One of the things I learned as young securities lawyer was that securities offerings can be made only by prospectus. Accordingly, one of the first things we did whenever we embarked on an IPO was to send a memo to our clients reminding them of the limitations imposed on communications under the securities laws and
I have often said that the SEC is an outstanding agency – for example, see here. I still believe that, although my belief has been tested in the last couple of years by the “regulatory rampage” in which the SEC has engaged.
But there is always room for improvement, and in a November speech
Remember those three monkeys – see no evil, hear no evil, speak no evil? Well, that’s kind of how the SEC views the internet and social media. Time after time after time, the SEC has cautioned that social media are fraught, to the point that I sometimes wonder if there is a watermark, visible only to securities lawyers, in every SEC pronouncement about the web and social media that says “PROCEED AT YOUR PERIL!” And, unfortunately, many (too many, IMHO) SEC attorneys follow the SEC’s lead and either don’t encourage or actively discourage clients from taking advantage of the opportunities afforded by technology.
An example may be helpful. Several years ago, when I was in-house, we decided to include in our proxy statement a live link to something on our website. When we sent our draft proxy statement to outside counsel for the customary rules check, one of the comments we received was a strong admonition to remove the link or at least not make it “live.” The rationale was that there might be something on our website that we wouldn’t put in an Exchange Act filing and that the link would somehow suck all that bad stuff into the proxy statement and lead to liability.
Continue Reading Note to SEC: The internet and social media are here – deal with it!
In the last several days, the SEC has engaged in a skirmish, and possibly an opening battle, against SPACs. A recap follows.
The first shot was fired on March 31, when the Staff of the SEC’s Division of Corporation Finance and the Office of Chief Accountant issued separate public statements about a number of risks and challenges associated with taking private companies public via “deSPAC” transactions.
The CorpFin statement covered a lot of territory, pointing out the following pitfalls, among others, facing companies that go public via a deSPAC. These pitfalls reflect that such companies are subject to rules governing shell companies that do not apply to companies going public through conventional IPOs.
The statement also reminds companies that public issuers are required to maintain accurate books and records as well as internal control on financial reporting – both areas that have been the basis for enforcement actions by the SEC.
Continue Reading Caveat Everybody — The SEC Takes Aim at SPACs
On February 19, 2019, the Securities and Exchange Commission voted to propose a new rule that would expand the availability of the “testing-the-waters” provisions that enable eligible companies to engage in certain communications to gauge institutional investor interest in a proposed IPO. Currently, only companies that qualify as “emerging growth companies” or “EGCs” are eligible to test the water. The new rule and related amendments would expand the availability of the provisions to all types of issuers, including investment companies.
The purpose of the testing-the-waters provisions is to allow potential issuers to gauge market interest in a possible initial public offering or other registered securities offering by discussing the offering with certain investors, including qualified institutional buyers (“QIBs”) and institutional accredited investors (“IAIs”), prior to filing a registration statement. SEC Chairman Jay Clayton said that “[t]he proposed rules would allow companies to more effectively consult with investors and better identify information that is important to them in advance of a public offering.” The proposed rules and related amendments are intended to give more issuers a cost-effective and flexible means of communicating with institutional investors regarding contemplated offerings and evaluating market interest.Continue Reading Testing-the-waters provisions to be available to bigger fish
If you find the title of this posting confusing, let me explain: On June 28, the SEC announced revisions to the definition of “smaller reporting company”that will significantly expand the number of companies that fit within that category (i.e., “smaller gets bigger”). As a result, more public companies will be able to reduce the disclosure they are required to provide under SEC rules (i.e., “which means less”). The new definition will go into effect 60 days after publication in the Federal Register.
Background
The SEC adopted the reduced disclosure requirements applicable to smaller reporting companies, or SRCs, in 2007. These reduced requirements were intended to ease the costs and other burdens of disclosure for small companies. The reduced requirements enabled SRCs, among other things, to:
In addition, SRCs that are not “accelerated filers” (companies that must file their Exchange Act reports on an accelerated basis) need not provide an audit attestation of management’s assessment of internal controls, required by the Sarbanes-Oxley Act. More on this below.
Continue Reading Smaller gets bigger, which means less (the new definition of “smaller reporting company”)
A few weeks ago, I attended the “spring” meeting of the Council of Institutional Investors in Washington (the quotation marks signifying that it didn’t feel like spring – in fact, it snowed one evening). These meetings are always interesting, in part because over the 15+ years that I’ve been attending CII meetings, their tone has changed from general hostility towards the issuer community to a more selective approach and a general appreciation of engagement.
So what’s on the mind of our institutional owners? First, an overriding concern with capital structures that limit or eliminate voting rights of “common” shareholders. CII’s official position is that such structures should be subject to mandatory sunset provisions; that position strikes me as reasonable (particularly as opposed to seeking their outright ban), but it’s too soon to tell whether it will gain traction.Continue Reading News from the front
The still relatively new SEC Chair, Jay Clayton, has let it be known that one of his missions is to improve the health of our IPO market and, thereby, to improve our capital markets generally. His minions – including a senior SEC Staff member I recently heard in Washington – have been spreading this gospel according to Jay.
I wish him (and them) luck, but I wonder if the mission is impossible. I’m thinking of some recent articles, including one by the inimitable Andrew Ross Sorkin entitled “Fixing the ‘Brain Damage’ Caused by the I.P.O. Process”, that makes the resuscitation of IPOs seem unlikely. As if the title weren’t off-putting enough, one of the executives quoted in the article described his company’s IPO process as “a way of living in hell without dying”. Not a good start.Continue Reading Can the US IPO market be brought back from the dead?
In late July, S&P Dow Jones and FTSE Russell announced that they were changing or proposing to change the standards that govern whether a company is included in their indices. Although their approaches differ, the changes would effectively bar most companies with differential voting rights from their indices, as follows:
Continue Reading Class Acts: Stock Indices Bar Differential Voting Rights
I don’t know when Congress decided that every piece of legislation had to have a nifty acronym, but the House Financial Services Committee recently passed (on a partisan basis) what old-fashioned TV ads might have called the new, improved version of the “Financial CHOICE Act”. The word “choice” is in solid caps because it stands for “Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs”.
Whether and for whom it creates hope, opportunity or something else entirely may depend upon your perspective, but whatever else can be said of the Act, it is long (though at 589 pages, it is slightly more than half as long as Dodd-Frank), and it addresses a very broad swath of issues. Here’s what it has to say about some key issues in disclosure, governance and capital formation, along with some commentary.
Continue Reading The Financial CHOICE Act – everything you’ve ever wanted, and more?