As our readers know, I am irritated by Congress’s penchant for naming bills so as to create nifty acronyms. And for including provisions that have nothing to do with the name or the acronym.  However, I can better put up with these irritants when the legislation – and SEC regulations implementing the legislation – create a good result.

Such is the case with the FAST Act. It stands for “Fixing America’s Surface Transportation Act,” and despite its acronymic name and its questionable connection to securities law, it contained some provisions to make disclosures more effective and the process by which disclosures are made somewhat easier.

These benefits were engraved in stone by the SEC on March 20, when it adopted a series of rules under the FAST Act. The rules provide for the following types of relief:
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SEC Rule 701 exempts non-reporting companies from registering securities offered or sold to employees, officers, directors, partners, trustees, consultants, and advisors under compensatory benefit plans or other compensation agreements. As discussed in an earlier post, under the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) passed by Congress in 2018, the threshold for the aggregate sales price of securities sold during any consecutive 12-month period that triggers additional disclosure requirements under Rule 701 was increased from $5 million to $10 million.   What may have gone unnoticed was that the SEC has adopted final rules to implement EGRRCPA and has published a concept release “soliciting comment on possible ways to modernize rules related to compensatory arrangements in light of the significant evolution in both the types of compensatory offerings and the composition of the workforce since the Commission last substantively amended these rules in 1999.”

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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.


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On December 19, 2018, the SEC adopted final rules allowing reporting companies to rely on the Regulation A exemption.

How did we get here?

The SEC adopted a new – and greatly improved – Regulation A, known as Reg A+, in 2015.  As noted in previous posts (see here and here) Reg A, provides an exemption from registration under the Securities Act for smaller public offerings, but for many years was seldom used due to cost restraints and small financing caps.  The 2015 amendments, adopted in response to the JOBS Act, remedied these shortcomings, updating Reg A to make it a more viable capital-raising tool.

The main benefits of Reg A+ include the following:

  • Companies can raise up to $50 million every 12 months via two overlapping tiers.
    • Tier 1: offerings of up to $20 million in a 12-month period.
    • Tier 2: offerings of up to $50 million in a 12-month period.
  • Insiders can sell their shares in a Reg A+ offering.
  • Investors in a Reg A+ offering have immediate liquidity – they can sell their shares once the offering is completed and don’t have to hold them for a period of time.
  • Some Reg A+ offerings are exempt from state securities or “blue sky” laws.
  • Some Reg A+ offerings are easier to list on an exchange.
  • Reg A+ can be used for merger and acquisition transactions.

What’s new?
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Following a tweet from the President last August, the SEC has begun the process of reviewing the existing quarterly reporting regime and will be further exploring possible changes that may ease administrative and other burdens on public companies. Specifically, the President “asked the SEC to study!” whether less frequent reporting for publicly traded companies would “allow greater flexibility and save money.” This is not a new issue on the SEC’s radar screen, but it has recently regained traction– the SEC issued a concept release in 2016 soliciting public comments more specifically on reporting frequency and the current quarterly reporting process.

The request for comments, which can be viewed here, asks for public input on several questions related to the existing reporting regime. One of the more interesting questions on which the SEC is seeking input is whether the practice of public companies issuing forward earnings guidance places undue pressure and focus on short-term results and negatively impacts long-term results. Several commentators have expressed concern on this issue over the years and believe management teams with a longer-term view would be better stewards of investor capital. Many of the other specific questions asked by the SEC in its request for comments relate directly to the current reporting process and whether changes could be made that balance the interests of investors while making the reporting process more efficient, including, among other things:
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The SEC recently settled charges against two prominent celebrities in connection with the promotion of initial coin offerings. Boxer Floyd Mayweather Jr. and music producer and social media star DJ Khaled were charged in separate incidents with failing to disclose that they had received payments for promoting ICOs. While the SEC has provided prior guidance

A while back – March 2017, to be exact – I posted a piece entitled “Beware when the legislature is in session”, citing a 19th Century New York Surrogate’s statement that “no man’s life, liberty or property are safe while the legislature is in session.”

It may be time to amend that statement, for Washington seems to be at it regardless of whether the legislature is in session.  A very rough count suggests that there are more than 20 pending bills dealing with securities laws, our capital markets, corporate governance and related matters.  And that does not include other initiatives, such as the President’s August 17 tweet that he had directed the SEC to study whether public companies should report their results on a semi-annual, rather than a quarterly, basis.

Problems with the Approach

I’m not saying that all of the ideas being floated are awful, or even bad.  (One good thing is that our legislators seem to have decided that trying to give every statute a name that can serve as a nifty acronym isn’t worth the effort.)  In fact, some of the ideas merit consideration.  However (you knew there would be a “however”), I have problems with the way in which these bills deal with the topics in question.  (I have problems with some of the ideas, as well, but more on that later.)

  • First, in my experience, far too many legislators do not understand what our securities laws are all about, and some do not want to understand or do not care. I will not cite particular instances of this, but I’ve been surprised several times with the level of ignorance or worse (i.e., cynicism) demonstrated by legislators and their staffs about the matters their proposals address.  At the risk of hearing you say “duh”, this does not lead to good legislation.
  • Second, these bills represent a slapdash approach when what is needed is a comprehensive, holistic one. Even the best of the pending bills and proposals is a band-aid that will create another complication in an already overcrowded field of increasingly counterintuitive and/or contradictory regulations, interpretations, and court decisions.

Problems with the Proposals

As promised (threatened), I also have concerns about a number of the proposals being bruited about, but for the moment I’ll focus on two of them – eliminating quarterly reporting and Senator Warren’s “Accountable Capitalism Act”.
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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.


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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.
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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.


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