Tag Archives: sec

David N. Feldman

New Law Orders SEC to Allow Reporting Companies to use Regulation A+

The President today signed the Economic Growth, Regulatory Relief and Consumer Protection Act. Most of the bill is centered around easing some Dodd-Frank restrictions as they apply to smaller banks. But buried in Section 508, called “Improving Access to Capital,” Congress adopted a major change to Regulation A+. Previously, the Reg A+ rules required, in Section 251(b)(2), that a company cannot use Reg A+ if it is subject to the SEC reporting requirements under Section 13 or 15(d) of the Securities Exchange Act immediately prior to the offering. This includes, for example, every company listed on a national exchange such as Nasdaq or the NYSE and many companies that trade over-the-counter. The new law reverses that and orders the SEC to change the rules to permit reporting companies to utilize Reg A+.

In addition, currently, Rule 257 of Reg A+ requires companies completing Tier 2 (raising any amount up to $50 million) offerings to file specified periodic and current reports under what has become known as “light reporting” if they do not become full reporting companies. The new law directs the SEC to amend that to say that a reporting company that conducts a Tier 2 offering going forward will be deemed to have met the periodic and current reporting requirements under that rule if they file what is required of a full permanent SEC reporting company.

What are the implications of this change? Allowing already public and reporting companies to use Reg A+ will provide them access to the unique benefits of this streamlined public offering process. Over-the-counter companies can conduct a Tier 2 public offering free of state blue sky merit review. All companies can use broad “testing the waters” with online or broadcast promotion of their public offering to anyone – this is limited to institutional investors otherwise. The SEC also has been giving much more limited review to these filings, which are completed quickly.

While this is a very positive change it has somewhat limited benefit. Companies trading on national exchanges, as well as over-the-counter companies with market capitalizations in excess of $75 million, can use short registration Form S-3 after they have been public for a year, so long as they have filed all their quarterly filings on time for the prior year. Using S-3 is generally much quicker, cheaper and simpler than even a Reg A+ offering. So as a practical matter this is only likely to help over-the-counter companies with market capitalizations below $75 million, companies that went public less than a year ago and listed companies who missed a filing deadline in the last year. But it is a positive development nonetheless.

Cryptocurrencies and Digital Tokens as Securities

Since the release of Bitcoin in 2009, cryptocurrencies and digital tokens powered by blockchain technology have garnered the attention of investors, financial intermediaries and government agencies. Sales of digital tokens representing cryptocurrencies or some other digital asset or utility in so-called initial coin offerings (ICOs) have provided over $10 billion in capital to technology startups, and the aggregate market value of digital coins has surpassed $325 billion. ICOs have been typically open to the public through website platforms that link to white papers describing a startup’s technological proposition. More often than not, ICOs fund little more than concepts and ideas rather than development stage businesses. Staying largely under the radar of financial regulators, many ICOs have been a source of fraud, market manipulation and the financing of illegitimate ventures.

The investigative report of the Securities and Exchange Commission (SEC) on The DAO in July 2017 served as a point of departure for the ICO marketplace. Over a 30-day period in mid-2016, The DAO, a digital decentralized autonomous organization initiated on the Ethereum blockchain, issued digital tokens worth $150 million to fund various “projects” that would be voted on by token holders. Investors in the tokens would share in the earnings from these projects and could sell DAO tokens on the open market over cryptocurrency exchanges. The SEC found that The DAO tokens were in fact securities under longstanding securities law principles and that any offer or sale of the tokens was subject to registration with the SEC unless there was a valid exemption. The SEC applied the Howey test, which dates back to 1946, in its analysis. Under the Howey test, a digital token is a security if it represents an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. The SEC concluded The DAO token squarely met the criteria under the Howey test, and found that the tokens were securities sold without registration or a valid exemption. The SEC also indicated that the platforms that traded The DAO tokens were required to register under a national securities exchange or operate under an exemption. Continue reading Cryptocurrencies and Digital Tokens as Securities

SEC Releases New Guidance on Cybersecurity Disclosures for Public Companies

The recent spate of high-profile cybersecurity breaches has not spared public companies, as demonstrated by large data breaches in recent years involving Equifax Inc. (NYSE: EFX) and a multitude of other companies.  In response to the proliferation of cybersecurity threats to public companies, on February 21, 2018, the SEC released interpretive guidance to assist companies in preparing disclosures about cybersecurity risks and incidents.  The release, which expands upon the staff’s 2011 guidance and addresses several new topics, was adopted unanimously by the full SEC and, therefore, carries significant weight.

As the SEC release makes clear, in order to meet their ongoing disclosure requirements, public companies should adequately and timely disclose any and all material cybersecurity risks and incidents in their registration statements and in their periodic and current reports.  Public companies must weigh the potential materiality and likelihood of identified risks and, in the case of cybersecurity incidents, the importance of any compromised information and the impact on their operations.  Further, the SEC encourages the use of Forms 8-K and 6-K to promptly disclose cybersecurity risks and incidents, as it will help to reduce the risks of selective disclosure and insider trading.  The SEC guidance indicates that, although some time may be needed to discern the scope and implications of a cybersecurity incident, an ongoing internal or external investigation would not, on its own, provide a basis for avoiding disclosures of a material cybersecurity incident.  The release includes specific guidance on a number of disclosure elements required by Regulation S-K and Regulation S-X, including risk factors, management discussion and analysis, description of the business, legal proceedings, financial statements and board risk oversight. Continue reading SEC Releases New Guidance on Cybersecurity Disclosures for Public Companies

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.

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.

Continue reading SEC Issues Updated Guidance Regarding Conflict Mineral Rules

First SEC Staff Comments on Recent Non-GAAP CDIs

As many of us have noticed, the first comment letters from the staff in the SEC’s Division of Corporation Finance, following Corp Fin’s recent issuance of new CDI guidance on the presentation of non-GAAP financial measures, have become available publicly.  The comment letters shed additional useful light on Corp Fin’s views concerning non-GAAP presentations.

One of the comment letters sent to Alexandria Real Estate Equities, Inc. on June 20, 2016, provides a particularly helpful glimpse into Corp Fin’s views about the use of non-GAAP information in the executive summary of MD&A.  The staff’s letter includes the following comment in reference to MD&A in the registrant’s 2015 Form 10-K:

We note that in your executive summary you focus on key non-GAAP financial measures and not GAAP financial measures which may be inconsistent with the updated Compliance and Disclosure Interpretations issued on May 17, 2016 (specifically Question 102.10). We also note issues related to prominence within your earnings release filed on February 1, 2016. Please review this guidance when preparing your next earnings release.

Indeed, the executive summary portion of the MD&A – when initially conceptualized in the SEC’s 2003 release providing interpretive guidance in the preparation of MD&A – was supposed to include an overview to facilitate investor understanding.  The overview was intended to reflect the most important matters on which management focuses in evaluating operating performance and financial condition.  In particular, the overview was not supposed to be duplicative, but rather more of a “dashboard” providing investors insight in management’s operation and management of the business.

Looking back at the release to write this blog entry, I note references, with regard to Commission guidance on preparation of the MD&A overview, explaining that the presentation should inform investors about how the company earns revenues and income and generates cash, among other matters, but should not include boilerplate disclaimers and other generic language.  The Commission even acknowledged that the overview “cannot disclose everything and should not be considered by itself in determining whether a company has made full disclosure.”

Many companies have presented in their MD&A overview those non-GAAP measures used by management to operate the business and otherwise manage the company.  Where appropriate, references typically are made to the information appearing elsewhere in the document, presented to enable compliance with applicable rules and guidance for non-GAAP presentations.  Interestingly, the staff, in its comment, questions the “prominence” of the non-GAAP presentation in the context of the earnings release (noting that the staff provides less specificity in the portion of its comment relating to the MD&A overview).  This focus on prominence – to the extent the staff’s concerns relate to the MD&A overview – is worth further consideration in preparing MD&A disclosure.   In this connection, query whether the staff – in questioning prominence – could be expressing a view that when management analyzes for investors the measures on which it focuses in managing the business, if management relies on non-GAAP measures, it necessarily must focus on (and explain) – with no less prominence – the corresponding GAAP measures.

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.

Continue reading SEC Ends Losing Streak; Conflict Minerals Rule Upheld

New York Comptroller Seeks Qualcomm’s Records on Political Giving; SEC Contemplating Political Contribution Disclosure Rules

A “books and records” action brought by New York’s comptroller to determine how Qualcomm Incorporated “is spending corporate funds in the political arena” may create a precedent for shareholders seeking to force corporate disclosure of political contributions.

The suit was brought last week in Delaware Chancery Court by Comptroller Thomas DiNapoli as trustee of the New York State Common Retirement Fund, a shareholder of Qualcomm. The complaint cites to recent studies concluding that “corporate political spending is negatively correlated with enterprise value” and may indicate “more widespread control and governance deficiencies.”

Continue reading New York Comptroller Seeks Qualcomm’s Records on Political Giving; SEC Contemplating Political Contribution Disclosure Rules

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.”

Continue reading SEC Staff Issues Wells Notice to Netflix and Its CEO

SEC Rule Proposal Would Permit Public Offerings in “Private Placements” and Facilitate Capital Formation

As required by the JOBS Act, the U.S. Securities and Exchange Commission has proposed rules to eliminate the prohibition on general solicitation and general advertising in private placements exempt from registration by Rule 506 under the Securities Act of 1933, as long as all purchasers of the securities are accredited investors. The elimination of the prohibition on general solicitation and general advertising will result in issuers being able to attract a wider variety of investors with less cost. Increased competition for quality investments could also improve terms for issuers, reducing their cost of capital.

The firm’s client alert regarding the SEC’s proposal may be accessed here.