As previously reported on our Securities Regulation and Corporate Governance Monitor (available here and here), on May 28, 2024, the standard settlement cycle for most broker-dealer transactions will be shortened from “T+2″ to “T+1,” subject to certain exceptions. The SEC approved this change in its rule amendments to Rule 15c6-1(a) under the Exchange Act adopted on February 15, 2023.
SEC Exempts Rule 144A Debt Issuances From Rule 15c2-11 Information Requirements
On October 30, 2023, the Securities and Exchange Commission (the “Commission") issued an Order exempting brokers and dealers from the requirements of Rule 15c2-11(g) (the “Rule") under the Securities Exchange Act of 1934, as amended, with respect to fixed-income securities that are sold in compliance with the safe harbor in Rule 144A (the “Rule 144A") under the Securities Act of 1933, as amended, for resales to Qualified Institutional Buyers (“QIBs"). As a result, issuers of Rule 144A fixed-income securities will not have to publish public information in order for brokers to quote their securities and facilitate trading.
UPDATE: California Governor Signs Climate Legislation Into Law, But Signals Changes To Come
On October 7, 2023, California Governor Gavin Newsom signed into law Senate Bill 253, the Climate Corporate Data Accountability Act (“SB 253") and Senate Bill 261, Greenhouse Gases: Climate-Related Financial Risk (“SB 261"). The legislation imposes extensive new climate-related reporting requirements on any public or private U.S. business entity with annual revenues over $1 billion and $500 million (for SB 253 and SB 261, respectively) doing business in the state. A detailed discussion of each bill is available in our recent client alert.
New Vote Reporting Disclosures Required on Form N-PX – Vote Reports Now Extend to All 13F Filers – No Longer Limited to Registered Funds
In November 2022, the Securities and Exchange Commission (“SEC”) adopted amended rules that update the existing reporting requirements on Form N‑PX and create new Form N‑PX reporting requirements for institutional investment managers.[1] The purpose of these amendments is to increase transparency surrounding proxy voting records. Prior to the adoption of this new rule, registered investment management companies (“Funds”), such as mutual funds and exchange traded funds, were required to publicly report their annual proxy voting records on Form N‑PX.
Supreme Court Upholds Tracing Requirement For Section 11 Claims in Direct Listings – Slack Technologies LLC v. Pirani, No. 21-200
On June 1, 2023, the Supreme Court of the United States unanimously upheld that plaintiffs alleging the registration statement for a “direct listing" IPO contained a material misstatement or omission, who sue under Section 11 of the Securities Act of 1933, must trace the shares they bought to the registration statement. In a direct listing, unlike a traditional IPO, unregistered shares can be sold by non-affiliates on the initial listing date, so it is possible that certain shares bought on the first day will be unregistered shares and thus not subject to the strict liability standard of Section 11.
SEC Enforcement Action Highlights Importance of Non-GAAP Policies and Disclosure Controls and Procedures
On March 14, 2023, the SEC charged DXC Technology Co. (“DXC") with making material misstatements with respect to its non-GAAP financial performance measures, stating that, DXC “negligently misclassif[ied] tens of millions of dollars of expenses as [transaction, separation and integration-related (“TSI")] costs and improperly exclude[ed] them in its reporting of non-GAAP measures." The SEC’s order also found that DXC, and specifically its controllership function and disclosure committee, failed to maintain “adequate" disclosure controls and procedures relating to DXC’s non-GAAP disclosures, citing the following shortcomings:
SEC Publishes C&DIs Addressing Tender Offer Issues
On March 17, 2023, the staff of the Division of Corporation Finance (the “Staff") of the Securities and Exchange Commission released over thirty questions and answers in the form of Compliance and Disclosure Interpretations (“C&DIs") addressing various tender offer issues.
SEC Updates Non-GAAP C&DIs
On December 13, 2022, the staff of the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission announced an update to its Compliance and Disclosure Interpretations (“C&DIs”) on Non-GAAP Financial Measures under Questions 100.01, 100.04 – 100.06, and 102.10(a)(b)(c). Many of the changes memorialize positions the Staff has taken in comment letters or provide additional detail about those positions.
SEC Proposes Rule to Amend Beneficial Ownership Reporting
On February 10, 2022, the Securities and Exchange Commission (the “Commission”) announced a proposed rule to modernize the rules governing beneficial ownership reporting
SEC Proposes Rule Changes to Shorten the Security Settlement Cycle to T+1 by March 31, 2024
On February 9, 2022, the Securities and Exchange Commission (the “Commission”) announced a proposed rule to shorten the standard settlement cycle for most broker-dealer transactions from two business days after the trade date (“T+2″) to one business day after the trade date (“T+1″), while soliciting comments regarding challenges and possible approaches to achieving settlement by the end of trade date (“T+0″).
Now Available: Considerations for Preparing Your 2021 Form 10-K
As we do each year, we offer our observations on new developments and recommended practices for calendar-year filers to consider in preparing their Form 10-K. This alert reviews the recent amendments to Regulation S-K adopted by the U.S. Securities and Exchange Commission (“SEC”) and discusses how public companies are reacting to these new requirements.
SEC Proposes Rules on Insider Trading, Rule 10b5-1 and Share Repurchases
On December 15, 2021, the Securities and Exchange Commission (“SEC” or “Commission”) held a virtual open meeting where it considered four rule proposals, including two that are particularly pertinent to all public companies: (i) amendments regarding Rule 10b5-1 insider trading plans and related disclosures and (ii) new share repurchase disclosures rules.
Recent SEC Amendments Bring Changes to Filing Fee Disclosure and Payment Methods
On October 13, 2021, the Securities and Exchange Commission (the “SEC”) adopted amendments to modernize filing fee disclosure for certain forms and schedules, as well as update payment methods for fees related to these filings. The final rule highlighted three primary goals of the amendments: (i) update disclosure requirements related to filing fees in order to provide more certainty to filers that the proper fee was calculated and facilitate the SEC staff’s review of such fee; (ii) modernize the payment method for filing fees and reduce the cost and burden on processing fee payments; and (iii) permit filers to reallocate previously paid filing fees in more situations than what was previously permitted. An overview of these changes is provided below. The amendments also contained certain technical, conforming and clarifying changes related to filing fee-related instructions and information.
SEC Staff Scrutiny of Climate Change Disclosures Has Arrived: What to Expect And How to Respond
Recently, the SEC’s Division of Corporation Finance has issued a number of comment letters relating exclusively to climate-change disclosure issues. The letters we have seen to date comment on companies’ most recent Form 10-K filings, including those of calendar year companies who filed their Form 10-K more than 6 months ago, and have been issued by a variety of the Division’s industry review groups, including to companies that are not in particularly carbon-intensive industries. Many of the climate change comments appear to be drawn from the topics and considerations raised in the SEC’s 2010 guidance on climate change disclosure, as reflected in the sample comments that we have attached in the annex to this alert. We expect this is part of a larger Division initiative because the letters are similar (although not identical), contain relatively generic comments, and have been issued in close proximity to one another. Accordingly, it is reasonable to expect that additional comment letters will be issued in the coming weeks and months.
Summary Chart and Comparative Blackline Reflecting Recent Amendments to MD&A Requirements Now Available
On November 19, 2020, the SEC announced that it had adopted amendments to Item 301 (“Selected Financial Data"), Item 302 (“Supplementary Financial Information") and Item 303 (“Management’s Discussion and Analysis of Financial Condition and Results of Operations") of Regulation S-K. This article provides (1) a high level summary of the amendments, effective dates and Commissioners’ views, (2) a detailed description of the amendments in tabular format, and (3) a blackline comparison of the changes to Item 302(a) and Item 303 of Reg S-K.
SEC Updates Rules Relating to Electronic Submission of Documents
On November 17, 2020, the Securities and Exchange Commission (the “SEC”) announced that it had approved amendments to Regulation S-T and the Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR”) Filer Manual relating to the use of electronic signatures for SEC filings, including registration statements, reports on Forms 10-K, 10-Q and 8-K, and Section 16 reports. The new rules expressly provide for the use of e-signature methods (e.g., “DocuSign” and “AdobeSign”) for these filings, subject to new authentication procedures summarized below.
NYSE’s Attempt to Allow Primary Offerings in Direct Listings Hits a Snag
Direct listings have emerged as one of the new innovative pathways to the U.S. public capital markets, thought to be ideal for entrepreneurial companies with a well-recognized brand name or easily understood business model. We have also found it attractive to companies that are already listed on a foreign exchange and are seeking a dual listing in the United States. Because direct listings are currently limited to secondary offerings by existing shareholders, they are not an attractive option for companies seeking to raise new capital in connection with a listing.
SEC Issues Guidance Regarding Submission of Supplemental Materials and Confidential Treatment Requests in Light of COVID-19 Concerns
On August 4, 2020, the Division of Corporation Finance (the “Division") of the Securities and Exchange Commission (the “SEC") issued guidance relating to the submission of supplemental materials and information subject to Rule 83 confidential treatment requests in light of COVID-19 concerns (available here). The Division is providing a temporary secure file transfer process for the submission of supplemental materials pursuant to Securities Act Rule 418 and Exchange Act Rule 12b-4, including supplemental materials subject to a Rule 83 confidential treatment request. This secure file transfer process is a temporary accommodation to the SEC’s rules and procedures for receiving confidential information (as discussed in a prior client alert, available here), due to ongoing health and safety concerns related to COVID-19.
Coronavirus Disease 2019 Update: Impact under Nasdaq Rules of SEC Relief to Affected Companies
On March 8, 2020, we discussed on a post (available here) about the announcement (available here) by the Securities and Exchange Commission (the “Commission”) that providedconditional regulatory relief (Order available here) for certain filing obligations under the federal securities laws to companies impacted by the coronavirus disease 2019 (“COVID-19”).
SEC Provides Conditional Regulatory Relief and Additional Disclosure Guidance for Companies Affected by the Coronavirus Disease 2019 (COVID-19)
On March 4, 2020, the Securities and Exchange Commission (the “Commission”) announced (available here) that it is providing conditional regulatory relief (Order available here) for certain filing obligations under the federal securities laws to companies impacted by the coronavirus disease 2019 (“COVID-19”), including “U.S. companies located in the affected areas, as well as companies with operations in those regions.
Everyone Jump In! All Issuers Will Be Allowed to “Test-the-Waters”
On September 26, 2019, the SEC announced (available here) that it has adopted a new rule, Rule 163B (available here) under the Securities Act of 1933, that allows all issuers to “test-the-waters." This accommodation, which had previously been available only to emerging growth companies (EGCs), allows issuers and authorized persons (e.g., underwriters) to engage in discussions with, and provide written offering material to, certain institutional investors prior to, or following, the filing of a registration statement, to determine market interest in potential registered securities offerings. Rule 163B will become effective 60 days after publication in the Federal Register.
Desktop Calendar of SEC Deadlines for 2020 Now Available
This is a smart time of year to confirm plans for SEC reporting and capital markets transactions in 2020. To assist public companies in keeping track of the various filing deadlines, we have prepared a desktop reference calendar that sets forth filing deadlines for many SEC reports. To assist companies with planning capital markets transactions, including IPOs, our calendar also provides the staleness dates (i.e., the last date financial statements may be used in a prospectus or proxy statement without being updated).
SEC Proposes to Improve Disclosures Relating to Acquisitions and Dispositions of Businesses
On May 3, 2019, the Securities and Exchange Commission announced (available here) proposed changes to existing disclosure requirements in connection with acquisitions and dispositions of businesses. The proposed rules (available here) are intended to: (1) improve financial disclosures regarding the acquisition and disposition of businesses, (2) facilitate more timely access to capital, and (3) reduce the complexity and compliance costs related to such disclosures.
NYSE Amends Shareholder Approval Rule
On March 20, 2019, the SEC approved changes to the NYSE’s shareholder approval rule. The changes amend the price requirements that companies must meet to qualify for exceptions to the shareholder approval requirements under NYSE’s rule 312.03(b) (related party issuances) and 312.03(c) (the 20% rule). The NYSE changes are comparable to changes made to Nasdaq’s 20% shareholder approval rule in September 2018.
SEC Proposes Long-Awaited Expansion of “Test-the-Waters” to All Issuers – Use With Caution
On February 19, 2019, the Securities and Exchange Commission (the “SEC") proposed a new rule that would allow all issuers to engage in “testing the waters." Specifically, the SEC proposed an exemption (the “Proposed Rule") to certain provisions of Section 5 of the Securities Act of 1933 (the “Securities Act") commonly referred to as “gun-jumping" provisions. This exemption would permit any issuer or authorized person (e.g., an underwriter) to engage in oral or written communications with potential investors that the issuer reasonably believes are qualified institutional buyers (“QIBs") or institutional accredited investors (“IAIs"). Currently, this exemption to the gun-jumping provisions is only available to emerging growth companies (“EGCs"). The SEC believes that the Proposed Rule may “help issuers better assess the demand for and valuation of their securities," which may in turn “enhance the ability of issuers to conduct successful offerings and lower their cost of capital." This goal is consistent with the SEC’s overall effort to increase the number of public companies and reduce the regulatory burden of capital raising.
As Government Shutdown Continues, SEC Updates Guidance and Capital Markets Are Hindered
As we are all aware, the SEC has been closed since December 27th as a result of the ongoing partial shutdown of the federal government. While there are staff members available to respond to emergency situations involving market integrity and investor protection, including law enforcement, and the SEC continues to operate certain systems such as the EDGAR system, most activities are currently suspended. The SEC does not have staff in place to review registration statements and other filings, acceleration requests, Rule 3-13 waiver requests, and no-action letter requests, including with respect to shareholder proposal exclusions. As discussed in our previous post available here, the Staff has provided an FAQ page regarding operations during the shutdown. These FAQs were updated and supplemented recently. You should continue to visit the SEC’s website, including the FAQs, for any additional updates both during and shortly after the shutdown.
Changes and Considerations for the 2018 Form 10-K
Below are select developments to keep in mind when preparing the Annual Report on Form 10-K this year. Registrants will need to update their disclosure in the upcoming 2018 Form 10-K as a result of recent rulemaking by the Securities and Exchange Commission (the "SEC") and new SEC guidance and accounting rule changes, as well as to reflect new and developing risk areas that the SEC or investors have identified.
Partial Shutdown: Potential Impact on SEC Operations
A partial shutdown of the federal government began at midnight on December 21, 2018. As a result, the SEC Division of Corporation Finance (the “Staff”) announced that the SEC would “remain fully operational for a limited number of days” from the beginning of the federal government shutdown. The SEC will be closed on December 24th and 25th in observance of the federal holiday. It is expected to have funding to remain in “open” status through the end of December 26th. Should the shutdown continue past the 26th, the SEC’s operating status is expected to change to “closed” and the SEC will begin to operate according to its Operations Plan under a Lapse in Appropriations and Government Shutdown. As currently envisaged, starting on December 27th the SEC “will have only an extremely limited number of staff members available to respond to emergency situations involving market integrity and investor protection, including law enforcement.” Regardless of the SEC’s operating status, the EDGAR filing system will continue to accept reports, registration statements and other filings. Accordingly, public companies must continue to file periodic and current reports when due on Forms 10-K, 10-Q and 8-K; however, from December 27th the SEC will not be able to declare registration statements effective nor qualify Form 1-A offering statements. A prolonged shutdown could create difficulties for the IPO market and for many public companies without an effective shelf registration statement and, in particular, would create a complex calculus for any company thinking about going public in January.
SEC Modifies XBRL Filing Requirements
On June 28, 2018, the Securities and Exchange Commission (the “SEC") adopted a final rule, Inline XBRL Filing of Tagged Data, which substantially alters requirements related to the use of the eXentsible Business Reporting Language (“XBRL") format in operating companies’ financial statement information and funds’[1] risk/return summary information. The rule was published in the Federal Register on August 16, 2018, available here, and will be effective on September 17, 2018.
SEC Proposes to Substantially Lighten Financial Disclosures for Issuers and Guarantors of Registered Debt
On July 24, 2018, the Securities and Exchange Commission (the “Commission") proposed amendments to Rules 3-10 and 3-16 of Regulation S-X (available here) in an effort to “simplify and streamline" the financial disclosures required in offerings of certain guaranteed debt and debt-like securities (collectively referred to as “debt securities"), as well as offerings of securities collateralized by securities of an affiliate of the registrant, registered under the Securities Act of 1933, as amended (the “Securities Act"). These proposed changes would, if implemented, facilitate greater speed to market for such public offerings, significantly reducing the Securities Act disclosure burdens for such registrants, as well as reducing the registrant’s disclosure obligations in its subsequent annual and interim reports required under Securities Exchange Act of 1934, as amended (the “Exchange Act"). Taken together, the proposed changes represent a significant liberalization of the current disclosure requirements.
SEC Updates Guidance on Draft Registration Statements
New SEC Policy Permits the Exclusion of Certain Financial Information from Draft Registration Statements; Additional Detail Provided Regarding Recent Updates to Draft Registration Statement Procedures
SEC Warns that Securities Laws May Apply to Initial Coin Offerings and Other Digital Currency Sales
On Tuesday, July 25, 2017, the Securities and Exchange Commission (“SEC”) issued a Report of Investigation (the “Report”) finding for the first time that an offer and sale of virtual currency, often called an Initial Coin Offering (abbreviated “ICO”) or “Token Sale”, can be subject to U.S. federal securities laws. While the SEC decided not to pursue an enforcement action in this particular instance, the SEC did find that that the ICO that was the subject of the Report involved an offering of securities subject to U.S. federal securities laws.
SEC Chairman Jay Clayton Delivers First Public Remarks Since Confirmation
In his first public speech since being confirmed as Chairman of the U.S. Securities and Exchange Commission (“SEC” or “the Commission”), Jay Clayton addressed the Economic Club of New York on July 12, 2017. In his remarks, available here, Chairman Clayton discussed his vision of the principles that should guide the Commission and opportunities to apply those principles in practice.
SEC Economist Comments on New Technologies Used by the Commission to Identify Risk, Detect Fraud and Enforce the Securities Laws
Last week Scott Bauguess, Acting Director and Acting Chief Economist of the Securities and Exchange Commission’s (SEC) Division of Economic Risk and Analysis, shared insights about how the SEC is leveraging artificial intelligence and machine learning to track, and perhaps predict, emerging risks in the marketplace.[1] In the latest in a series of speeches,[2] Bauguess also described how the SEC is using big data, harnessed with the appropriate processing power and partnered with human intuition, to focus investigative and enforcement resources. While Bauguess and others at the SEC see a bright future for data analytics at the SEC, particularly in identifying emerging trends, Bauguess stressed the human element is ever important in assessing risk, combatting fraud and bringing or recommending enforcement actions.
SEC Significantly Expands Confidential Review of Registration Statements
Will Allow Confidential Submission of All Registration Statements for IPOs, Spin-Offs and Most Offerings Within 12 Months of an IPO or Spin-Off The Securities and Exchange Commission (“SEC”) announced[1] on Thursday that its the Staff of the Division of Corporation Finance (the “Staff”) will soon allow all companies to submit initial public offering (“IPO”) draft registration statements for confidential review. This change expands a benefit previously reserved for Emerging Growth Companies (“EGCs”), and is specifically aimed at encouraging more companies to enter the public market. The SEC also announced that it will review draft registration statements submitted by non EGCs that omit financial statements that the issuer reasonably believes will not be required when the registration statement is filed publicly, and indicated a willingness to discuss expedited reviews with issuers and their advisors.
SEC Adopts Amendment Shortening Trade Settlement Cycle From T+3 to T+2 (potential implications)
The SEC has adopted an amendment to Rule 15c6-1(a) of the Exchange Act (the Settlement Cycle Rule) shortening the standard settlement cycle for most broker-dealer transactions from three business days after the trade date (“T+3”) to two business days after the trade date (“T+2”). The compliance date for the amendment is September 5, 2017. The new requirement will prohibit broker-dealers from effecting or entering into a contract for the purchase or sale of a security (other than exempted securities, government securities, municipal securities, commercial paper, bankers’ acceptances, and commercial bills) that provides for payment of funds and delivery of securities later than the second business day after the date of the contract, unless otherwise expressly agreed to by the parties at the time of the transaction.
SEC Adopts Requirements for Active Hyperlinks In Exhibit Indexes
The SEC has adopted final rules requiring an active hyperlink to each filed exhibit identified in the exhibit index of most Securities Act and Exchange Act registration statements and reports that are required to include exhibits under Item 601 of Regulation S-K. The rules become effective on September 1, 2017 (though the adopting release encourages early compliance), provided that smaller reporting companies and non-accelerated filers that submit filings in ASCII format need not comply with the rules until September 1, 2018. The new requirements will apply to Forms S-1, S-3, S-4, S-8, S-11, F-1, F-3, F-4, SF-1, SF-3, 10, 10-K, 10-Q, 8-K, F-10, 20-F and 10-D (though the compliance date for Form 10-D will be announced at a later date). The requirement will not apply to other forms under the multi-jurisdictional disclosure system used by certain Canadian issuers or to Form 6-K, as exhibits and exhibit indexes are not required by those forms.
Marblegate Case Overturned by Second Circuit Court of Appeals
In a case closely watched by companies and investors alike, on January 17, 2016, the Second Circuit Court of Appeals overturned the decision of the District Court for the Southern District of New York in Marblegate Asset Management vs. Education Management Corp. The District Court had held that a series of debt restructuring transactions by Education Management Corp. violated Section 316(b) of the Trust Indenture Act of 1939, as amended. Section 316(b) of the Trust Indenture Act provides that “the right of any holder of any indenture security to receive payment of the principal and interest on such indenture …shall not be impaired or affected without the consent of such holder.” Reading this provision broadly, the District Court found that a restructuring that released a parent guarantee and effectively stripped most of the assets from the issuer of the debt without the consent of each bondholder violated Section 316(b), even though the particular indenture for the bonds in question was not amended in connection with the restructuring. The District Court concluded that Section 316(b) protects a bondholder’s practical ability to receive payment even where the indenture was not explicitly modified. The District Court’s decision, together with another similar decision in the Southern District of New York in the case of Meehancombs Global Opportunities Funds, LP v. Caesers Entertainment Corp., caused significant concern among practitioners that these decisions significantly limited companies’ ability to enter into negotiated debt restructurings without consent of 100% of all indenture bondholders. Because the requirement of 100% approval gives bondholders significant negotiating leverage and creates a real risk of “holdouts,” such a requirement could effectively prevent many debt restructurings outside of a bankruptcy court.
SEC Releases Multiple Interpretations of Interest for Foreign Private Issuers
On December 8, 2016, the SEC released a series of Compliance and Disclosure Interpretations (better known as “CD&Is”) of relevance to “foreign private issuers” and their counsel. The new C&DIs are included in the Securities Act Rules, Exchange Act Rules and Exchange Act Forms pages of the Division of Corporation Finance C&DI area of www.sec.gov. Below is a summary of the principal new interpretations. Thanks to Alan Bannister for preparing this summary. Definition of “Foreign Private Issuer” For purposes of the U.S. Securities Act of 1933 (the “Securities Act”) and the U.S. Securities Exchange Act of 1934 (the “Exchange Act”), the term “foreign private issuer” is defined as any foreign issuer, other than a foreign government, that does not meet the following conditions on the relevant date: (a) more than 50 percent of its outstanding voting securities are held (directly or indirectly) of record by residents of the United States, and (b) any of the following: (i) the majority of the issuer’s executive officers or directors are U.S. citizens or residents; (ii) more than 50% of the issuer’s assets are located in the United States; or (iii) the issuer’s business is administered principally in the United States. See Rule 405 under the Securities Act and Rule 3b-4(c) under the Exchange Act. The new interpretations included insights into each element of this definition for purposes of both the Securities Act and the Exchange Act. More than 50 percent of its voting securities held by U.S. residents. The Staff noted that a person with a green card is assumed to be a U.S. resident, and other persons without such permanent residency may also be deemed U.S. residents. The issuer should consistently apply other criteria which it chooses, and such criteria could include physical presence, mailing address, nationality or tax residence. (Securities Act Rules – Question 203.18; Exchange Act Rules – Question 110.03) The Staff also addressed the impact of multiple classes of voting securities, noting that an issuer must make this determination either on the basis of voting power or numbers of securities, provided that the issuer is consistent in applying the methodology over time. (Securities Act Rules – Question 203.17; Exchange Act Rules – Question 110.02) Majority of Board or Executive Officers are U.S. citizens or residents. When an issuer has more than one board, the Staff indicated that the issuer must make its determination based on the board that performs functions most closely similar to those undertaken by a U.S.-style board of directors, and if those duties are divided between both boards, the issuer could aggregate the members of both boards in making its calculation. (Securities Act Rules – Question 203.20; Exchange Act Rules – Question 110.05) In a separate CD&I, the Staff clarified that the determination of U.S. citizenship and residency for officers and for the board must be made for each group separately. (Securities Act Rules – Question 203.19; Exchange Act Rules – Question 110.04) Assets in the U.S. The Staff confirmed that an issuer may use the geographic segment information determined in preparing its financial statements in determining whether more than 50 percent of its assets are in the U.S. Alternatively, the issuer may apply any other reasonable method of assessing the location and amount of its assets, if that method is applied on a consistent basis. (Securities Act Rules – Question 203.21; Exchange Act Rules – Question 110.06) Administration of the business principally in the United States. In one CD&I, the Staff indicated that this determination will require the exercise of judgment by the issuer, as it noted that there is no single factor or group of factors that are determinative under this clause of the definition. Instead, the issuer must assess on a consolidated basis the locations from which its officers and managers primarily direct, control and coordinate the issuer’s activities. (Securities Act Rules – Question 203.22; Exchange Act Rules – Question 110.07) In a further interpretation, the Staff noted that a board holding an annual board meeting in the United States would not, alone, result in a conclusion that the issuer’s business is principally administered in the U.S. (Securities Act Rules – Question 203.23; Exchange Act Rules – Question 110.08) Regulation S The collection of CD&Is released last week addressed a number of issues under Regulation S, which provides a safe harbor exemption from registration under the Securities Act for certain offshore offerings and sales of securities. Category 1 Offerings: Overseas Directed Offering. An offering which qualifies as an “overseas directed offering” will be eligible for exemption under Category 1 of Regulation S – the least burdensome category under that Regulation. An overseas directed offering is an offering by a foreign issuer directed solely into, and to residents of, a single country (other than the United States). The Staff stated that securities offered in one or more countries within the European Union (and no other jurisdictions) will be treated as an offering made into a single country in light of the extent of the integration of the EU rules for prospectuses, transparency, trading and other matters. (Securities Act Rules – Question 277.02) In another similar query, the Staff confirmed that the Category 1 exemption under Rule 903(b)(1)(iv) for securities offered and sold to employees of the issuer or an affiliate pursuant to a benefit plan established and maintained under the laws of a country outside the United States is available for such plans established under the laws, customs and practices of the European Union. (Securities Act Rules – Question 277.03) Factors to Determine Whether a Natural Person is a Resident of the United States for Purposes of the Definition of “US person”. The Staff took an almost identical position on this query as it did in response to questions regarding the method of determining the residency of the holders of the issuer’s voting securities for purposes of the definition of foreign private issuer discussed above. (Securities Act Rules – Question 276.01) Guaranteed Debt Securities: Determining Which Category of Regulation S. Rule 903(b)(4) states that in an offering of debt securities fully and unconditionally guaranteed by the parent, the status of the parent company guarantee alone determines which category of Regulation S is applicable. The Staff, however, has clarified that the provisions of Rule 903(b)(4) should be interpreted to apply whether the parent company is the issuer or co-issuer (with other subsidiaries) of securities guaranteed by one or more of its subsidiaries or where the parent is the guarantor (or co-guarantor with other subsidiaries) of debt securities issued by one or more of its subsidiaries. As a result, under this interpretation, provided that the guarantee is full and unconditional, the status of the parent’s guarantee or its (guaranteed) debt securities (as the case may be) will determine the appropriate category of Regulation S applicable to the offering. (Securities Act Rules – Question 277.06) Use of F Forms for Certain Non-Foreign Private Issuers of Guaranteed Securities Foreign private issuers of debt securities are accorded certain favorable accommodations in their registration statements and ongoing reporting obligations, including for example an exemption from including a compensation discussion and analysis, as well as details of individual compensation for the directors and named executive officers. Foreign private issuers also benefit from reduced reporting requirements, required only to file an annual report and any other reports or information required to be, or voluntarily made, public under the laws of the issuer’s home country or any other jurisdictions where its securities trade.
OM&A Staff Publishes Updated Guidance on Tender Offers
On Friday, November 18, 2016, the Staff in the Office of Mergers & Acquisitions (“OM&A”) in the Division of Corporation Finance (the “Staff”) at the Securities and Exchange Commission released several new Compliance and Disclosure Interpretations (“C&DIs”) addressing:
SEC Eliminates Need for Affirmative “Tandy” Representations from Issuers
On October 5, 2016, the Staff in the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission (the “SEC”) announced that it will no longer require companies to make so-called Tandy representations in their filing review correspondence.
When the Tail Wags the Unicorn: SEC Chair Voices Concerns About Pre-IPO Investments
On March 31, SEC Chair Mary Jo White gave a keynote address at Stanford University in which she discussed some of the SEC’s emerging priorities with respect to pre-IPO stage companies, private capital markets and fintech. According to Chair White, the SEC is paying particular attention to the risks of fraud and investor confusion that can arise when companies choose to stay private longer.
“FAST” Act Legislation Enacted — Potentially Significant Impact on Capital Markets
On December 4, 2015, President Obama signed into law the Fixing America’s Surface Transportation Act, known as the “FAST Act.” This five-year transportation bill also includes a number of provisions related to securities laws and capital-raising measures. The key securities law provisions of the FAST Act are summarized as follows: Reforming Access for Investments in Startup Enterprises:
Corp Fin Issues New Guidance on Unbundling of Proposals
On October 27, 2015, the Division of Corporation Finance of the Securities and Exchange Commission (the “SEC”) issued two new Compliance and Disclosure Interpretations (“CDIs”) regarding the “unbundling” of certain proposals under Rule 14a-4(a)(3) of the Exchange Act in the context of mergers, acquisitions, and similar transactions. Federal proxy rules generally prohibit the grouping of separate matters into a single proposal submitted for shareholder approval. The rules provide that companies must separately submit — or “unbundle” — proposals to allow shareholders to vote on each matter. In connection with business combination transactions, acquiring companies have at times attempted to bundle several amendments to their organizational documents with the business combination when seeking shareholder approval of the transaction. The new CDIs clarify the Staff’s position with respect to this circumstance, requiring separate votes for the transaction and for any material amendment to the acquiror’s organizational documents. The new CDIs are available here.
NYSE Amends Rule on Release of Material News
The New York Stock Exchange (“NYSE”) has amended its rule on release of material news to the public, effective September 26, 2015. Most importantly, the amendments extend the pre-market hours during which companies must give notice to the NYSE before announcing material news, so that companies will have to notify the NYSE in connection with any announcements made at or after 7:00 a.m. Eastern time. The amendments also provide guidance about the release of material news after the close of trading, update the acceptable methods for releasing material news, and give the NYSE additional authority to halt trading in specific situations.
FINRA FAQs on Research Conflict of Interest Rules
On May 27, 2015, FINRA issued a set of FAQs on its research conflict of interest rules. These FAQs further expand upon views expressed by FINRA in settlement agreements entered into by FINRA in December 2014 with ten investment banks in connection with the 2010 proposed IPO by Toys “R” Us (the “Settlement Agreements”).
SEC Publishes Interpretations regarding “Regulation A+”
On June 23, 2015, the Staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”) published several new Compliance and Disclosure Interpretations (“Interpretations”) relating to rules and forms under the Securities Act of 1933, as amended (the “Securities Act”). These Interpretations address questions and considerations relating to “Regulation A+”, which was adopted by the SEC on March 25, and became effective last Friday, June 19.
SEC Votes Unanimously to Overhaul and Expand Regulation A; “Regulation A+” to Serve as an Exemption for Offerings up to $50 Million
The Securities and Exchange Commission (SEC) voted unanimously on March 25, 2015 to expand significantly the ability of certain issuers to raise capital in transactions exempt from the registration requirements of the Securities Act of 1933. This new regime, commonly referred to as “Regulation A+,” is intended to create additional opportunities for companies to raise capital without having to comply with the more burdensome aspects of the traditional registration process. The adopting release, including text of the final rules, is available at https://www.sec.gov/rules/final/2015/33-9741.pdf.
Another SEC Sweep? – More Enforcement Actions for Failure to Update 13D Disclosures – This Time In Connection With Going Private Transactions
Last Friday, the SEC announced that it had settled a string of 21C administrative proceedings brought against eight officers, directors, and shareholders of public companies for their failure to report plans and actions leading up to planned going private transactions. The SEC press release can be found here. In doing so, the SEC sent another strong reminder to those that beneficially own more than 5% of the equity securities of a public company to keep their 13D disclosures current.
SEC Grants No-Action Letter Allowing for 5-Business Day Debt Tender Offers
Today, January 23, 2015, the Division of Corporation Finance (the “Staff”) granted a no-action letter that was submitted on behalf of a consortium of law firms, including Gibson Dunn, whereby the Staff agreed to not recommend Enforcement action when a debt tender offer is held open for as short as 5 business days. This letter builds upon an evolving line of no-action letters granted over the past three decades that have addressed not only the overall duration of debt tender offers (typically the rules require a minimum of 20 business days), but also formula pricing mechanisms (that allow a final price to be announced several days prior to expiration). Following an extensive dialogue with members of the bar and numerous market participants, including issuers, investment banks and institutional investors that began several years ago, the Staff is now opening up the relief that it previously limited to “investment grade” debt securities. Under the no-action letter, “non-investment” grade debt securities are now eligible to be purchased on an expedited basis. In order to take full advantage of this relief, issuers will need to disseminate their offers in a widespread manner and on an immediate basis. This should enable more security holders to quickly learn about the offer and permit holders to receive the tender consideration in a shorter timeframe. In addition, the abbreviated offering period will allow more issuers to better price their tender offers with less risk posed by fluctuating interest rates and other timing and market concerns related to the offer.
SEC Proposes Amendments to Exchange Act Rules to Implement JOBS Act’s Liberalized 12(g) Registration and Deregistration Thresholds
On December 17, 2014, the SEC proposed amendments to revise the rules that govern the thresholds for registration and deregistration under Exchange Act Section 12(g). These amendments would change Exchange Act Rules 3b-4, 12g-1, 12g-2, 12g-3, 12g-4, 12g5-1 and 12h-3, as well as Securities Act Rule 405, to further implement the JOBS Act mandate that was partially reflected in the text of Exchange Act Section 12(g) upon the JOBS Act’s passage.
SEC Issues Guidance on the Use of Social Media and the Intrastate Offering Exemption
Solicitations using Social Media
During a webcast earlier this year, our partner Jim Moloney, who formerly worked in the SEC’s Office of Mergers & Acquisitions (“OM&A”), spoke with the current Chief of OM&A, Michele Anderson. On that webcast, Ms. Anderson acknowledged that “social media is here to stay,” noting that the Commission was “trying to find a way to make it work.” Following the webcast, the SEC’s Division of Corporation Finance (“Corp Fin”) posted a new round of Securities Act Compliance and Disclosure Interpretations (“C&DIs”) that approved hyperlinking to legends or required statements in satisfaction of the requirements of Rules 134, 165 and 433 in certain situations. Under three new interpretations, Corp Fin clarified that an electronic communication containing a hyperlink to a legend (or a required statement in the Rule 134 context) would be acceptable so long as:
Corp Fin Issues Revised Statement on WKSI Waivers
On March 12, 2014, the SEC’s Division of Corporation Finance (Corp Fin) issued a Revised Statement on Well-Known Seasoned Issuer Waivers (the Revised Statement).
SEC Proposes Rules to Implement “Regulation A-Plus” Exemption Under the JOBS Act
The Securities and Exchange Commission today proposed rules to implement a new exemption from registration for securities offerings made pursuant to Section 3(b)(2) of the Securities Act of 1933 (Securities Act), as mandated by Section 401 of the Jumpstart Our Business Startups Act (JOBS Act). This new offering exemption is commonly referred to as “Regulation A-Plus.
SEC Corp Fin Staff Issues General Solicitation Interpretations Under the JOBS Act
On November 13, 2013, the Staff of the SEC’s Division of Corporation Finance issued new Compliance and Disclosure Interpretations (C&DIs) providing guidance on recent rule amendments lifting the ban on general solicitation in securities offerings made pursuant to Rule 506(c) of Regulation D under the Securities Act of 1933 (Securities Act) and Rule 144A under the Securities Act, as mandated by the Jumpstart Our Business Startups Act (JOBS Act).
SEC Proposes Crowdfunding Rules
Yesterday, the Securities and Exchange Commission (the “SEC”) held an open meeting to approve the release of proposed crowdfunding rules implementing Title III of the 2012 Jumpstart Our Business Startups Act (the “JOBS Act”). Once the SEC adopts final implementing rules, the crowdfunding exemption contained in Section 4(a)(6) of the Securities Act of 1933 (the “Securities Act”) will allow U.S. private companies (primarily startups and small businesses) to raise up to $1 million in any 12-month period from pools of small investors without registration under the Securities Act. The fundraising will be required to be conducted through a registered intermediary—either a registered broker or an online “funding portal.” While the SEC missed the December 31, 2012 deadline to adopt implementing rules, it now appears to be moving ahead full speed with the proposed rulemaking.
Removal of General Solicitation Ban, Bad Actor Disqualification Rules to Become Effective September 23, 2013; Comment Period on Related Proposed Amendments Also to End September 23, 2013
The Commission’s final rules to remove the ban on general solicitation and general advertising in offerings pursuant to Rule 506 of Regulation D under the Securities Act of 1933 (the “Securities Act”) and pursuant to Rule 144A under the Securities Act, and to disqualify felons and certain other “bad actors” from participating in offerings pursuant to Rule 506, were published in the Federal Register today. As a consequence, the final rules will become effective on September 23, 2013.
SEC Approves Final Rules to Permit Advertising in Rule 506 and Rule 144A Offerings; Also Proposes Rules to Add Additional Investor Protections
At an Open Commission Meeting on July 10, 2013, the Securities and Exchange Commission (the “SEC” or the “Commission”) adopted final rules to eliminate the prohibition against general solicitation and general advertising (together, “general solicitation”) in securities offerings conducted pursuant to Rule 506 of Regulation D under the Securities Act of 1933 (the “Securities Act”) and Rule 144A under the Securities Act, as required by Section 201(a) of the Jumpstart Our Business Startups Act (the “JOBS Act”). Rule 506 currently permits an issuer to raise an unlimited amount of capital in a private placement to an unlimited number of accredited investors and up to 35 non-accredited investors provided that the issuer does not engage in general solicitation; it is the most widely used exemption under Regulation D. Rule 144A permits the resale of an unlimited amount of securities in a private transaction to qualified institutional buyers. The Commission approved the rules by a vote of 4-1 with Commissioner Aguilar dissenting.
Corp Fin Updates Compliance and Disclosure Interpretations
On May 16, the Staff of the Division of Corporation Finance updated C&DI’s across topic areas primarily relating to Securities Act practice. This is the first set of updates to the C&DI’s for the Securities Act and its rules and forms since February 2012. The new and revised C&DI’s do not reveal significant shifts in Staff views, but they do include new guidance regarding Rule 144 holding periods and volume limits, use of resale registration statements after private equity line financings, Form 8-K reporting of material impairments and disclosure of non-GAAP financial measures in a company’s compensation discussion and analysis. Following is a summary of the new and revised C&DI’s. Securities Act Forms · In calculating whether the size of a stock and warrants offering exceeds Form S-3 General Instruction I.B.6(a)’s one-third cap, an issuer is required to follow Instruction 2, even when the warrants are not exercisable for common stock within 12 months. (Securities Act Forms Question 116.24) · An issuer may post-effectively amend an automatic shelf registration statement to add more securities of a class already registered, even when the initial registration statement registered the offer and sale of a specified number and class of securities. (Securities Act Rules Question 210.03) · Even if an issuer relies on Rule 430B(b) to omit from a prospectus until after effectiveness “the identities of selling security holders and amounts of securities to be registered on their behalf,” the issuer must disclose the aggregate number of shares registered for resale before effectiveness. (Securities Act Rules Question 228.04) · When a company files a resale registration statement for securities sold in a private equity line financing, the private transaction may be deemed to be “completed” (a factor that must be met for the company to be allowed to register the “resale” of the securities prior to its exercise of the put) despite the lack of a fixed price if (1) the agreement provides for pricing based on a formula tied to market price and (2) there is an existing market for the securities as evidenced by trading on a national securities exchange or through the facilities of the OTC Bulletin Board or the OTCQX or OTCQB marketplaces of OTC Link ATS. (Securities Act Sections Question 139.13) · Although Form S-4 Item 3 does not expressly contemplate incorporation by reference of risk factors, a registrant that is permitted to, and does, incorporate by reference registrant information under either Item 11 or 13 of Form S-4 may also incorporate risk factors from its latest Form 10-K. (Securities Act Forms Question 125.12) Rule 144 · Non-affiliate donees and pledgees of securities that the donor or pledgor acquired in the open market may resell the securities pursuant to Rule 144 without regard to the holding period requirement of Rule 144(d) but subject to the current information requirement in Rule 144(c)(1). (Securities Act Rules Question 129.03 and Interpretation 532.01) · An affiliate’s sales of securities back to an issuer in a private transaction are excludable when calculating the amount of securities that the affiliate may sell under Rule 144. (Securities Act Rules Question 133.07) Regulation D · If an acquiror seeks written consents from a target’s shareholders, which include non-accredited investors, to approve a business combination transaction involving the issuance of securities in reliance on Rule 505 or 506, then financial statement and other information specified in Rule 502(b)(2) must be provided to target shareholders who are non-accredited investors a reasonable amount of time prior to obtaining written consents. (Securities Act Rules Question 256.22) Regulation S-K · Instruction 5 to Regulation S-K Item 402(b) provides that the rules governing non-GAAP financial measures do not apply to target levels (for compensation purposes) that are non-GAAP financial measures, other than to disclose “how the number is calculated from the registrant’s audited financial statements.” This Instruction applies not only to the target levels but also to the actual results of the non-GAAP financial measure used as a target. (Regulation S-K Question 118.09) · In an IPO, a price range in excess of $2 for offerings up to $10 per share, or in excess of 20% of the high end of the range for offerings over $10 per share, will not be considered a “bona fide estimate of the range of the maximum offering price” for purposes of Instruction 1 to Regulation S-K Item 501(b)(3). Also, “[i]f an auction clearing price will be used as the primary factor in establishing the final offering price, a price range in excess of $4, for offerings up to $20 per share, or in excess of 20% of the high end of the range, for offerings over $20 per share, will not be considered bona fide.” (Regulation S-K Question 134.04) · Although Regulation S-K Item 601(b)(101)(i) requires an interactive data file “only if the registration statement contains a price or price range,” “registration statements for shelf offerings, at-the-market offerings, exchange offers and secondary offerings must comply with the interactive data filing requirement even though they generally do not include a specific offering price at the time of effectiveness, unless the financial statements are incorporated by reference into the registration statement” (emphasis added). (Regulation S-K Question 146.17) Exchange Act Form 8-K · An impairment conclusion that is made at a time that coincides with the preparation, review or audit of financial statements for the next periodic report, even if not made “in connection with” such preparation, review or audit, does not trigger an Item 2.06 Form 8-K. (Exchange Act Form 8-K Question 110.01)
Proposed Amendments to DGCL Section 251 Increasing Attractiveness of Tender Offer Structure
The Delaware State bar recently proposed an amendment to Section 251 of the Delaware General Corporation Law (DGCL) to add new subparagraph (h) that would greatly enhance the appeal of the tender offer over a one-step merger structure.
Departure of SEC Chairman Schapiro Creates Uncertainty Regarding Rules to Remove the General Solicitation Ban in Certain Private Offerings
On November 26, 2012, SEC Chairman Mary Schapiro announced that she will leave the Commission on Friday, December 14. Commissioner Elisse Walter will take over as Chairman.
On August 29, 2012, the SEC proposed rules to implement Section 201(a) of the JOBS Act, which requires the SEC to eliminate the prohibition against general solicitation and general advertising (together, “general solicitation”) in securities offerings conducted pursuant to Rule 506 of Regulation D under the Securities Act of 1933 (the “Securities Act”) and Rule 144A under the Securities Act. The Commission voted 4-1 to propose the rules, with Democratic Commissioner Aguilar as the lone dissent, but Commissioner Walter, also a Democrat, expressed reservations about the proposal in her opening statement at the Commission’s meeting. Republican Commissioners Gallagher and Paredes strongly supported the proposed rules.
JOBS Act Implications for Mergers & Acquisitions
While most commentary regarding theJOBS Act has focused on capital markets issues and the impact the new rules will have on capital-raising transactions, the JOBS Act can also have significant implications in the merger and acquisition context.
New Process for Submitting Draft Registration Statements and Amendments
Draft Registration Statements to Be Submitted and Filed on EDGAR
On September 26, 2012, the SEC’s Division of Corporation Finance announced that, beginning on Monday, October 1, 2012, Emerging Growth Companies and foreign private issuers may voluntarily submit their draft registration statements and amendments for confidential, non-public staff review using either the current secure email system or through a new EDGAR-based submission process.
The Division of Trading and Markets Posts FAQs on Select JOBS Act Issues
On August 22, 2012, the SEC’s Division of Trading and Markets released Frequently Asked Questions providing views on selected provisions of the Jumpstart Our Business Startups Act, or JOBS Act. The FAQs clarify the staff’s views on certain permissible conduct relating to research analyst communications, “test the waters” provisions, and post-offering communications.