Photo by Patricia J. Lovelace © All rights reserved
This week, the SEC published a series of new Compliance and Disclosure Interpretations (“CDIs”) related to the newly revised Regulation A, which became effective on June 19, 2015. While many of the new CDIs addressed procedural and interpretational issues under the new rules, there was an important development that could make Regulation A that much more useful for companies.
The positive news comes in the form of the SEC staff’s response to Question 182.07 which asks whether issuers would be able to use Regulation A in connection with merger or acquisition transactions that meet the criteria for Regulation A in lieu of registering the offering on an S-4 registration statement. Based on the SEC’s final adopting release, it did not appear that Regulation A would be available for use in these types of business combination transactions. However, the interpretation published yesterday clarifies that issuers may, in fact, use Regulation A in connection with mergers and acquisitions. The one exception is that Regulation A would not be available for business acquisition shelf transactions that are conducted on a delayed basis.
This is a very positive development for issuers that want to issue equity in connection with acquisitions of other companies, but do not wish to become a public reporting company under the Exchange Act. Previously, these issuers had very few Continue Reading
Photo by Lisandro M. Enrique © 2015 All rights reserved
Today is June 19th. It is an exciting day for companies that need to raise capital because Reg A+ finally goes into effect.
As a reminder, Reg A+ is a nickname for SEC Regulation A, as amended by the SEC. Reg A has been around for many years but was rarely used because it was available only to very small financings, had too many limitations, and was costly. As part of the JOBS (Jumpstart Our Business Startups) Act enacted in 2012, the SEC was instructed to update Reg A to make it more useful as a capital-raising tool. Reg A+ is the result.
The main benefits of Reg A+ include the following:
- Companies can raise up to $50 million every 12 months.
- Insiders can sell their shares in a Reg A+ offering.
- Investors in a Reg A+ offering have immediate liquidity – they can sell their shares once the offering is completed and don’t have to hold them for a period of time.
- Some Reg A+ offerings are exempt from state securities or “blue sky” laws.
- Some Reg A+ offerings are easier to list on an exchange.
We think Reg A+ provides a great opportunity to raise capital and can be looked at as an alternative to either a private placement or an IPO. But, don’t take our word for it. Here is what others are saying about Reg A+. If you have any questions about Reg A+, please feel free to reach out to any of the Gunster attorneys in the Securities and Corporate Governance Practice.
The first enforcement action involving a crowdfunding project was recently brought by the Federal Trade Commission. It involved the development of a board game which did not go well despite a successful crowdfunding campaign. This matter is interesting and instructive not only because it is the first such case, but also because it highlights some of the significant risks inherent in the crowdfunding process. The FTC’s official press release on this matter contains a good summary of the relevant events.
According to the FTC complaint, Erik Chevalier discovered an idea for a board game called The Doom that Came to Atlantic City! This game was designed to be a dark fantasy take on the traditional Monopoly board game. The game had originally been developed by two designers, but Chevalier planned to take their concept and produce and distribute a finished game. To raise money for this venture, Chevalier turned to Kickstarter, probably the best known crowdfunding platform. According to the FTC complaint, Chevalier represented to investors that the funds raised would primarily be used for the development, production, completion, and distribution of this game, and that participants would receive certain rewards, such as copies of the final game and action figures, in return for their participation in this campaign.
This crowdfunding campaign was very successful. Chevalier’s original goal was to raise $35,000, but this campaign raised more than $122,000 for the development of this game. Unfortunately, things went bad as the game development process encountered delays.
According to the FTC complaint, Continue Reading
Unless you’ve been off the grid, you’ve surely read about the kerfuffle between Senator Elizabeth Warren and SEC Chair Mary Jo White (here’s an example). It seems that Senator Warren is unhappy that the SEC, under Chair White’s leadership, hasn’t done enough. Specifically – among other things – it hasn’t adopted a bunch of rules that the Senator believes are critical, such as requiring public companies to disclose the ratio of CEO pay to that of rank-and-file employees.
I’ve written before about Congressional interference in SEC rulemakings (for example, Connecticut Senator Blumenthal’s recommendation that the SEC should deem “fee-shifting” by-laws not just a risk factor but a “major” risk factor – discussed here). I’ve also called out the SEC when I think it’s out of line (for example, here). However, the recent attacks by Senator Warren seem to me to be beyond the pale – they’re strident and scream disrespect for Chair White and for the Commission generally.
Moreover, they demonstrate Senator Warren’s inability, failure or refusal (or all of the above) to recognize certain fundamental issues with which the SEC has to deal, including these (among many others): Continue Reading
Early stage and startup companies often face difficulty in obtaining initial financing. These companies normally do not have access to traditional venture capital, angel, or bank financing. Even when a startup finds an investor, the company may not have the time or the funds to pursue the long and complicated negotiation and documentation process required for a convertible debt or preferred stock investment.
Y Combinator (a Silicon Valley technology accelerator) developed a possible solution for this situation: the SAFE (Simple Agreement for Future Equity). This is a short document that contains the basic terms of an investment in an early stage company. Y Combinator’s goal was to create a standard set of terms and conditions that the investor and the startup can agree upon without protracted negotiations so that the startup can obtain its initial funding relatively quickly and cheaply. Y Combinator offers both a summary of SAFE concepts and sample SAFE documents on its site. Y Combinator first proposed this instrument in December 2013, but it is just now beginning to be used outside of Silicon Valley.
While the SAFE has appeared in a number of forms, the basic concept is that the investor provides funding to the company in exchange for the right to receive equity upon some future event. The standard SAFE contains no term or repayment date, and no interest accrues. The investor gets the right to receive the company’s equity when a future event occurs (normally a future equity financing). There is no need to spend time or money negotiating the company’s valuation, the terms of the conversion to equity or any similar items (which can often be tough and protracted negotiation items) – all of those decisions can be deferred into the future. The investor will receive shares in the subsequent offering, often at a discount to the price that other investors pay in that offering. The parties can also negotiate a cap on the valuation used in connection with the SAFE, and this may provide additional protection to the investor.
The beauty of the SAFE concept (from the company’s standpoint) is that it Continue Reading
As we approach the end of the 2015 peak proxy season, the annual parade of articles and studies of executive compensation has begun. To no one’s surprise (at least not mine), the numbers keep going up, and some investors and media types are looking for someone to blame. Companies and their boards or compensation committees are obvious targets (in some cases, quite justifiably), and some have criticized investors themselves, who continue to overwhelmingly support say-on-pay proposals whether or not their support seems warranted.
If you accept that one symptom of insanity is to repeat the same behaviors over and over again while expecting different results, then it appears we’re in the midst of an epidemic of compensation craziness. Why did anyone seriously think that say-on-pay votes would cause executive compensation to decrease? (Parenthetically, there are people who think that disclosure of CEO-to-median employee pay ratios will lead to a reduction in executive pay. Talk about crazy.) I learned a long time ago – from the mouth of Pearl Meyer herself – that every attempt to rein in executive pay by legislation, regulation or disclosure (i.e., shame) has failed. Why did anyone think this would be different? In other words, limiting executive compensation is like what Mark Twain said (or not) about the weather – everybody talks about it, but nobody does anything about it. At least nothing that works.
Well, maybe not. It seems that Dan Price, the CEO of a company called Gravity Payments in Seattle, who’s been making over “a million-dollar salary,” decided this year that he would do something about it. Specifically, he cut his compensation and decided that everyone in his company would make at least $75,000 per year. You’d think that he’d be given laurel wreaths or maybe a ticker-tape parade, at least in some circles of compensation-land, but you’d be wrong. There have been articles (i.e., screeds) written by some in the industry that he’s going about it all wrong, that it’s not a solution that can be applied on a broad base, and so on. He’s even been referred to as crazy.
A recent case out of the Delaware Court of Chancery could result in heightened scrutiny of equity award grants to non-employee directors. Although this decision was rendered at the procedural stage of the case and the merits of the claims have yet to be fully analyzed, this case potentially affects directors of Delaware companies and those advising them on compensation-related matters.
In this case, a stockholder of Citrix, Inc. (“Citrix”) brought a derivative lawsuit against the Citrix board of directors alleging a number of things, including breach of fiduciary duty by the board of directors in awarding significant equity compensation awards. Specifically, the plaintiff alleged that restricted stock units (“RSUs”) granted to non-employee directors (who constituted eight of the nine Citrix board members) under the Citrix equity incentive plan, were excessive.
Because the non-employee directors who received the RSU grants in question constituted eight of the nine members of the Citrix board of directors, the plaintiff was successfully able to rebut the business judgement rule presumption and the defendants bear the burden of proving to the court’s satisfaction that the RSU grants were the product of both fair dealing and fair price (i.e., the “entire fairness” standard of review).
The defendants argued that Continue Reading
It shouldn’t come as a surprise to anyone nerdy enough to be reading this blog that the Dodd-Frank Act mandated SEC rulemaking in four areas relating to the disclosure of executive compensation:
- pay ratio,
- clawbacks, and
- pay-for performance.
These items have been variously referred to as the “four horsemen” (as in apocalypse) or the “gang of four” (as in Chairman Mao’s evil wife and her evil friends).
Up until now, the SEC has been moving at a rather leisurely pace to get the horsemen – er, rules – out. In fact, the SEC’s failure to adopt final pay ratio disclosure rules has generated some criticism (see my recent UpTick). Perhaps for that reason, the SEC seems to be moving forward to propose the remaining rules at a somewhat faster pace. Just about 10 weeks ago, the SEC proposed rules on hedging.
And now the SEC has scheduled an open meeting on April 29 at which it will consider proposing rules for pay-for-performance disclosure. You can find the SEC’s Sunshine Act notice of this meeting here. It’s anyone’s guess what the proposed rules will look like, but the proposals will definitely generate lots of interest. So, for the time being, all I can suggest is “watch this space.” We’ll let you know once we have a chance to see what emerges from the open meeting.
I’ve done my share of griping about the SEC, but credit needs to be given where credit is due. And credit is due to the SEC for adopting a new, improved version of Regulation A that has become known as “Reg A+”. (OK, we can gripe about how long it took the SEC to adopt the final rule, but let’s be gracious and remember that justice delayed isn’t necessarily justice denied.)
Reg A has been around forever, but has been used very infrequently. Like many other long-time SEC practitioners, I’ve never done a Reg A deal. There are many reasons for this, but the big one is that Reg A limited the maximum amount of an offering to $5 million – hardly enough to justify the costs involved (which included compliance with Blue Sky laws). Then Reg D came along, as well as the amendment of Rule 144 reducing the amount of time that an investor had to hold “restricted securities,” and the rest is history.
The JOBS Act called for the SEC to review and update Reg A, and they’ve done an A+ job – all puns intended. Here are some key provisions of Reg A+ Continue Reading
On Sunday, April 12, the Business section of the New York Times led with an article by Gretchen Morgenson taking the SEC to task for not having adopted rules requiring disclosure of CEO pay ratios. This follows similar complaints by members of Congress, most recently in the form of a March letter by 58 Democratic congressmen to Chair White. And going further back – specifically, to Chair White’s Senate confirmation hearing in March 2013 – Senator Warren told Chair-Designate White that SEC action on this rule “should be near the top of your list.”
I’ve given this a great deal of thought since Congress mandated pay ratio disclosure in the Dodd-Frank Act, and I’ve yet to figure out why – aside from political considerations – so many people think this disclosure is so important or what it will achieve. In fact, when I coordinated a comment letter on the rule proposal as Chair of the Securities Law Committee of the Society of Corporate Secretaries and Governance Professionals, I told a number of people that it was the hardest comment letter I’d ever worked on, and I believe that was the case because it was hard to comment on a proposal that struck and continues to strike me as ill-advised and unnecessary in its entirety.
Ms. Morgenson’s article proves my point. It provides pay ratio data for a number of companies, as determined by a Washington think tank. But at the end of the article, all the data demonstrate is that the CEOs of the companies in question make a ton of money. The ratios don’t tell us anything more than that; Disney had the highest ratio, but does anyone need a ratio to know that its CEO makes lots of money? Ditto Oracle, Starbucks and the others – in all cases, the ratio is far less informative than the dollar amounts, which of course are and have for many years been disclosable.
The ratios might – but only might – be more meaningful if we knew what the underlying facts are; for example, what is the mix of US to non-US employees? To what extent are the employees part-time or seasonal? But of course the article doesn’t reveal this information, and neither would the proposed SEC rules. And the SEC Staff has indicated the final rules are not likely to allow companies to exclude non-US, part-time or seasonal employees. In other words, we won’t be able to distinguish between two companies with the same pay ratios regardless of the fact that one may have vast numbers of employees in the third world while the other’s employees are located in major industrialized countries.