On July 21, 2017, Delaware Governor John C. Carney Jr. signed into law, effective August 1, 2017, Senate Bill 69 (“SB 69”), amending Delaware’s General Corporation Law (“DGCL”) to, among other things, allow corporations to utilize electronic databases and blockchain technology to maintain and distribute certain corporate records. The passage of SB 69 further solidifies Delaware’s position as the leader in corporate regulatory innovation by demonstrating the state’s readiness to embrace new and innovative technologies being utilized by the corporate market.
SEC Requests Comments on New PCAOB Auditor Reporting Standard
On June 1, 2017, the PCAOB adopted a new auditor reporting standard—PCAOB Release No. 2017-001, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion and Related Amendments to PCAOB Standards(the “Standard”)—that will be significant for public companies. A copy of our prior client alert on the Standard is here.
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.
Changes Coming to Governance Provisions of New York Nonprofit Law
Amendments to New York’s Not-For-Profit Corporation Law are set to take effect on May 27. The amendments impact several provisions of The New York Nonprofit Revitalization Act (“NRA”), which imposed substantial governance requirements on nonprofits when it took effect in 2014. The amendments build greater flexibility into aspects of the NRA that were viewed as overly broad or prescriptive. Key elements of the amendments are summarized below. A redline showing the changes to the statutory language is available here. Nonprofits incorporated in New York, and other nonprofits that may be subject to the Not-For-Profit Corporation Law due to their activities, should take note of the amendments and consider whether changes to their governance practices and documents are appropriate. 1. Related party transactions. The NRA provides for enhanced board oversight of related party transactions. The amendments explicitly permit an authorized committee of the board to review and approve related party transactions, as an alternative to full board approval. They also codify exceptions to the definition of “related party transaction” that are based on guidance previously issued by the Charities Bureau of the New York Attorney General’s office (available here). These exceptions mean that immaterial or ordinary course transactions are no longer subject to the board/committee approval procedures under the NRA. Specifically, the exceptions cover: (a) transactions that are themselves “de minimis” or where the related party’s financial interest is de minimis, with the judgment of what is de minimis to be left to individual nonprofits based on factors such as size and budget; (b) transactions that “would not customarily be reviewed” by the board at “similar organizations in the ordinary course of business” and that are available to others on the same or similar terms; and (c) transactions where a related party receives a benefit as a result of being a member of a class that benefits from the nonprofit’s work, where the benefit is available to all similarly situated members of the class on the same terms. The amendments also create a defense to actions brought by the New York Attorney General challenging related party transactions. The defense allows nonprofits to take steps to ratify transactions that were not approved in accordance with the procedures in the NRA, and to enhance their mechanisms for complying with these procedures in the future, in order to limit the possibility of adverse actions against nonprofits for inadvertent or insignificant violations of the related party provisions. 2. Audit committee independence requirements. The amendments modify the definition of “independent director,” which applies to directors serving on the audit committee, by amending the standard on business relationships between a nonprofit and entities where directors (or their relatives) have relationships. Currently, this standard prohibits a director from being independent if the director is an employee of, or has a substantial financial interest in, an entity that does business with the nonprofit, if the amount of business exceeded the lesser of $25K or 2% of the other entity’s consolidated gross revenues in any of the last three fiscal years. The amendments provide tiered thresholds that are tied to the revenues of the other entity, as follows:
SEC Revises Cover Page of Exchange Act and Other Forms and Revises Other Rules Under JOBS Act
Today, new rules became effective that change the cover page of many forms filed with the Securities and Exchange Commission (the “SEC”). The SEC has adopted technical amendments to conform certain rules and forms to self-executing provisions of the Jumpstart Our Business Startups Act (the “JOBS Act”). The SEC’s adopting release is available here. Although the rule changes were driven by the need to accommodate Emerging Growth Companies (“EGCs”) in the SEC’s reporting regime, the amendments affect the Securities Act registration forms and Exchange Act reporting forms used by all companies, even those that are not EGCs. The technical amendments apply to Forms S-1, S-3, S-4, S-8, S-11, F-1, F-3, F-4, 10, 8-K, 10-Q, 10-K, 20-F, 40-F and C.
SEC’s Division of Corporation Finance Suspends Enforcement of Certain Conflicts Minerals Requirements
It has been an eventful week for those following the conflict minerals rules in the news. The United States District Court for the District of Columbia issued final judgment in the long-running conflicts minerals litigation (detailed here) and, following a statement by Acting Chairman Piwowar, the Division of Corporation Finance has issued a blanket statement that it will not recommend enforcement of some of the most burdensome requirements of the rules (available here).
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.