David C. Scileppi

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As mentioned on Brock and Dave’s Blog and a recent article by Bloomberg, the conflict minerals disclosure required by the Dodd-Frank Act appears to be close to final.  These proposed rules are highly controversial because of the estimated high costs for public companies to comply with the new rules compared to the small perceived benefit to investors.  In fact, we have previously blogged regarding the likelihood that the SEC has grossly underestimated the compliance costs.

Under the proposed conflict minerals rules, companies must disclose whether certain minerals used in production chains originate from the Democratic Republic of the Congo or its neighboring countries.  Minerals sourced from these areas of central Africa often fund militia and other military groups’ operations which have exacerbated internal conflicts and human rights violations.   Congress believes that by requiring these disclosures public companies may be encouraged to seek alternative sources, materials, or suppliers to project a more socially responsible image to consumers.

In a letter to the SEC, Senator Leahy and other members of Congress have taken issue with the proposed final rules apparently circulating around the Capitol.  In the letter, the Senator and his colleagues have informed the SEC that they believe the proposed final rules contravenes Congress’s legislative intent by allowing the conflict mineral reports to be “furnished” rather than “filed.”  The difference, of course, is not just semantics.  Items “filed” in periodic reports are subjected to liability under the Securities Act of 1933, including Section 11 and Section 12(a)(2), because the information is incorporated by reference into Securities Act registration statements.  Items “furnished” are subject only to liability under the Securities Exchange Act of 1934, primarily Rule 10b-5.  Because Section 11 liability presents essentially “strict liability” for issuers, it would be much easier for a plaintiff to win a judgment against an issuer for faulty conflict minerals disclosure if the disclosure is “filed” rather than “furnished.”

Whether or not the legislative intent espoused by Senator Leahy in his letter is correct, we believe the foundation of the entire law is flawed.  As we have blogged before, we strongly disagree with the increasing frequency in which social policy has been weaved
Continue Reading Conflict minerals rule may be reaching a conclusion

As reported in the Wall Street Journal, Facebook, Inc. filed a registration statement with the SEC late Wednesday to register to go public.  This continues the recent trend of established technology companies going public since the beginning of last year.  Whether the stock price ultimately supports its expected lofty valuation remains to be seen.

While the IPO has been long-expected, it is important to remember the reason why Facebook decided to go public: it was required.  Section 12(g) of the Securities Exchange Act of 1934 requires companies that have at least $10,000,000 in assets and at least 500 shareholders as of the end of its fiscal year to register with the SEC.  This shareholder limit has not been adjusted since its adoption in 1964, and causes companies that need to raise capital to face two equally unappealing choices: limit the number of investors to ensure the 500 limit is not breached or register with the SEC regardless of whether being a public company is in the company’s best interests once the limit is met.  While a recent proposed bill in the House has attempted to lessen the burden on private companies looking to raise capital by increasing the shareholder limit from 500 to 1000, to date no legislation has been enacted into law.  The SEC is also reviewing the shareholder limit.

Until Congress or the SEC acts, private companies should consider taking a few safeguards to avoid the requirement to register with the SEC.  First, adopt a shareholders’ agreement that restricts the transferability of the shares.  The transfer restriction will prevent shareholders from subsequently transferring their shares to multiple new shareholders which could cause the company to exceed the limit.  Second, issue stock options to employees rather than shares of stock.  Stock options are considered a separate class of equity security, and since 2007, the SEC has exempted companies from having to register under Section 12(g) because there were more than 500 option holders.  Third, private companies can adopt an insider trading policy that prohibits any employee from reselling their shares.  Facebook adopted such a policy, which effectively eliminated the secondary distribution of its shares.  Fourth, companies can implement high transfer fees to restrict the distribution of its shares similar to the fees
Continue Reading Missed in Facebook IPO frenzy: they had to go public. Here are 6 ways private companies can remain private

Last Friday, the SEC’s Division of Corporate Finance issued its fourth topic in its CF Disclosure Series, which periodically provides the SEC’s views on various topics.  This time, the SEC addressed, what it believes to be, inconsistent disclosures on European sovereign debt holdings.  The SEC reminds registrants, particularly bank holding companies, of their obligations to…

Late last week, a shareholder activist filed, what is believed to be, the first proxy access resolution for this proxy season.  The target of the proposal, MEMC Electronic Materials, Inc., is an S&P 500 company that manufactures and sells wafers and related products to the semiconductor and solar industries.  As discussed in a previous blog…

Earlier this month, FINRA proposed new Rule 5123 to regulate private offerings.  Proposed Rule 5123 is a second attempt by FINRA this year to expand the regulatory process  on private offerings.  In January, FINRA had proposed a much more comprehensive set of changes, including proposed regulations affecting private placements not involving a FINRA member firm. …

The Dodd-Frank Act mandated the SEC to adopt rules to require reporting companies to make certain “social disclosures.” For example, Section 1502 of Dodd-Frank requires the SEC to adopt disclosure rules that will require reporting companies to make certain disclosures if “conflict minerals” are “necessary to the functionality or production” of its manufactured products. Metals…

On August 16, 2011, the PCAOB issued a concept release seeking comments on ways that auditor independence, objectivity, and professional skepticism could be enhanced.  While the PCAOB seeks advice on any approach, the concept is focused on mandatory audit firm rotation.  Consequently, the release could lead to companies having to change their auditors every few…

In a resounding victory for public companies Friday, the United States Court of Appeals for the District of Columbia Circuit struck down the Securities and Exchange Commission’s rule on proxy access.  The controversial proxy access rule would have permitted shareholders to more easily and more cheaply nominate a minority slate of director candidates for election…

The IRS recently issued proposed regulations under Internal Revenue Code Section 162(m) relating to the deduction limitation for certain employee remuneration in excess of $1,000,000, which if passed, will have a significant impact on the design of equity based compensation plans for existing public companies and privately-held companies that ultimately become publicly held. Under Code…