Securities Law – Duane Morris on Capital Markets

April 23, 2021 by Duane Morris

SEC Continues to Educate Investors About SPAC Enforcement Risks

Special purpose acquisition companies, or SPACs, have quickly become a part of the Wall Street vernacular, but until recently, they were rare. In fact, the New York Stock Exchange went 10 years without listing a SPAC until 2017. Although the market seems to have embraced SPACs, regulatory authorities, including the U.S. Securities and Exchange Commission, have expressed concern that these investment vehicles may present certain risks for investors.

To read the full text of this Duane Morris Alert, please visit the firm website.

May 22, 2020May 22, 2020 by Darrick M. Mix

SEC Adopts Amendments to Financial Reporting Requirements in Acquisitions and Dispositions of Businesses

Yesterday, May 21, 2020, the Securities and Exchange Commission announced that it approved amendments to its rules and forms “to improve for investors the financial information about acquired or disposed businesses, facilitate more timely access to capital, and reduce the complexity and costs to prepare the disclosure.” The 267-page final rule release is available by clicking here.

The amendments update SEC rules which have not been comprehensively addressed since their adoption, some over 30 years ago. Jay Clayton, the SEC’s Chairman, said that amendments are “designed to enhance the quality of information that investors receive while eliminating unnecessary costs and burdens [and] will benefit investors, registrants and the market more generally.”

Among other things, the amendments:

update the significance tests (i.e., to determine when financial statements regarding an acquisition or disposition must be included) in Rule 1-02(w) and elsewhere by revising the investment test to compare the registrant’s investments in and advances to the acquired or disposed business to the registrant’s aggregate worldwide market value if available; revising the income test by adding a revenue component; expanding the use of pro forma financial information in measuring significance; and conforming, to the extent applicable, the significance threshold and tests for disposed businesses to those used for acquired businesses;
modify and enhance the required disclosure for the aggregate effect of acquisitions for which financial statements are not required or are not yet required by eliminating historical financial statements for insignificant businesses and expanding the pro forma financial information to depict the aggregate effect in all material respects;
require the financial statements of the acquired business to cover no more than the two most recent fiscal years;
permit disclosure of financial statements that omit certain expenses for certain acquisitions of a component of an entity;
permit the use of, or reconciliation to, International Financial Reporting Standards as issued by the International Accounting Standards Board in certain circumstances;
no longer require separate acquired business financial statements once the business has been included in the registrant’s post-acquisition financial statements for nine months or a complete fiscal year, depending on significance; and
make corresponding changes to the smaller reporting company requirements in Article 8 of Regulation S-X, which will also apply to issuers relying on Regulation A.

The amendments will be effective on Jan. 1, 2021, but voluntary compliance will be permitted in advance of the effective date.

April 27, 2020April 27, 2020 by Barry Steinman

SEC Amendments to Accelerated and Large Accelerated Filer Definitions Become Effective

Today, final amendments to the definitions of “accelerated filer” and “large accelerated filer” under Rule 12b-2 of the Securities Exchange Act of 1934 became effective. The SEC adopted the final rule implementing the amendments on March 12, 2020.

The amendments are designed to reduce the number of issuers that qualify as accelerated and large accelerated filers, thereby promoting capital formation for certain smaller reporting companies by reducing compliance costs while still maintaining investor protections.

For additional information regarding the amendments, please visit the firm website.

March 25, 2020 by Darrick M. Mix

SEC Announces Reporting Relief and Issues Guidance Regarding COVID-19

On March 25, 2020, the Securities and Exchange Commission announced that it is extending the filing periods covered by its previously enacted conditional reporting relief for certain public company filing obligations under the federal securities laws, and that it is also extending regulatory relief previously provided to funds and investment advisers whose operations may be affected by COVID-19. In addition, the SEC’s Division of Corporation Finance issued its current views regarding disclosure considerations and other securities law matters related to COVID-19.

Filing Deadline Relief for Public Companies

To address potential compliance issues, the SEC issued an order [https://www.sec.gov/rules/exorders/2020/34-88465.pdf] that, subject to certain conditions, provides public companies with a 45-day extension to file certain disclosure reports that would otherwise have been due between March 1 and July 1, 2020. This order supersedes and extends the SEC’s prior order of March 4, 2020. Among other conditions, companies must continue to convey through a current report (Form 8-K) a summary of why the relief is needed in their particular circumstances for each periodic report that is delayed. The SEC may provide extensions to the time period for the relief, with any additional conditions it deems appropriate, or provide additional relief as circumstances warrant. The SEC encouraged companies and their representatives to contact SEC staff with questions or matters of particular concern.

Relief for Funds and Investment Advisers

The SEC also issued two orders [https://www.sec.gov/rules/other/2020/ia-5469.pdf and https://www.sec.gov/rules/other/2020/ic-33824.pdf] that provide certain investment funds and investment advisers with additional time with respect to holding in-person board meetings and meeting certain filing and delivery requirements, as applicable. These orders supersede and extend the filing periods covered by the SEC’s prior orders of March 13, 2020. Among other conditions, entities must notify the SEC and/or investors, as applicable, of the intent to rely on the relief, but generally no longer need to describe why they are relying on the order or estimate a date by which the required action will occur.

Disclosure Guidance for Public Companies

Further, the Division of Corporation Finance issued Disclosure Guidance Topic No. 9 [https://www.sec.gov/corpfin/coronavirus-covid-19] (the “Guidance”), providing the staff’s current views regarding disclosure and other securities law obligations that companies should consider with respect to COVID-19 and related business and market disruptions. The Division has been monitoring how companies are reporting the effects and risks of COVID-19 on their businesses, financial condition, and results of operations and is providing the Guidance as companies prepare disclosure documents during this uncertain time. In the Guidance, the Division reminds companies that a number of existing rules or regulations require disclosure about the known or reasonably likely effects of and the types of risks presented by COVID-19. As a result, disclosure of these risks and COVID-19-related effects may be necessary or appropriate in management’s discussion and analysis, the business section, risk factors, legal proceedings, disclosure controls and procedures, internal control over financial reporting, and the financial statements. The Guidance also poses a series of questions designed to help companies assess COVID-19-related effects and consider their disclosure obligations (for example: How has COVID-19 impacted your financial condition and results of operations? In light of changing trends and the overall economic outlook, how do you expect COVID-19 to impact your future operating results and near-and-long-term financial condition? Do you expect that COVID-19 will impact future operations differently than how it affected the current period?)

The Guidance notes that companies and related persons to be mindful of their market activities, including the issuance or purchase of securities, in light of their obligations under the federal securities laws. For example, where COVID-19 has affected a company in a way that would be material to investors or where a company has become aware of a risk related to COVID-19 that would be material to investors, the company, its directors and officers, and other corporate insiders who are aware of these matters should refrain from trading in the company’s securities until such information is disclosed to the public. The Guidance also reminds companies of their obligations under Regulation FD to avoid selective disclosures.

January 15, 2019 by Darrick M. Mix

The Government Shutdown and Effectiveness of Registration Statements under Section 8(a)

Given the shutdown of the SEC as part of the wider government shutdown, we are seeing many registration statements being filed with no delaying amendment language and with the language required by Rule 473 to allow automatic effectiveness in 20 days in accordance with Section 8(a) of the Securities Act. In the last two weeks, at least 30 such registration statements have been filed. In all of 2018, there were only three such registration statements, and in all of 2017, there were only two. Obviously, the deals must go on, and corporate issuers and their counsel have seen the Division of Corporation Finance’s FAQs regarding Actions During Government Shutdown and have heeded the answers set forth therein. (For now, the FAQs are posted on the Division of Corporation Finance’s homepage.)

The first of these “automatically effective” registration statements filed in 2019 was on Form S-4 in connection with the pending merger of BSB Bancorp and People’s United Financial, Inc. Since then, issuers have filed these registration statements on Forms S-1, S-3 and S-4 in connection with a variety of transactions. If the government shutdown continues, we should expect to see many more of these filings.

February 21, 2018 by Barry Steinman

U.S. Supreme Court Holds Whistleblowers Must Report to SEC to be Afforded Protection Under Dodd-Frank Act

On Wednesday, February 21, 2018, the United States Supreme Court held, 9-0, in the case of Digital Realty Trust, Inc. v. Somers that the term “whistleblower” under the Dodd-Frank Wall Street Reform and Consumer Protection Act does not include individuals who report violations of securities laws internally to their companies but not to the United States Securities and Exchange Commission.

In Digital Realty Trust, Paul Somers sued his former employer, Digital Realty Trust, alleging that his employment was terminated because he reported certain suspected securities laws violations to Digital Realty Trust’s senior management and that such termination constituted an unlawful retaliation against a whistleblower under the Dodd-Frank Act. The Court held in favor of Digital Realty Trust, stating that the whistleblower anti-retaliation provision under the Dodd-Frank Act does not protect individuals who have reported alleged misconduct internally to their employer, but not to the SEC.

In reaching its conclusion, the Court focused on the actual text of the anti-retaliation provision of the Dodd-Frank Act as well as the Dodd-Frank Act’s purpose. The Court noted that the Dodd-Frank Act defines a “whistleblower” as “any individual who provides…information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.” Further, the Court stated that the purpose of the Dodd-Frank Act was to aid the SEC’s enforcement efforts by motivating people who know of securities law violations to tell the SEC.

The Court’s ruling overturned the Ninth Circuit’s March 2017 ruling and resolved a split between the Ninth and Fifth Circuits. In March 2017, the Ninth Circuit found that Mr. Somers was entitled to protection under Dodd-Frank Act. In July 2013, the Fifth Circuit ruled in the case of Asadi v. G.E. Energy that whistleblowers must take their complaints to the SEC to be eligible for protection under the Dodd-Frank Act.

May 15, 2017 by Barry Steinman

SEC Issues Updated Guidance Regarding Conflict Mineral Rules

On April 7, 2017, the SEC Division of Corporate Finance issued updated guidance regarding the SEC’s conflict minerals rules, stating that, in light of uncertainties regarding how the SEC will resolve issues relating to its conflict mineral rules, the SEC will not recommend enforcement action with respect to a company – even if it is subject to Item 1.01(c) of Form SD – to comply with the disclosure obligations under the SEC’s conflict minerals rules by only including in its Form SD the disclosures required by Items 1.01(a) and (b) of Form SD.

The SEC was prompted to update its guidance by the April 3, 2017 final judgment of the U.S. District Court for the District of Columbia in National Association of Manufacturers, et al. v. Securities and Exchange Commission,[1] in which the court held that the provisions of Item 1.01(c) of Form SD that require companies to report to the SEC and state on their websites that a product has “not been found to be ‘DRC conflict free’” violates the First Amendment of the U.S. Constitution.

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July 25, 2013September 10, 2014 by Richard L. Cohen

SEC Ends Losing Streak; Conflict Minerals Rule Upheld

The SEC scored a victory in the U.S. Court of Appeals for the District of Columbia Circuit in a case filed in October 2012 by the U.S. Chamber of Commerce, the Business Roundtable, and the National Association of Manufacturers. The plaintiffs challenged the SEC’s rule on disclosure of the use of conflict minerals on grounds that aspects of the rule were arbitrary and capricious under the Administrative Procedure Act and claiming that the disclosures required by the SEC and by Congress run afoul of the First Amendment. In a 63-page decision in favor of the SEC, the Court found no problems with the SEC’s rulemaking and disagreed that the “conflict minerals” disclosure scheme transgressed the First Amendment.

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July 24, 2013September 10, 2014 by Darrick M. Mix

Fifth Circuit to Dodd-Frank Whistleblowers: Call the SEC First

The U.S. Court of Appeals for the Fifth Circuit’s decision last week in Asadi v. G.E. Energy (USA) has been hailed as a triumph for employers because it requires whistleblowers who bring retaliation claims under the Dodd–Frank Wall Street Reform and Consumer Protection Act to show that they suffered retaliation because they reported potential violations to the U.S. Securities and Exchange Commission. The Fifth Circuit rejected the position adopted by the SEC in its regulations implementing Dodd-Frank and by the few district courts that have addressed the issue. That rejected approach interprets Section 922 of Dodd-Frank to apply its enhanced protections to certain whistleblowers even if they had not reported their concerns to the SEC. Although this decision narrows the category of employees who can seek the enhanced protections of Dodd-Frank, it will likely increase the number of whistleblowers who report their concerns to the SEC.

Our firm’s client alert regarding the case can be found here.

December 7, 2012September 10, 2014 by Darrick M. Mix

SEC Staff Issues Wells Notice to Netflix and Its CEO

The Wall Street Journal and other news outlets reported late yesterday that Netflix, Inc. filed a Form 8-K disclosing that each of Netflix and its CEO, Reed Hastings, had received a Wells notice from the staff of the Securities and Exchange Commission relating to an alleged violation of Regulation Fair Disclosure (FD) in connection with a Facebook post by Hastings on July 3, 2012. Hastings’ Facebook post stated that “Netflix monthly viewing exceeded 1 billion hours for the first time ever in June. When House of Cards and Arrested Development debut, we’ll blow these records away.”

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