July 2012

Coke vs. Pepsi.  Apple vs. Microsoft.  Energizer vs. Duracell.  All are great brand rivalries.  Today we look at one of the biggest rivalries in the capital markets space: NYSE vs. Nasdaq.  And ever since the Nasdaq debacle with the Facebook IPO, the rivalry has only intensified. 

Companies going public face lots of decisions including where to list their shares.  Ever since the dot-com craze of the late 1990s, the rivalry between the NYSE and Nasdaq has been fierce.  Each exchange attempts to woo each other’s clients to switch their listing.  In fact, some big names have changed exchanges over the past year.  Texas Instruments and Viacom switched from the NYSE to Nasdaq in 2011.  Earlier this year, TD Ameritrade left Nasdaq for the Big Board, but Nasdaq countered by poaching Kraft.  Nasdaq (with its history of winning the listings of technology companies) and the NYSE have been fighting hand-to-hand in the technology company space with Groupon and Zynga choosing Nasdaq and LinkedIn and Pandora going with the NYSE.  So is one exchange better than the other?  This post will examine some of the most important factors you should consider in making your decision.

Historic DifferencesThe NYSE started operating in 1792 while Nasdaq started up in 1971.  The 200 year head start by the NYSE led to a couple of differences initially, but these changes have largely disappeared over the past decade.  Nasdaq has no physical trading floor; it is 100% electronic.  Because the NYSE operated without the assistance of computers for the bulk of its existence, it has a physical trading floor; however, since 2007 virtually all NYSE stock can be traded electronically.  One of the other major differences went away in 2008 when the SEC began allowing Nasdaq-listed companies to have one-, two- or three-letter ticker symbols.  Historically, all Nasdaq-listed companies needed to have a four letter trading symbol.  (Zillow was the first Nasdaq-listed company to take a one-letter trading symbol, “Z.”)  The ticker change followed Nasdaq’s conversion from an interdealer quotation system to a licensed national exchange in 2006, which from an issuer’s perspective, had little to no effect other than to further legitimize the then 35-year old “upstart” Nasdaq.

Branding and MarketingThe biggest difference between the two exchanges is the public’s perception of the exchanges.  Nasdaq with its upstart image and all electronic trading platform has attracted more technology-based companies, many of which did not qualify to list on the NYSE when they originally went public.  The Big Board, on the o Continue Reading Where to list: NYSE or Nasdaq?

Imagine the following scenario. Your company is publicly traded. As such, senior management is keenly aware of the potential for executives and employees trading in the company’s securities on the basis of material nonpublic information in violation of Section 10(b) of the Exchange Act and the infamous Rule 10b-5 promulgated thereunder. To prevent improper trading, the company has instituted an insider trading policy which, among other things, requires certain high-level executives to pre-clear trades internally, prohibits directors and officers from trading during “blackout periods” (i.e., the period immediately prior to fiscal quarter and year ends), and requires periodic training for all employees on the scope of insider trading laws. As model corporate citizens, all of the company’s directors, officers, and employees follow the company’s policies precisely. No one would dare to take the risk of attempting to gain illicit profits by trading the company’s stock while in possession of material nonpublic information.

One day, just before the end of a quarter (and therefore during a blackout period), analysts covering your company reduce their estimates for the company’s quarterly results which in turn, causes the company’s share price to decline. The company’s officers know that the analysts’ revised estimates are accurate and that the company will report sub-par earnings results the following week but none of those officers initiated any trades to improperly take advantage of this material nonpublic information. However, as a result of the decline in share price alone, one of the company’s executive officers unknowingly violated Section 10(b) and Rule 10b-5 and both he and the company are now potentially on the hook for insider trading liability. 

How can this be if none of the officers executed any trades you ask? The problem arises from the fact that company policy does not prohibit margining company securities. When the share price declined, the value of the securities in the executive’s margin account dropped sufficiently to trigger a margin call requiring the executive to deposit additional collateral to make up the shortfall or risk having the broker sell a portion of the pledged securities (this is similar to what happened to the founder and chairman of Green Mountain Coffee Roasters, Inc. earlier this year). Regardless of which route is taken, the executive is in a problematic situation. 

If the executive does nothing and allows the broker to sell company stock, he’d be violating company policy by trading during the blackout Continue Reading Margin calls: The insider trading trap

New mandated cybersecurity disclosure requirements appear to be imminent. Cybersecurity has become a critical issue for most companies, and almost all companies today face cybersecurity risks due to the substantial increases in the volume of data and information stored online, the rise of multiple platforms for accessing data and the sophistication of criminal hackers. Cyber incidents such as a data breach or an intrusion into a company’s systems can have very negative and expensive results. These risks are considerably higher for any company that stores personal information or that operates in a regulated industry such as financial services or health care. Despite this significant increase in cybersecurity risks and the liabilities associated with such cyber incidents, however, public companies to date have had very little guidance regarding their disclosure obligations in this area.

The primary guidance that the SEC has issued on cybersecurity disclosure to date has been the 2011 CF Disclosure Guidance:  Topic No. 2 (Cybersecurity) (the “Release”) issued by the SEC’s Division of Corporation Finance on October 13, 2011. This Release was helpful in that it gave some indication of the Division of Corporation Finance’s positions on cybersecurity issues and cyber incidents. The Release provided overall guidance, however, and did not provide detailed information or instructions on cyber disclosure. Additionally, the Release did not contain official SEC rules or regulations. Accordingly, companies could use the Release for broad principles but were still left to develop disclosure information about cybersecurity and other similar matters based on their own evaluations of what should be disclosed.

Under the Release, some of the items that public companies are advised to address include:

  1. review the adequacy of their disclosure regarding cybersecurity and cyber incidents on a regular basis;
  2. disclose the risks of cyber incidents in “Risk Factors” if these items are significant risk factors that would make an investment in the company speculative or risky;
  3. disclose known or threatened cyber incidents;
  4. address cybersecurity risks and cyber incidents in the Company’s Management’s Discussion and Analysis if the costs or other consequences associated with such incidents are reasonably likely to have a material effect on the Company’s results of operations, liquidity or financial condition or would cause reported financial information to not be indicative of future operating results or financial condition;
  5. disclose a cyber incident in “Description of Business” if the cyber incident materially affected the company’s products, services, relationships with customers or suppliers or competitive conditions; Continue Reading Get ready for increased cybersecurity disclosure requirements

Compensation committees remain on the hot seat.  Stemming from the Dodd-Frank Act, the SEC has adopted rules directing each national securities exchange to require companies with listed equity securities to comply with new compensation committee and compensation advisor requirements. Among other things, these new rules require national securities exchanges to implement listing standards that require :

  • each member of a listed company’s compensation committee to be an “independent” director;
  • the issuer to consider relevant factors (to be determined by the national securities exchange) including, but not limited to, the source of compensation of a member of the compensation committee member and whether a compensation committee member is “affiliated” with the issuer, subsidiary of the issuer, or an affiliate of the subsidiary;
  • an issuer’s compensation committee to have the authority and responsibility to retain compensation advisers and consider the independence of compensation advisers; and
  • require issuers to include specified disclosure about the use of compensation consultants and any related conflicts of interest in the proxy materials for their annual shareholders’ meetings.

As we noted when these rules were originally proposed, the SEC has not infringed on the traditional rights of states to define corporate law because these new rules do not require an issuer to have a compensation committee.  Rather, the new rules require that the independence rules be applied to committees performing functions typically performed by a compensation committee regardless of the name of the committee (compensation committee, human resource committee, etc.).  Under the final rules, the SEC has broadened the independence requirement to apply also to the members of the listed issuer’s board of directors who, in the absence of a compensation committee, oversee executive compensation matters.

The final definition of “independence” for a compensation committee will largely depend on the final rules of each national Continue Reading Are your compensation committee members independent?

Bowing to industry pressure, FINRA has adopted vastly scaled back private placement requirements under FINRA Rule 5123.  Originally proposed in October 2011, the proposed rule was highly controversial because it significantly infringed on the capital raising process.  In particular, the originally proposed rules would require each offering to have an offering document, which must include anticipated use of proceeds and the amount of expenses to be paid to the participating broker-dealer.  The offering document would have had to be filed with FINRA and at least 85% of the proceeds must have been used for the business purposes required to be disclosed in the offering document.  After receiving scathing criticism, FINRA proposed various amendments with each amendment softening the originally proposed rule.

The final Rule 5123, which the SEC has granted accelerated approval, now requires each FINRA member firm that participates in a private placement of securities to file a copy of any private placement memorandum (PPM), term sheet, or other offering document used in connection with a sale, within 15 days of the date of the first sale. Where no such documents are created or used in connection with a covered offering, the rule requires that the participating member provide FINRA with notice that no disclosure documents were used. I believe that this watered-down version of FINRA Rule 5123 is much more consistent with Congress’s intent in making capital raising not a burdensome process.

FINRA Rule 5123 does provide confidential treatment to the offering documents.  In addition, FINRA has made it clear that the filing requirement is merely a notice filing and the offering is not subject to a review or approval process by FINRA.  The filing obligations rest with each participating member in an offering and not with the issuer.  Certain offerings are exempt from the notice filings, including offerings made of bank (not bank holding company) securities.

Generally, I strongly object to any obstacles to capital raising.  While I do not agree with the addition of this notice filing, I applaud the industry’s collective effort to largely curtail the original burdensome requirements.