On Oct. 7, 2020, the Securities and Exchange Commission (SEC) proposed a limited and conditional exemption from broker registration for natural persons, referred to as “finders,” who seek to help non-reporting, private companies raise capital from accredited investors in exempt offerings, subject to certain conditions. Generally, persons who effect transactions in securities for the account of others cannot do so through interstate commerce unless the person is registered with the SEC. There has long been ambiguity about when or if finders, who seek to bridge the gap between businesses and investors by identifying potential investment opportunities, must register as broker-dealers with the SEC. The proposed exemption seeks to clarify the role and obligations of finders so that small businesses can more easily connect with the investments they need to succeed. In the current market, small businesses often struggle to identify potential investors, and few broker-dealers are willing to raise capital in the smaller transactions.…
On March 13, 2020, in response to the recent outbreak of the coronavirus disease (COVID-19), the Securities and Exchange Commission released guidance providing regulatory flexibility to reporting companies seeking to change the date, time, or location of annual shareholder meetings and use new technologies, such as “virtual” shareholder meetings, that avoid the need for in-person meetings. Given the public health and safety concerns related to COVID-19, the Commission provided guidance for reporting companies on how to meet their obligations under the federal proxy rules.…
On March 4, 2020, the Securities and Exchange Commission issued an Order granting conditional relief from certain filing obligations under the federal securities laws for reporting companies whose compliance may be delayed by the coronavirus disease (COVID-19). In the press release accompanying this unprecedented Order, SEC Chairman Jay Clayton noted, “The health and safety of all participants in our markets is of paramount importance. While timely public filing of Exchange Act reports is a cornerstone of well-functioning markets, we recognize that this situation may prevent certain issuers from compiling these reports within the required timeframe.”…
One of the worse situations a company may face to be determined to be an investment company under the Investment Company Act of 1940, as amended (the act). If determined to be an investment company, the company is subject to the full regulation under the act. In addition, a company may inadvertently become an investment company; in such a case, all of its contracts are potentially voidable and it cannot engage in any other business. Generally, companies inadvertently become investment companies by virtue of their investments in certain securities which trigger the act’s 40 percent test.
Many times a number of companies fall within the definition of an investment company because operating companies have large amounts of assets invested in cash management instruments, government securities and money market funds.…
Any person who regularly monitors the U.S. financial markets has likely noticed the recent emergence of digital currency, also referred to as “cryptocurrency,” in recent months. For example, the price of bitcoin, the most widely known form of cryptocurrency, surged from a price below $800 per bitcoin in 2016, to a remarkable $17,000 per bitcoin recently in 2017. Despite this potential volatility, the acceptance of cryptocurrencies as legitimate forms of currency is likely; as evidenced by an array of local, national and international markets as well as an increasing range of products and participants, associated with these currencies. With the potential for these currencies to be used in everyday transactions, many questions are raised. What are cryptocurrencies? Can cryptocurrencies and their associated products be used to secure investments? And if so, can secured investments using these products be regulated? The commissioner of the Security Exchange Commission (SEC) released a statement in December 2017 addressing these issues, and many of the answers depend on the familiar adage: substance over form. Accordingly, one contemplating a transaction utilizing cryptocurrencies should first consider how these currencies might be regulated.…
Effective for filings on and after Sept. 1, 2017, registrants will be required to include a hyperlink to each exhibit identified in the exhibit index of periodic reports, current reports and registration statements. For registration statements, the rule applies to the initial registration statement, and to each subsequent pre-effective amendment.
The SEC adopted the final rules on March 1, 2017. According to the SEC’s adopting release, the rules are intended to address the inefficient and time-consuming search required to locate exhibits that have been incorporated by reference into reports and registration statements.
These rules apply to the following types of filings:
- Form 8-K
- Form 10-Q
- Form 10-K
- Form 10
- Form 10-D
- Registration statements:
- Forms S-1, S-3, S-4, S-8, S-11, F-1, F-3, F-4, SF-1, SF-3, SF-3, F-10 and 20-F
The SEC has approved 12 Regulation A+ offerings (and about 40 initial Form 1-A filings have been made) since the new Regulation A+ rules became effective in June. The companies now raising money under Regulation A+ include a dental device manufacturer, technology companies, an automaker, a cannabis company and a bank. Regulation A+ allows private companies to raise up to $50 million by selling debt or equity to the public without having to meet all of the requirements of a traditional initial public offering.
Many of the companies using Regulation A+ are true startups, but some are existing businesses with customer revenue and operations. Dental device manufacturer Sun Dental Holdings is notable because it is using a registered broker-dealer placement agent to conduct its offering. Many of the approved offerings seek to publicly sell securities that likely will not result in loss of control for the current owners or require mandatory distributions or dividends, despite potentially raising millions.
Below is a summary of the SEC-approved Regulations A+ offerings. …
We reported previously in April 2014 on the ruling by the United States Court of Appeals for the District of Columbia Circuit striking down the part of the SEC’s conflict minerals rules that requires a registrant to describe its products as not “DRC conflict free” and upholding the remainder of the conflict minerals rules. Upon a rehearing of the case by the D.C. Circuit, the court on Aug. 18, 2015 reaffirmed its previous decision by a 2-1 vote.
In its April 14, 2014 decision, the D.C. Circuit struck down the requirement in the conflict minerals rules that an issuer describe its products as not “DRC conflict free” because it violates the First Amendment by compelling speech by the issuer.…
The SEC has proposed rules that require the securities exchanges to adopt rules that in turn require listed companies to adopt, disclose and comply with a clawback policy for executive compensation based on erroneous financial statements. The new rules would apply to almost all companies listed on a securities exchange (such as NASDAQ and NYSE), including smaller reporting companies.
Many companies already have adopted interim clawback policies in an attempt to comply with the spirit of the law that requires the new rules, Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Until now, some key terms in the law have been undefined. The proposed rules are a good opportunity to think about whether existing policies sync with the proposed rules on the following key terms:
- Are the correct “executive officers” included under the policy?
- Is “incentive-based compensation” properly understood under the policy?
- What types of, and how much, incentive-based compensation must be clawed back?
- Are there any exceptions?
- What types of clawback terms should be included in employment agreements?
Recently finalized Regulation A+ allows most private companies to raise up to $50 million by selling securities to the public. Companies using Regulation A+ can advertise the offering and solicit investors, and anyone can invest (subject to some reasonable investment limits for non-accredited investors).
Owners of a company raising capital with Regulation A+ can sell up to $15 million of their own securities in the company as part of the offering, and there are no limits on the resale of the securities (except for affiliates), assuming a secondary market actually develops.
Regulation A+ does come with compliance obligations, including an offering statement that is subject to SEC review and comment, and audited financial statements and semi-annual reporting obligations for offerings above $20 million. But such compliance obligations are not nearly as onerous as they are for a traditional public offering.…
Scandal roiled the banking industry Wednesday as four of the world’s largest banks — Citigroup, JPMorgan Chase, Barclays and Royal Bank of Scotland — pleaded guilty to federal antitrust violations for conspiring to manipulate foreign-currency markets over the course of several years. The scheme involved collusion by traders at the various banks to fix the U.S. dollar – euro exchange rate by coordinating trades and agreeing not to buy or sell at certain times to protect one another’s trading positions.
The guilty pleas place the banks on probation and require them to pay criminal fines totaling more than $2.5 billion, in addition to billions more that they have agreed to pay to state and federal regulators. One of these penalties — a $925 million fine levied against Citigroup — is the largest single fine ever imposed for a violation of the Sherman Act (the federal statute that criminalizes price-fixing and other horizontal conspiracies among competing businesses). The guilty pleas were also historic in that they were entered by the banks’ parent companies rather than by subsidiaries — marking the first time since the Drexel Burnham Lambert scandal of the late 1980s that the primary banking unit of an American financial institution has pleaded guilty to criminal charges. …
The Securities and Exchange Commission (SEC) has approved the Financial Industry Regulatory Authority’s FINRA Rule 2040, which will permit the payment of compensation, fees, concessions, discounts, commissions or other allowances to unregistered persons if a member firm determines the activities of the unregistered person in question do not require registration as a broker-dealer. Support for the determination can be derived by, among other things, reasonably relying on previously published releases, no-action letters or SEC staff interpretations, seeking a no-action letter from the SEC or obtaining a legal opinion from an independent, reputable U.S. licensed counsel knowledgeable in the area.
A member firm’s determination must be reasonable under the circumstances and should be reviewed from time to time, suggested to be annually by FINRA, if payments to unregistered persons are ongoing. In addition, a member firm must maintain books and records that support the member firm’s determination.
FINRA Rule 2040 has an effective date of Aug. 24, 2015.…
Yesterday, the SEC announced penalties totaling approximately $2.6 million against directors, officers, beneficial owners and issuers for failure to promptly report information about holdings and transactions in company stock.
The primary enforcement weapon for these types of failures historically has been public shaming: Rule 405 of Regulation S-K requires issuers to identify insiders who failed to file Section 16 reports on time during the previous year. But, apparently, based on yesterday’s announcement, the SEC also will levy fines against issuers and individual insiders for chronic filing failures.
Settled fines for individuals ranged from approximately $25,000 to $100,000. Six publicly-traded companies settled claims that they contributed to the filing delinquencies of their insiders and paid fines ranging from $75,000 to $150,000.…
According to a Wall Street Journal article reported by Emily Chasen, Senior Editor at The Wall Street Journal‘s CFO Journal, on Sept. 5, 2014, the U.S. Commerce Department acknowledged “it cannot determine which refiners and smelters around the world are financially fueling violence in the war-torn Congo region.”
The WSJ article noted that companies including Intel Corp. and Apple have spent a substantial amount of time and millions of dollars “investigating their supply chains to figure out which components might contain gold, tin, tungsten and tantalum from mining operations blamed for funding armed militia groups in the Democratic Republic of the Congo.” According to Tom Quaadman, vice president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, “[a]t the end of the day, the conflict minerals rule creates the worst outcome — it has not helped lessen the conflicts in the Congo and creates economic harm in the U.S.”
The SEC final rules on conflict minerals, adopted Aug. 22, 2012, pursuant to Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, require companies to publicly disclose their use of conflict minerals that originated in the Democratic Republic of the Congo or an adjoining country. See SEC Adopts Final Rules for Disclosing Use of Conflict Minerals (posted Aug. 24, 2012). Additionally, the conflict mineral rules have been the subject of much litigation during the past two years, which has provided no clarity to companies as to their compliance obligations.
Editor’s note: Though the basis for …
These amendments complete some long-awaited steps to make structural and operational reforms to address risks of investor runs in money market funds to address investor runs out of funds as occurred during the 2008 financial crisis. Specifically, the new rules require institutional prime money market funds to value the funds on a floating net asset value rather than a fixed $1 share price. Additionally, the rules allow money market funds boards to impose liquidity fees and redemption gates during periods of financial stress.
The final rules provide a two-year transition period to enable both funds and investors time to fully adjust their systems, operations and investing practices.…
It has been more than two years since the JOBS Act was passed and almost nine months since the SEC proposed crowdfunding rules — but still no final rules. Should entrepreneurs care? Probably not. The proposed SEC rules are burdensome. The rules limit the total amount raised to $1 million in any rolling 12-month period, and moderate-income investors would be limited to a $5,000 investment (at the most). Additional proposed rules require audited financials (for some offerings), limits on advertising, and filings with the SEC, among other requirements. Entrepreneurs with great ideas should not settle for these types of investments.
Crowdfunding for accredited investors already exists, and it may fill an important funding gap for growing businesses that have not attracted angel investors and are not ready for venture capital or private equity. Not all startups are tech based, and not all angel investors in a particular entrepreneur’s community know what a good investment looks like. But a well-curated accredited crowdfunding platform can provide exposure to a lot of potential accredited investors.…
We reported previously on the ruling by the United States Court of Appeals for the District of Columbia Circuit striking down the part of the SEC’s conflict minerals rules that requires a registrant to describe its products as not “DRC conflict free” and upholding the remainder of the conflict minerals rules. Many observers have been eagerly awaiting the SEC’s response to this decision, including whether the SEC will delay the implementation of the conflict minerals rules.
On April 29, 2014, the SEC issued its response to the court’s decision in the conflict minerals rules challenge. In short, the SEC affirmed the June 2, 2014 deadline for registrants to file Form SD and their conflict minerals reports. Consistent with the court’s ruling, the SEC stated that registrants will not be required to describe their products as “DRC conflict free,” having “not been found to be ‘DRC conflict free,’” or “DRC conflict undeterminable.”
If a registrant voluntarily elects to describe any of its products as “DRC conflict free” in its conflict minerals report, it would be permitted to do so provided it had obtained an independent private sector audit (IPSA) as required by the conflict minerals rules. Pending further action from the SEC, an IPSA will not be required unless a registrant voluntarily elects to describe a product as “DRC conflict free” in its conflict minerals report.
Compliance with the conflict minerals rules can be a substantial undertaking. Registrants need to continue their compliance efforts and be prepared for the June 2, …
On April 24, 2014, Siliconware Precision Industries Co., Ltd. (Siliconware) earned the distinction of being the first registrant to file a conflict minerals report on Form SD. Here are links to Siliconware’s Form SD and its conflict minerals report. Although the filing deadline is not until June 2, 2014, this example gives registrants a glimpse of what conflict minerals disclosure might look like.
Siliconware reported that its due diligence efforts showed a portion of its products to be “DRC conflict undeterminable” and the remainder to be “DRC conflict free,” as those terms are defined in the Exchange Act. Siliconware chose to use these terms, which were prescribed in the conflict minerals rules, notwithstanding the fact that the requirement to use those specific terms was recently struck down by U.S. Court of Appeals on First Amendment grounds.
Registrants should continue to monitor conflict minerals reports of other registrants as they are filed in order to get a sense of market practice for the conflict minerals disclosure.…
On April 14, 2014, the United States Court of Appeals for the District of Columbia Circuit issued its ruling in the challenge to the SEC’s conflict minerals rules. The court struck down the requirement that an issuer describe its products as not “DRC conflict free” because it violates the First Amendment by compelling speech by the issuer. However, the Court upheld other key parts of the conflict minerals rules, including without limitation the lack of a de minimis exception, the country of origin due diligence requirement and the extension of the rules to issuers that “contract to manufacture” products.
The court concluded that compelling an issuer to describe their products as not “DRC conflict free,” is not narrowly tailored and, therefore, would not survive an immediate scrutiny review (although the court declined to state whether strict or immediate scrutiny would apply). However, the court did suggest that it would be permissible for the SEC to require an issuer to describe the conflict minerals status of its products using the issuer’s own language rather than the specific language required by the statute or the rules.…
In the ever-changing world of corporate law, it’s important to have trusted resources that can keep an eye out for how the relentless evolution of regulation and legislation can affect business operations, governance, strategy and growth. Our goal is for the Federal Securities Law Blog, and the Porter Wright attorneys who contribute to it, to be one of those resources. We invite you to read our most recent e-book, which provides updates about recent federal rules changes that can have an impact on your business. Download the Corporate Must Reads e-book.…
Earlier this month, the Securities and Exchange Commission (SEC) issued a no-action letter indicating the staff of the Division of Trading and Markets would not recommend enforcement action if an “M&A broker” were to engage in the transfer of the ownership and control of a privately held company through the purchase, sale or transfer involving securities or assets of the company, to a buyer who will actively operate the company or the business conducted with the assets of the company, without registering as a broker-dealer.
An M&A broker may not:
- have the ability to bind a party to an M&A transaction described above;
- provide financing for the M&A transaction;
- have custody, control or possession or otherwise handle funds or securities issued or exchanged in the M&A transaction; or
- facilitate an M&A transaction with a group of buyers if the group was formed with the assistance of the M&A broker.
The buyer in the M&A transaction may not be a passive investor. The buyer must acquire control and actively operate the company or the business conducted with the assets of the company. Control may be acquired through the ownership of securities, by contact or otherwise. Control is presumed to exist if the buyer or group of buyers has the right to vote 25% or more of a class of voting securities or in the case of a partnership or limited liability company, has the right to receive upon dissolution or has contributed 25% or more of the capital.
For purposes of …
A “deferred prosecution agreement” (or DPA) is not a new concept to government prosecutors or to SEC Chairman Mary Jo White, but it is new to the SEC. Under a DPA, the government agrees to withhold prosecution in exchange for enforcement assistance — providing information, implementing internal compliance policies, or other cooperation with SEC investigations.
This tool has been around for a long time (Mary Jo White used it back in her days as a federal prosecutor) but the SEC did not use it until 2011 when it agreed to a DPA with the steel pipe products company Tenaris S.A. In agreeing to the Tenaris DPA, the SEC announced “its first-ever use of the approach to facilitate and reward cooperation in SEC investigations.” The SEC promised to refrain from civil prosecution of anti-bribery charges against Tenaris in exchange for the company’s strengthening and enforcing stricter internal compliance policies.
Now, the Commission announced that it has, for the first time, agreed to a DPA with an individual, Scott Herckis of Heppelwhite Fund LP. Heppelwhite, a Connecticut-based hedge fund, was charged in 2012 with misleading investors and misappropriating fund assets. Herckis was the fund’s administrator from 2010 to 2012. The Commission credits Herckis’ “voluntary and significant cooperation” in its decision to file an enforcement action against Hepplewhite. Last month, a federal judge in New York ordered the distribution of $6 million of the assets of Heppelwhite’s founder, Berton Hochfeld, to defrauded investors.
Under the DPA, Herckis still faces penalties for his …
In March, an affiliate of SAC Capital agreed to a record high settlement of $616 million for charges of insider trading. As it turned out, the SEC was only getting started with the company and its owner, Steve Cohen. In July, both Cohen and SAC Capital were themselves indicted on insider trading.
Based on reports, SAC Capital agreed earlier this week to settle its charges for $1.2 billion, shattering the record again. In addition, the company agreed to plead guilty to each count in the indictment and close its investment advisory business. The indictment accused the company, among other things, of fostering a culture of insider trading, citing “institutional failure.”
As if setting a new record-high settlement wasn’t enough, the settlement terms give no shelter to Cohen, personally. The settlement states outright that it provides “no immunity from prosecution for any individual and does not restrict the government from charging any individual for any criminal offense.” By refusing to grant immunity to Cohen in this deal, the SEC confirmed that it will continue its civil investigation of the billionaire hedge fund manager and is even considering criminal charges in the future.
The SEC voted unanimously to propose rules regulating the offering and selling of securities through “crowdfunding”. Crowdfunding – a method of raising money through small sums contributed by many individuals – has become an internet mainstay. But so far, crowdfunding websites (such as Kickstarter or Indiegogo) constructed their platforms so as to avoid falling under SEC regulation. In particular, the traditional crowdfunding method does not offer financial returns on an investment or a share in a company’s profits.
The proposed rules (read them in their entirety) would allow companies to raise up to $1 million through crowdfunding platforms within a 12-month period. Other features of the proposed rules include:
- Investors will be subject to income-based limits on the total amount of securities they can purchase through crowdfunding within a 12-month period. No investor will be able to invest more than $100,000 in crowdfunding-based securities within a 12-month period.
- Certain companies will be ineligible to raise funds through crowdfunding, including: companies that are already SEC-reporting companies, non-U.S. companies, companies with no specific business plan, and certain investment companies.
- Companies will be required to file certain information with the SEC.
- Companies are required to disclose certain information to the crowdfunding platform and prospective investors, such as financial statements, related-party transactions, the company’s business plan, and description of the offering.
- Crowdfunding platforms will have to become registered with the SEC, either as broker-dealers or funding portals.
The rules were proposed as directed by the Jumpstart Our Business Startups Act (JOBS Act), …