In July 2018, Coinbase – one of the largest cryptocurrency platforms — announced that it had won regulatory approval for a trio of acquisitions. This announcement generated a lot of publicity that Coinbase is on its way to creating the first marketplace on which blockchain-based tokens classified as “securities” can be traded. As it turns out, Coinbase never received regulatory approval for the acquisitions. However, the announcement was nevertheless a potentially significant event for the future of crypto trading.

In order to operate an exchange for securities, an entity must register as a national securities exchange or operate under an exemption from registration, such as the exemption provided for alternative trading systems (ATS) under SEC Regulation ATS. An entity that wants to operate an ATS must first register with the SEC as a broker-dealer, become a member of a self-regulating organization, such as FINRA, and file an initial operation report with the SEC on Form ATS.

Because Coinbase is neither registered as a national securities exchange nor operates under an exemption, it cannot operate an exchange-based trading platform for blockchain-based securities. However, the recently announced acquisitions indicate that Coinbase may be headed in that direction. The three companies acquired by Coinbase were:

  • Venovate Marketplace, Inc. (registered as a broker-dealer and licensed to operate an ATS)
  • Keystone Capital Corp. (registered as a broker-dealer)
  • Digital Wealth LLC (registered as an investment advisor)

By acquiring companies with the proper licenses already in place, Coinbase may be able to speed up its plan to create an exchange-based trading platform for blockchain-based securities as a regulated broker-dealer.

What exactly are blockchain-based securities anyway? Continue Reading Coinbase takes steps toward first blockchain-based token exchange

No, this is not a riff on Hamlet’s soliloquy.  It’s about the current kerfuffle (one of my favorite words) about stock buybacks.  In case you’ve not heard, some (but not all) of the concerns about stock buybacks are as follows:

  • Plowing all that cash into buying back stock means that it’s not going into plant and equipment, R&D or other things that facilitate longer-term growth and job creation.
  • Companies are using the windfall from the 2017 tax act to buy shares back rather than to make investments that will create jobs and longer-term growth.
  • Stock buybacks artificially inflate stock prices and earnings per share, which contributes to or results in additional (i.e., excessive) executive compensation.
  • By reducing the number of shares outstanding, buybacks mask the dilutive effects of equity grants to senior management.

And now there’s another concern.  Specifically, in a recent speech, new SEC Commissioner Jackson announced that stock buybacks are being used by executives to dispose of the shares they receive in the equity grants referred to above.  And one of his proposed solutions is that compensation committees engage in more active oversight – or, rather, that compensation committees should be required to engage in more active oversight – of insider trades “linked” to buybacks.

Continue Reading To buy or not to buy

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:

  • present only two (rather than three) years of financial statements and the related management’s discussion and analysis;
  • provide executive compensation for only three (rather than five) “named executive officers”;
  • omit the compensation discussion and analysis in its entirety;
  • present only two (vs. three) years of information in the summary compensation table; and
  • omit other compensation tables, pay ratio disclosure, and narrative descriptions of various compensation matters.

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

On February 21 the SEC issued a  “Commission Statement and Guidance on Public Company Cybersecurity Disclosures”. The Release contains new guidelines and requirements regarding public companies’ disclosure responsibilities for cybersecurity situations. No new rules or regulations have been issued at this point, but the Release contains some valuable guidance. It is also clear that cybersecurity is a hot button for the SEC and for Chair Clayton, and I believe that cybersecurity disclosure issues will be subject to more rigorous scrutiny going forward. All public companies should carefully review the Release and evaluate their disclosure obligations in connection with cybersecurity.

The Release updates the SEC’s position on cybersecurity. The SEC’s previous guidance in this area was primarily a Corporation Finance Division Release issued in 2011 that did not contain specific disclosure requirements. The cybersecurity landscape has changed radically since then. The substantial increases in the number and severity of cybersecurity incidents, coupled with the growing dependence of businesses on cyber systems and the associated problems that arise in a cybersecurity incident, have clearly convinced the SEC that additional disclosure is required. Continue Reading SEC issues guidance on cybersecurity disclosure obligations (and more)

For the first time since 2015, the SEC has its full complement of five commissioners.  That’s a good thing.  And at least one new Commissioner – Robert Jackson – seems to have hit the ground running.  For example, he made a speech in San Francisco just the other day in which he expressed his disfavor of dual-class stock, suggesting that it would create “corporate royalty”. Specifically, because shareholders in at least some dual-class companies have no voting rights, leadership of the company could be passed down through the generations in perpetuity.

Commissioner Jackson is a smart man – I’ve seen him speak at a number of programs, and he’s demonstrated his intelligence as well as his telegenic appearance.  His use of the “corporate royalty” meme also shows that he’s witty, though don’t think we need to worry too much about CEO titles becoming hereditary.

What I do think we may need to worry about is where he goes with his concerns.  Specifically, the point of his speech is to suggest that exchanges adopt mandatory sunset provisions so that their dual-class structures would fade away over time.

Continue Reading Dual-class shares: marching toward merit regulation?

 

With Chair Jay Clayton and Corp Fin Director Bill Hinman now in office for several months, the SEC seems to be gaining traction in a number of areas of interest to
public companies.

Pay Ratio Disclosures

As we noted in a Gunster E-Alert, on September 21, the SEC issued interpretations to assist companies in preparing the pay ratio disclosures called for under Item 402(u) of Regulation S-K.  The consensus (with which we agree) is that the interpretations will make it much easier for companies to prepare their ratios and related disclosures and hopefully to reduce litigation exposure associated with those disclosures.

Continue Reading Your tax dollars at work (at the SEC)

Some of you may remember Christopher Cox, who served as SEC Chair from 2005 to early 2009, when he was succeeded by Mary Schapiro.  His name doesn’t come up often, perhaps because his legacy was a weakened Commission tarnished by, among other things, the financial crisis and the Madoff scandal.

While Chairman Cox may not have been responsible for either of those debacles, he did leave another unpleasant legacy – XBRL.  He was among the biggest cheerleaders for XBRL, claiming that it would enable investors to compare companies within and across industries and would perform various other miracles.  Suffice it to say it hasn’t done that.  Aside from the fact that it’s time-consuming, it has failed to provide the benefits of comparability.  As a client recently said,

“[E]ven if two companies use the same taxonomy/tagging for Cost of Sales, they probably are not consistent in the underlying details that go into Cost of Sales.  One company might classify certain components as G&A instead.  There are many other examples.  Consistency is very important for one company’s reporting from period to period, however comparisons of competitors’ financials will always be approximations at best.”

Continue Reading RIP XBRL?

The young ones among you may not be familiar with Harvey Pitt, but he is an incredibly smart man and a gifted attorney who chaired the SEC some years back.  He made some political gaffes in that role, but that doesn’t diminish his understanding of the securities laws and how disclosure works.

A few weeks ago, he was quoted in The Wall Street Journal on the subject of disclosure (“Harvey Pitt Envisions a New Form of Corporate Disclosure”).  Specifically, he points out that “[d]isclosure is supposed to be for the purpose of informing…but…it’s become for the purpose of providing a defense”.  He also says “…when you have proxy statements that run hundreds of pages…it’s impossible to expect any normal individual to put in the time to read all of those pages”.  As I said, he’s an incredibly smart man.

So what is his solution?  He suggests a “summary disclosure document the way disclosure used to be” – say five or six pages – and that more detailed information be available by hyperlink for the investors who want to dig deep.  At the same time, companies could track how many people actually make that deep dive and make judgments as to eliminating information that no one seems interested in.

Continue Reading On the subject of effective disclosure…

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waldryano

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?