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.

Following the recent financial crisis and government bailouts of major U.S. financial institutions, the federal government has gradually facilitated a power shift from companies and their officers and boards of directors to their shareholders. A prime example of this is the recently enacted “say-on-pay voting” requirements. Through provisions of the Dodd-Frank Act which was passed in July 2011, Congress directed the SEC to adopt rules requiring public companies to give their shareholders a vote, on an advisory basis, on the approval of executive compensation (“say-on-pay”). The implemented rules also require public companies to hold an advisory vote on the frequency (“say-on-when”) with which the say-on-pay vote would occur. Taking into account the results of the say-on-when vote, companies determined whether to hold say-on-pay votes on an annual, biennial, or triennial basis, with most electing to hold annual say-on-pay votes. Despite these shareholder votes being advisory, and as we explained in a previous blog, these votes may actually be more impactful than originally anticipated due to the effect of poor or failed say-on-pay votes on the recommendations from proxy advisory firms, such as ISS. For example, a “poor” (i.e., less than 70% shareholder approval) or “failed” say-on-pay vote result (i.e., less than 50% shareholder approval) could lower one or more of a company’s ISS “GRId” scores (or other proprietary proxy advisory firm corporate governance rating scores) which would negatively impact the recommendations published by the proxy advisory firms with respect to the election of directors and other corporate governance matters being put to a vote of the shareholders at the annual meeting. By way of example, if a public company receives less than 70% shareholder approval for executive compensation, the company must show that it took steps to address its perceived executive pay shortcomings, otherwise ISS will recommend a “withhold” vote for the directors up for re-election at the next annual meeting.

Going one-step further, however, the United Kingdom announced on June 20, 2012 that it will be implementing a binding say-on-pay vote requirement for public companies. According to the Department for Business Innovation and Skills, the U.K. government will “introduce a new binding vote on companies’ pay policies in order to empower shareholders and Continue Reading Binding say-on-pay: Is it coming to a public company near you?

The “Risk Factors” section of any disclosure document is vital to the protection of the issuer. Generations of securities lawyers and accountants have worked into the night to develop lists of risks that would make any sane potential investor run away screaming. Most of us have seen innumerable examples of conventional risk factors like competition, legal and regulatory changes, impact of the loss of key personnel and others. Many of these risk factors are virtually identical regardless of the issuer’s industry space, and it’s doubtful that many readers of disclosure materials pay much attention to these risk factors.

The new breed of public technology companies, however, present some novel and interesting risks. The disclosure of these risks still strives to protect the issuer and give the potential purchaser the relevant information necessary to make an informed investment decision, but they focus on areas that are quite different from the disclosures used by more conventional companies. These technology company disclosure documents still contain many conventional risk factors, but it’s interesting to see the new areas that are considered material risks for these companies.

Here are several of the key items that been used as material risk factors in recent technology company disclosure documents filed by prominent technology companies:

Data Security.  This is a very hot issue for most technology companies these days, especially in the social media space. Facebook is a great example, as it has data from close to 900 million users. LinkedIn has similar dynamics and issues on a smaller scale. A data breach for any of these companies would have huge legal ramifications, as state, Federal and international regulatory authorities and private plaintiffs would quickly react. LinkedIn recently experienced these negative ramifications first hand as it was sued for $5 million in connection with its recent data breach.  The potential damage to a company’s brand and credibility could also be significant.  Click here for language from the Facebook prospectus and the LinkedIn prospectus as good examples. The SEC also offered some guidance on this topic in “CF Disclosure Guidance Topic No. 2 – Cybersecurity”. Continue Reading That sounds risky: New generation of risk factors for technology companies

Issuers who would not otherwise meet the NASDAQ independence rules may now breathe (a small) sigh of relief. On May 30, the SEC published notice of NASDAQ’s proposed change to Listing Rule 5605.

Generally, Rule 5605 requires issuers to maintain an “independent” audit, compensation, and nominating committees. There is an exception to the independence rules that allows one nonindependent director to serve on one of these key committees under “exceptional and limited circumstances” for up to two years.

Generally, this exception is rarely used — in the two-year period ended December 31, 2011, only 37 issuers used the exception – and is usually used only by the smallest of the listed issuers.

Under the current exception, if a director would not be considered independent because either the Board determined that the director had a relationship that interfered with the director’s independent judgment or if the director failed one of NASDAQ’s objective tests such as being employed by the company or one of its affiliates or accepting certain payments from the company in excess of $120,000 in a year, then the director could serve in an “exceptional and limited circumstance” provided that the company did not employ a family member of that director.

Under the proposed new rules, the director would be permitted to serve provided that the employed family member was not an executive officer.

While the exception does not impact a tremendous amount of companies, it does have a disproportionate benefit to smaller issuers, particularly companies with large shareholders who may be deemed affiliates of the issuer. The expected impact will be small, but I welcome any relief for smaller issuers especially given the tremendous burden placed on smaller issuers over the past 10 years.

With the passing of the Jumpstart Our Business Startups (JOBS) Act, the thresholds for whether a company must be public changed dramatically. This is particularly true for smaller banks and bank holding companies. 

The prior rule required registration with the SEC if the institution reached 500 or more holders of a single class of stock and had $10 million in assets. After the JOBS Act, the ownership number increased to 2,000 shareholders. Further, banks and bank holding companies may now deregister with fewer than 1,200 shareholders, a number previously set at 300. 

So the race is on for many smaller banks and bank holding companies to go private and save the high costs associated with being a public company.

At first glance, it may appear obvious that going private is the best thing to do. However, this is not necessarily the case. 

  • Many investors prefer having regular and comprehensive disclosures about their investments. This is required for public companies, but not for private ones. 
  • Also, investors like liquidity in their stocks. However, stocks in private companies are harder to trade, if they can be traded at all. 
  • Merger prospects can also be reduced by going private because it is harder to use private company stock as currency in a deal. 

For these reasons, the decision to go private should be considered carefully on a case-by-case basis.

 Social media is all the rage and seems to be rearing its head in just about every aspect of daily life. Turn on any television news program, whether CNN, ESPN, or any other, and you’ll be sure to be brought up to date with who has “tweeted” what to whom or what someone’s latest facebook status update means to the future of the world as we know it. However, there is more to social media than providing additional outlets to those persons and businesses already in the limelight. The fact of the matter is that these new social media tools allow just about anyone to widely disseminate information across the world at little to no cost. Naturally, organizations have realized the power of social media for promoting their cause and for fundraising purposes, particularly charitable organizations and political campaigns, many of which have raised significant amounts through a crowd-sourced approach.

Entrepreneurs have also recognized this potential and have sought to utilize social media for their own capital raising purposes. Unfortunately, many of the entrepreneurs may not realize that raising capital in this manner has securities laws implications which, if not sufficiently addressed at the outset, could be extremely detrimental to their business. Accordingly, these social media-based capital offerings are required to be registered with the SEC or offered pursuant to an exemption from registration. Until recently, there did not exist a specific exemption for crowdfunded offerings. However, the recently enacted Jumpstart Our Business Start-ups Act, or “JOBS Act”, created a crowdfunding exemption as the result of a successful campaign by small business advocates who saw crowdfunding as a useful tool to help small businesses in need of capital while at the same time minimizing investor protection concerns by imposing a small per capita investment limit. Many blogs and business-oriented publications have been creating a buzz about the new crowdfunding exemption and have been touting it as a boon for small businesses in need of capital. But as the title, of this post implies, we feel that this excitement is generally misplaced. Continue Reading The new crowdfunding exemption: much ado about nothing

The SEC Advisory Committee on Small and Emerging Companies has announced a public meeting to be held at 9:00 a.m. on Friday, June 8, 2012 in Multi-Purpose Room LL-006 at the SEC’s Washington, D.C. headquarters.  The meeting will be webcast on www.sec.gov.  The agenda for the meeting will be to focus on the JOBS Act and other rules and regulations affecting small and emerging companies.  The notice provides several ways to submit comments in advance of the meeting. 

For more information about how the JOBS Act may apply to your business, contact David C. Scileppi.

Find out more about Gunster’s Emerging Growth Companies Task Force.

Facebook’s IPO seemed like a sure thing only a short time ago. This iconic leader in the technology space led by a charismatic CEO seemed destined to have a blockbuster IPO. The IPO encountered a number of substantial problems and challenges, however, and the stock’s post-IPO performance has been far less than stellar, with none of the big increase in the stock price that was widely anticipated. This IPO is now widely viewed as flawed and as a failure in many respects.

 After three full trading days, Facebook’s shares are trading about 16% below the IPO price. The stock closed slightly above its IPO price on its first day of trading, but this only happened because the underwriters bought enough shares to support the stock. A variety of problems contributed to this poor debut, including the sale of large blocks of stock by existing Facebook shareholders, General Motors’ last minute decision to curtail substantial advertising on Facebook, a negative assessment of Facebook’s second quarter revenue forecast by analysts for the lead underwriter (which was allegedly only shared with potential large institutional purchasers), strange technical glitches at NASDAQ and the underwriters’ decision to increase both the number of shares sold and the offering price. Facebook’s final IPO prospectus can be found here.

The stock’s performance suggests that the underwriters’ original valuation ($34 per share) was only slightly higher than the company’s valuation as perceived by investors. The decision to take the IPO price to $38 per share increased the valuation beyond this perceived fair value. The subsequent decline in the stock value has taken the stock price down to a level that the market perceives is reasonable.

While Facebook’s current and prospective problems are daunting, the company was able to raise a huge amount of money at a premium to its actual value, so the IPO transaction was beneficial to the company. This is understandable given the tremendous demand for the stock that existed prior to the IPO, even in light of the problems that existed. The post-IPO results so far, while disappointing when compared to other technology IPOs, are short term and will correct themselves if the company increases its value. I’m actually surprised that the IPO price was as low as it was given the extremely high profile of this offering, but the significant negative factors that surrounded the offering contributed to this. In any case the company’s final valuation was still a huge multiple of historical earnings.

Continue Reading The Facebook IPO – From Sure Thing to Big Mess