I’ve been known to make some weird connections in this blog, so if you’re wondering what’s with the title of this posting, read on.

Some years ago, my wife and I took a fabulous trip to Egypt.  One of the many fascinating things and people we learned about was Hatshepsut, a Pharaoh who ruled Egypt from 1479 to 1458 BC, or thereabouts.  She’s been called Queen Hatshepsut, but technically that’s not correct, because she was literally a Pharaoh – a title that our guides told us was an exclusively male title for which there was no female equivalent.

Hatshepsut is believed to have been a very successful leader, opening trade routes and creating a boom in the construction of many grand temples and so on – something one of our guides referred to as an “edifice complex.”  However, after her death, her son, Pharaoh Tutmosis III, and possibly his son (to say nothing of the patriarchy) sought to eradicate her existence.  Her name was removed from records and many of her statues and images were defaced or destroyed.

But enough ancient history.
Continue Reading Why Is the SEC Like Pharaoh Tutmosis III?

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The Nasdaq Stock Market has developed a reputation for being the hip securities exchange, technologically and otherwise.  In many ways, it deserves this reputation.  For example:

  • In 1991, Nasdaq became the world’s first electronic stock market.
  • In 1992, it joined with the London Stock Exchange to form the first intercontinental linkage of capital markets.
  • In 1998, using the slogan “the stock market for the next hundred years,” Nasdaq became the first U.S. stock market to trade online.
  • In 2016, Adena Friedman was promoted to chief executive officer, becoming the first woman to run a major exchange in the U.S.

So it is not particularly surprising that, once again, in August 2021, Nasdaq took center stage and became the first major stock exchange to adopt a board diversity rule for its listed companies.

WHY THIS RULE?  WHY NOW?

The answer to the first question is clear. Notwithstanding widespread acknowledgement by corporate America that board diversity leads to greater innovation, smarter decision-making, and improvements to the bottom line, actual board diversity remains elusive.  As of 2020, only 20.9% of Fortune 500 board seats were held by White women, and a mere 5.7% were held by Black and Latina women; and while 2021 saw gains of 300% in new directors who are Black and 200% gains in Latino directors, 80% of all Fortune 500 board members are White, and 70% are male.[1]  So even though the new rule will not create “instant” diversity, it will create measurable board diversity goals, forcing companies that have given lip service to diversity to act – or to disclose that they have failed to act.

Why now?  Personally, I ask, “Why not before?”  The answers to those questions, however, are beyond the scope of this blog.  For this moment, I am cautiously optimistic that Nasdaq’s new diversity rule can be a catalyst for meaningful change that leads to the bona fide board diversity that corporate America has been incapable of accomplishing thus far.
Continue Reading Nasdaq’s Board Diversity Rule: The “Hip” Exchange Does It Again

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Lest you think that the summer is a quiet time for those of us in the wacky world of securities and corporate governance, think again.  Here’s some of what’s going on:

Legislation

On July 30, the House Financial Services Committee passed 11 bills and sent them to the full House. One of the bills would authorize the SEC to revise the reporting period for 13F disclosures from quarterly to monthly, change the time period to submit such reports, and expand the list of items to be disclosed to include certain derivatives.  The issuer and investment communities support these moves, and House passage seems likely, but the Senate is another matter altogether.

Another bill would impact family offices in a number of ways, including limiting the use of the family office exemption from registration as an investment adviser with the SEC to offices with $750 million or less in assets under management; requiring family offices with more than $750 million of assets under management to register with the SEC as “exempt reporting advisers”; and preventing persons who are barred or subject to final orders for conduct constituting fraud, manipulation, or deceit from being associated with a family office.
Continue Reading Summer Doldrums? Not So Much!

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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.

  • Financial statements for the target must be filed with an 8-K report within four business days of the completion of the business combination.  The usual 71-day extension for such financial statements is not available.
  • The combined company will not be eligible to incorporate Exchange Act reports or proxy or information statements until three years after the completion of the business combination.
  • The combined company will not be eligible to use Form S-8 for the registration of securities issuable under compensation and benefit plans until at least 60 calendar days after the combined company has filed current Form 10 information. (This information is customarily included in a “Super 8-K” filed within four business days after closing of the deSPAC transaction.)
  • For three years following the completion of the deSPAC transaction, the company will be unable to use some streamlined procedures for offerings and other filings, such as using a free-writing prospectus.

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

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The SEC recently increased the funding limits for several types of exempt offerings. The increases were fairly substantial, and we believe they may create increased opportunities to raise external financing. Smaller companies in particular should be aware of these increases, as they may provide increased access to capital.

The new funding limits were included in a Final Rule entitled “Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets,” issued by the SEC on November 2, 2020. The SEC also issued an explanatory Press Release which contains a helpful Fact Sheet regarding the Final Rule and the new funding limits. The purpose of the Final Rule was to harmonize and bring some consistency to the somewhat complex system of securities offerings that are exempt from registration with the SEC. This system is a critical component of the capital raising process, and for many smaller companies these exempt offerings are the only methods available for external capital raising. This Final Rule became effective on March 15, 2021.

This Final Rule impacted three exemptions from registration that are widely used, especially by smaller companies:  Regulation Crowdfunding, Regulation A (commonly known as “Regulation A+”) and Rule 504 of Regulation D.  The major changes are as follows:
Continue Reading Show me the money: Increased funding limits for exempt offerings may increase access to capital

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Environmental, Social and Governance considerations (ESG) are expected to play an increasing role in equity pay determinations for executive officers. About 50 percent of S&P 500 companies used ESG metrics in cash-based, short-term incentive compensation plans during 2020. Conversely, only about 4 percent of S&P 500 companies used ESG metrics in long-term equity incentive plans. This should change beginning with 2021 awards due to anticipated SEC-required disclosure of ESG business risks. ISS, Glass Lewis and large investors (e.g., BlackRock, Vanguard) have made calls for more ESG disclosure. Banks increasingly view ESG risks as credit risks. In addition, national media outlets have made the case for executive pay to tie with ESG goals.

In recent years equity awards made to executive officers have been tied to achieving company performance goals. But these performance evaluations are usually linked to relative total shareholder return or financial metrics such as EPS or return on invested capital. As the tide shifts to include ESG metrics, the question now asked is, “how do we set equity awards for executives to help our company attain its ESG goals?”
Continue Reading ESG Considerations for Equity Incentive Plans

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My apologies to those of you who thought I would expound on the corporate governance implications of Madonna’s early oeuvre; but I want to write about materiality, and I’m a sucker for a catchy title.

Those of us who spend our waking (and many sleeping) hours thinking about disclosure know that materiality is the linchpin of disclosure; if something is material, you at least have to consider disclosing it – though of course, probability and other factors can impact that decision.  We also know that there are any number of judicial interpretations of what is and is not material.  However, it seems to me that we are approaching a tipping point in how materiality may impact disclosures.

Take, for example, the position of SEC Commissioner Elad Roisman, who has stated, in effect, that there is no need for SEC rules explicitly requiring disclosures concerning climate change and other ESG matters, because existing rules already require disclosure of anything that is material to a company.  (For example, see his keynote address to the 2020 National Conference of the Society for Corporate Governance.)  I have been a member of the Society for many years, and I have heard many of my fellow members express similar views.  However, if that is the case, taking that view to its logical extreme, why have any specific disclosure requirements at all?  Why not just say “tell us what’s material”?
Continue Reading Living in a material world

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First, Broc Romanek

I don’t often write about the people I’ve come across in the course of my absurdly long career, but there are some exceptions.  One exception was a December 2019 post in which I noted that Broc Romanek had retired from thecorporatecounsel.net.  At the time, I predicted (probably because I hoped it would be true) that we hadn’t heard the last of him.  I am thrilled to report that my prediction has come true, as Broc has recently launched ZippyPoint.com, his latest and no doubt greatest achievement.

Why “ZippyPoint”?  Well, why not?  It’s punchy and catchy.  The fact that the name has nothing whatsoever to do with securities law or corporate governance makes it all the more endearing (though the website is all about securities law and corporate governance).  It’s also typical of Broc’s great and weird sense of humor.
Continue Reading Ups and Downs

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On November 2, 2020, the SEC announced the adoption of extensive amendments to the rules governing exempt offerings, more commonly known as “private placements.” The announcement stated that the amendments are intended to “harmonize, simplify, and improve” the exempt offering framework, allowing issuers to move from one exemption to another, and to (1) increase the offering limits for certain private placements and revise certain individual investment limits, (2) establish consistent rules governing offering communications and permit certain “test-the-waters” and “demo day” activities, and (3) harmonize disclosure and eligibility and bad actor disqualification provisions.

The amendments are designed to promote better access to private capital while maintaining investor protections and simplifying the complex patchwork of federal private placement exemptions that has existed for over 50 years. However, they contain their own complexities and some pitfalls that can make compliance challenging.

Below are highlights of the amendments adopted by the SEC.
Continue Reading The SEC Harmonizes the Private Placement Exemption Rules

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There was good news and bad news from the SEC this week.

First, the good news.

It’s unofficial, but Bloomberg reported this week that the SEC is “shelving” its proposed overhaul of Form 13F.  (Hopefully, “shelving” doesn’t mean being put on the shelf to be taken down later on, as in a shelf registration.  In a hopeful sign, the Bloomberg piece says that “some within the [SEC] have been notified it’s dead.”)  As readers of this blog know, I was not a fan of the overhaul;  from my perspective, it was a misstep in what has otherwise been a run of pretty good rulemaking by the SEC.

As if to prove that investors and companies sometimes have more in common than one might think, the proposal was criticized by a broad swath of groups.  Companies objected to the fact that it would make it even harder to identify and communicate with their investors (that was the major concern I expressed in my blog posting).  But investors weren’t happy with it either; some questioned whether the proposal would generate the cost savings the SEC cited as one of the principal benefits.  In fact, the Bloomberg article cites a Goldman Sachs study to the effect that of the 2,238 comment letters received on the proposal, only 24 supported it.

The article states that the SEC “still believes that the…trigger [for 13F filings]…hasn’t been altered in four decades [and] needs to be changed.”  True, perhaps, but the SEC’s approach was to throw out baby (i.e., the benefits of 13F filings) with the bathwater.  The SEC is also quoted to the effect that “[t]he comments received illustrate that the form is being used in ways that were not originally anticipated.”  Also true, but that speaks to many larger issues, including so-called proxy plumbing, that the SEC needs to address.  In the meantime, this quick fix was not a fix at all.

Now for the bad news.
Continue Reading Good News, Bad News