On December 4, 2013, the Staff of the SEC’s Division of Corporation Finance issued new Compliance and Disclosure Interpretations (C&DIs) providing guidance on rules recently adopted by the SEC that prohibit certain felons and other “bad actors” from participating in private securities offerings that rely on Rule 506 of Regulation D under the Securities Act of 1933 (Securities Act). The rule generally applies to the issuer, certain third parties that participate in the offering, and certain controlling persons, officers and affiliates of the issuer and such third parties (covered persons).
Securities Regulation
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.
Private Placement of Publicly Traded Equity Securities as Consideration in an M&A Transaction after the JOBS Act
In April 2012, we wrote here about the potential future impact of the Jumpstart Our Business Startups Act (“JOBS Act”) on M&A transactions in which an acquirer seeks to issue its privately placed equity securities as consideration in an acquisition. Our discussion at the time focused on the conditions of Rule 506 of Regulation D under the Securities Act of 1933 (the “Securities Act”) and, in particular, the tension faced by issuers that are required to determine the offerees’ status as “accredited investors” or as otherwise suitable to evaluate the potential investment. We noted that such issuers have historically been prohibited from using any form of “general solicitation” when offering securities in such transactions. Subsequently, in July 2013, the SEC adopted final rules (effective September 23, 2013) to eliminate the absolute prohibition against general solicitation in securities offerings conducted pursuant to Rule 506, as required by Section 201(a) of the JOBS Act (Gibson Dunn’s summary and analysis of the rules may be found here). The following discussion updates our earlier post to address the legal and practical effects of these new rules for M&A transactions that include a private placement component.
SEC Staff Grants Request to Exclude Rule 14a-8 Shareholder Proposal Regarding Repayment of Student Loans
Gibson Dunn successfully represented DeVry Inc. in obtaining no-action relief from the SEC staff (the “Staff”) for the exclusion of a shareholder proposal requesting that DeVry “annually report to shareholders on the expected ability of students at Company-owned institutions to repay their student loans.” The shareholder proposal, which was submitted by the New York City Comptroller’s Office on behalf of several New York City pension funds, specified particular quantitative and other information to be included in the requested report. DeVry’s no-action request argued that DeVry could exclude the shareholder proposal under Rule 14a-8(i)(7) as relating to DeVry’s ordinary business operations because the proposal implicated decisions concerning product quality. The no-action request identified shareholder proposal precedents relating to the quality of products or services in other industries (such as beverages and banking) and pointed out that, similar to those precedents, the proposal at issue was focused on the quality of DeVry’s educational services. In a response letter dated September 6, 2013, the Staff concurred that the shareholder proposal could be excluded, noting that “the proposal focuses primarily on information the company should provide regarding the quality of its educational services” and that “[p]roposals that concern product quality are generally excludable under rule 14a-8(i)(7).” The Staff’s decision to grant DeVry’s no-action request is notable because the Staff had denied a no-action request earlier this year regarding an identical shareholder proposal submitted to another company. The earlier no-action request had also asserted that the proposal was excludable under Rule 14a-8(i)(7), but its reasoning focused on the proposal’s infringement of the company’s risk assessment practices and compliance with laws rather than on how the proposal implicated the quality of the company’s products or services. The Staff’s concurrence with DeVry’s no-action request highlights the importance of identifying the appropriate issue that may support exclusion of a shareholder proposal, exploring and addressing any precedents and clearly articulating the reasons for which the proposal implicates a particular basis for exclusion.
SEC Proposes Rules Regarding Internal Pay Ratio Disclosure
The SEC today held an open meeting and voted, 3-2, to approve the issuance of proposed rules to implement the internal pay ratio disclosure requirement in Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). SEC Chair Mary Jo White and Commissioners Kara Stein and Luis Aguilar voted to propose the rules and Commissioners Daniel Gallagher and Michael Piwowar dissented. Statements made by the Commissioners today regarding the proposal are on the SEC website and available here. The comment period for the SEC’s proposed rules will be 60 days after the proposing release is published in the Federal Register; the proposing release is on the SEC website and available here.
NGOs Release Report on Expectations for Conflict Minerals Reporting
On September 5, 2013, a white paper titled, “Expectations for Companies’ Conflict Minerals Reporting,” was released by two NGOs dedicated to human rights issues, the Enough Project and the Responsible Sourcing Network, describing in detail the expectations and suggestions of certain sustainable and responsible investors, or SRIs, and nongovernmental organizations, or NGOs, for the content of Form SD filings and Conflict Minerals Reports expected to be filed with the SEC next year. The two groups make a number of suggestions that far-exceed the literal requirements of the SEC’s conflict minerals rules. The paper, which is available at www.enoughproject.org/files/Expectations-for-Companies-Conflict-Minerals-Reporting.pdf, suggests that issuers disclose, among other things:
Are Changes to the Audit Report on the Horizon? PCAOB Issues Two Significant Proposals
Today, the Public Company Accounting Oversight Board (“PCAOB”) proposed for public comment two audit standards that, if adopted, would significantly change the audit report model, and dramatically expand the auditor’s responsibilities in reporting on management’s disclosures outside the financial statements. PCAOB Chairman Doty remarked that the proposed standards – running to almost 300 pages – mark a “watershed moment” for auditing in the United States.
U.S. District Court Upholds SEC’s Conflict Minerals Rules
Yesterday, Judge Robert Wilkins of the U.S. District Court for the District of Columbia issued a decision granting the SEC’s motion for summary judgment in a suit challenging the SEC’s conflict minerals rules, which were mandated under the Dodd-Frank Act and issued by the SEC on August 22, 2012. As a result, the conflict minerals rules remain in effect as adopted by the SEC. The parties have not yet indicated whether they will appeal the decision. The National Association of Manufacturers, the U.S. Chamber of Commerce and the Business Roundtable had challenged the rules in October 2012, arguing that the rules are arbitrary and capricious and impose undue costs on companies in violation of the Administrative Procedure Act of 1946 and the Securities Exchange Act of 1934, and compel speech in violation of the First Amendment by requiring companies to make misleading disclosures suggesting that their products promote violence and human rights abuses. Rejecting the petitioners’ arguments, the court found that various aspects of the conflict minerals provision in the Dodd-Frank Act were ambiguous, and it gave deference to the SEC’s judgments, including its determination not to adopt a de minimis exception and to include within the scope of the rules issuers that “contract to manufacture” products containing conflict minerals. In regard to the First Amendment argument, the court gave deference to Congress in light of the foreign affairs aspect of the Dodd-Frank conflict minerals provision. The district court’s opinion is available at https://ecf.dcd.uscourts.gov/cgi-bin/show_public_doc?2013cv0635-37.
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.