Spoiler alert – despite the title and the creepy photo, this is not about zombies, vampires, or anything else of a spooky nature. Rather, it’s how we can hopefully make some of the deadwood in our proxy statements meaningful.
I realize that the upcoming
I have long thought that the SEC is among the best, if not the best, government agency. Over the years, I’ve worked with and gotten to know many folks on the SEC’s staff, who have consistently impressed me as bright, hard-working, serious about the SEC’s mission, and very nice people. I am sure that most people on the staff continue to possess these and other great attributes.
However.
As with most organizations, the tone at the top is critical. And, at least from outward appearances, the tone at the top of the SEC is at best dismissive, if not hostile, towards business, and disingenuous. I’m not saying that the SEC should bow to corporate America’s wishes and do its bidding. But it’s in the interest of our capital markets and the participants in those markets that the SEC consider a wide range of views and engage in thorough and thoughtful deliberation (part of what is known in the corporate world as the fiduciary duty of due care) before making decisions.
That does not seem to be the case. In the last year or so, the SEC has repeatedly demonstrated fealty to the institutional investor community by such things as announcing, early in Chair Gensler’s tenure, that the SEC would not enforce rules providing for a more level playing field between companies and proxy advisory firms, adopted by the SEC barely two years earlier, and then formally rescinding those rules (see here). I’m not saying those rules were perfect – far from it; in fact, they met the classic definition of compromise, in that all sides were dissatisfied with the outcome. However, they were a start, and instead of getting rid of them the SEC could and, IMHO, should have worked to improve them.
Continue Reading Rooting for the other guys?
Remember those three monkeys – see no evil, hear no evil, speak no evil? Well, that’s kind of how the SEC views the internet and social media. Time after time after time, the SEC has cautioned that social media are fraught, to the point that I sometimes wonder if there is a watermark, visible only to securities lawyers, in every SEC pronouncement about the web and social media that says “PROCEED AT YOUR PERIL!” And, unfortunately, many (too many, IMHO) SEC attorneys follow the SEC’s lead and either don’t encourage or actively discourage clients from taking advantage of the opportunities afforded by technology.
An example may be helpful. Several years ago, when I was in-house, we decided to include in our proxy statement a live link to something on our website. When we sent our draft proxy statement to outside counsel for the customary rules check, one of the comments we received was a strong admonition to remove the link or at least not make it “live.” The rationale was that there might be something on our website that we wouldn’t put in an Exchange Act filing and that the link would somehow suck all that bad stuff into the proxy statement and lead to liability.
Continue Reading Note to SEC: The internet and social media are here – deal with it!
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?
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!
Popular cryptocurrency exchange Coinbase went public on Nasdaq on April 14 using a direct listing. The company achieved a huge valuation (more than $100 billion) in this offering. While it’s too early to tell whether Coinbase’s stock price will hold up over time, the initial success of this offering is impressive. This continues a string of successful direct listing offerings by large technology companies such as Slack, Spotify, Palantir and Asana, all of which utilized this process to become public companies. What is a direct listing and how is it better (or worse) than a traditional IPO? More importantly, should you use a direct listing to take your company public? (Spoiler alert: maybe not).
Direct listing is a somewhat rare process in which a company achieves public company status without using traditional underwritten IPO sales efforts. Historically, only the company’s existing shareholders were allowed to sell shares in a direct listing. The company would not receive any of the proceeds of the offering as it would not be allowed to issue new shares, and accordingly all funds would go directly to the selling shareholders. On December 22, 2020, however, the SEC approved a rule change proposed by the NYSE that allows a company to conduct a primary offering through a direct listing under certain circumstances. Nasdaq later submitted a similar proposal which is currently under SEC review but which should be approved, as it is substantially similar to the NYSE proposal. This should fuel even more interest in direct listings going forward.
Continue Reading Direct Listings – A viable IPO alternative?
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.
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
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
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
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