1. The SEC has finally adopted Regulation Crowdfundinghere, which was required by the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosures Act of 2012 (. . . seriously). Its 686 pages belie the elegant simplicity of the rule and its combination of cheap, speedy equity raising and simultaneous guarantee that no investor ever will lose money. Or at least that’s what we assume would be disclosed by a more thorough reading than we are willing to give it. A summary of our speedy review:   
    • Annual investment limits. Annual capital raises are limited to $1 million, but offerings are not integrated with other exempt offerings. Depending on annual income and net worth, an investor may invest between 5% and 10% of annual income or net worth, with a minimum of $2,000 and a maximum of $100,000. The investor limit applies to all crowdfunding offerings in the 12-month period, not to a specific offering. The rule allows debt or equity issuances.  
    • Intermediaries. Offerings must be made only on the Internet by a single registered funding portal or registered broker-dealer, and advertising is limited to information to draw potential investors to the intermediary’s offering page. The offering platform must have specified functionality, including the ability of potential investors with accounts to communicate with each other. Funding portals must register on a new Form Funding Portal. Intermediaries have obligations to watchdog issuers and offerings, including responsibility to monitor issuer and investor compliance with the rules and to ensure investors acknowledge investment risks. An intermediary also must make specified disclosures, including about its compensation and financial interest in an issuer, and its system must adhere to specifications about accepting, processing, confirming, and cancelling investments.  
    • Excluded issuers. Some issuers can’t use the rule, including those subject to the public reporting requirements of the ’34 Act, investment companies, foreign issuers, “bad actors,” those who failed to maintain crowdfunding reporting requirements, and development stage companies with no defined business plan.  
    • Issuer disclosures. Issuers must file a Form C, which includes disclosure of use of proceeds, targeted offering size, price, business, directors and officers, ownership, indebtedness, related party transactions, other exempt offers by the issuer, risk factors, transfer restrictions, financial statements (the requirements for which vary depending on the target size of the offering), and MD&A. Material changes must be reported on a Form C/A, and annual reports on a Form C-AR are required 120 days after the end of the issuer’s fiscal year. An issuer may terminate its C-AR reporting obligations in specified circumstances, including if it has filed one C-AR and has fewer than 300 holders of record or if it has filed three C-ARs and has $10 million or less in assets.  

More summaries are hereherehereherehere, and here. Our favorite law firm client alert on the topic is the following, largely because “Chiller” font really grabs the eye but also for its brazenly honesty assessment. 

Click here to view image.

  1. The same day it published final crowdfunding rules, the SEC also proposed rules to modify Rule 147 and Rule 504 to facilitate small capital raises here
    • Rule 147, which is a safe harbor for “intrastate” offerings exempt from federal registration, has been of limited value because adverting that leaks to neighboring states foils the exemption. The SEC’s proposed rule would allow general advertising and solicitation as long as sales are made only to intrastate residents and as long as no more than $5 million is raised in a 12-month period, and specified limits on individual investors apply.
    • The SEC also proposed to increase the maximum capital raise under Rule 504 from $1 million to $5 million and to prohibit “bad actors” from relying on the rule.

SEC action could be viewed as acknowledgment that the SEC’s crowdfunding rules are too burdensome to be particularly useful, but as evidence that the SEC won’t stand in the way of state crowdfunding exemptions, and, by the way, that Regulation D is a much better exemption. Commentary is here and here

  1. To emphasize that Regulation D is a much better exemption than Regulation Crowdfunding, or any other exemption, the SEC also updated its report on unregistered securities offerings in the U.S., here.
  2. In the wake of the 2015 proxy season:
    • Some law firm resources on what happened and what might happen in 2016, with such dire titles as “ Is Proxy Access Inevitable,” are herehere, and here.
    • Shearman & Sterling released its 13th Annual Survey on Corporate Governance & Executive Compensation, a review of practices by the 100 largest U.S. public companies, here.
    • The SEC published Staff Legal Bulletin 14H, here, to address when shareholder proposals may be excluded from a proxy statement under 14a-8(i)(7) and 14a-8(i)(9) following the turmoil from the Third Circuit’s decision in Trinity Wall Street v. Wal-Mart Stores, Inc. and the SEC's own earlier refusal to take a position on Whole Foods’ request to omit a shareholder proxy access proposal in favor of its own proposal. On the former, the SEC stated that it agreed with the concurring judge’s views regarding the “significant policy exception” to the ordinary business exclusion in Trinity and not with the new two-part test adopted by the majority. According to the SEC, “a proposal may transcend a company’s ordinary business operations even if the significant policy issue relates to the ‘nitty-gritty of its core business.’” On the latter, the SEC said it will only allow exclusion “if a reasonable shareholder could not logically vote in favor of both proposals.” In other words, proposals won’t be found conflicting unless they “directly conflict,” for example if the proposal by the company is to vote “yes” and the shareholder proposal is to vote “no.” Basically, the SEC changed is analytical framework so that very little will be excludable under 14a-8(i)(9). Commentary is here
    • The SEC published two new CDIs on “unbundling” under Rule 14a-3(a)(3) in the M&A context, here
  3. The D.C. Circuit Court of Appeals denied, here, the SEC’s and Amnesty International’s petitions, here and here, for an en banc rehearing of the Court’s earlier affirmation that requiring a company to disclose that its products were “not found to be DRC conflict free” is compelled speech that violates the First Amendment. The SEC also reacted to the U.S. District Court for the District of Massachusetts requiring the SEC to file an expedited process for resource extraction rule-making but doing just that, here. The SEC says it will adopt rules within 270 days, but emphasized that it is going to be super hard, in part because it is silly for Congress to push these types of rules onto the SEC to implement in the first place. (Fine, it didn’t actually say that, but we sense that’s what it meant.)
  4. In accounting news
    • The Center for Audit Quality published its transparency barometer, here, noting that companies are increasingly disclosing more about the selection and oversight of their independent auditors.
    • PWC published its 2015 annual director survey, here
    • The PCAOB’s Division of Registration and Inspections issued a “Staff Inspection Brief,” here, noting it will focus on three big areas of deficiency: internal control over financial reporting; assessing and responding to risks of material misstatement; and accounting estimates, including fair value measurements. It will also focus on areas affected by risk factors like issuer and industry characteristics, likely accounting issues encountered by the issuer (revenue recognition, you software companies), location of operations (like in shady areas of the world), considerations related to particular audit firms (what did we call PWC out on last time), and other relevant information (whatever else they like).
    • FASB issued proposed updated guidance on “materiality” in financial statement reporting. In an attempt to draw interest, it has titled one release “Qualitative Characteristics of Useful Financial Information,” here, and the other “Assessing Whether Disclosures Are Material,” here
  5. Issuers have only until 8 p.m. EST November 13, 2015 to review and correct any erroneous data that ISS uses to calculate their Governance QuickScore, see here. Some commentary on QuickScore updates is here and here. ISS released its draft voting policies, available here, regarding board actions without shareholder approval, “overboarding,” and compensation at externally managed issuers. ISS previously released its policy survey results, available here. Notably the draft voting policies do not capture policy survey results on proxy access. A summary of the policy survey is here. Other commentary on ISS’s policy survey is herehere, and here
  6. The U.S. Court of Appeals for the Second Circuit ruled, here, that an employee is protected under SEC whistleblower rules if fired after internally reporting a whistleblower claim. That diverges from the Fifth Circuit’s view that a report to the SEC is required before the protections apply. It also highlights that it’s a pretty good idea for the SEC to issue interpretive guidance to correct Circuit Court rulings: “We conclude that the pertinent provisions of Dodd-Frank create a sufficient ambiguity to warrant our deference to the SEC’s interpretive rule, which supports [former employees’] view of the statute.” Note too that a California District Court, here, followed the earlier Fifth Circuit holding in Asadihere
  7. The Network, which provides compliance software and services, released a White Paper, here, about whistleblowers, suggesting that you give them a hug. (And noting that 92% first report misconduct inside the company, only 20% report outside the company, and only 9% report to the government, and then mostly when they feel the company has retaliated against them.) The best thing about the report is, of course, the cover, because, we assume, being a whistleblower is quite like perching on a sun-dappled rock in the Scottish Highlands. 
  8. Finally, and because when you’re important enough even the things you don’t do are a big deal, we note that the U.S. Supreme Court declined to hear the appeal of United States v. Newmanhere, an insider trading case that held that the government must prove that a tippee knew or should have known of the personal benefit received by the tipper and that the benefits were sufficiently “consequential.” Some analysis of Newman and developments since it was decided is here. And just for the heck of it, an explanation of the classical theory of insider trading is here.

September 9, 2015

  1. As foreshadowed by the recent publication of supplemental analysis on the effect of its proposed rules, the SEC adopted final pay ratio ruleshere. The first covered reporting period starts in the first full fiscal year beginning on or after January 1, 2017, which means a calendar year company would include disclosure in its proxy statement in 2018. So calm down; you’ve got some breathing room. Among the items that make this fairly dumb rule less painful: (a) the final rule retains the proposed flexible approach that allows sampling and assumptions to select the median employee; and (b) the rule adds that the selected median employee can be used as the benchmark for three years, which, considering the cost of running the analysis to find the median employee, probably results in fantastic job security for that guy. 

    Commentary abounds, and more will follow. Some resources are herehereherehere, and here. Suggestions that, even though time-consuming and expensive, this rule will be a bust are here and here.
  2. D.C. Courts have recently battered the SEC for rulemaking relating to resource extraction.
    • The D.C. District Court ordered the SEC, here, to file an expedited schedule within 30 days for final rulemaking to require oil, gas and mining companies to disclose payments to foreign governments or the federal government. The original rules, held to be defective because the SEC did not consider its discretion to allow non-public disclosure only to the SEC and because it acted arbitrarily and capriciously in not considering an exemption for countries where publication of such information is illegal, were remanded to the SEC to be fixed in July 2013 and have sat there since.
    • The D.C. District Court’s slap follows the D.C. Circuit Court’s smack, here, when it affirmed that requiring a company to state that its products are not “conflict free” violates free speech rights. The ruling casts further uncertainty on when a third-party audit of a conflict minerals report might be required, since that requirement is premised on some of the same language the Court struck down. (See Corporation Finance Director Higgins’ statements, here, that “Pending further action, an [independent private sector audit] will not be required unless a company voluntarily elects to describe a product as ‘DRC conflict free’ in its Conflict Minerals Report.”) Possibly, more SEC guidance will be forthcoming.
  3. In other conflict minerals news, the Government Accountability Office released a report on 2014 conflict minerals disclosures, here, noting that almost nobody could actually figure out where their conflict minerals came from. In some ways, the report merely echoes what activists have been decrying—“these reports aren’t very useful.” Yep.
  4. The SEC issued new Compliance and Disclosure Interpretations (256.23 to 256.33), here, about Rule 506(c) exemptions under Regulation D. Recall that Rule 506(c) is a “big deal” in securities law, and probably the most significant change implemented by the JOBS Act. On the same day, the SEC released a no action letter, here, agreeing with Citizen VC, Inc. that the procedures it described in its request letter would create a substantive, pre-existing relationship that would allow it to send materials to its new best friends without violating general solicitation or advertisement rules (and thus it could make offerings under Rule 506(b) without the modest additional hoops required by Rule 506(c)).
  5. In other JOBS Act related news, Montana and Massachusetts filed their initial brief, here, arguing that the SEC’s “Tier 2” Regulation A+ rules impermissibly preempt state law and that its rulemaking was not based on a permissible construction of the Securities Act of 1933, was not the result of reasonable decision making, and was arbitrary and capricious because it did not adequately analyze the effect on the public interest and investor protection.
  6. The SEC has moved, here, to consider whether to disapprove proposed NYSE rules to exempt early-stage companies from having to obtain shareholder approval before issuing shares to related parties and their affiliates, provided the audit committee or similar independent committee approves the issuances. Per the SEC, it's not saying it will stop this, but why on earth should it allow it? Less interesting, perhaps, is the NYSE’s immediately effective rule, here, to expand the requirements for advance notice of material news announcements.
  7. The Council of Institutional Investors published “Proxy Access: Best Practices,” here, and noted that nobody, but nobody, is following all of its declared best practices. A summary of the report is here. An analysis of proxy access bylaw “trends” from the recent proxy season is here
  8. The SEC issued an interpretation under Dodd-Frank whistleblower provisions, here, that whistleblowers qualify for the anti-retaliation provisions in Dodd-Frank even if they report only internally and not to the SEC. Perhaps in anticipation of other federal circuit courts’ consideration of the issue, the interpretation responds to the decision in Asadi v. GE Energy (USA), L.L.C.here, in which the Fifth Circuit held that the plaintiff was not a whistleblower under the Dodd-Frank Act because he failed to report to the SEC.
  9. The summer months saw the 13th anniversary of the Sarbanes Oxley Act and the fifth anniversary of the Dodd-Frank Act, both designed to cure ills done the world by evil corporations. A few items to commemorate the occasions:
    • Rulemaking progress under Dodd-Frank is summarized by SEC Chair White here (“The Commission has taken action to address virtually all of the mandatory rulemaking provisions”) and by Davis Polk here (“Of the 390 total rulemaking requirements, 247 (63.3%) have been met with finalized rules….”).
    • Provititi’s 2015 SOX compliance report is here. Among other things, it suggests compliance costs associated with internal controls are rising. (Happy anniversary!)

(We note that, although we were hoping for some sort of special invitation, the SEC’s gala celebration of the 75th anniversary of the Investment Company Act and the Investment Advisers Act is open to the public on a first-come basis. See here. Still, the lack of a personal invite stings, and that’s why we’re not mentioning anything in particular about the alleged historic import of those acts.)

  1. 44 U.S. Senate Democrats signed a letter, here, in support of a petition to require public disclosure of campaign donations. There is no Congressional requirement for rulemaking (the petition came from the Committee on Disclosure of Public Spending), but it does add fuel, perhaps, to a hot disclosure topic. 
  2. We were reminded what a remarkably helpful document the SEC’s Financial Reporting Manual is when the SEC posted updates to it last month (here) to add guidance on catching up on delinquent 1934 Act filing obligations.
  3. Finally, the U.S. Court of Appeals for the D.C. Circuit reminds us, here, that to be “meaningful,” cautionary language in securities filings should be, well, meaningful: avoid boilerplate, describe specific risks, don’t misstate historic facts and update statements as things change. Commentary on the ruling is here.