Photo of David C. Scileppi

David is a Gunster Shareholder and Co-Chair of its Securities and Corporate Governance Practice.  His principal areas of practice are securities, corporate governance, mergers and acquisitions, and general corporate law.  He has extensive experience in securities matters, including advising clients with regard to private and public offerings of securities (including initial public offerings) and ongoing disclosure obligations.  David has taken companies public as an attorney and, while an auditor with KPMG LLP, as an accountant.

Long Delay for JOBS Act Changes
Photo by Omar Parada

On January 14th, the House passed H.R. 37 “Promoting Job Creation and Reducing Small Business Burdens Act.”  Although passed with some support from the Democrats (29 votes, which in these days of hyper-partisanship is practically a bipartisan bill), the White House issued a veto threat on January 12th because the bill also delays part of the Volker Rule effectiveness until July 21, 2019.  Thus, in its current form, it looks dead on arrival, but there are some interesting ideas that I support and will hopefully make it in a revised bill later in the term:

  • Delays the requirement for savings and loan holding companies to register under the Securities Exchange Act of 1934 to the same extent as bank holding companies (assets of $10 million and class of equity securities held of record by 2,000 or more persons).  Also allows deregistration for savings and loan holding companies when they have fewer than 1200 shareholders of record.  This seems fair and was likely an unintended distinction made when the JOBS Act passed.  Unfortunately, this innocuous bill was grouped with the Volker delay. 
  • Provides for an exemption from the Securities Exchange Act of 1934 for certain business brokers.  The bill provides for some restrictions such as
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Florida corporation pushing the envelope with restrictive bylaws?
Photo by Stuart Rankin

How to stop frivolous plaintiff lawsuits?  Since 2010, when Vice Chancellor Laster of the Delaware Court of Chancery noted that “if boards of directors and stockholders believe that a particular forum would prove an efficient and value promoting locus for dispute resolution, then corporations are free to respond with charter provisions selecting an exclusive forum for intra-entity disputes,” many public companies have adopted bylaws provisions restricting frivolous derivative lawsuits.  As the ABA notes, these so called “forum selection bylaws” are extensions of the forum selection clauses that have long been upheld in contracts.

As anyone who has ever worked on a public merger well knows, within hours after a merger is announced, several plaintiff firms will announce an “investigation” and then file a derivative lawsuit (presumably based on the findings of their thorough “investigation”).  Of course, frivolous lawsuits aren’t limited to M&A transactions, but many of these lawsuits follow the same pattern.  As a result, public companies have had continued interest in restricting such lawsuits.  Forcing plaintiffs to sue in Delaware with a forum selection bylaw is one way to help restrict lawsuits.  But, more recently, some companies have become even more creative.  Here is a quick chronological summary of the movement to adopt restrictive bylaws:

  • March 2010 – Vice Chancellor Laster  of the Delaware Court of Chancery suggests
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Nasdaq fees are ready for takeoffIn late August, Nasdaq announced changes to their annual listing fees.  Generally, the fees will increase effective January 1, 2015, but Nasdaq is also adopting an all-inclusive annual fee and eliminating its quarterly fees.  The new annual fee will now include fees related to listing additional shares, record-keeping changes, and substitution listing events.  The all-inclusive fee is optional for issuers until January 1, 2018 at which point it becomes mandatory.

Issuers have a choice to make.  Option #1 – An issuer can do nothing and continue to pay an annual fee as well as pay the quarterly fees to list additional shares.  Under this method, an issuer will experience increased 2015 fees ranging from 0% to 40% depending on how many shares an issuer has outstanding.  Generally, the largest increases are for issuers with less than 10 million shares outstanding (14% increase) and for issuers with more than 100 million shares outstanding (40% if there are between 100 and 125 million shares outstanding and 25% if there are more than 150 million shares outstanding).  Think of this option as the same as flying on an airplane.  You get a seat (usually), but if you want anything else you need to pay.

Option #2 – Elect to
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ISS trying to save its own neck?On Thursday, Institutional Shareholder Services Inc. (ISS) announced the launch of a new data verification portal to be used for equity-based compensation plans that U.S. companies submit for approval by their shareholders.  This is a welcome change to ISS policy; although call me a cynic, but I believe this new policy has more to do with the SEC Staff’s recent interpretive guidance and less to do with actually improving their product.

Criticism of ISS (and the other proxy advisors) is nothing new.  Public companies have long complained about ISS’s conflicts of interest (ISS “grading” issuers’ corporate governance policies and then charging companies a subscription fee to learn how to improve their “grades”).  Further, ISS constantly churns their corporate governance policies (presumably) to keep their services relevant.  But, the biggest complaint from public companies occurs when ISS makes a recommendation based on erroneous data.  In fact, in a study from the Center on Executive Compensation, 17% of respondents reported erroneous analysis of long-term incentive plans and 15% of respondents reported that
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Congress to rescue public companies from proxy advisory firms?Who says Congress isn’t popular?  Well, Congress may become much more popular with public company executives if Congressman Patrick McHenry (R-NC) can make good on his recent promise to challenge the power of proxy advisory firms if the SEC doesn’t act.  In a recent keynote speech at an American Enterprise Institute conference on the role of proxy advisory firms in corporate governance, Rep. McHenry stated that proxy advisory firms are a significant issue on Capitol Hill.

As I have blogged about before, there are some real questions as to whether proxy advisory firms actually serve investors’ interests.  While ISS and Glass Lewis are entitled to create a business model based on providing services to institutional investors, there has been either a market or regulatory failure that has forced public companies to consider corporate governance policies promulgated by two unregulated proxy advisory firms before making business decisions.  Public companies should be making decisions based on what makes sense for their company and their shareholders and not based on trying to meet arbitrary policies of ISS or Glass Lewis (policies that seem to be continuously tweaked to keep the proxy advisory firms services relevant).  To be fair, ISS and Glass Lewis claim that their policies aren’t arbitrary at all, but rather their policies reflect their clients’ views.  Of course, for that to be the case, all of their institutional investor clients would need to have a monolithic view toward corporate governance.

Because institutional investors may own hundreds or even thousands of positions in public companies, institutional investors do not have the ability or the resources to research all of the issues facing each of those holdings.  That is where ISS and Glass Lewis step in to provide guidance to these institutional investors.  While some institutional investors have robust voting policies and attempt to make educated and informed voting decisions,
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Intrastate offering exemption
Photo by Jimmy Emerson

Last week, the SEC issued three new interpretations related to the so-called “intrastate offering exemption,” which is a registration exemption that facilitates the financing of local business operations.  An intrastate offering is exempt because it does not involve interstate commerce, and is therefore, outside the scope of the Securities Act.

We have received a few calls this week from startup companies who mistakenly believed that these new interpretations were creating a new registration exemption.  Largely, the mistaken belief is caused by the confusion stemming from some recent state law changes that allow for intrastate crowd funding.  While the new SEC interpretations were prompted by the recent state law changes, the intrastate offering exemption has been around since 1933, but for many reasons, it is not heavily relied upon.  And, despite the three new interpretations, we still advise against using the intrastate offering exemption.

What is this intrastate offering exemption?

The intrastate offering exemption is actually two separate exemptions, Section 3(a)(11) and a safe harbor Rule 147.  Although the two exemptions differ slightly, generally, if the (i) issuer is incorporated or organized in the same state in which it is offering securities; (2) a substantial portion of the issuer’s business occurs within that state; (3) each offeree and purchaser is a resident of the state; (4) the offering proceeds are used primarily within that state; and (5) the securities come to rest within that state, then your offering would be exempt from federal registration requirements.  The investors do not need to be accredited (unlike Regulation D offerings), there is no limitation on the manner of offering, there are no prescribed disclosures, there is no maximum amount that can be raised (unlike Rule 504, Rule 505, or Regulation A), and the shares are freely transferable to other residents of the state.  In other words, it is a fairly broad exemption that allows a lot of flexibility to issuers, especially to startup companies who need as much flexibility as possible when raising capital.

Ok, so what is such a problem with the intrastate offering exemption?

While there is lots of flexibility with the exemption, the intrastate offering exemption
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Intrastate offering exemption
Photo by Jimmy Emerson

Last week, the SEC issued three new interpretations related to the so-called “intrastate offering exemption,” which is a registration exemption that facilitates the financing of local business operations.  An intrastate offering is exempt because it does not involve interstate commerce, and is therefore, outside the scope of the Securities Act.

We have received a few calls this week from startup companies who mistakenly believed that these new interpretations were creating a new registration exemption.  Largely, the mistaken belief is caused by the confusion stemming from some recent state law changes that allow for intrastate crowd funding.  While the new SEC interpretations were prompted by the recent state law changes, the intrastate offering exemption has been around since 1933, but for many reasons, it is not heavily relied upon.  And, despite the three new interpretations, we still advise against using the intrastate offering exemption.

What is this intrastate offering exemption?

The intrastate offering exemption is actually two separate exemptions, Section 3(a)(11) and a safe harbor Rule 147.  Although the two exemptions differ slightly, generally, if the (i) issuer is incorporated or organized in the same state in which it is offering securities; (2) a substantial portion of the issuer’s business occurs within that state; (3) each offeree and purchaser is a resident of the state; (4) the offering proceeds are used primarily within that state; and (5) the securities come to rest within that state, then your offering would be exempt from federal registration requirements.  The investors do not need to be accredited (unlike Regulation D offerings), there is no limitation on the manner of offering, there are no prescribed disclosures, there is no maximum amount that can be raised (unlike Rule 504, Rule 505, or Regulation A), and the shares are freely transferable to other residents of the state.  In other words, it is a fairly broad exemption that allows a lot of flexibility to issuers, especially to startup companies who need as much flexibility as possible when raising capital.

Ok, so what is such a problem with the intrastate offering exemption?

While there is lots of flexibility with the exemption, the intrastate offering exemption
Continue Reading

Intrastate offering exemption
Photo by Jimmy Emerson

Last week, the SEC issued three new interpretations related to the so-called “intrastate offering exemption,” which is a registration exemption that facilitates the financing of local business operations.  An intrastate offering is exempt because it does not involve interstate commerce, and is therefore, outside the scope of the Securities Act.

We have received a few calls this week from startup companies who mistakenly believed that these new interpretations were creating a new registration exemption.  Largely, the mistaken belief is caused by the confusion stemming from some recent state law changes that allow for intrastate crowd funding.  While the new SEC interpretations were prompted by the recent state law changes, the intrastate offering exemption has been around since 1933, but for many reasons, it is not heavily relied upon.  And, despite the three new interpretations, we still advise against using the intrastate offering exemption.

What is this intrastate offering exemption?

The intrastate offering exemption is actually two separate exemptions, Section 3(a)(11) and a safe harbor Rule 147.  Although the two exemptions differ slightly, generally, if the (i) issuer is incorporated or organized in the same state in which it is offering securities; (2) a substantial portion of the issuer’s business occurs within that state; (3) each offeree and purchaser is a resident of the state; (4) the offering proceeds are used primarily within that state; and (5) the securities come to rest within that state, then your offering would be exempt from federal registration requirements.  The investors do not need to be accredited (unlike Regulation D offerings), there is no limitation on the manner of offering, there are no prescribed disclosures, there is no maximum amount that can be raised (unlike Rule 504, Rule 505, or Regulation A), and the shares are freely transferable to other residents of the state.  In other words, it is a fairly broad exemption that allows a lot of flexibility to issuers, especially to startup companies who need as much flexibility as possible when raising capital.

Ok, so what is such a problem with the intrastate offering exemption?

While there is lots of flexibility with the exemption, the intrastate offering exemption
Continue Reading