SEC Chair Mary Jo White has indicated that the SEC will require that, in certain cases, admissions be made as a condition of settling rather than permitting the defendant to “neither admit nor deny” the allegations in the complaint of its enforcement action. The move marks a departure from the typical practice at the SEC and many other civil federal regulatory agencies of allowing defendants to settle cases without admitting or denying the charges. The policy of allowing defendants to neither admit nor deny the allegations has been increasingly criticized for its inherent lack of transparency regarding both the alleged wrongdoing and the corresponding disgorgement and forfeiture penalties.
According to White, the new policy will apply only in select cases, such as those where there is egregious conduct and/or wide spread public interest. While the precise parameters of the new policy have not been specified, White did note that the new policy would be applied on a case by case basis and that for most cases currently settling, the old policy would still apply.
Debate about the old policy began about two years ago, when Judge Jed S. Rakoff rejected a $285 million settlement that the SEC negotiated with Citigroup, in part because the deal included “neither admit nor deny” language. The SEC has appealed, and the case is pending before a panel of the U.S. Second Circuit Court of Appeals. Since then, a handful of other judges have voiced their discomfort with allowing defendants to pay fines without admitting liability.
In previously defending the old policy, the SEC has argued that most defendants would refuse to settle if they had to admit wrongdoing. Essentially, companies and executives would rather fight in court than admit liability and face additional liability in parallel civil lawsuits, as well as the added difficulty of losing director and officer indemnification coverage which often pays the legal fees for corporate officers (a benefit which can be lost if Continue Reading
The PCAOB’s recently proposed auditing standards aim to “provide investors and other financial statement users with potentially valuable information that investors have expressed interest in receiving but have not had access to in the past” by changing the standard auditor’s report and increasing the auditor’s responsibilities. Sounds like a lofty goal, except that the information that they are proposing to require auditors to provide is either (i) self-evident; (ii) an infringement on the judgment of the issuer’s audit committee; or (iii) just plain not helpful. What the proposed auditing standards do accomplish, however, is to add more costs to being a public company just like their last proposal on mandatory auditor rotation.
Critical Audit Matters. Under the proposed auditing standards, an auditor will be required to include a discussion in its auditor’s report about the issuer’s “critical audit matters.” Difficult, subjective, or complex judgments, items that posed the most difficulty in obtaining sufficient evidence, and items that posed the most difficulty in forming the opinion on the financial statements are deemed to be “critical audit matters.” While this requirement may seem straightforward at first, the reality is that this “new” information should be self-evident by anyone who knows how to read a financial statement. Revenue recognition, estimates for allowances, pension assumptions, etc. are typically deemed to be “critical audit matters” by an auditor when planning audit procedures. These critical accounting policies are already discussed in issuers’ MD&A and in their financial statements. Further, any investor who actually is looking at the fundamentals of an issuer’s business and historical results should already be highly focused on estimates that, if wrong, could materially impact the financial statements. Auditors will end up being overly inclusive on what is deemed “critical” for fear of having Continue Reading
Almost 10 months since Superstorm Sandy caused widespread destruction to the northeastern U.S., an area not known for frequent hurricane activity, the people and businesses affected have still not fully recovered. As we now reenter the peak of hurricane season, businesses along the eastern seaboard are probably taking a closer look now than in years past at their disaster preparedness in light of last year’s events. The impact of Hurricane Sandy was certainly not limited to the U.S. In reality, there were global implications as, for example, U.S. equity and options markets were closed for two full trading days following the storm. As a result, the SEC, FINRA and the CFTC undertook a joint review of their individual business continuity and disaster recovery planning. Last week, on August 16, these three regulatory agencies issued a joint release outlining some lessons learned and best practices noted in their investigations and review.
The release focused on a number of specific areas including:
- Widespread disruption considerations;
- Alternative locations considerations;
- Vendor relationships;
- Telecommunications services and technology considerations;
- Communication plans;
- Regulatory and compliance consideration; and
- Review and testing.
The primary motif in the release was that Continue Reading
Things are quickly getting real in the virtual currency world. Virtual currency providers have endured a series of recent shutdowns, prosecutions, restrictions, court decisions and investigations ranging from a ban on Bitcoin use by the Thai government to an investigation by the New York Department of Financial Services which in a memorandum called the virtual currency space “a virtual Wild West for narcotrafficers and other criminals.” The U.S. Senate Committee on Homeland Security and Governmental Affairs announced that it has initiated an inquiry into Bitcoin and other virtual currencies and has requested a number of regulatory agencies to provide information on their role in preventing criminal activity in the digital currency space. Regulators seized the United States assets of Mount Gox, the largest global entity involved in exchanging Bitcoins for actual currency, and the SEC recently issued an Alert on some of the dangers of virtual currencies. And now, a federal court has ruled that Bitcoins are securities.
Bitcoin is the major player in the virtual currency industry. Bitcoin’s currency is a true virtual currency which is not sponsored or managed by any country or backed by any asset, and it is not regulated by any central bank or other agency. Bitcoins exist through an open-source software program. Users can buy Bitcoins through exchanges that convert real money into the virtual currency. Users of Bitcoins can keep their identities confidential and can participate in financial transactions on what appears to be a totally secret basis. The value of a Bitcoin is determined by a software algorithm which apparently monitors and controls the available supply of Bitcoins.
A recent federal court decision centered on Bitcoins will have interesting and far-reaching ramifications for virtual currencies and even has some important securities law implications. Trendon Shavers is one of the most visible and prominent players in the virtual currency industry and is heavily involved in Bitcoin matters. As part of his Bitcoin activities, Mr. Shavers formed First Pirate Savings & Trust, which he characterized as a “virtual hedge fund” based entirely on Bitcoins. He wisely Continue Reading
When managing investments and strategies for personal financial goals, retail investors often seek guidance from their investment advisers, and on an increasing basis, from their broker-dealers. Broker-dealers and investment advisers are regulated extensively, but the regulatory requirements differ. Broker-dealers and investment advisers are also subject to different standards under federal law when providing investment advice about securities.
The Investment Advisers Act of 1940 regulates specified financial professions, including financial planners, money managers, and investment consultants. Under the Advisers Act, an investment adviser is any person who, for compensation, is engaged in a business of providing advice to others or issuing reports or analyses regarding securities. With regard to the required standard of care applied to investment advisers when providing advice to their clients, applicable case law requires a fiduciary standard which, essentially, requires that the advisor put the client’s interests first, ahead of his or her own interest.
The Securities Exchange Act of 1934 and its implementing rules comprise the most central regulatory apparatus for broker-dealers. The Exchange Act defines a broker as a “person engaged in the business of effecting transactions in securities for the account of others,” while a dealer is a “person engaged in the business of buying and selling securities for his own account.” In comparison to the fiduciary obligation of an investment advisor, broker-dealers currently have a less stringent “suitability standard” that requires that investment products they sell fit an investor’s financial needs and risk profile.
Under the Investment Advisers Act, registered broker-dealers are excluded from its terms so long as Continue Reading
As we previously blogged about, the SEC finally adopted final rules to remove the ban on general solicitation and advertising in Rule 506 offerings. The removal of the ban is a huge change in the way private offerings may be conducted and welcome relief to the thousands of issuers each year who have tapped out their “friends and family,” but yet are too small to attract private equity funds. With these new changes, however, bring challenges in making sure you conduct a “new” Rule 506 offering (a/k/a Rule 506(c) offering) correctly.
So, with the caveat that best practices are still being developed for Rule 506(c) offerings and issuers and attorneys are still parsing through the new rules, here are five potential pitfalls to avoid:
1. Being too lenient as to reasonable steps. Beginning in mid-September, Rule 506(c) offerings will allow general solicitation and advertising as long as you sell securities only to accredited investors and take reasonable steps to verify that the purchasers are accredited. Issuers are faced with the prospect of defining for themselves what “reasonable steps” are. That is good and bad. What issuers can’t do is simply take the easy way out – issuers bear the burden of proving that its offering qualifies for a registration exemption. The final rules release from the SEC gives a lot of suggestions about what reasonable steps could entail, but each case is fact and circumstance based. You should also note that the traditional method of self-certification won’t cut it for purposes of Rule 506(c). Fortunately, the SEC also provided four specific “safe harbors” that are each deemed to be reasonable steps: Continue Reading
Although the SEC recently finalized rules that will remove the ban on general solicitation and advertising for certain private offerings under Rule 506 of Regulation D, it does not mean that issuers will have free reign and complete discretion over their use of advertisements. That is, issuers looking to locate potential investors through advertising after the new rules become effective in September may still be subject to other laws that will restrict the manner in which they advertise or solicit investments.
For example as Keith Bishop over at the California Corporate & Securities Law Blog points out in a recent post that certain other state laws may be implicated with these types of advertisements. According to the post, in California, Rule 260.302 of the California Code of Regulations states, in part, that:
An advertisement should not contain any statement or inference that an investment in the security is safe, or that continuation of earnings or dividends is assured, or that failure, loss, or default is impossible or unlikely.”
Thus, it is possible that states could use advertising laws and regulations to regulate, to some extent, private offerings under the new Rule 506. However, the question remains, as to how far these types of state laws and regulations can go? The answer to this question is Continue Reading
The ABA Journal is soliciting nominations for law blogs to include in their 7th Annual Blawg 100. Essentially, the American Bar Association puts together a list each year to honor the legal blogs that have the most impact. If you like what you read on our blog, we are asking you to consider nominating The Securities Edge for inclusion in this year’s list.
We think we have had a great two year run so far. If you agree, use the form here to nominate us. It only takes about a minute. Nominations are due no later than 7 p.m. ET on Friday, Aug. 9, 2013.
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The SEC issued Final Rules last week that effectively eliminate the ban on the use of general solicitation and general advertising in connection with certain securities offerings performed under Rule 506 of Regulation D. This is a major shift that will allow issuers to use general solicitation and advertising to promote certain private securities offerings. Rule 506 is widely used by many startup and early stage companies to provide a safe harbor from registration under the 1933 Act. The elimination of this ban should have very positive effects for startup and early stage companies. Hopefully it will facilitate capital raising for these companies and thus begin to allow some of the long-awaited positive impacts that we all expected from the JOBS Act. These Final Rules will become effective in mid-September of this year.
The SEC also issued a Press Release and a Fact Sheet that contain helpful information on the Final Rules.
These Final Rules provide amendments to Rule 506 and Rule 144A under the 1933 Act. I will focus on the Rule 506 amendments since they are most relevant to startup and early stage company financing situations. These Rule 506 amendments allow an issuer to engage in general solicitation and advertising in connection with the offering and sale of securities under Rule 506 provided that all purchasers of the securities are accredited investors under the Rule 501 standards and that the issuer takes “reasonable steps” to verify each investor’s accredited investor status. The Rule 506 amendments provide a non-exclusive list of methods that issuers can use to verify the accredited investor status of natural persons. These amendments also amend Form D to require issuers to tell the SEC whether they are relying on the provision that permits general solicitation and advertising in a Rule 506 offering. The Final Rules also contain some very interesting economic and statistical data on Rule 506 offerings and participation by accredited investors.
In a related development, the SEC issued a Final Rule on July 10, 2013 that amended Continue Reading
The Foreign Corrupt Practices Act (“FCPA”), enacted to deter bribery and other corrupt practices in the conduct of international business, originally claimed jurisdiction over U.S. companies and individuals who used the mail or other instrumentalities of interstate commerce to further a bribe. A 1998 amendment, however, expanded the FCPA’s jurisdictional reach to include, among others, “issuers” of securities listed on U.S. exchanges (including foreign companies so listed). Thus, as businesses strategize to capitalize on the increasingly global market, those with securities issued in the United States must make sure to stay in compliance with the FCPA. If companies like Walmart, Ralph Lauren and Tyco International weren’t doing so before, they certainly are now.
So what is the FCPA and what conduct does it proscribe? Well, the FCPA has two separate and distinct prohibitions. First, the FCPA’s “anti-bribery provisions” prohibit the offer, promise, or payment of “anything of value” to a “foreign official” in order to “obtain or retain business.” Importantly, the FCPA covers payments to consults, agents, and any other intermediaries or representatives when the party making the payment knows, or has reason to believe, that some part of the payment will be used to bribe or influence a foreign official.
Second, the FCPA’s “books and records” provision imposes affirmative duties on issuers to maintain accurate books and a system of internal controls, and prohibits behavior intended to conceal an issuer’s lack of compliance with these duties. Essentially, issuers must maintain books that accurately and fairly reflect their transactions and disposition of assets, and must have internal accounting controls adequate to provide reasonable assurance of the integrity of the company’s financial systems and its disclosures.
In the last few years, FCPA enforcement has been on the rise as the SEC and the Department of Justice (“DOJ”), the agencies charged with enforcing the FCPA, have Continue Reading