SEC Adopts Regulation A Amendments
As mandated by the JOBS Act, the SEC adopted rules to amend Regulation A to facilitate smaller companies’ access to capital. The amended rules, referred to as Regulation A+, enable smaller companies to offer and sell up to $50 million of securities in a 12-month period without going through a full-blown registration process, subject to eligibility, disclosure and reporting requirements. The rules provide for two tiers of offerings: Tier 1, for offerings of securities of up to $20 million in a 12-month period, with not more than $6 million in offers by affiliates; and Tier 2, for offerings of securities of up to $50 million in a 12-month period, with not more than $15 million in offers by affiliates. Tier 2 offerings are subject to certain ongoing reporting requirements, including a requirement to provide audited financial statements. Importantly, however, state law registration requirements will be preempted in Tier 2 offerings, making Regulation A+ a much more viable alternative than under the prior regulation.
Potential to Violate Whistleblower Protections in Confidentiality Agreements
The SEC recently announced its first enforcement action against a company for requiring employees to sign confidentiality agreements “with the potential to stifle the whistleblowing process.” The action, brought against KBR, Inc., alleged a violation of Exchange Act Rule 21F-17 even though the SEC was not aware of KBR having taken action to enforce it or of any KBR employee having been prevented from communicating with SEC staff. KBR required employees interviewed in connection with an internal investigation to sign a confidentiality agreement that prohibited them from discussing their interview without clearance from KBR’s law department. As part of a settlement with the SEC, KBR paid $130,000 and agreed to amend its confidentiality agreements with language that expressly permits regulatory reporting by the employee. In light of this development, public companies should review their confidentiality agreements to ensure compliance with Rule 21F-17, including by adding language that permits regulatory reporting.
SEC Civil Insider Trading Case Proceeds Despite Newman Ruling
Ever since the Second Circuit overturned the insider trading convictions of two former hedge fund managers in United States v. Newman, there has been considerable debate about how difficult it may be for the SEC to move forward with insider trading cases. On Monday, U.S. District Judge Jed Rakoff allowed a civil insider trading suit filed by the SEC to proceed, suggesting that Newman may not present a substantial hurdle, at least at the motion to dismiss stage. In SEC v. Payton, the court held that the SEC’s complaint had adequately alleged that the tipper of material nonpublic information had received a personal benefit for the disclosure and that the remote tippees had had sufficient knowledge of that benefit under the “recklessness” standard applicable to civil cases. Judge Rakoff found that, to establish the personal-benefit requirement established by Newman, a “close, mutually dependent financial relationship” between tipper and tippee is sufficient. According to the New York Times, “Under this approach, [Newman] should not present much of a hurdle for the SEC if it can demonstrate evidence of a benefit that appears to be of some reasonable value and a relationship that goes beyond a work friendship or being golf buddies.”
SEC Charges Polycom and former CEO With Hiding Perks From Investors
Recently, the SEC charged the former CEO of Polycom with using nearly $200,000 in corporate funds for personal perks that were not disclosed to investors. The SEC alleges that in doing so, the former CEO violated the antifraud, proxy solicitation, periodic reporting, books and records and internal controls provisions of the federal securities laws. The SEC separately charged Polycom in a related administrative action finding that the company had inadequate internal and disclosure controls. The company agreed to settle the charges; however, the charges against the former CEO are pending in federal court. According to Andrew J. Ceresney, Director of the SEC’s Division of Enforcement, “[the SEC] will not hesitate to charge executives with fraud when they allegedly use a public company as a personal expense account and hide it from investors.”
The Ticker shares recent developments in SEC compliance, capital markets, corporate governance, executive compensation and other matters important to public companies and their officers and directors. It is published by Fredrikson & Byron’s Public Companies Group.