaq Rule 5605 delineates the requirements for a Board of Directors and committees. The Nasdaq rule complies with SEC Rule 10A-3 related to audit committees for companies listed on a national securities exchange.

SEC Rule 10A-3

SEC Rule 10A-3 requires that each national securities exchange have initial listing and ongoing qualification rules requiring each listed company to have an audit committee comprised of independent directors. Although the Nasdaq rules detail its independence requirements, the SEC rule requires that at a minimum an independent director cannot directly or indirectly accept any consulting, advisory or other compensation or be affiliated with the company or any of its subsidiaries. The prohibition against compensation

SEC Proposed Amendments To Rule Governing Proxy Advisory Firms

The SEC has been considering the need for rule changes related to proxy advisors for years as retail investors increasingly invest through funds and investment advisors where the asset managers rely on the advice, services and reports of proxy voting advice businesses. It is estimated that between 70% and 80% of the market value of U.S. public companies is held by institutional investors, the majority of which use proxy

Nasdaq Board Independence Standards

Nasdaq Rule 5605 delineates the listing qualifications and requirements for a board of directors and committees, including the independence standards for board members. Nasdaq requires that a majority of the board of directors of a listed company be “independent” and further that all members of the audit, nominating and compensation committees be independent.

Under Rule 5605, an “independent director” means a person other than an executive officer or employee of a company or any individual having a relationship which, in the opinion of the company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In other words, the question of independence must ultimately be determined by the board of directors who must make an affirmative finding that a director is independent. However, the Nasdaq rules specify certain relationships that would disqualify a person from being considered independent. Stock ownership is not on the list and is not enough, without

SEC Proposes To Tighten Shareholder Proposal Thresholds

As anticipated on November 5, 2019, the SEC issued two highly controversial rule proposals. The first is to amend Exchange Act rules to regulate proxy advisors. The second is to amend Securities Exchange Act Rule 14a-8(b) to increase the ownership threshold requirements required for shareholders to submit and re-submit proposals to be included in a company’s proxy statement. The ownership thresholds were last amended in 1998 and the resubmission rules have been in place since 1954. Together the new rules would represent significant changes to the proxy disclosure and solicitation process and shareholder rights to include matters on a company’s proxy statement. Not surprisingly, given the debate surrounding this topic, each of the SEC Commissioners issued statements on the proposed rule changes.

I am in support of both rules. This blog addresses the proposed rule changes related to shareholder proposals. Shareholder proposals, and the process for including or excluding such proposals in a company’s proxy statement, have been

SEC Investor Advisory Committee Meeting

On November 7, 2019, the SEC Investor Advisory Committee held a meeting on the topics of (i) whether investors use environmental, social and governance (ESG) data in making investment and capital allocation decisions; and (ii) the SEC’s recent concept release on harmonization of securities offering exemptions. For more on ESG matters, see HERE and for my blog on the SEC’s concept release on exempt offerings, see HERE. Both SEC Chair Jay Clayton and Commissioner Allison Herren Lee made remarks before the committee. As always, it is helpful in navigating our complex securities laws and regulatory priorities to stay informed on matters involving SEC decision makers and policy setters.

The Investor Advisory Committee was created by the Dodd-Frank Act to advise the SEC on regulatory priorities, the regulation of securities products, trading strategies, fee structures, the effectiveness of disclosure, and on initiatives to protect investor interests and to promote investor confidence and the integrity of the securities marketplace. The Dodd-Frank

SEC Solicits Input To Improve Markets For Thinly Traded Securities

On October 17, 2019, the SEC made a statement inviting stock exchanges and market participants to submit “innovative proposals designed to improve the secondary market structure for exchange listed equity securities that trade in lower volumes, commonly referred to as ‘thinly traded securities.’” On the same day the SEC issued a staff background paper on the subject. The SEC is not asking for input on how a company can better promote its stock and gain investor awareness, but rather how the capital market system, including trading rules and regulations, can be amended or improved to benefit thinly traded securities.

The staff background paper cites many statistics on the number of thinly traded securities, which they define as trading less than 100,000 shares daily. It also refers to the U.S. Department of the Treasury report entitled “A Financial System That Creates Economic Opportunities; Capital Markets” – see HERE for a summary of the report. As a result of

The SEC, FinCEN And CFTC Issue A Joint Statement On Digital Assets

On October 11, 2019 the SEC, FinCEN and CFTC issued a joint statement on activities involving digital assets. Various agencies have been consistently working together, with overlapping jurisdiction, on matters involving digital assets and distributed ledger technology. Earlier, in August, the SEC and FINRA issued a joint statement on the custody of digital assets, including as it relates to broker-dealers and investment advisors (see HERE).

The purpose of the joint statement is to remind persons engaged in activities involving digital assets of their anti-money laundering and countering the financing of terrorism (AML/CFT) obligations under the Bank Secrecy Act (BSA). AML/CFT obligations apply to entities that the BSA defines as “financial institutions,” such as futures commission merchants and introducing brokers obligated to register with the CFTC, money services businesses (MSBs) as defined by FinCEN (for more information on MSBs see HERE), and broker-dealers and mutual funds obligated to register

SEC Adopts New Rule To Expand Testing The Waters For All Companies

The SEC has adopted final rules allowing all issuers to test the waters prior to the effectiveness of a registration statement in a public offering. The proposed rules were published in February of this year (see HERE). The final rules are largely the same as proposed. The rule change is designed to encourage more companies to go public. Although it will help in this regard, a much larger expansion of testing the waters, allowing unlimited testing the waters (subject to anti-fraud of course) for all registered offerings under $50 million, would go far to improve the floundering small cap IPO market.

Prior to the rule change, only emerging growth companies (“EGCs”) (or companies engaging in a Regulation A offering) could test the waters in advance of a public offering of securities. The proposal implements a new Securities Act Rule 163B. For an in-depth analysis of testing the waters and communications during an offering process, see my two-part blog HERE

SEC Issues Guidance On Proxy Advisory Firms

On August 29, 2019, the SEC issued anticipated guidance related to the application of the proxy rules to proxy advisory firms. Market participants have been very vocal over the years regarding the need for SEC intervention and guidance to rein in the astonishing power proxy advisor firms have over shareholder votes, and therefore public companies in general. The new SEC interpretation clarifies that advice provided by proxy advisory firms generally constitutes a “solicitation” under the proxy rules including the necessity to comply with such rules and the related anti-fraud provisions. On the same day, the SEC issued guidance on the proxy voting responsibilities of investment advisors, including when they use proxy advisory firms. This blog focuses on the guidance directly related to proxy advisory firms.

The SEC has been considering the role of proxy advisors for years. In 2010 it issued a concept release seeking public comment on the role and legal status of proxy advisory firms within the

SEC Concept Release On Private Offerings

On June 18, 2019, the SEC issued a 211-page concept release and request for public comment on ways to simplify, harmonize, and improve the exempt (private) offering framework. The concept release seeks input on whether changes should be made to improve the consistency, accessibility, and effectiveness of the SEC’s exemptions for both companies and investors, including identifying potential overlap or gaps within the framework.

From a high level the SEC is seeking public comment on (i) whether the exemptive framework as a whole is effective for both companies and investors; (ii) ways to improve, harmonize and streamline the exemptions; (iii) whether there are gaps in the regulations making it difficult for smaller companies to raise capital; (iv) whether the limitations on who can invest and amounts that can be invested (i.e., accredited investor status) pose enough investor protection and conversely create undue obstacles to capital formation; (v) integration and transitioning from one offering exemption to another; (vi) the use of

SEC Proposes Amendments to Accelerated and Large Accelerated Filer Definitions

As promised by SEC Chair Jay Clayton almost a year ago when the SEC amended the definition of a “smaller reporting company” as contained in Securities Act Rule 405, Exchange Act Rule 12b-2 and Item 10(f) of Regulation S-K (see HERE ), on May 9, 2019, the SEC proposed amendments to the definitions of an “accelerated filer” and “large accelerated filer.”

In June 2018, the SEC amended the definition of a smaller reporting company (SRC) to include companies with less than a $250 million public float or if a company does not have an ascertainable public float or has a public float of less than $700 million, a SRC is one with less than $100 million in annual revenues during its most recently completed fiscal year. At that time the SEC did not amend the definitions an accelerated filer or large accelerated filer. As a result, companies with $75 million or more of public float that qualify as SRCs remained

SEC Establishes Analysis Matrix for Digital Assets

On April 3, 2019, the SEC’s Division of Corporation Finance published a “Framework for Investment Contract Analysis of Digital Assets,” issued a No-Action Letter to Turnkey Jet, Inc. and made a statement on both. Although all guidance is appreciated, there is really nothing new or different about the analysis, which is firmly based on SEC v. W.J. Howey Co. (the “Howey Test”). Moreover, as discussed below, even though the SEC found that Turnkey Jet did not need to comply with the federal securities laws in the issuance and sales of its tokens, the opinion and issued guidelines do not go far enough and still leave a great deal of uncertainty.

Framework for Investment Contract Analysis of Digital Assets

The SEC’s framework sets forth facts and circumstances to be considered in applying the Howey Test to determine if a digital asset is an investment contract and thus a security subject to state and federal securities laws in its

SEC Adopts Rules to Amend Regulation S-K

On March 20, 2019 the SEC adopted amendments to Regulation S-K as required by the Fixing America’s Surface Transportation Act (“FAST Act”). The proposed amendments were first published on October 11, 2017 (see HERE). A majority of the amendments were adopted as proposed. As part of the SEC’s ongoing Disclosure Effectiveness Initiative, the amendments are designed to modernize and simplify disclosure requirements for public companies, investment advisers, and investment companies. For a detailed list of actions that have been taken by the SEC as part of its Disclosure Effectiveness Initiative, see my summary at the end of this blog.

The FAST Act, passed in December 2015, contained two sections requiring the SEC to modernize and simplify the requirements in Regulation S-K. Section 72002 required the SEC to amend Regulation S-K to “further scale or eliminate requirements… to reduce the burden on emerging growth companies, accelerated filers, smaller reporting companies, and other smaller issuers, while still providing all material

The Under $300 Million Market Cap Class

Depending on whom you ask, a public company with less than $300 million market cap could be considered a micro-cap company, a penny stock (unless their share price is over $5.00), a lower middle market company or even middle market. Divestopedia defines “lower middle market” as “the lower end of the middle market segment of the economy, as measured in terms of annual revenue of the firms. Firms with an annual revenue in the range of $5 million to $50 million are grouped under the lower middle market category.” Wikipedia defines “middle market” as “companies larger than small businesses but smaller than big businesses that account for the middle third of the U.S. economy’s revenue. Each of these companies earns an annual revenue of between $100 million and $3 billion.” In a speech to the Greater Cleveland Middle Market Forum, SEC Commissioner Robert J. Jackson, Jr. defined a middle market company as those with trailing twelve-month sales of $50 million

Testing the Waters for All Issuers

As anticipated, on February 19, 2019 the SEC voted to propose an expansion of the ability to “test the waters” prior to the effectiveness of a registration statement in a public offering, to all companies. Currently only emerging growth companies (“EGCs”) (or companies engaging in a Regulation A offering) can test the waters in advance of a public offering of securities. The proposal would implement a new Securities Act Rule 163B. For an in-depth analysis of testing the waters and communications during an offering process, see my two-part blog HERE and HERE. The SEC proposal is open for public comment for a sixty (60)-day period.

Historically all offers to sell registered securities prior to the effectiveness of the filed registration statement have been strictly regulated and restricted. The public offering process is divided into three periods: (1) the pre-filing period, (2) the waiting or pre-effective period, and (3) the post-effective period. Communications made by the company during

SEC Cautionary Statement on Audits of Public Companies Operating in China

Eight years following the crash of the Chinese reverse merger boom and a slew of SEC enforcement proceedings, the SEC is once again concerned with the financial reporting by U.S. listed companies with operations based in China. In December 2018, the SEC issued a cautionary public statement from SEC Chair Jay Clayton, SEC Chief Accountant Wes Bricker and PCAOB Chairman William D. Duhnke III entitled “Statement on the Vital Role of Audit Quality and Regulatory Access to Audit and Other Information Internationally – Discussion of Current Information Access Challenges with Respect to U.S.-listed Companies with Significant Operations in China.”

Just reading the title reminded me of the boom in China-based reverse mergers around 2009-2010 followed by the trading halts or delistings of at least 50 companies in 2011 and 2012. In the summer of 2010, the SEC launched an initiative to determine whether certain companies with foreign operations—including those that were the product of reverse mergers—were accurately reporting their

Updated Disclosures for Mining Companies

In the 4th quarter of 2018, the SEC finalized amendments to the disclosure requirements for mining companies under the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”). The proposed rule amendments were originally published in June 2016. In addition to providing better information to investors about a company’s mining properties, the amendments are intended to more closely align the SEC rules with current industry and global regulatory practices and standards as set out in by the Committee for Reserves International Reporting Standards (CRIRSCO). In addition, the amendments rescind Industry Guide 7 and consolidate the disclosure requirements for registrants with material mining operations in a new subpart of Regulation S-K.

The final amendments require companies with mining operations to disclose information concerning their mineral resources and mineral reserves. Disclosures on mineral resource estimates were previously only allowed in limited circumstances. The rule amendments provide for a two-year transition period with compliance beginning in

An IPO Without The SEC

On January 23, 2019, biotechnology company Gossamer Bio, Inc., filed an amended S-1 pricing its $230 million initial public offering, taking advantage of a rarely used SEC Rule that will allow the S-1 to go effective, and the IPO to be completed, 20 days from filing, without action by the SEC. Since the government shutdown, several companies have opted to proceed with the effectiveness of a registration statement for a follow-on offering without SEC review or approval, but this marks the first full IPO, and certainly the first of any significant size. The Gossamer IPO is being underwritten by Bank of America Merrill Lynch, SVB Leerink, Barclays and Evercore ISI. On January 24, 2019, Nasdaq issued five FAQ addressing their position on listing companies utilizing Section 8(a). Although the SEC has recommenced full operations as of today, there has non-the-less been a transformation in the methods used to access capital markets, and the use of 8(a) is just

SEC Updates CDI Related to Smaller Reporting Company Definition

On June 28, 2018, the SEC adopted the much-anticipated amendments to the definition of a “smaller reporting company” as contained in Securities Act Rule 405, Exchange Act Rule 12b-2 and Item 10(f) of Regulation S-K. For more information on the new rules, see HERE

Among other benefits, it is hoped that the change will help encourage smaller companies to access US public markets. The amendment expands the number of companies that qualify as a smaller reporting company (SRC) and thus qualify for the scaled disclosure requirements in Regulation S-K and Regulation S-X. The SEC estimates that an additional 966 companies will be eligible for SRC status in the first year under the new definition.

As proposed, and as recommended by various market participants, the new definition of a SRC will now include companies with less than a $250 million public float as compared to the $75 million threshold in the prior definition. In addition, if a company does

SEC Provides Enforcement Driven Guidance On Digital Asset Issuances And Trading

On November 16, 2018, the SEC settled two actions involving cryptocurrency offerings which settlement requires the registration of the digital assets. On the same day, the SEC issued a public statement stating, “[T]hese two matters demonstrate that there is a path to compliance with the federal securities laws going forward, even where issuers have conducted an illegal unregistered offering of digital asset securities.”

The two settled actions, CarrierEQ Inc., known as Airfox and Paragon Coin Inc., both involved an unregistered issuance of a cryptocurrency. In its statement the SEC highlighted three other recent settled actions involving digital assets and, in particular, the actions involving Crypto Asset Management, TokenLot and EtherDelta. The three additional cases involved investment vehicles investing in digital assets and the providing of investment advice, and secondary market trading of digital asset securities.

The SEC has developed a consistent mantra declaring both support for technological innovation while emphasizing the requirement to “adhere to [our] well-established and well-functioning

Financial Statement Disclosure Relief Under Rule 3-13

Rule 3-13 of Regulation S-X allows a company to request relief from the SEC from the financial statement disclosure requirements if they believe that the financial information is burdensome and would result in disclosure of information that goes beyond what is material to investors. Consistent with the ongoing message of open communication and cooperation, the current SEC regime has been actively encouraging companies to avail themselves of this relief and has updated the CorpFin Financial Reporting Manual to include contact information for staff members that can assist.

As part of its ongoing disclosure effectiveness initiative, the SEC is also considering amendments to the financial statement disclosure process and the publication of further staff guidance. In addition to advancing disclosure changes, allowing for relief from financial statement requirements could help encourage smaller companies to access public markets, an ongoing goal of the SEC and other financial regulators. For a review of the October 2017 Treasury Department report to President Trump, including

SEC Commissioner Hester Peirce Continues to Support Technology

In three recent speeches, SEC Commissioner Hester Peirce continued to proclaim her support for technological innovation and freedom in capital markets. On September 12, 2018, Ms. Peirce gave a speech at the Cato Institute’s FinTech Unbound Conference which she titled Motherhood and Humble Pie, on September 24 she spoke at the University of Michigan Law School titling her speech Wolves and Wolverines, and then on October 2 she spoke at the Financial Planning Association 2018 Major Firms Symposium, calling that speech Pickups and Put Downs. Besides the great titles, I applaud her content and perspective.

Motherhood and Humble Pie

A prevailing theme in all three speeches centered on her dissent to the SEC’s rejection of an exchange traded product or mutual fund. As an aside, since I wrote this blog on the SEC’s published concerns related to a cryptocurrency-related exchange traded product or mutual fund, HERE, the SEC has continued to deny several more applications for such a product.

SEC Adopts Amendments to Simplify Disclosure Requirements

In August the SEC voted to adopt amendments to certain disclosure requirements in Regulations S-K and S-X (the “S-K and S-X Amendments”) as well as conforming changes throughout the federal securities laws and related forms. The amendments are intended to simplify and update disclosure requirements that are redundant, duplicative, overlapping, outdated or superseded with the overriding goal of reducing compliance burdens on companies without reducing material information for investors. The new amendments finalize and adopt the proposed rules that had previously been issued on July 13, 2016. See my blog on the proposed rule change HERE. The final rule changes were substantially, but not entirely, as proposed.

The Regulation S-X and S-K Amendments come as a result of the Division of Corporation Finance’s Disclosure Effectiveness Initiative and as required by Section 72002 of the FAST Act. The proposing release also requested public comment on a number of disclosure requirements that overlap with, but require information incremental to, U.S. GAAP

FINRA Examines Fintech Including Blockchain

On July 30, 2018, the Financial Industry Regulatory Authority (FINRA) published a Special Notice seeking public comments on how FINRA can support fintech developments including those related to data aggregation services, supervisory processes, including with the use of artificial intelligence, and the development of a taxonomy-based, machine-readable rulebook. The Special Notice, and fintech in general, necessarily includes blockchain technology, a topic FINRA has been examining for a few years now. Last July, FINRA held a Blockchain Symposium to assess the use of distributed ledger technology (DLT) in the financial industry, and earlier in January 2017 FINRA issued a report entitled “Distributed Ledger Technology: Implications of Blockchain for the Securities Industry” on the topic (see HERE).

Also, on July 6, 2018, FINRA sent Regulatory Notice 18-20 to its members asking all FINRA member firms to notify FINRA if they engage in activities related to digital assets such as cryptocurrencies, virtual coins and tokens. FINRA informs members that it is

SEC Amends Rule 701 And Issues A Concept Release On Rule 701 And Form S-8 – Part II

On May 24, 2018, President Trump signed the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Act”) into law. Section 507 of the Act directed the SEC to increase the threshold under Rule 701 of the Securities Act, for providing additional disclosures to employees from aggregate sales of $5,000,000 during any 12-month period to $10,000,000. In addition, the threshold is to be inflation-adjusted every five years. The Act required that the amendment be completed within 60 days and on July 18, 2018, the SEC complied and published the amendments. The amendments were effective immediately upon publication in the federal register.

On the same day, the SEC issued a concept release on potential further amendments to both Rule 701 and SEC Form S-8. The SEC is seeking public comment on ways to modernize the rules related to compensatory plans acknowledging the significant changes in both types of compensatory offerings and workforce composition in the past few decades.

Part I

SEC Adopts Inline XBRL

On June 28, 2018, the SEC adopted amendments to the XBRL requirements to require the use of Inline XBRL for financial statement information and fund risk/return summaries. Inline XBRL involves embedding XBRL data directly into the filing so that the disclosure document is both human-readable and machine-readable. Accordingly, no separate XBRL filings are required. The amendments also eliminate the requirement for companies to post XBRL data on their websites.

In 2009 the SEC adopted rules requiring companies to provide the information from the financial statements accompanying their registration statements and periodic and current reports in machine-readable format using XBRL by submitting it to the SEC as exhibits to their filings and posting it on their websites, if any. Since that time, however, many industry participants have expressed concerns regarding the quality of, extent of use of, and cost to create XBRL data. In fact, the SEC itself has discovered quality issues with the data in XBRL. As with all

Regulation A For Publicly Reporting Companies, Economic Growth and Regulatory Relief

Regulation A+ will soon be available for publicly reporting companies. On May 24, 2018, President Trump signed the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Act”) into law. Although the Act largely focuses on the banking industry and is being called the Dodd-Frank Rollback Act by many, it also contained much-needed provisions amending Regulation A+ and Rule 701 of the Securities Act.

The Act also amends Section 3(c)(1) of the Investment Company Act of 1940 to create a new category of pooled fund called a “qualifying venture capital fund,” which is a fund with less than $10,000,000 in aggregate capital contributions. A qualifying venture capital fund is exempt from the registration requirements under the 1940 Act as long as it has fewer than 250 investors. Section 3(c)(1) previously only exempted funds with fewer than 100 investors. The amendment is effective immediately and does not require rulemaking by the SEC, although I’m sure it will be followed by

SEC Spring 2018 Regulatory Agenda

On May 9, 2018, the SEC posted its latest version of its semiannual regulatory agenda and plans for rulemaking with the U.S. Office of Information and Regulatory Affairs. According to the preamble, information in the agenda was accurate as of March 13, 2018. On April 26, 2018, SEC Chairman Jay Clayton gave testimony before the Financial Services and General Government Subcommittee of the House Committee on Appropriations regarding the SEC’s requested fiscal year 2019 budget. This blog will summarize the newest regulatory agenda and SEC upcoming budgetary requests.

Usually the agenda is separated into two categories: (i) Existing Proposed and Final Rule Stages; and (ii) Long-term Actions. The Spring 2018 agenda is broken down by (i) “Prerule Stage”; (ii) Proposed Rule Stage; (iii) Final Rule Stage; and (iv) Long-term Actions. The Proposed and Final Rule Stages are intended to be completed within the next 12 months and Long-term Actions are anything beyond that. The number of items to be completed

The SEC Has Provided Guidance On Ether and Bitcoin, Sort Of

On June 14, 2018, William Hinman, the Director of the SEC Division of Corporation Finance, gave a speech at Yahoo Finance’s All Markets Summit in which he made two huge revelations for the crypto marketplace. The first is that he believes a cryptocurrency issued in a securities offering could later be purchased and sold in transactions not subject to the securities laws. The second is that Ether and Bitcoin are not currently securities. Also, for the first time, Hinman gives the marketplace guidance on how to structure a token or coin such that it might not be a security.

While this gives the marketplace much-needed guidance on the topic, a speech by an executive with the SEC has no legal force. As a result, the blogs and press responding to Mr. Hinman’s speech have been mixed. Personally, I think it is a significant advancement in the regulatory uncertainty surrounding the crypto space and a signal that more constructive guidance

The 2017 SEC Government-Business Forum On Small Business Capital Formation Final Report

The SEC has published the final report and recommendations of the 2017 annual Government-Business Forum on Small Business Capital Formation (the “Forum”). As required by the Small Business Investment Incentive Act of 1980, each year the SEC holds a forum focused on small business capital formation. The goal of the forum is to develop recommendations for government and private action to eliminate or reduce impediments to small business capital formation. I previously summarized the opening remarks of the SEC Commissioners. See HERE.

The forum is taken seriously by the SEC and its participants, including the NASAA, and leading small business and professional organizations. Recommendations often gain traction. For example, the forum first recommended reducing the Rule 144 holding period for Exchange Act reporting companies to six months, a rule which was passed in 2008. In 2015 the forum recommended increasing the financial thresholds for the smaller reporting company definition, and the SEC did indeed propose a change

Going Public Without An IPO

On April 3, 2018, Spotify made a big board splash by debuting on the NYSE without an IPO. Instead, Spotify filed a resale registration statement registering the securities already held by its existing shareholders. The process is referred to as a direct listing. As most of those shareholders had invested in Spotify in private offerings, they were rewarded with a true exit strategy and liquidity by becoming the company’s initial public float.

In order to complete the direct listing process, NYSE had to implement a rule change. NASDAQ already allows for direct listings, although it has historically been rarely used. To the contrary, a direct listing has often been used as a going public method on the OTC Markets and in the wake of Spotify, may gain in popularity on national exchanges as well.

As I will discuss below, there are some fundamental differences between the process for OTC Markets and for an exchange. In particular, when completing a direct

The Division of Corporation Finance’s Disclosure Review And Comment Process

Those that regularly read my blog know that I sometimes like to go back to basics. This blog will revisit and discuss the SEC’s Division of Corporation Finance (“CorpFin”) comment and review process. Back in March 2016, I wrote about the SEC comment and review process, including a description of the internal review process, review levels and breakup of industry sector reviewers. That blog can be read HERE. Since that time, the SEC has eliminated the Tandy Letter requirement. See HERE. Furthermore, on March 22, 2018, CorpFin updated its “Filing Review Process” page on the SEC website.

At the end of each calendar year, the big four accounting firms generally publish studies on CorpFin’s Comment Priorities. Their studies, and other recent publications, uniformly found that the number of comments, especially in a registration process, has dramatically declined. I have noticed this trend as well in my practice.

Also consistent in reports is a list of recent

The SEC Has Issued New Guidance On Cybersecurity Disclosures

On February 20, 2018, the SEC issued new interpretative guidance on public company disclosures related to cybersecurity risks and incidents. In addition to addressing public company disclosures, the new guidance reminds companies of the importance of maintaining disclosure controls and procedures to address cyber-risks and incidents and reminds insiders that trading while having non-public information related to cyber-matters could violate federal insider-trading laws.

The prior SEC guidance on the topic was dated, having been issued on October 13, 2011. For a review of this prior guidance, see HERE. The new guidance is not dramatically different from the 2011 guidance.

Introduction

The topic of cybersecurity has been in the forefront in recent years, with the SEC issuing a series of statements and creating two new cyber-based enforcement initiatives targeting the protection of retail investors, including protection related to distributed ledger technology (DLT) and initial coin or cryptocurrency offerings (ICO’s). Moreover, the SEC has asked the House Committee on Financial

OTC Markets Issues Comment Letters On FINRA Rules 6432 And 5250; The 15c2-11 Rules

January 8, 2018, OTC Markets Group, Inc. (“OTC Markets”) submitted a comment letter to FINRA related to FINRA Rule 6432. Rule 6432 requires that a market maker or broker-dealer have the information specified in Securities Exchange Act Rule 15c2-11 before making a quotation in a security on the over-the-counter market. Although I summarize the salient points of the OTC Markets comment letter, I encourage those interested to read the entire letter, which contains an in-depth analysis and comprehensive arguments to support its position. On February 8, 2018, OTC Markets submitted a second comment letter to FINRA, this one related to FINRA Rule 5250. Rule 5250 prohibits companies from compensating market makers in connection with the preparation and filing of a Form 211 application.

Rule 6432 – Compliance with the Information Requirements of SEA Rule 15c2-11

Subject to certain exceptions, including the “piggyback exception” discussed below, Rule 6432 requires that all broker-dealers have and maintain certain information on a

The 2017 SEC Government-Business Forum On Small Business Capital Formation

On November 30, 2017, the SEC held its annual Government-Business Forum on Small Business Capital Formation (the “Forum”). It will be several months until the final report with recommendations from the forum is published, but the opening remarks from SEC Chair Jay Clayton and Commissioners Kara Stein and Michael Piwowar provide ongoing and consistent guidance as to the current focus of the SEC. For a review of the recommendations by last year’s forum, see HERE.

As expected, the topics of cryptocurrency and ICO’s were front and center at the Forum. In his opening remarks at the Forum, Division of Corporation Finance Director William Hinman confirmed that the SEC believes that ICO’s generally involve securities offerings and that the securities laws must be complied with. Hinman continued that the SEC is providing guidance through enforcement and public statements on the topic.

As with other statements and speeches, the SEC hedges by pointing out the validity of an ICO as

The Senate Banking Committee’s Hearing On Cryptocurrencies

On February 6, 2018, the United States Senate Committee on Banking Housing and Urban Affairs (“Banking Committee”) held a hearing on “Virtual Currencies: The Oversight Role of the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission.” Both SEC Chairman Jay Clayton and CFTC Chairman J. Christopher Giancarlo testified and provided written testimony. The marketplace as a whole had a positive reaction to the testimony, with Bitcoin prices immediately jumping up by over $1600. This blog reviews the testimony and provides my usual commentary.

The SEC and CFTC Share Joint Regulatory Oversight

The Banking Committee hearing follows SEC and CFTC joint statements on January 19, 2018 and a joint op-ed piece in the Wall Street Journal published on January 25, 2018 (see HERE). As with other areas in capital markets, such as swaps, the SEC and CFTC have joint regulatory oversight over cryptocurrencies. Where the SEC regulates securities and securities markets, the CFTC

The CFTC And Cryptocurrencies

The SEC and U.S. Commodity Futures Trading Commission (CFTC) have been actively policing the crypto or virtual currency space. Both regulators have filed multiple enforcement actions against companies and individuals for improper activities including fraud. On January 25, 2018, SEC Chairman Jay Clayton and CFTC Chairman J. Christopher Giancarlo published a joint op-ed piece in the Wall Street Journal on the topic.

Backing up a little, on October 17, 2017, the LabCFTC office of the CFTC published “A CFTC Primer on Virtual Currencies” in which it defines virtual currencies and outlines the uses and risks of virtual currencies and the role of the CFTC. The CFTC first found that Bitcoin and other virtual currencies are properly defined as commodities in 2015. Accordingly, the CFTC has regulatory oversight over futures, options, and derivatives contracts on virtual currencies and has oversight to pursue claims of fraud or manipulation involving a virtual currency traded in interstate commerce. Beyond instances of fraud

The SEC And CFTC Joint Statements On Cryptocurrencies; Global Regulators Join In

On January 19, 2018 and again on January 25, 2018, the SEC and CFTC divisions of enforcement issued joint statements regarding cryptocurrencies. The January 19 statement was short and to the point, reading in total:

“When market participants engage in fraud under the guise of offering digital instruments – whether characterized as virtual currencies, coins, tokens, or the like – the SEC and the CFTC will look beyond form, examine the substance of the activity and prosecute violations of the federal securities and commodities laws. The Divisions of Enforcement for the SEC and CFTC will continue to address violations and bring actions to stop and prevent fraud in the offer and sale of digital instruments.”

The January 25, 2018 statement was issued by SEC Chairman Jay Clayton and CFTC Chairman J. Christopher Giancarlo and was published as an op-ed piece in the Wall Street Journal. In summarizing the statements, I add my usual commentary and facts and information

Multiple Changes To Private Offering Compliance And Disclosure Interpretations (C&DI)

The SEC has been fine-tuning its Compliance and Disclosure Interpretations (C&DI), making multiple amendments, additions and deletions on September 20, 2017. The SEC made revisions to reflect changes to Rules 147 and 504, the repeal of Rule 505, as well as numerous non-substantive revisions throughout the C&DI to update for current rules and statutory references. Likewise, several C&DI have been removed that did not accurately reflect current rules.

On October 26, 2016, the SEC passed new rules to modernize intrastate and regional securities offerings. The final new rules amended Rule 147 to reform the rules and allow companies to continue to offer securities under Section 3(a)(11) of the Securities Act of 1933 (“Securities Act”). The SEC created a new Rule 147A to accommodate adopted state intrastate crowdfunding provisions. New Rule 147A allows intrastate offerings to access out-of-state residents and companies that are incorporated out of state, but that conduct business in the state in which the offering is being

SEC and NASAA Statements on ICOs and More Enforcement Proceedings

The message from the SEC is very clear: participants in initial coin offerings (ICO’s) and cryptocurrencies in general need to comply with the federal securities laws or they will be the subject of enforcement proceedings. This message spreads beyond companies and entities issuing cryptocurrencies, also including securities lawyers, accountants, consultants and secondary trading platforms. Moreover, the SEC is not the only watchdog. State securities regulators and the plaintiffs’ bar are both taking aim at the crypto marketplace. Several class actions have been filed recently against companies that have completed ICO’s.

After a period of silence, on July 25, 2017, the SEC issued a Section 21(a) Report on an investigation and related activities by the DAO, with concurrent statements by both the Divisions of Corporation Finance and Enforcement. On the same day, the SEC issued an Investor Bulletin related to ICO’s. For more on the Section 21(a) Report, statements and investor bulletin, see HERE. Since that time,

The SEC’s 2017 Enforcement Priorities And Results

No more broken windows! In a series of speeches by various top brass at the SEC followed by the publication of the SEC Enforcement Division 2017 Report on results and priorities, the SEC has confirmed both directly and through its actions that the era of “broken windows” enforcement is over. The broken windows policy was first shepherded by Mary Jo White in 2013 and was one in which the SEC committed to pursue infractions big and small and to investigate, review and monitor all activities. The idea was that small infractions lead to bigger infractions, and the securities markets have had the reputation that minor violations are overlooked, creating a culture where laws were treated as meaningless guidelines.

Michael Piwowar has been a critic of broken windows since its inception. In a speech to the Securities Enforcement Forum in 2014, Mr. Piwowar stated, “[I]f every rule is a priority, then no rule is a priority.” He continued, “[I]f you

OTC Markets Group Establishes A Stock Promotion Policy

As OTC Markets Group continues to position itself as a respected venture trading platform, it has adopted a new stock promotion policy and best practices guidelines to improve investor transparency and address concerns over fraudulent or improper stock promotion campaigns. The stock promotion policy and best practices guidelines are designed to assist companies with responsible investor relations and to address problematic issues. Recognizing that fraudulent stock promotion is a systemic problem requiring an all-fronts effort by industry participants and regulators, the new policy focuses on transparency and disclosure of current information, and the correction of false statements or materially misleading information issued by third parties.

For several years, OTC Markets Group has been delineating companies with a skull-and-crossbones sign where they have raised concerns such as improper or misleading disclosures, spam campaigns, questionable stock promotion, investigation of fraudulent or other criminal activity, regulatory suspensions or disruptive corporate actions. While labeled with a skull and crossbones, a company that does not

SEC Statements On Cybersecurity – Part 2

On September 20, 2017, SEC Chair Jay Clayton issued a statement on cybersecurity that included the astonishing revelation that the SEC Edgar system had been hacked in 2016. Since the original statement, the SEC has confirmed that personal information on at least two individuals was obtained in the incident. Following Jay Clayton’s initial statement, on September 25, 2017, the SEC announced two new cyber-based enforcement initiatives targeting the protection of retail investors, including protection related to distributed ledger technology (DLT) and initial coin or cryptocurrency offerings (ICO’s).

The issue of cybersecurity is at the forefront for the SEC, and Jay Clayton is asking the House Committee on Financial Services to increase the SEC’s budget by $100 million to enhance the SEC’s cybersecurity efforts.

This is the second in a two-part blog series summarizing Jay Clayton’s statement, the SEC EDGAR hacking and the new initiatives. Part I of this blog, which outlined Chair Clayton’s statement on cybersecurity and the EDGAR

SEC Monitors Impact of Hurricanes On Capital Markets

As I wrote this blog I continued to have no power at my home after one week, though thankfully it has returned by publication date. Living in South Florida, our firm has felt and seen the devastating impact of Hurricane Irma on the state and send our thoughts and wishes to all affected by both Irma and Hurricane Harvey in Texas.

On September 13, 2017, the SEC issued a press release confirming that it is closely monitoring the effects of both Irma and Harvey on the capital markets. In particular, the SEC is working to make sure that investors have access to their securities accounts and evaluating the need for extending filing deadlines for reporting companies. Furthermore, the SEC is watching for and will keep investors updated via alerts on storm-related scams.

Despite the announcement that the SEC is monitoring the markets and considering extending filing deadlines, no specific broad-based relief has been granted. As has been done historically, I

SEC Announces Regulatory Agenda

In July 2017 the SEC posted its latest version of its semi-annual regulatory agenda and plans for rulemaking with the U.S. Office of Information and Regulatory Affairs. The agenda is as interesting for what’s on it, as for what isn’t. The semi-annual list only contains 33 legislative action items that the SEC intends to propose or finalize in the next 12 months. The fall 2016 list contained 62 items. As further discussed in this blog, the list does not include proposals on executive compensation, or many other Dodd-Frank mandated rules.

In the preamble to the list it indicates that it was completed in March, when Michael Piwowar was acting Chair of the SEC. Chair Jay Clayton and now Commissioner Michael Piwowar have been publicly like-minded, with a goal of directing the SEC towards assisting in small and emerging business growth and capital raise activities, while remaining tough on fraud. A summary of Chair Clayton’s first public speech as head of

SEC Issues Report on Initial Coin Offerings (ICO’s)

On July 25, 2017, the SEC issued a report on an investigation related to an initial coin offering (ICO) by the DAO and statements by the Divisions of Corporation Finance and Enforcement related to the investigative report (the “Report”). On the same day, the SEC issued an Investor Bulletin related to ICO’s. Offers and sales of digital coins, cryptocurrencies or tokens using distributed ledger technology (DLT) or blockchain have become widely known as ICO’s. For an introduction on DLT and blockchain, see HERE.

The basis of the report is that offers and sales of digital assets, including cryptocurrencies, are subject to the federal (and state) securities laws. From the highest level, the nature of a digital asset must be examined to determine if it meets the definition of a security using established principles (see HERE). In addition, all offers and sales of securities must either be registered with the SEC or there must be an available exemption

SEC Chair Jay Clayton Discusses Direction Of SEC

In a much talked about speech to the Economic Club of New York on July 12, 2017, SEC Chairman Jay Clayton set forth his thoughts on SEC policy, including a list of guiding principles for his tenure. Chair Clayton’s underlying theme is the furtherance of opportunities and protection of Main Street investors, a welcome viewpoint from the securities markets’ top regulator. This was Chair Clayton’s first public speech in his new role and follows Commissioner Michael Piwowar’s recent remarks to the SEC-NYU Dialogue on Securities Market Regulation largely related to the U.S. IPO market. For a summary of Commissioner Piwowar’s speech, read HERE.

Guiding Principles

Chair Clayton outlined a list of eight guiding principles for the SEC.

#1: The SEC’s Mission is its touchstone

As described by Chair Clayton, the SEC has a three part mission: (i) to protect investors; (ii) to maintain fair, orderly and efficient markets, and (iii) to facilitate capital formation. Chair Clayton stresses that it

Financial Choice Act 2.0 Has Made Progress

On June 8, 2017, the U.S. House of Representative passed the Financial Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs Act (the “Financial Choice Act 2.0” or the “Act”) by a vote of 283-186 along party lines. Only one Republican did not vote in favor of the Act. On May 4, 2017, the House Financial Services Committee voted to approve the Act. A prior version of the Act was adopted by the Financial Services Committee in September 2016 but never proceeded to the House for a vote.

The Financial Choice Act 2.0 is an extensive, extreme piece of legislation that would dismantle a large amount of the power of the SEC and strip the Dodd-Frank Act of many of its key provisions. The future of the Act is uncertain as it is unlikely to get through the Senate, although a rollback of Dodd-Frank remains a priority to the current administration. It is also possible that parts of the lengthy

Recommendations Of SEC Government-Business Forum On Small Business Capital Formation

In early April, the SEC Office of Small Business Policy published the 2016 Final Report on the SEC Government-Business Forum on Small Business Capital Formation, a forum I had the honor of attending and participating in. As required by the Small Business Investment Incentive Act of 1980, each year the SEC holds a forum focused on small business capital formation. The goal of the forum is to develop recommendations for government and private action to eliminate or reduce impediments to small business capital formation.

The forum is taken seriously by the SEC and its participants, including the NASAA, and leading small business and professional organizations. The forum began with short speeches by each of the SEC commissioners and a panel discussion, following which attendees, including myself, worked in breakout sessions to drill down on specific issues and suggest changes to rules and regulations to help support small business capital formation, as well as the related, secondary trading markets. In

Road Shows

Introduction; Definitions

We often hear the words “road show” associated with a securities offering. A road show is simply a series of presentations made by company management to key members of buy-side market participants such as broker-dealers that may participate in the syndication of an offering, and institutional investor groups and money managers that may invest into an offering. A road show is designed to provide these market participants with more information about the issuer and the offering and a chance to meet and assess management, including their presentation skills and competence in a Q&A setting. Investors often place a high level of importance on road show meetings and as such, a well-run road show can make the difference as to the level of success of an offering.

A road show usually involves an intensive period of multiple meetings and presentations in a number of different cities over a one-to-two-week period. Although road shows are generally live, they

The Senate Banking Committee Passes Several Pro-Business Bills

On March 9, 2017, the Senate Banking Committee approved the first set of bills to go through the committee under the new administration. The five bills were cleared as one package and are aimed at making it easier for companies to grow and raise capital. The bills are bipartisan and could be some of the first to pass through Congress under the new regime. Only two Democrats opposed the bills: Massachusetts Senator Elizabeth Warren, who is consistently pushing for greater investor protections regardless of the impact on businesses, and Rhode Island Senator Jack Reed.

Interestingly, in 2016, most of these pro-business bills were passed by the House and never made it through the Senate. For a brief outline of the numerous House bills passed in 2016, see my blog HERE. Each of the current bills had already been presented in prior years, either as stand-alone bills or packaged with other provisions, but never made it through the Senate. The

Addressing the SEC White Paper on OTC Equities

The SEC recently published a paper on OTC equity securities on their website. While I am always happy to see more research around OTC equities, I am surprised by the paper’s overly negative and misinformed conclusions about the growth in OTC dollar volumes.

Moreover, I am concerned that these flawed conclusions, drawn from outdated research and a study of a small group of securities subject to investigative requests by the SEC or FINRA, will be used to develop new regulations that harm capital formation. Regulatory action based on this skewed sample could negatively impact the vast majority of companies that trade successfully on the OTC Markets.

The OTC Markets are More Transparent Today

The SEC’s paper, “Outcomes of Investing in OTC Stocks,” by Joshua White, does not address the improvements in transparency and technology made over the past several years. Instead, it focuses on negative outcomes for investors of Pink companies that provide no information to the market.

Academic studies

SEC Issues Final Rules Requiring Links To Exhibits

On March 1, 2017, the SEC passed a final rule requiring companies to include hyperlinks to exhibits in filings made with the SEC. The amendments require any company filing registration statements or reports with the SEC to include a hyperlink to all exhibits listed on the exhibit list. In addition, because ASCII cannot support hyperlinks, the amendment also requires that all exhibits be filed in HTML format. The rule change was made to make it easier for investors and other market participants to find and access exhibits listed in current reports, but that were originally provided in previous filings.

The SEC first proposed the rule change on August 31, 2016, as discussed in my blog HERE. The new rule continues the SEC’s Division of Corporation Finance’s ongoing Disclosure Effectiveness Initiative. I anticipate that this initiative will not only continue but gain traction in the coming years under the new administration as, hopefully, more duplicative, antiquated and immaterial requirements come

The SEC Has Proposed The Use Of Universal Proxy Cards

The SEC has seen a huge exodus of key officials and employees since the recent change in administration, and the ultimate effect of these changes on pending or proposed rule making remains to be seen. However, some proposed rules, whether published or still in drafting process, will remain largely unaffected by the political changes. This could be one of them. In particular, on October 16, 2016, the SEC proposed amendments to the federal proxy rules to require the use of universal proxy cards in connection with contested elections of directors. The proposed card would include the names of both the company and opposed nominees. The SEC also proposed amendments to the rules related to the disclosure of voting options and standards for the election of directors.

Currently where there is a contested election of directors, shareholders likely receive two separate and competing proxy cards from the company and the opposition. Each card generally only contains the directors supported by the

SEC Issues White Paper On Penny Stock Risks

On December 16, 2016, the SEC announced several new settled enforcement proceedings against market participants including issuers, attorneys and a transfer agent, related to penny stock fraud. On the same day the SEC issued a new white paper detailing the risks associated with investing in penny stocks. This blog summarizes the SEC white paper.

As I have written about on numerous occasions, the prevention of micro-cap fraud is and will always be a primary focus of the SEC and other securities regulators. In fact, the SEC will go to great lengths to investigate and ultimately prosecute micro-cap fraud. See my blog HERE regarding the recent somewhat scandalous case involving Guy Gentile.

Introduction

The SEC Division of Economic and Risk Analysis published a white paper on the risks and consequences of investing in stocks quoted in the micro-cap markets versus those listed on a national securities exchange. The paper reviewed 1.8 million trades by more than 200,000 investors and concludes that

What Does The SEC Do And What Is Its Purpose?

As I write about the myriad of constantly changing and progressing securities law-related policies, rules, regulations, guidance and issues, I am reminded that sometimes it is important to go back and explain certain key facts to lay a proper foundation for an understanding of the topics which layer on this foundation. In this blog, I am doing just that by explaining what the Securities and Exchange Commission (SEC) is and its purpose. Most of information in this blog comes from the SEC website, which is an extremely useful resource for practitioners, issuers, investors and all market participants.

Introduction

The mission of the SEC is to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation. Although each mission should be a priority, the reality is that the focus of the SEC changes based on its Chair and Commissioners and political pressure. Outgoing Chair Mary Jo White viewed the SEC enforcement division and task of investor protection as her

The SEC Has Issued New C&DI Guidance On Regulation A+

On November 17, 2016, the SEC Division of Corporation Finance issued three new Compliance and Disclosure Interpretations (C&DI) to provide guidance related to Regulation A/A+. Since the new Regulation A+ came into effect on June 19, 2015, its use has continued to steadily increase. In my practice alone I am noticing a large uptick in broker-dealer-placed Regulation A+ offerings, and recently, institutional investor interest.

Following a discussion on the CD&I guidance, I have included some interesting statistics, practice tips, and thoughts on Regulation A+, and a refresher summary of the Regulation A+ rules.

New CD&I Guidance

In the first of the new CD&I, the SEC has clarified that where a company seeks to qualify an additional class of securities via post-qualification amendment to a previously qualified Form 1-A, Item 4 of Part I, which requires “Summary Information Regarding the Offering and Other Current or Proposed Offerings,” need only include information related to the new class of securities seeking

SEC Issues New C&DI Clarifying The Use Of Form S-3 By Smaller Reporting Companies; The Baby Shelf Rule

The SEC has been issuing a slew of new Compliance and Disclosure Interpretations (“C&DI”) on numerous topics in the past few months. I will cover each of these new C&DI in a series of blogs starting with one C&DI that clarifies the availability of Form S-3 for the registration of securities by companies with a public float of less than $75 million, known as the “baby shelf rule.”

The Baby Shelf Rule

Among other requirements, to qualify to use an S-3 registration statement a company must have filed all Exchange Act reports in a timely manner, including Form 8-K, within the prior 12 months and trade on a national exchange. An S-3 also contains certain limitations on the value of securities that can be offered. Companies that have an aggregate market value of voting and non-voting common stock held by non-affiliates of $75 million or more, may offer the full amount of securities under an S-3 registration. For companies

SEC Issues Report On Regulation S-K

As required by Section 72003 of the Fixing America’s Surface Transportation Act (the “FAST Act”), on November 23, 2016, the SEC issued a Report on Modernization and Simplification of Regulation S-K (the “Report”) including detailed recommendations for changes.

The Report continues the ongoing review and proposed revisions to Regulations S-K and S-X as related to reports and registration statements filed under the Exchange Act of 1934 (“Exchange Act”) and Securities Act of 1933 (“Securities Act”). Regulation S-K, as amended over the years, was adopted as part of a uniform disclosure initiative to provide a single regulatory source related to non-financial statement disclosures and information required to be included in registration statements and reports filed under the Exchange Act and the Securities Act. Regulation S-X contains specific financial statement preparation and disclosure requirements.

The Disclosure Effectiveness Initiative began in December 2013, when the SEC, as required by the JOBS Act, issued its first report on the Regulation S-K disclosure requirements. The

SEC Proposes Shortening Trade Settlement

On September 28, 2016, the SEC proposed a rule amendment to shorten the standard broker-initiated trade settlement cycle from three business days from the trade date (T+3) to two business days (T+2). The change is designed to help reduce risks, including credit, market and liquidity risks, associated with unsettled transactions in the marketplace. Outgoing SEC Chair, Mary Jo White was quoted as saying that the change “is an important step to the SEC’s ongoing efforts to enhance the resiliency and efficiency of the U.S. clearance and settlement system.” I have previously written about the clearance and settlement process for U.S. capital markets, which can be reviewed HERE.

Background

DTC provides the depository and book entry settlement services for substantially all equity trading in the US. Over $600 billion in transactions are completed at DTC each day. Although all similar, the exact clearance and settlement process depends on the type of security being traded (stock, bond, etc.), the form the

SEC Eliminates The “Tandy Letter”

On October 5, 2016, the SEC Division of Corporation Finance (CorpFin) announced that, effective immediately, it would no longer require companies to include “Tandy” letter representations in comment letter response or registration acceleration requests addressed to the SEC.

Background

Beginning in the 1970s the SEC began to require an affirmative statement from the company acknowledging that the company cannot use the SEC’s comment process as a defense in any securities-related litigation. Named after the first company required to provide the affirmations, this language is referred to as a “Tandy” letter. By 2004 the “Tandy” letter was required in all comment letter responses to the SEC as well as registration acceleration requests. The “Tandy” portion of a response was required to be agreed to by the company itself, so if the response letter was on attorney letterhead, a signature line was required to be included for the company or the company could submit a separate letter. The Tandy language for an

SEC Cracks Down On Failure To File 8-K For Financing Activities; An Overview Of Form 8-K

Introduction and Background

On September 26, 2016, and again on the 27th, the SEC brought enforcement actions against issuers for the failure to file 8-K’s associated with corporate finance transactions and in particular PIPE transactions involving the issuance of convertible debt, preferred equity, warrants and similar instruments. Prior to the release of these two actions, I have been hearing rumors in the industry that the SEC has issued “hundreds” of subpoenas (likely an exaggeration) to issuers related to PIPE transactions and in particular to determine 8-K filing deficiencies. Using this as a backdrop, this blog will also address Form 8-K filing requirements in general.

Back in August 2014, the SEC did a similar sweep related to 8-K filing failures associated with 3(a)(10) transactions. See my blog HERE for a discussion of those actions and 3(a)(10) proceedings in general. The 8-K filing deficiency actions were a precursor to a larger SEC investigation on 3(a)(10) transactions themselves which culminated in two well-known

Yahoo Hacking Scandal And Obligations Related To Cybersecurity

On September 26, 2016, Senator Mark R. Warner (D-VA), a member of the Senate Intelligence and Banking Committees and cofounder of the bipartisan Senate Cybersecurity Caucus, wrote a letter to the SEC requesting that they investigate whether Yahoo, Inc., fulfilled its disclosure obligations under the federal securities laws related to a security breach that affected more than 500 million accounts. Senator Warner also requested that the SEC re-examine its guidance and requirements related to the disclosure of cybersecurity matters in general.

The letter was precipitated by a September 22, 2016, 8-K and press release issued by Yahoo disclosing the theft of certain user account information that occurred in late 2014. The press release referred to a “recent investigation” confirming the theft of user account information associated with at least 500 million accounts that was stolen in late 2014. Just 13 days prior to the 8-K and press release, on September 9, 2016, Yahoo filed a preliminary 14A filing with

SEC Has Approved FINRA’s New Category Of Broker-Dealer For “Capital Acquisition Brokers”

On August 18, 2016, the SEC approved FINRA’s rules implementing a new category of broker-dealer called “Capital Acquisition Brokers” (“CABs”), which limit their business to corporate financing transactions. FINRA first published proposed rules on CABs in December 2015. My blog on the proposed rules can be read HERE. In March and again in June 2016, FINRA published amendments to the proposed rules. The final rules enact the December proposed rules as modified by the subsequent amendments.

A CAB will generally be a broker-dealer that engages in M&A transactions, raising funds through private placements and evaluating strategic alternatives and that collects transaction-based compensation for such activities. A CAB will not handle customer funds or securities, manage customer accounts or engage in market making or proprietary trading.

Description of Capital Acquisition Broker (“CAB”)

There are currently FINRA-registered firms which limit their activities to advising on mergers and acquisitions, advising on raising debt and equity capital in private placements or advising on

Changes In India’s Laws Related To Foreign Direct Investments- A U.S. Opportunity; Brief Overview For Foreign Private Issuers

In June 2016, the Indian government announced new rules allowing for foreign direct investments into Indian owned and domiciled companies. The new rules continue a trend in laws supporting India as an open world economy. A large portion of the U.S. public marketplace is actually the trading of securities of foreign owned or held businesses. Foreign businesses may register and trade directly on U.S. public markets as foreign private issuers, or they may operate as partial or wholly owned subsidiaries of U.S. parent companies that in turn quote and trade on either the OTC Markets or a U.S. exchange.

Brief Overview for Foreign Private Issuers

Definition of Foreign Private Issuer

Both the Securities Act of 1933, as amended (“Securities Act”) and the Securities Exchange Act of 1934, as amended (“Exchange Act”) contain definitions of a “foreign private issuer.” Generally, if a company does not meet the definition of a foreign private issuer, it is subject to the same registration and

SEC Announces Enforcement Results For Fiscal Year-End 2016

On October 11, 2016, the SEC announced its enforcement results for fiscal year-end September 30, 2016 (FYE 2016). In FYE 2016 the SEC filed a record 868 enforcement actions, including against companies and executives for reporting violations, misconduct by companies and gatekeepers, fraud actions and more resulting in judgments and orders totaling more than $4 billion in disgorgement and penalties.

The actions also included a record number of enforcement proceedings against investment advisors and investment companies, a trend I expect to continue in the coming year as the SEC continues to crack down on the failure to adequately disclose all fees associated with investments into and operations of funds, as well as related party transactions.

Consistent with prior speeches and messaging, SEC Chair Mary Jo White made the following quote in the release announcing the enforcement results: “By every measure the enforcement program continues to be a resounding success holding executives, companies and market participants accountable for their illegal actions.

SEC Issues Proposed Amendments To Item 601 Of Regulation S-K Related To Exhibits

On August 31, 2016, the SEC issued proposed amendments to Item 601 of Regulation S-K to require hyperlinks to exhibits in filings made with the SEC. The proposed amendments would require any company filing registration statements or reports with the SEC to include a hyperlink to all exhibits listed on the exhibit list. In addition, because ASCII cannot support hyperlinks, the proposed amendment would also require that all exhibits be filed in HTML format.

This newest proposed rule change to Regulation S-K is part of the SEC Division of Corporation Finance’s Disclosure Effectiveness Initiative. At the end of this blog, I include an up-to-date summary of the proposals and request for comment related to the ongoing Disclosure Effectiveness Initiative.

Background

SEC Requests Comment On Changes To Subpart 400 To Regulation S-K

On August 25, 2016, the SEC requested public comment on possible changes to the disclosure requirements in Subpart 400 of Regulation S-K. Subpart 400 encompasses disclosures related to management, certain security holders and corporate governance. The request for comment is part of the ongoing SEC Division of Corporation Finance’s Disclosure Effectiveness Initiative and as required by Section 72003 of the FAST Act.

Background

The topic of disclosure requirements under Regulations S-K and S-X as pertains to financial statements and disclosures made in reports and registration statements filed under the Exchange Act of 1934 (“Exchange Act”) and Securities Act of 1933 (“Securities Act”) has come to the forefront over the past couple of years. The purpose of the Disclosure Effectiveness Initiative is to assess whether the business and financial disclosure requirements continue to provide the information investors need to make informed investment and voting decisions.

Regulation S-K, as amended over the years, was adopted as part of a uniform disclosure initiative

FinCEN Updates Due Diligence Rules

On May 11, 2016, the Financial Crimes Enforcement Network (“FinCEN”) issued new final rules under the Bank Secrecy Act requiring financing institutions, including brokerage firms, to adopt additional anti-money laundering (AML) procedures that include specific due diligence and ongoing monitoring requirements related to customer risk profiles and customer information. In addition, the new rules require financial institutions to collect and verify information about beneficial owners and control person of legal entity customers.

The Securities Exchange Act of 1934 (“Exchange Act”) specifically requires brokerage firms to comply with the Bank Secrecy Act. FinCEN provides minimum rules. Brokerage firms are also required to comply with AML rules established by FINRA, including FINRA Rule 3310. The purpose of the AML rules is to help detect and report suspicious activity including the predicate offenses to money laundering and terrorist financing, such as securities fraud and market manipulation. FINRA also provides a template to assist small firms in establishing and complying with AML procedures. As

Smaller Reporting Companies vs. Emerging Growth Companies

The topic of reporting requirements and distinctions between various categories of reporting companies has been prevalent over the past couple of years as regulators and industry insiders examine changes to the reporting requirements for all companies, and qualifications for the various categories of scaled disclosure requirements. As I’ve written about these developments, I have noticed inconsistencies in the treatment of smaller reporting companies and emerging growth companies in ways that are likely the result of poor drafting or unintended consequences. This blog summarizes two of these inconsistencies.

As a reminder, a smaller reporting company is currently defined as a company that has a public float of less than $75 million in common equity as of the last business day of its most recently completed second fiscal quarter, or if a public float of zero, has less than $50 million in annual revenues as of its most recently completed fiscal year-end. I note that on June 27, 2016, the SEC issued

SEC Continues Efforts To Prevent Microcap Fraud

As I’ve written about numerous times in the past, a primary agenda of the SEC and FINRA is to prevent small- and micro-cap fraud. On March 23, 2016, the SEC charged Guy Gentile with penny stock fraud. The SEC complaint, as well as numerous industry articles and a blog by Mr. Gentile himself, reveal in-depth efforts by the SEC together with FINRA and the FBI and DOJ to remove recidivist and bad actors from the micro-cap system. While the methods used by the regulators have been the subject of heated debates and articles, the message and result remain that the SEC is committed to its efforts to deter securities law violations.

Although small- and micro-cap fraud has always been an important area of concern and enforcement by the SEC since the financial crisis of 2008, it has increasingly been a focus. Regulators have amplified their efforts through regulations and stronger enforcement, including the SEC Broken Windows policy, increased Dodd-Frank whistleblower

SEC Issues Proposed Regulation S-K And S-X Amendments

On July 13, 2016, the SEC issued a 318-page proposed rule change on Regulation S-K and Regulation S-X to amend disclosures that are redundant, duplicative, overlapping, outdated or superseded (S-K and S-X Amendments). The proposed rule changes follow the 341-page concept release and request for public comment on sweeping changes to certain business and financial disclosure requirements issued on April 15, 2016. See my two-part blog on the S-K Concept Release HERE and HERE.

The proposed S-K and S-X Amendments are intended to facilitate the disclosure of information to investors while simplifying compliance efforts by companies. The proposed S-K and S-X Amendments come as a result of the Division of Corporation Finance’s Disclosure Effectiveness Initiative and as required by Section 72002 of the FAST Act. Prior to the issuance of these S-K and S-X Amendments, on June 27, 2016, as part of the same initiative, the SEC issued proposed amendments to the definition of “Small Reporting Company” (see

Testing The Waters; Regulation A+ And S-1 Public Offerings – Part 1

The JOBS Act enacted in 2012 made the most dramatic changes to the landscape for the marketing and selling of both private and public offerings since the enactment of the Securities Act of 1933. These significant changes include: (i) the creation of Rule 506(c), which came into effect on September 23, 2013 and allows for general solicitation and advertising in private offerings where the purchasers are limited to accredited investors; (ii) the overhaul of Regulation A creating two tiers of offerings, which came into effect on June 19, 2015 and allows for both pre-filing and post-filing marketing of an offering, called “testing the waters”; (iii) the addition of Section 5(d) of the Securities Act, which came into effect in April 2012, permitting emerging growth companies to test the waters by engaging in pre- and post-filing communications with qualified institutional buyers or institutions that are accredited investors; and (iv) Title III crowdfunding, which came into effect May 19, 2016 and allows

SEC Proposes Amendments To Definition Of “Small Reporting Company”

On June 27, 2016, the SEC published proposed amendments to the definition of “smaller reporting company” as contained in Securities Act Rule 405, Exchange Act Rule 12b-2 and Item 10(f) of Regulation S-K. The amendments would expand the number of companies that qualify as a smaller reporting company and thus qualify for the scaled disclosure requirements in Regulation S-K and Regulation S-X. The rule change follows the SEC concept release and request for public comment on sweeping changes to the business and financial disclosure requirements in Regulation S-K. Throughout the SEC Concept Release, it referenced the scaled and different disclosure requirements for the different categories of company and affirmed that it was evaluating and considering changes to the eligibility criteria for each.

If the rule change is passed, the number of companies qualifying as a smaller reporting company will increase from 32% to 42% of all reporting companies.

The proposed rule change follows the SEC Advisory Committee on

SEC Issues Concept Release On Regulation S-K; Part 2

On April 15, 2016, the SEC issued a 341-page concept release and request for public comment on sweeping changes to certain business and financial disclosure requirements in Regulation S-K (“S-K Concept Release”). This blog is the second part discussing that concept release. In Part I, which can be read HERE, I discussed the background and general concepts for which the SEC provides discussion and seeks comment. In this Part II, I will discuss the rules and recommendations made by the SEC and, in particular, those related to the 100, 200, 300, 500 and 700 series of Regulation S-K.

Background

The fundamental tenet of the federal securities laws is defined by one word: disclosure. In fact, the SEC neither reviews nor opines on the merits of any company or transaction, but only upon the appropriate disclosure, including risks, made by that company. However, excessive rote immaterial disclosure can dilute the material important information regarding that particular company and have the

SEC Issues Concept Release On Regulation S-K; Part 1

This is the first blog in a two-part series on the S-K Concept Release. In this Part I, I will discuss the background and general concepts for which the SEC provides discussion and seeks comment. In Part II of the series I will discuss the rules and recommendations made by the SEC and, in particular, those

The U.S. Capital Markets Clearance And Settlement Process

Within the world of securities there are many sectors and facets to explore and understand. To be successful, a public company must have an active, liquid trading market. Accordingly, the trading markets themselves, including the settlement and clearing process in the US markets, is an important fundamental area of knowledge that every public company, potential public company, and advisor needs to comprehend. A basic understanding of the trading markets will help drive relationships with transfer agents, market makers, broker-dealers and financial public relations firms as well as provide the knowledge to improve relationships with shareholders. In addition, small pooled funds such as venture and hedge funds and family offices that invest in public markets will benefit from an understanding of the process.

This blog provides a historical foundation and summary of the clearance and settlement processes for US equities markets. In a future blog, I will drill down into specific trading, including short selling.

History and Background

The Paperwork Crisis

Regulation SCI

The SEC adopted Regulation Systems Compliance and Integrity (Regulation SCI) on November 3, 2015 to improve regulatory standards and processes related to technology in the securities business including by financial services firms. Regulation SCI was originally proposed in March 2013. Security and standards related to technological processes, data storage and systems has been a top priority of the SEC over the last few years and continues to be so this year.

Background

Technology has transformed the securities industry over the last years both in the area of regulatory oversight such as through algorithms to spot trading anomalies that could indicate manipulation and/or insider trading issues, and for market participants through enhanced speed, capacity, efficiency and sophistication of trading abilities. Enhanced technology carries the corresponding risk of failures, disruptions and of course hacking/intrusions. Moreover, as U.S. securities market systems are interconnected; an issue with one entity or system can have widespread consequences for all market participants.

Regulation SCI was proposed and

Responding To SEC Comments

Background

The SEC Division of Corporation Finance (CorpFin) reviews and comments upon filings made under the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”). The purpose of a review by CorpFin is to ensure compliance with the disclosure requirements under the federal securities laws, including Regulation S-K and Regulation S-X, and to enhance such disclosures as to each particular issuer. CorpFin will also be cognizant of the anti-fraud provisions of the federal securities laws and may refer a matter to the Division of Enforcement where material concerns arise over the adequacy and accuracy of reported information or other securities law violations, including violations of the Section 5 registration requirements. CorpFin has an Office of Enforcement Liason in that regard.

CorpFin’s review and responsibilities can be described with one word: disclosure!

CorpFin selectively reviews filings, although generally all first-time filings, such as an S-1 for an initial public offering or Form 10 registration under

SEC Advisory Committee On Small And Emerging Companies Reviews Capital Formation

On February 25, 2016, the SEC Advisory Committee on Small and Emerging Companies (the “Advisory Committee”) met and listened to three presentations on access to capital and private offerings. The three presentations were by Jeffrey E. Sohl, Professor of Entrepreneurship and Decision Science Director, Center For Venture Research at University of New Hampshire; Brian Knight, Associate Director of Financial Policy, Center for Financial Markets at the Milken Institute; and Scott Bauguess, Deputy Director, Division of Economic and Risk Analysis at the SEC. The presentations expound upon the recent SEC study on unregistered offerings (see blog HERE).

The presentations were designed to provide information to the Advisory Committee as they continue to explore recommendations to the SEC on various capital formation topics. This blog summarizes the 3 presentations.

House Passes More Securities Legislation

In what must be the most active period of securities legislation in recent history, the US House of Representatives has passed three more bills that would make changes to the federal securities laws. The three bills, which have not been passed into law as of yet, come in the wake of the Fixing American’s Surface Transportation Act (the “FAST Act”), which was signed into law on December 4, 2015.

The 3 bills include: (i) H.R. 1675 – the Capital Markets Improvement Act of 2016, which has 5 smaller acts imbedded therein; (ii) H.R. 3784, establishing the Advocate for Small Business Capital Formation and Small Business Capital Formation Advisory Committee within the SEC; and (iii) H.R. 2187, proposing an amendment to the definition of accredited investor. None of the bills have been passed by the Senate as of yet.

Meanwhile, the SEC continues to finalize rulemaking under both the JOBS Act, which was passed into law on April 5,

SEC Gives Insight On 2016 Initiatives

SEC Chair Mary Jo White gave a speech at the annual mid-February SEC Speaks program and, as usual, gave some insight into the SEC’s focus in the coming year. This blog summarized Chair White’s speech and provides further insight and information on the topics she addresses.

Consistent with her prior messages, Chair White focuses on enforcement, stating that the SEC “needs to go beyond disclosure” in carrying out its mission. That mission, as articulated by Chair White, is the protection of investors, maintaining fair, orderly and efficient markets, and facilitating capital formation. In 2015 the SEC brought a record number of enforcement proceedings and secured an all-time high for penalty and disgorgement orders. The primary areas of focus included cybersecurity, market structure requirements, dark pools, microcap fraud, financial reporting failures, insider trading, disclosure deficiencies in municipal offerings and protection of retail investors and retiree savings. In 2016 the SEC intends to focus enforcement on financial reporting, market structure, and the

State Blue Sky Concerns; Florida and New York

I have often written about state blue sky compliance and issues in completing offerings that do not pre-empt state law, including Tier 1 of Regulation A+ and initial or direct public offerings on Form S-1. I’ve also often expressed my opinion that the SEC, together with FINRA, is best suited to govern most securities-related registrations and exemptions, including both for offerings and broker-dealer matters, and that the states should be more focused on state-specific registrations and exemptions (such as intrastate offerings) and investigation and enforcement with respect to fraud or deceit, or unlawful conduct.

Despite the SEC support for the NASAA-coordinated review program to simplify the state blue sky process for securities offerings, such as under Tier 1 of Regulation A+, only 43 states participate. I say “only” in this context because the holdouts – including, for example, Florida, New York, Arizona and Georgia – are extremely active states for small business development and private capital formation. Moreover, even

SEC Proposes Transfer Agent Rules

On December 22, 2015, the SEC issued an advance notice of proposed rulemaking and concept release on proposed new requirements for transfer agents and requesting public comment. The transfer agent rules were adopted in 1977 and have remained essentially unchanged since that time. An advance notice of proposed rulemaking (ANPR) describes intended new and amended rules and seeks comments on same, but is not in fact that actual proposed rule release. The SEC indicates that following the comment process associated with this ANPR, it intends to propose actual new rules as soon as practicable.

To invoke thoughtful comment and response, the SEC summarized the history of the role of transfer agents within the securities clearing system as well as the current rules and proposed new rules. In addition, the SEC discusses and seeks comments on broader topics that may affect transfer agents and the securities system as a whole. This blog gives a high level review of the whole APNR

SEC’s Financial Disclosure Requirements For Sub-Entities Of Registered Companies

As required by the JOBS Act, in 2013 the SEC launched its Disclosure Effectiveness Initiative and has been examining disclosure requirements under Regulation S-K and Regulation S-X and methods to improve such requirements. In September 2015, the SEC issued a request for comment related to the Regulation S-X financial disclosure obligations for certain entities other than the reporting entity. In particular, the SEC is seeking comments on the current financial disclosure requirements for acquired businesses, subsidiaries not consolidated, 50% or less owned entities, issuers of guaranteed securities, and affiliates whose securities collateralize the reporting company’s securities.

It is important to note that the SEC release relates to general financial statement and reporting requirements, and not the modified reporting requirements for smaller reporting companies or emerging growth companies. In particular, Article 8 of Regulation S-X applies to smaller reporting companies and Article 3 to those that do not qualify for the reduced Article 8 requirements. The SEC discussion and request for

SEC Issues Report On Accredited Investor Definition

On December 18, 2015, the SEC issued a 118-page report on the definition of “Accredited Investor” (the “Report”). The report follows the March 2015 SEC Advisory Committee on Small and Emerging Companies (the “Advisory Committee”) recommendations related to the definition. The SEC is reviewing the definition of “accredited investor” as directed by the Dodd-Frank Act, which requires that the SEC review the definition as relates to “natural persons” every four years to determine if it should be modified or adjusted.

The definition of “accredited investor” has not been comprehensively re-examined by regulators since its adoption in 1982; however, in 2011 the Dodd-Frank Act amended the definition to exclude a person’s primary residence from the net worth test of accreditation.

Although the Report contains detailed discussions on the various aspects of the definition of an accredited investor, the history of the different aspects of the definition, a discussion of different approaches taken in other U.S. regulations and in foreign

Title III Crowdfunding

As required by Title III of the JOBS Act, on October 30, 2015, the SEC has published the final crowdfunding rules. Regulation Crowdfunding has been long in the making, with the JOBS Act having been passed on April 5, 2012, and the first set of proposed crowdfunding rules having been published on October 23, 2013. The new rules will be effective 180 days after publication, but the forms for registering a funding portal with the SEC will be effective and available January 29, 2016.

The SEC has dubbed the new rules “Regulation Crowdfunding.” Regulation Crowdfunding provides the rules implementing Section 4(a)(6) of the Securities Act of 1933 (the Securities Act) and the regulatory framework for registered funding portals and broker-dealers that companies are required to use as intermediaries in crowdfunding offerings. In addition, Regulation Crowdfunding exempts securities sold under Section 4(a)(g) from the mandatory registration requirements found in Section 12(g) of the Securities Exchange Act of 1934 (“Exchange Act”).

SEC Guidance on Shareholder Proposals and Procedural Requirements

In late October the SEC issued its first updated Staff Legal Bulletin on shareholder proposals in years – Staff Legal Bulletin No. 14H (“SLB 14H”). The legal bulletin comes on the heels of the SEC’s announcement on January 16, 2015, that it would no longer respond to no-action letters seeking exclusion of shareholder proposals on the grounds that the proposal directly conflicts with one of the company’s own proposals to be submitted to shareholders and the same meeting, as further discussed herein. SLB 14H will only allow exclusion of a shareholder proposal if “a reasonable shareholder could not logically vote in favor of both proposals.” As a result of the restrictive language in SLB 14H, it is likely that the direct conflict standard will rarely be used as a basis for excluding shareholder proposals going forward. With the publication of SLB 14H, the SEC will once again entertain and review no-action requests under the “direct conflict” grounds for exclusion.

SLB

SEC Proposes Amendments Related To Intrastate And Regional Securities Offerings- Part 1

On October 30, 2015, the SEC published proposed rule amendments to facilitate intrastate and regional securities offerings. This rule proposal comes following the September 23, 2015, Advisory Committee on Small and Emerging Companies (the “Advisory Committee”) recommendation to the SEC regarding the modernization of the Rule 147 Intrastate offering exemption. The SEC has proposed amendments to Rule 147 to modernize the rule and accommodate adopted state intrastate crowdfunding provisions. The proposed amendment eliminates the restriction on offers and eases the issuer eligibility requirements, provided however the issuer must comply with the specific state securities laws. In addition, the SEC has proposed amendments to Rule 504 of Regulation D to increase the aggregate offering amount from $1 million to $5 million and to add bad actor disqualifications from reliance on the rule. Finally, the SEC has made technical amendments to Rule 505 of Regulation D.

In this Part I of the blog, I will discuss the Rule 147 amendment and in

SEC Small Business Advisory Committee Public Company Disclosure Recommendations

On September 23, 2015, the SEC Advisory Committee on Small and Emerging Companies (the “Advisory Committee”) met and finalized its recommendation to the SEC regarding changes to the disclosure requirements for smaller publicly traded companies.

By way of reminder, the Committee was organized by the SEC to provide advice on SEC rules, regulations and policies regarding “its mission of protecting investors, maintaining fair, orderly and efficient markets and facilitating capital formation” as related to “(i) capital raising by emerging privately held small businesses and publicly traded companies with less than $250 million in public market capitalization; (ii) trading in the securities of such businesses and companies; and (iii) public reporting and corporate governance requirements to which such businesses and companies are subject.”

The topic of disclosure requirements for smaller public companies under the Securities Exchange Act of 1934 (“Exchange Act”) has come to the forefront over the past year. In early December the House passed the Disclosure Modernization and

SEC Advisory Committee On Small And Emerging Companies Recommends Modernizing Rule 147 for Intrastate Crowdfunding Offerings

On September 23, 2015, the SEC Advisory Committee on Small and Emerging Companies (the “Advisory Committee”) met and finalized its recommendation to the SEC regarding the modernization of the Rule 147 Intrastate offering exemption. The recommendations are focused on facilitating recently enacted and future state-based crowdfunding initiatives.

I have written about the Advisory Committee on numerous occasions, but by way of reminder, the Committee was organized by the SEC to provide advice on SEC rules, regulations and policies regarding “its mission of protecting investors, maintaining fair, orderly and efficient markets and facilitating capital formation” as related to “(i) capital raising by emerging privately held small businesses and publicly traded companies with less than $250 million in public market capitalization; (ii) trading in the securities of such businesses and companies; and (iii) public reporting and corporate governance requirements to which such businesses and companies are subject.”

In formulating its recommendations, the Advisory Committee gave specific consideration to the belief

The Stronger Enforcement Of Civil Penalties Act; A Push For Higher SEC Penalties

In July a Democratic senator and a Republican senator together introduced the Stronger Enforcement of Civil Penalties Act of 2015 (SEC Penalties Act), which would give the SEC the ability to levy much heftier penalties for securities fraud, and against recidivists. The Act was referred to the Senate Baking, Housing and Urban Affairs Committee for review and further action. The proposed SEC Penalties Act would increase the limits on civil monetary penalties and directly link the size of the penalty to the scope of harm and associated investor losses, and substantially increase the penalties for repeat offenders.

Background: A Trend Towards Increased Enforcement

The SEC Penalties Act continues a trend to deter securities law violations through regulations and stronger enforcement including the SEC Broken Windows policy, increased Dodd-Frank whistleblower activity and reward payments, and increased bad actor prohibitions. See my prior blog on bad actor prohibitions HERE.

The SEC Broken Windows policy is one in which the SEC is

SEC Has Adopted Final Pay Ratio Disclosure Rules

span style=”font-family: Calibri;”On August 5, 2015, the SEC published and adopted final pay ratio disclosure rules. The final rules are substantially the same as the proposed rules which were published in September 2013. The rules will require inclusion of the new disclosures in proxy materials, registration statements and annual reports beginning in the fiscal year starting on or after January 1, 2017.

The proposed new rules implement Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) by amending Item 402 of Regulation S-K. The recently proposed “pay vs. performance” rules, which I discussed in my blog HERE would also amend Item 402. As an Item 402 disclosure, the new pay ratio disclosure will also be the subject of the “say on pay” advisory vote. My blog on say on pay for smaller reporting companies can be read Here.

Interestingly, in the final published rules, the SEC makes a point of stating that

SEC Issues Guidance On General Solicitation And Advertising In Regulation D Offerings

Effective September, 2013, the SEC adopted final rules eliminating the prohibition against general solicitation and advertising in Rules 506 and 144A offerings as required by Title II of the JOBS Act. The enactment of new 506(c) resulting in the elimination of the prohibition against general solicitation and advertising in private offerings to accredited investors has been a slow but sure success. Trailblazers such as realtymogul.com, circleup.com, wefunder.com and seedinvest.com proved that the model can work, and the rest of the capital marketplace has taken notice. Recently, more established broker-dealers have begun their foray into the 506(c) marketplace with accredited investor-only crowdfunding websites accompanied by marketing and solicitation to draw investors.

The historical Rule 506 was renumbered to Rule 506(b) and issuers have the option of completing offerings under either Rule 506(b) or 506(c). Rule 506(b) allows offers and sales to an unlimited number of accredited investors and up to 35 unaccredited investors, provided however that if any unaccredited investors