Joining the seemingly endless parade of blockchain-enabled initial coin offerings (ICOs) that have hit the market, the Securities and Exchange Commission (SEC) is promoting a new offering of digital tokens, called Howeycoins, for sale to the public. The Howeycoins platform is touted as one of the largest cryptocurrency platforms, enabling investors to use digital tokens to buy services or products in the travel industry, such as airplane tickets, hotel rooms and rental cars, or simply to trade for profit. In addition, Howeycoins are said to be officially registered with the SEC and will trade on an SEC-compliant exchange.
The offering is being conducted using the format of most ICOs. Investors are drawn to a website, in this case www.howeycoins.com, to participate in the offering. The ICO is structured as an investment discount “ladder,” giving early investors significant discounts to the offering price of the tokens, and there is a time counter showing the days, hours, minutes and seconds before the ICO is closed. Purchases can be made with credit cards. As are typical of ICOs, there is a link to a “white paper” that describes the value and utility proposition associated with Howeycoin. The website also identifies the management team and includes celebrity testimonials. Continue reading SEC Launches Howeycoins ICO (Spoiler – it’s Fake)
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.
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
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.
Today, Sebastian Abero, the head of the SEC’s Office of Small Business Policy, had some very positive news for those interested in the new Regulation A+. He revealed that, since the Reg A+ rules were adopted by the SEC in June 2015, through September 2017, there have been 69 completed Reg A+ offerings raising a total of $611 million. That’s an average of $8.8 million per deal. As we also know, seven of those companies completed offerings that immediately commenced trading on national securities exchanges.
Abero was speaking at the annual SEC Government-Business Forum on Small Business Capital Formation, this year being held in Austin, TX. Other speakers included SEC Chairman Jay Clayton. Mr. Clayton’s remarks focused on helping what he called “Mr. and Ms. 401(k)” obtain opportunities to invest in growth companies. He acknowledged that a “one size fits all regulatory structure does not fit all” as he talked about the benefits of scaled disclosure for smaller issuers. He acknowledged there is room for improvement in the regulations to remove some of the “speed bumps” in the path to capital formation. He also hinted at expanding which companies can benefit from reduced disclosure as “smaller reporting companies.”
Investment banker Mark Elenowitz also spoke this morning at the Forum and pushed to increase the maximum that can be offered in Reg A+ deals to $75 million (a bill is working its way through Congress to do that). Nasdaq Vice President AnneMarie Tierney agreed with increasing the cap. She also talked about the challenges of best efforts underwritings in Reg A+ deals. The best efforts deals can garner less aftermarket support than in firm commitment underwritings. Panelists also suggested that the resales of Reg A+ securities should be exempt from SEC registration when trading in the over-the-counter markets. Currently issuers have to rely on certain somewhat cumbersome exemptions.
At this week’s Practising Law Institute’s Annual Institute on Securities Regulation, SEC Chairman Jay Clayton commented, among other things, on initial coin offerings, or ICOs. As we know, this year alone billions of dollars have been raised in ICOs, where cryptocurrency in the form of a “token” or coin is sold to investors to raise money for a company or other business endeavor. The tokens often trade on an online platform. Previously the SEC had issued a warning saying that the tokens may be securities and to be careful. Prior to that players were assuming securities laws did not apply. They also last week issued a warning to celebrities about risks of endorsing ICOs.
Chairman Clayton went a bit further today, going off his script to say that he has yet to see an ICO that doesn’t have “sufficient indicia” of being a securities offering. He also mentioned that the trading platforms could face SEC scrutiny and might have to either register as national securities exchanges or make clear they have an exemption from doing so.
While there may well be circumstances in which structures can be implemented to avoid being deemed securities, it seems there could be an exciting opportunity for ICO promoters to conduct their offerings under the securities laws, and allow trading of tokens on proper SEC approved exchanges. There would still be real benefits, including not diluting insiders’ ownership of their company. This could reduce the risk of fraud and still encourage capital formation.
The Regulation A+ rules adopted by the SEC in 2015 included scaled reporting obligations to assist in reducing issuers’ offering costs as against a traditional IPO. However, if a company is seeking to become a full Securities Exchange Act reporting company, which is required if it is planning a national exchange listing, its disclosure must follow traditional IPO Form S-1 level disclosure, without the benefit of scaling. The one exception: even these companies may utilize financial statements that are up to nine months old. Normally in a Form S-1 your financials cannot be more than 135 days “stale.” Last month, the SEC and Nasdaq permitted Chicken Soup for the Soul Entertainment Inc. to go public, trade on Nasdaq and complete its Reg A+ offering with no financial information from 2017. The other three Reg A+ issuers that have completed IPOs onto national exchanges utilized financials that were no more than 135 days old.
The unanswered question, however, was this: is a company that does not have “current” financials in its Regulation A+ offering documents immediately out of compliance with reporting obligations right after it becomes a full reporting company upon completion of the IPO? The SEC answered this in a positive way last week with several Compliance and Disclosure Interpretations (C&DIs). The answer: if you have missing quarterly reports on Form 10-Q when you finish your IPO, you are given 45 days from then to file them. If you are missing an annual report on Form 10-K, you have 90 days to complete that.
This small piece of guidance adds another substantial cost-saving benefit to Reg A+. The ability to defer the preparation and reporting of four and one-half months of financial information beyond what Form S-1 would require allows a company to deal with that cost after it raises money in its IPO, if it is comfortable that the scaled disclosure will not impede the ability to complete the fundraising and IPO.
HR 2864, the “Improving Access to Capital Act,” passed the US House of Representatives on September 5, 2017 with a lopsided bipartisan vote of 403-3. The short bill directs the SEC to permit full Securities Exchange Act reporting companies to use Regulation A+ for a public offering. Previously, only non-reporting companies could utilize the new streamlined approach with unlimited testing the waters capabilities.
Some smaller companies trading in the over-the-counter markets have been contemplating suspending their SEC reporting obligations to be able to move forward with a Reg A+ offering. If this bill passes the Senate and is signed by Pres. Trump, that would no longer be necessary. The bill makes clear that the company would be deemed to satisfy the post-offering reporting obligations under Reg A+ so long as they continue with full quarterly and other reporting required of most Exchange Act reporting companies.
As a practical matter, this change would only help companies trading in the over-the-counter markets with under $75 million market capitalization, companies that went public in the last year or those that have not made recent filings on a timely basis, since all others have some ability to utilize short registration Form S-3, which is a very simple and quick process even compared with Reg A+. It also avoids the limits on the value of shares that can be registered on Form S-3 for smaller exchange listed companies. But help it would.
The House Financial Services Committee recently approved a bill that would permit full SEC reporting companies to use Tier 2 of Regulation A+ to effect a streamlined, lower cost public offering of their securities. The bill now moves to the full House. In implementing rules under the Jumpstart Our Business Startups (JOBS) Act in 2015, the SEC retained the historical restriction that only non-reporting companies could utilize Reg A. There was really no particular reason this could not have been changed.
Now that practitioners have witnessed the closing of well over 30 Reg A+ deals, three of which are now successfully trading on national exchanges, it would seem logical to expand the availability of Reg A+ to reporting companies. They would have a history of full disclosure, and could clearly benefit from utilizing a faster and cheaper option to raise money from the public. OTC Markets, Inc. had submitted a petition several years ago that encouraged this, and Duane Morris submitted a letter to the SEC in support of that petition. Presumably this would only benefit companies that are not eligible for short registration Form S-3, including companies with less than a $75 million market cap and trading over-the-counter.
As noted in Crowdfund Insider, the new Republican-led SEC could, on its own, simply implement this change and avoid the need for Congress to pass a bill. There are some questions to address, however, such as would the relaxed financial reporting requirements apply before the offering is approved by the SEC? Would the testing the waters rules be the same? It will be interesting to see if this develops further.
Purveyors of initial coin offerings (ICOs) received a strong lashing from the SEC recently in declaring that one particular ICO was a securities offering that should have been fully registered with the SEC or met with an exemption from registration. A very new and exploding technique, in ICOs companies issue digital tokens through blockchain technology to investors. It is said over $1 billion has been raised in ICOs just since this January. Several known pending deals seek to raise over $100 million each.
Because the coin purchasers do not invest in the company, some experts claim they are therefore not securities. The SEC disagreed but also said in a press release they would not bring an action against the particular company “in light of the facts and circumstances.” They then issued a warning to all those in the ICO world that many other such offerings might be deemed securities, especially if they become tradeable in a secondary market as many do. In ICOs, very little information is typically provided to investors, and many deals are completed even without attorneys or other advisers.
The SEC investigated the case in question, involving a virtual company known as “the DAO,” because millions of dollars of coins in their ICO were hacked (most were recovered). They also issued an investor bulletin warning the public about potential fraud in ICOs, including bad actors making promises of large returns on investment. ICOs may indeed become a worthwhile investment and method for companies to access capital, especially if promoters accede to the SEC’s warning and conduct a proper IPO or exempt offering such as under Regulation D.