These are interesting times for technology companies that are contemplating initial public offerings. For companies of sufficient size, the exchange for the listing of their securities generally comes down to the New York Stock Exchange and the Nasdaq Stock Market. The NYSE has historical prestige and a long track record, while the Nasdaq has cultivated a progressive, tech-friendly reputation. If you are a high visibility technology company, you will probably find these exchanges actively competing for your listing. Such benefits as free advertising have been used, and business deals involving a company’s services may influence a company’s decision as to which exchange to list its securities. For example, Oracle’s switch to the NYSE from Nasdaq was reportedly in part due to an agreement by the NYSE to continue to use Oracle software in its operations.
Nasdaq has long been the favorite exchange for the listing of technology company offerings. This was probably due to the initial progressive use of automation and electronics in this exchange’s early operations which resonated with technology company executives. Rather than traders waving pieces of paper (the historical process at the NYSE), Nasdaq pioneered the use of electronic quotation boards and other advanced methods in its operations. Nasdaq was willing to list the offerings of smaller companies and was also cheaper than the NYSE. All of these factors allowed Nasdaq to build a reputation as the technology companies’ preferred exchange. This reputation was fostered and supported by the listing of a large number of technology companies, including big hitters like Apple and Microsoft.
Nasdaq’s role as the preeminent exchange for technology companies has been diminished. One of the major blows for this exchange was Continue Reading
On the same day that the SEC proposed rules that may make capital raising easier for companies by repealing the ban on general solicitation for private offerings, the SEC also proposed rules that may make it much more difficult to raise capital. Why would they do this? The repeal on the ban on general solicitation was required by the JOBS Act, but there is a lot of concern about fraud without the ban in place. And while the SEC’s mission is to maintain fair, orderly, and efficient markets and facilitate capital formation, the SEC has a third mission: to protect investors.
Here is a highlight (or a lowlight depending on your perspective) of what is being proposed:
- Require the filing of a Form D at least 15 calendar days in advance of using any general solicitation (rather than the current requirement of 15 calendar days after the first sale of securities);
- Require the filing of a “closing amendment” to Form D within 30 calendar days after the termination of an offering (there is no current requirement to file a final amendment);
- Increase the amount of information gathered by Form D such as the number of investors in the offering and the type of general solicitation used in the offering;
- Automatically disqualify an issuer from using Regulation D for one year if the issuer failed to file a Form D (currently no such harsh consequences);
- Mandate certain legends on all written general solicitation materials; and
- Require the filing of general solicitation materials with the SEC (temporary rule for two years)
Now, while these are still only proposed rules and the comment period continues through November 4, 2013, there has been a huge outcry from the startup community. Critics of these proposed Continue Reading
For a board of directors of a company, perhaps no decision is as important (and litigious) as the sale of the company in a change-of-control transaction. Shareholder lawsuits aimed at merger and acquisition (“M&A”) transactions (usually in the form of a putative shareholder class action or derivative suit) often allege that the directors of the acquisition target company breached their fiduciary duties in approving the transaction in question, and name the acquiring company and other defendants as aiders and abettors of the fiduciary violation. In support of their claim, the plaintiffs typically assert one, all, or a few of the following:
- Transaction price is inadequate,
- Directors failed to exercise due care to maximize the price being offered,
- Transaction is coercive to shareholders because of so-called deal protection measures included in the agreements,
- Public disclosures associated with the transaction are inadequate or misleading, and/or
- Some or all of the directors have some form of conflict of interest.
The rationale for shareholder litigation generally stems from the idea that managerial agency costs are high, and that class actions and derivative suits are key shareholder monitoring mechanisms necessary to keep managers in line. On the other hand, representative litigation claims are often lawyer-driven, reflecting the agency costs that arise out of contingency fee suits that make the lawyer the real party in interest in these cases. In any event, the fact is that shareholder litigation in the United States has exploded in recent years. According to one study, in 2012, shareholders challenged 93 percent of M&A deals valued over $100 million and 96 percent of transactions valued over $500 million.
And while the deferential business judgment rule (i.e., the presumption that the directors’ actions were informed and taken in the good-faith belief that the actions were in the company’s best interests) generally enables directors to Continue Reading
While the U.S. government over the past few years seems to be in a constant state of imminent closure, it finally has happened. What does this mean to issuers? At the moment, as Broc Romanek blogged about today, it will be business as usual (at least for the SEC). For the next few weeks, the SEC believes it has access to sufficient funds to continue normal operations. The SEC was able to stay open in the last government shutdown in the 1990s.
If the budget impasse continues beyond a few weeks, however, the SEC’s Operational Plan for a governmental shutdown would presumably go into effect. According to the SEC’s contingency plan, of its 4,149 employees only 252 would report to work. The employees not furloughed would largely consist of those critical for the safety of human life or the protection of property or to carry out emergency enforcement activities. No one may volunteer to work without pay. All law enforcement and litigation matters, except emergency matters, all processing and approvals of filings and registration statements, and all non-emergency rule-making would be suspended. EDGAR would remain operational; however, the SEC would be unable to process filings, provide interpretive advice, issue no-action letters or conduct any other normal activities.
Most likely, public outcry will cause the government factions to compromise and strike a budget deal before the SEC need to implement its shutdown plan, but an impending SEC shutdown is worth watching especially if you are currently contemplating a securities offering.
Compensation of public company executives re-emerged back into the public limelight after the recent financial crisis which began in late 2007. The public perception was one of outrage in large part due to the fact that many investors in public companies were experiencing significant losses in their investment portfolios while CEOs and other executives were still being paid record levels of compensation and bonuses.
As a direct result, Congress enacted a number of new laws intended to fix these perceived social injustices, most of which were included in the Dodd-Frank Act. Section 953(b) of Dodd-Frank, for example, was a highly controversial part of Dodd-Frank which directed the SEC to adopt rules requiring public companies to disclose the ratio of the CEO’s total compensation to that of its median employee. The crux of the controversy surrounding this rule related to how companies should determine median employee salary. Should part-time employees be included or just full-time employees? How should companies treat international employees in countries that have significantly lower relative wages as compared to the U.S.? Another concern of critics was whether the pay ratio metric was useful for investors.
On September 18, 2013, the SEC promulgated proposed rules regarding CEO pay ratio disclosures. As required by the Dodd-Frank Act, the proposal would amend existing executive compensation disclosure rules to require companies to disclose:
- The median of the annual total compensation of all its employees except the CEO.
- The annual total compensation of its CEO.
- The ratio of the two amounts.
The proposed rule would not specify any required calculation methodologies for identifying the median employee in terms of total compensation for all employees. Instead, it would allow companies to select a methodology that is appropriate to the size and structure of their own businesses and the way they compensate employees.
Like the other SEC disclosure rules mandated by Dodd-Frank, it seems that Congress is attempting to indirectly fix situations it views as problematic for one reason or another by mandating that public companies disclose certain things in their public filings. I presume the thought is that companies will be incentivized to change their practices so as not to be publicly shamed through these disclosures in their public filings. My presumption is supported, to some extent, by Continue Reading
The next big tech IPO is in the works. Twitter, the hugely popular short message social media site, announced last week that it has filed a Form S-1 registration statement with the SEC in connection with the company’s proposed initial public offering. This IPO has been rumored and anticipated for some time, and it will generate substantial interest among members of the tech and investment communities. This offering may not have the impact of last year’s Facebook IPO, but it will be close.
Twitter appropriately announced its planned IPO in a tweet on September 12:
(followed by a “get back to work” tweet):
This offering should proceed more smoothly and productively than the ill-fated Facebook IPO. The various participants in the IPO process learned a lot from the significant problems that the Facebook IPO encountered, and in some cases these lessons were driven home by significant monetary penalties (See my prior blog post regarding the Facebook IPO and its problems). No one wants a repeat of that situation, especially with such a high profile IPO. Twitter has also always impressed me as a more thoughtful and rational company than some in the tech space, and this should carry through in their IPO.
In its IPO filing process Twitter took advantage of one of the key available provisions of the JOBS Act. Section 6(e) of the Securities Act allows an “emerging growth company” to file an IPO registration statement on a confidential basis. This provision is designed to give the company and the SEC time to identify and work through potential problem areas or issues before investors see any information. It also allows companies to keep material nonpublic information confidential until late in the SEC review process. If the company decides not to proceed with its IPO, it has avoided the public disclosure of this information. If the company and the SEC can work out these problems and issues satisfactorily, the registration statement (amended as necessary) eventually becomes available to the public and the IPO process goes forward. This should make the registration process very quick and efficient after it emerges from the initial SEC review.
This confidential filing opportunity has been popular with emerging growth companies. According to an Ernst & Young JOBS Act study, approximately 63% of eligible companies used this process during the first year of its availability under the JOBS Act. The SEC has published a set of helpful FAQ’s which clarify many components of this confidential filing process.
Twitter added one interesting change to this Continue Reading
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