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.”
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.
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”)
Things are looking pretty good for the venture capital industry. Potential VC investors have a lot of money available, and industry and geographical trends show a positive outlook for VC investing in the near term. There are numerous factors that could negatively affect the outlook for VC investments, but it certainly appears that substantial VC investment activity could occur over the next twelve months.
The most significant positive factor for VC activity in the near term is the supply of available cash. According to a recent report, VC funds currently have approximately $120 billion available for investment. Even though this is a composite number that is applied across the whole VC industry, it is a huge amount of available investment funds.
Another positive factor is the increase in corporate VC investment. In a relatively short time (aided by large amounts of cash on corporate balance sheets), corporate investors have begun to play a key role in the VC industry, especially in larger deals. Last year corporate VC deals comprised 25% of total VC deals, and this percentage will continue to increase. See my prior blog post on the rise of corporate VC investors (Corporate Venture Capital Investments – Good for Startups?).
President Barack Obama signed into law Wednesday, May 11th, a bill that will provide protection for trade secrets on the federal level.
This new legislation, called the Defend Trade Secrets Act of 2016, or DTSA, has been hailed by commentators as an extremely significant addition to federal intellectual property law. The DTSA was created as an amendment to the Economic Espionage Act of 1996 to provide civil remedies for trade secret violations under federal law. While some potential issues exist, I believe that this new law should be beneficial to many companies because of the possible increased trade secret protection and aggressive potential remedies that it will provide.
Trade secret protection in the U.S. has primarily been available under applicable state law. The Uniform Trade Secrets Act provides some consistency, and it has been adopted by 48 states. The trade secret laws of the various states are not totally uniform, however, and this has sometimes made it difficult for companies to protect their trade secrets under the various state laws. Legal actions involving trade secret protection have generally been brought in state courts. Since the DTSA is a federal law, more trade secret actions will now be able to be brought in federal court, providing an additional potential venue for these actions.
The DTSA does not replace or preempt existing state laws. As a result, this could be an advantage to companies as it may provide a separate method of protecting their trade secrets. The DTSA also defines trade secrets a little more broadly, using “public economic value” as the heart of the trade secret definition. This broader definition of what constitutes a trade secret may expand the range of information that a company can claim as a trade secret.
That said, there is a potential problem here: the DTSA does not provide a uniform system of trade secret law and instead establishes a federal level of trade secret law on top of the existing states’ trade secret laws. This could increase the number and the complexity of legal actions involving trade secrets. Therefore, a company that wishes to assert a trade secrets action will need to analyze which court — state or federal — will be more advantageous, and this will likely vary with the different circumstances of each situation.
The DTSA contains fairly aggressive potential remedies that may be advantageous to companies which believe that a trade secret violation has occurred. The provision that has drawn the most interest is the ability of a court to issue an ex parte seizure order in certain extraordinary circumstances. Continue Reading New federal law provides additional protection for trade secrets
Nasdaq OMX Group, Inc. announced today that it will enter into a joint venture with SharesPost, Inc. to form a marketplace for the trading of shares of unlisted companies. This is an interesting and cutting edge move that solves some problems for both Nasdaq and SharesPost. This new marketplace should be very positive for rapidly growing and large private companies which want to allow some trading in their shares but which are not ready to become publicly traded companies. It will also give investors opportunities to buy the shares of large private companies before the shares of these companies become publicly traded. According to a Nasdaq press release issued today this new marketplace, which will be called The Nasdaq Private Market, will “provide improved access to liquidity for early investors, founders and employees while enabling the efficient buying and selling of private company shares”.
Nasdaq will own the majority of and will control this joint venture, but the joint venture will use SharesPost’s existing trading platforms and infrastructure. The joint venture will be run by SharesPost founder Greg Brogger. Depending on the speed of regulatory approval, this new market for unlisted shares could be operational later this year.
This move makes good sense for Nasdaq because it should help them to begin to rebuild their credibility with up and coming companies and the technology industry. These market segments have traditionally been Nasdaq’s strength, but Nasdaq has been losing company listings (even from technology companies) to the NYSE and other exchanges. Nasdaq’s problems in attracting new technology company listings may be due to the significant negative issues that occurred in the initial public offering of Facebook’s shares last year. Nasdaq took a huge hit to its credibility as it was roundly blamed and criticized for the technical glitches that occurred with the Facebook offering. Some estimates say that major market makers and broker dealers lost more than $500 million in the Facebook IPO because of Nasdaq’s technical glitches. Nasdaq will also soon feel the economic effects of this matter as it reportedly offered as much as $62 million to settle associated claims and it now faces a possible $5 million fine from the SEC. For a good discussion of the current status of Nasdaq’s Facebook offering woes, see Charlie Osborne’s post on ZDNet.
This new relationship should also be very beneficial to SharesPost. SharesPost, which began operations in 2009, experienced substantial success in facilitating trading of shares of unlisted companies. The company provided the platform for trading in unlisted securities of high visibility technology companies such as LinkedIn and Facebook before these companies’ securities became publicly traded. SharesPost eventually encountered regulatory scrutiny, however, and the SEC brought an action against the company for failure Continue Reading Potential good news for growth companies: Nasdaq to set up new private market for unlisted stocks
Following up on my post on the subject, I had the chance to speak with Colin O’Keefe of LXBN regarding the SEC sending a Wells notice to Netflix and its CEO over a Facebook post the latter made. In the interview, I explain what happened, why the SEC is displeased and why it needs to do more to make sure its rules and regulations reflect the changing technological landscape.
The use of social media as a public company information channel encountered a roadblock on December 5, 2012 as Netflix, Inc. and its CEO, Reed Hastings, both received Wells notices from the SEC regarding a prior Facebook post that Mr. Hastings had made. A Wells notice is a notification from the SEC that it intends to recommend enforcement action against a company or individual. This notice also gives the affected parties an opportunity to explain why such an action is not appropriate.
Mr. Hastings’ July 2012 Facebook post congratulated the company’s content licensing team for exceeding a milestone in monthly viewing hours. It also contained a positive prediction regarding future monthly viewing hours. Netflix did not issue a Form 8-K, a press release or any other disclosure at the time of this post. Mr. Hastings has made a habit of posting company information on his Facebook page. Here is the post that is the subject of the Wells notice:
Netflix filed a Form 8-K regarding this matter on December 5, 2012. According to this 8-K, the Wells notices indicated that the SEC staff intended to recommend that the SEC institute a cease and desist proceeding and/or bring a civil injunctive action against Netflix and Mr. Hastings for violations of Regulation FD, Section 13(a) of the Securities Exchange Act of 1934 and Rules 13a-11 and 13a-15 under the 1934 Act. Mr. Hastings also provided a statement that was attached as an Exhibit to this Form 8-K. The statement clearly indicates his feeling that the SEC’s application of Regulation FD is incorrect here.
Regulation FD prohibits selective disclosure of material information. This regulation was enacted to prevent public companies from selectively releasing material information to certain shareholders or other parties without broad distribution. For example, Regulation FD prevents a company from selectively providing information to certain friendly investment analysts or major shareholders before it is publicly. The policy behind this rule is that all investors should have equal access to material information.
Regulation FD is conceptually a good rule, as it helps to level the playing field among investors and interested parties. The real problem in the social media context is that Continue Reading Netflix CEO’s Facebook post leads to possible Regulation FD action by SEC – Time for some changes
Social media use has experienced a meteoric rise. According to Tweetsmarter (a social media blog), the top five social media sites (Facebook, Twitter, LinkedIn, Google+ and Pinterest) have 1.8 billion users. Many companies have also embraced social media use as a cheap and efficient channel for the dissemination of information. Good examples here include Best Buy’s Facebook page and Whole Foods’ Twitter account.
While social media is a very powerful force in marketing and branding, public companies face significant potential problems from its use. A public company’s posting of information on a social media site is equivalent to any other written information that is disclosed by other means. If material nonpublic information is disclosed via a social media channel, the company will face the same securities law issues that it would face from any other disclosure made through other means. Accordingly, public companies must consider the possible impacts of social media use and take steps to control and mitigate the potential negative effects of social media use.
While there is no perfect solution to the potential problems that social media use creates for public companies, I have assembled the following list of guidelines and best practices for public companies in the social media area:
Cybersecurity issues continue to be a hot topic for companies. As discussed in my prior blog posts, “Get ready for increased cybersecurity disclosure requirements” and “SEC pushes for disclosure of hacking incidents”, the SEC continues to focus on cybersecurity and data breach items and has now begun to encourage public companies to disclose them, even in the absence of applicable rules or regulations. The only official guidance from the SEC on cybersecurity disclosure continues to be the disclosure guidelines provided in October, 2011 in CF Disclosure Guidance: Topic No. 2 – Cybersecurity (the “Release”).
There has been some important movement on cybersecurity issues outside of the SEC. While this does not directly pertain to disclosure of these items, public companies should pay close attention to these developments since they may provide some valuable guidance in this area. These developments also confirm the importance of cybersecurity issues and support my position that the SEC will probably soon mandate additional disclosure requirements for cybersecurity items.
On September 19, 2012 Senator John D. Rockefeller IV (D, West Va.) sent a letter to the CEOs of all Fortune 500 companies posing questions about these companies’ cybersecurity policies and related issues. His letter asked these companies to evaluate their roles and responsibilities in connection with cybersecurity legislation and reform and to work with the Federal government to successfully enact cybersecurity legislation. Responses to this letter are voluntary, but it is likely that most of these companies will respond in some fashion. The companies’ responses were requested by October 19, 2012.
Senator Rockefeller has long been a very strong proponent of cybersecurity legislation, and he is clearly frustrated with the lack of progress in this area. He was instrumental in the introduction of both the Cybersecurity Act of 2010 and the Cybersecurity Act of 2012, both of which failed to gain Senate approval. The proposed Cybersecurity Act of 2012 was defeated by a filibuster in August 2012, and in his letter Senator Rockefeller attributes this filibuster to opposition from business and trade groups, particularly the United States Chamber of Commerce. He has supported President Obama’s proposed use of an executive order to enact cybersecurity protection outside of the legislative process, and he references this in his letter. Based on the language of his letter, however, Continue Reading Cybersecurity issues continue to draw attention
A number of well-known companies, including Zappos.com, Google, Quest Diagnostics, Eastman Chemcial and AIG, have recently experienced actual or potential intrusions into their computer systems and related confidential data. Some of these incidents have been active criminal attacks by sophisticated hackers, while others have resulted from situations such as lost or stolen laptops. The frequency and severity of hacking incidents have been steadily increasing. In fact, virtually all companies today are subject to the risks of such incidents due to the widespread use of Internet and information technology. The advent of a substantial mobile workplace with workers accessing data remotely through smartphones, tablets, laptops and other devices has also multiplied companies’ risks in this area.
As the risks have increased, the SEC has been recently increasing the pressure on public companies to disclose “hacking” and other cyberintrustion incidents in their regulatory filings. There are still no SEC rules governing such disclosure, but I believe that this has clearly become a high priority disclosure item. I also foresaw these increased cybersecurity disclosure requirements in my prior blog post (“Get Ready for Increased Cybersecurity Disclosure Requirements”). Public companies that experience a hacking or other cyberintrustion incident should carefully review the recent actions taken by the SEC and other public companies that have experienced these incidents.
The SEC took a major step in encouraging disclosure of hacking and other cybersecurity items with its issuance of “2011 CF Disclosure Guidance: Topic No. 2 (Cybersecurity)” (the “Release”) in October 2011. This Release only provided general guidance on disclosure of cyberincidents. The SEC has not yet developed any rules or regulations on cybersecurity or hacking incident disclosure, although we believe that such rules and regulations will be enacted at some point soon. In any case, based on recent events it appears that the Commission is strongly encouraging such disclosure despite the lack of existing rules and, in some cases, engaging in de facto rulemaking.
Companies tend to resist disclosure of hacking incidents for several Continue Reading SEC pushes for disclosure of hacking incidents