Securities Law

Category: Uncategorized

Posted on Wednesday, September 17 2014 at 6:09 pm by

This is the short link.">Wave of SEC Enforcement Actions Reinforces Importance of Strong Compliance Culture

On September 10, 2014, the Securities and Exchange Commission (the “SEC”) announced charges against 18 individuals and ten investment firms for violating federal securities laws that require prompt reporting about their holdings and transactions in company stock.  Six publicly traded companies were charged for contributing to filing failures by insiders or failing to report their insiders’ filing delinquencies.

The enforcement actions were concerned with two types of ownership reports – Form 4 and Schedules 13D and 13G.   A Form 4 is a report that officers, directors, and beneficial owners of more than 10 percent of a registered class of a company’s stock must use to report their transactions in company stock.  Schedules 13D and 13G are reports that beneficial owners of more than 5 percent of a registered class of a company’s stock must use to report holdings or intentions with respect to the company.  The SEC focused on these forms as they can provide investors the opportunity to evaluate a company’s future prospects based on the holdings and transactions of company insiders.

All but one of the individuals and companies agreed to settle the charges, with civil money penalties totaling $2.6 million.  The penalties for individual directors or officers ranged from $25,000 to $100,000, and the penalties for public companies ranged from $75,000 to $150,000.

All of the individuals charged had multiple violations.  Notably, many of the violations were reports that were late by just a few days.

In announcing these actions, the SEC emphasized that these reporting requirements apply irrespective of profits or a person’s reasons for acquiring holdings or engaging in transactions.  Moreover, the failure to timely file a required beneficial ownership report, even if inadvertent, constitutes a violation of these rules.

Most of the public companies charged with violations had voluntarily accepted responsibility for handling Section 16 filing requirements for their insiders – as most public companies do – but were negligent in performing those tasks, resulting in multiple untimely filings.  In addition, most of the companies charged failed to disclose information concerning delinquent Section 16 filings by its insiders, as required by Item 405 of Regulation S-K.

The investment firms charged failed to file multiple Section 16 reports on a timely basis and, in some cases, failed to file an initial Schedule 13G statement and/or amendments on a timely basis.

These enforcement actions reinforce the importance of a strong compliance culture at public companies.  The responsibility for complying with the federal securities laws are the responsibility of the individual and, as a result, directors, officers and major shareholders should familiarize themselves with the federal reporting requirements and ensure that all reports are timely filed in connection with any qualifying transaction.

Companies that accept responsibility for making these filings on behalf of insiders can also be held liable for individual violations of the reporting requirements and, therefore, must ensure they have an adequate public reporting compliance program in place.

Posted on Tuesday, March 4 2014 at 4:01 pm by

This is the short link.">SEC Provides No-Action Relief for M&A Brokers

On January 31, the staff of the Securities and Exchange Commission (“SEC”) issued a no-action letter (“No-Action Letter”) [1] permitting an “M&A Broker”, under certain circumstances, to facilitate mergers, acquisitions, business sales, and business combinations (together, “M&A Transactions”) in connection with the transfer of ownership of a “privately-held company” (any company that does not have any class of securities registered, or required to be registered, with the SEC under Section 12 of the Securities Exchange Act of 1934 and is not required to file periodic information, documents, or reports under Section 15(d) of the Exchange Act) without the M&A Broker registering as a broker-dealer under section 15(b) of the Exchange Act. The specific terms and conditions in the No-Action Letter are outlined below.

While the details of the definition of M&A Broker are complicated, the No-Action Letter has caught the securities industry by surprise. The No-Action Letter provides a potential exemption from SEC broker-dealer registration for many M&A industry consultants commonly referred to as “business brokers”, even if they are paid “finders” or “success” fees for securities-based M&A transactions between privately-held companies. In particular, the No-Action Letter permits an M&A Broker [2] to (i) advertise a privately-held company for sale with information such as the description of the business, general location, and price range, (ii) participate in the negotiations of the M&A Transaction, (iii) advise the parties to issue securities, or otherwise to effect the transfer of the business by means of securities, or assess the value of any securities sold, and (iv) receive transaction-based or other compensation, without registering as a broker-dealer with the SEC.

In particular, the SEC noted the following regarding M&A Brokers:

  • M&A Brokers may not have the ability to bind a party to an M&A Transaction.
  • M&A Brokers may not directly, or indirectly through any of its affiliates, provide financing for an M&A Transaction.
  • M&A Brokers may not have custody, control, or possession of or otherwise handle funds or securities issued or exchanged in connection with an M&A Transaction or other securities transaction for the account of others.
  • M&A Transactions may not involve a public offering, but instead must be conducted in compliance with an applicable exemption from registration under the Securities Act of 1933.
  • No party to any M&A Transaction may be a “shell company”,[3] other than a “business combination related shell company”.[4]
  • M&A Brokers representing both buyers and sellers must provide clear written disclosure as to the parties represented and obtain written consent from both parties to the joint representation. In addition, an M&A Broker facilitating an M&A Transaction with a group of buyers may do so only if the group is formed without the assistance of the M&A Broker.
  • The buyer, or group of buyers, in any M&A Transaction must, upon completion of the M&A Transaction, control and actively operate the company or the business conducted with the assets of the business.[5]
  • No M&A Transaction may result in the transfer of interests to a passive buyer or group of passive buyers.
  • Any securities received by the buyer or M&A Broker in an M&A Transaction will be restricted securities within the meaning of Rule 144(a)(3) under the Securities Act because the securities would have been issued in a transaction not involving a public offering.
  • M&A Brokers and each officer, director or employee of an M&A Broker: (i) cannot have been barred from association with a broker­dealer by the SEC, any state or any self-regulatory organization; and (ii) may not be suspended from association with a broker-dealer.

Future Considerations

The No-Action Letter is a welcome step towards clarifying the registration requirements for M&A Brokers; however, it remains to be seen what, if any, effect it will have on determinations under state securities laws and their varied definitions of “brokers”, “dealers” and “finders”. Although it is reasonable to assume that states that have adopted laws similar to federal law in this area may likewise adopt the interpretation presented in the No-Action Letter, only time will tell if this proves to be the case. We also recommend that individuals and companies looking to rely on the No-Action Letter to avoid SEC broker-dealer registration carefully consider the No-Action Letter’s requirements for transactions to fit under its parameters (namely, the requirements that qualifying transactions involve a buyer that will take voting control, assume executive officer or management positions or otherwise have the power to exert control over the seller after the transaction). Additionally, we note that the No-Action Letter does not address continuing issues regarding broker-dealer registration of private equity fund advisers that receive deal-based fees, who likely would not be able to comply with the M&A Broker definition. Nevertheless, the No-Action Letter’s stark departure from the SEC’s historical position that transaction-based compensation is the “hallmark of broker-dealer activity” is a positive step towards addressing, at the federal level, at least some of these issues.

For more information on the No-Action Letter, please contact any member of the Investment Management Team.


[1] SEC No-Action Letter re: M&A Brokers, dated January 31, 2014. A copy of the No-Action Letter is available here.

[2] An “M&A Broker” is defined in the No-Action Letter as a person engaged in the business of effecting securities transactions solely in connection with the transfer of ownership and control of a privately-held company (defined below) through the purchase, sale, exchange, issuance, repurchase, or redemption of, or a business combination involving, securities or assets of the company, to a buyer that will actively operate the company or its assets, whether through the power to elect officers and approve budgets or by service as an executive or other executive manager, among other things.

[3] A “shell” company is defined in the No-Action Letter as a company that: (1) has no or nominal operations; and (2) has: (i) no or nominal assets; (ii) assets consisting solely of cash and cash equivalents; or (iii) assets consisting of any amount of cash and cash equivalents and nominal other assets. In this context, a going concern need not be profitable, and could even be emerging from bankruptcy, so long as it has actually been conducting business, including soliciting or effecting business transactions or engaging in research and development activities.

[4] A “business combination related shell company” is defined in the No-Action Letter as a shell company (as defined in Rule 405 of the Securities Act) that is (1) formed by an entity that is not a shell company solely for the purpose of changing the corporate domicile of that entity solely within the United States or (2) formed by an entity defined in Securities Act Rule 165(f) among one or more entities other than the shell company, none of which is a shell company.

[5] A buyer, or group of buyers collectively, would have the necessary control if it has the power, directly or indirectly, to direct the management or policies of a company, whether through ownership of securities, by contract, or otherwise. The necessary control will be presumed to exist if, upon completion of the transaction, the buyer or group of buyers has the right to vote 25% or more of a class of voting securities; has the power to sell or direct the sale of 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. In addition, the buyer, or group of buyers, must actively operate the company or the business conducted with the assets of the company.


Posted on Thursday, December 5 2013 at 2:53 pm by

This is the short link.">NASDAQ Modifies Compensation Committee Independence Standards

On November 26, 2013, NASDAQ amended its independence standards for compensation committee members to remove the outright prohibition on compensatory fees. As revised, a board of directors instead must consider the receipt of such fees when determining eligibility for compensation committee membership.

In early 2013, NASDAQ adopted compensation committee independence standards that prohibit members of the compensation committee from directly or indirectly accepting any consulting, advisory or other compensatory fee from the issuer or its subsidiaries, which is the same standard applicable to audit committee members.

In order to match the more flexible rules of the New York Stock Exchange, NASDAQ has amended its compensation committee independence standards to remove the prohibition on the receipt of compensatory fees by compensation committee members. Instead, the revised rule requires that in affirmatively determining the independence of any director who will serve on the compensation committee, a company’s board must consider the source of compensation of the director, including any consulting, advisory or other compensatory fee paid by the company to the director.

NASDAQ has also modified the rule to remove the carve-out from the definition of compensatory fees for fees received by the director as: (i) a member of the compensation committee, the board of directors or any other board committee; and (ii) fixed amounts of compensation under a retirement plan (including deferred compensation) for prior service with the company. As a result, these fees should be considered in aggregate with all other sources of compensation of the director to determine whether such compensation would impair the director’s judgment as a member of the compensation committee.

The implementation deadline for the new compensation committee rules has not changed. Companies must comply with the amended rules by the earlier of: (1) their first annual meeting after January 15, 2014; or (2) October 31, 2014. Each company must submit a one-time certification to NASDAQ, no later than 30 days after the final implementation deadline applicable to it, that it has complied with the amended rules. The certification form will be available from NASDAQ no later than January 15, 2014.

Posted on Friday, October 25 2013 at 5:49 pm by

This is the short link.">SEC Finally Proposes Crowdfunding Rules

On Wednesday, October 23, the SEC, at long last, formally proposed rules which would allow companies to offer and sell securities through crowdfunding, as contemplated by the JOBS Act.  Crowdfunding is an innovative way for small companies and entrepreneurs to solicit investments from a multitude of investors over the internet.  Under Title III of the JOBS Act, legislation enacted in 2012 aimed at spurring small business growth by easing restrictions on capital-raising, Congress created an exemption in the securities laws to permit crowdfunding offerings.  The rules were directed to be finalized within 270 days after the JOBS Act was enacted, but have been delayed due to changes in SEC leadership, an exceptionally crowded rule-making agenda at the SEC and the inherent challenges in addressing the many new issues raised.

Under previous SEC regulations, companies engaged in private placements—that is, securities offerings not registered with the SEC—were generally limited in the manner in which they could sell securities and with respect to whom they could sell securities.  For example, a popular method, Rule 506, only permitted sales to “accredited” investors (including individuals with a net worth of $1 million or with an annual income over $200,000) and a limited number of unaccredited investors, and prohibited companies from using “general solicitation” to market their private offering, which precluded general advertising of the offering and required that offers only be made to investors with whom the issuer had a pre-existing relationship.  Other JOBS Act rulemaking has eliminated the ban on general solicitation for certain Rule 506 offerings, but only for offerings limited to accredited investors.  Under the proposed crowdfunding rules, companies taking advantage of crowdfunding would be able to publicly solicit investments through SEC-regulated broker-dealers or crowdfunding portals and access all investors, regardless of their net worth or annual income, subject to the limits described below.

While crowdfunding is aimed at opening up access to capital, the SEC is also seeking to balance protecting investors from fraud.  The proposed rules include investor thresholds, limitations on the amount of money companies may raise through crowdfunding, and company disclosure requirements.  Individuals who wish to invest in crowdfunding through an online portal will be required to disclose their income or net worth, and the portal will block individuals from investing over certain thresholds.  An investor with an annual income of less than $100,000 would be subject to a threshold of $2,000 or 5% of their annual net income or net worth, whichever is greater.  An investor with an annual income greater than $100,000 would be subject to a threshold of 10% of their annual income or net worth, whichever is greater.  Investors are prohibited from purchasing more than $100,000 of securities through a crowdfunding offering in a year.  Additionally, investors would not be able to resell securities purchased through crowdfunding for a one year period.  Under the proposed rules, issuers are limited to raising $1 million through crowdfunding in any one year period.

Companies taking advantage of crowdfunding would be required to file certain information with the SEC, and provide it to potential investors and crowdfunding portals.  These disclosures would require information about:

  • officers, directors and owners of 20% or more of the company;
  • the company’s business and how the company is going to use the funds raised;
  • the price of securities being offered;
  • the target offering amount and deadline to reach that amount, and whether the company will accept investments in excess of that amount;
  • the company’s financial condition; and
  • the company’s financial statements, which must be audited if the company is seeking to raise more than $500,000. 

Companies would have a continuing obligation to update the information with any material changes and provide updates on reaching the target offering amount.  Companies raising capital through crowdfunding would also be required to file an annual report with the SEC and make the report available to investors.  Many commentators have expressed fears that small businesses will find these disclosure requirements too burdensome to make crowdfunding a worthwhile endeavor.

The proposed rules also require the securities to be offered through either an SEC-registered broker-dealer or a crowdfunding portal, which is a new designation from the JOBS Act.  These intermediaries would be required to provide investors with informational materials about the companies, implement measures to reduce the risk of fraud, and provide forums for investors to discuss offerings.  Under the proposed rules, the intermediaries would be prohibited from offering investment advice or recommendations, soliciting purchases or offers, and holding or handling investor funds or securities.  Crowdfunding portals will also be subject to registration with and significant regulation by FINRA, which released its own proposed rules for comment on the same day as the SEC release.    

Certain companies may not utilize the crowdfunding exemption under the proposed rules.  These companies include non-U.S. companies, SEC reporting companies, certain investment companies, disqualified companies, companies not in compliance with the annual reporting requirements, companies without a business plan, and companies who plan to engage in a merger or acquisition with an unidentified company. 

The proposed rules now enter a 90-day comment period. Given the intense interest of commentators in this part of the JOBS Act to date, coupled with the proposing release containing 295 specific issues on which the SEC invites comment, it is likely that debate will continue well beyond this 90-day period.

Posted on Friday, October 4 2013 at 4:02 pm by

This is the short link.">SEC Proposes Rule for Pay Ratio Disclosure

On September 18, 2013, the Securities and Exchange Commission (the “SEC”) published a proposed rule that would implement Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act by amending Item 402 of Regulation S-K to require a public company to disclose the ratio of the median compensation of its employees to the compensation of its chief executive officer (“Pay Ratio Rule”).

Click here to continue reading alert authored by Thomas P. Hutton, Eric S. Kracov, Edward G. Olifer, David A. Stockton, Ravi R. Desai, Kevin M. Toomy

Posted on Friday, August 2 2013 at 2:25 pm by

This is the short link.">Rule 506(c) And The Future Of Private Placement Practices

Law360, New York (August 02, 2013, 2:17 PM ET) — As the securities bar carefully parses the language of the July 10 U.S. Securities and Exchange Commission release (the adopting release) implementing new Rule 506(c), which removes the bar on general solicitation and advertising in private placements, the implications of the new rule and the fundamental changes to long-standing practices that it will cause are coming into better focus.

Click here to continue reading article authored by Aaron Kaslow and David Stockton.

Posted on Monday, July 15 2013 at 2:26 pm by

This is the short link.">SEC Opens the Door to General Solicitation and Advertising in Private Placements

On July 10, 2013, the Securities and Exchange Commission (SEC) adopted long-awaited amendments to Rules 506 and 144A promulgated under the Securities Act of 1933 as required by Section 201(a) of the Jumpstart Our Business Startups Act (the “JOBS Act”). [1] The amendments implement key provisions of the JOBS Act that are expected to have a substantial impact on how businesses and private funds raise capital by permitting, for the first time, general solicitation and advertising in private, unregistered offerings. As a result of the new rules, issuers will be able to use unrestricted internet sites, print, broadcast or social media, and public invitation presentations or seminars in conducting their Rule 506 offerings, provided that they limit sales to “accredited investors.”[2]

 Click here to continue reading article authored by David Eaton, Jeffrey Skinner and David Stockton.

Posted on Tuesday, July 2 2013 at 3:28 pm by

This is the short link.">Step-by-Step Social Media Succumbs to Securities Disclosure Laws

The long arm of the federal securities laws is embracing evermore tightly statements made on social media by participants in the public securities markets. The most recent evidence of this is the Schedule 14A filing made by Carl Icahn last week to report his tweet that “Twitter is great. I like it almost as much as I like Dell.” This is just the latest chapter in the extension of the federal securities laws to the world of social media.

Social Media and Reg FD. Back in December 2012, the SEC made clear that it viewed social media communications as fair game for its enforcement actions. It investigated Netflix and its CEO when the CEO stated on his personal Facebook page that Netflix members had watched more than 1 billion hours of video that month. Netflix’s stock price immediately jumped, prompting the Commission to investigate whether Netflix and its CEO had violated Regulation FD, which prohibits public companies from disclosing material non-public information to investors, analysts or other market participants without also simultaneously making that information known to the broad market.
The SEC’s position on how to broadly disseminate material information has been slowly evolving. Originally, they only recognized formal SEC filings and broadly disseminated press releases as acceptable methods. Then in 2008, the SEC published guidance on when posting material information to a company website would be considered “public disclosure” for purposes of Reg FD. The SEC advised that the question of whether website disclosure is public hinges upon, among other key factual inquiries, whether a company website is a “recognized channel of distribution” – which in turn depends on “the steps that the company has taken to alert the market to its website and its disclosure practices, as well as the use by investors and the market of the company’s website.”
With respect to the Netflix CEO’s personal Facebook update, however, the SEC was evidently concerned that such a posting, without more, was not broad dissemination for Reg FD purposes. After concluding its investigation in April of this year, the SEC neither initiated an enforcement action against Netflix or its CEO, nor alleged wrongdoing. The SEC instead issued a report saying it would allow issuers to use social media channels to announce material non-public information in compliance with Reg FD, as long as they first notified investors in traditional SEC filings, press releases or on the company’s website that the information is being released in this manner. (Importantly, while Netflix had previously alerted the public that it might disclose important information via the company’s own website, Facebook page, Twitter feed and blog, it had not previously indicated that material Netflix news might be released through the CEO’s personal Facebook page.)

Social Media and Proxy Solicitation. The filing by Carl Icahn was not triggered by Reg FD requirements, which are only applicable to the issuer of securities, but rather by the SEC’s proxy solicitation rules. Because Icahn and his partner, Southeastern Asset Management, Inc., are in the process of soliciting votes against the proposed buy-out of Dell Computers being led by Michael Dell, all of their written communications that are intended to “solicit” a proxy are required to be filed with the SEC as additional proxy soliciting material. The SEC has interpreted what constitutes soliciting a proxy extremely broadly. It covers any communication, whether material or not, that is intended (or reasonably likely under the circumstances) to influence a shareholder vote. Since social media is a writing, just as is a press release, any statements on social media with such an intent or likely effect are, so the theory goes, subject to the SEC proxy filing rules.

It seems questionable whether “I like Dell” is reasonably likely to influence a vote, but it is less questionable what Ichan’s likely intentions were in saying it. In any event, Icahn’s securities lawyers were clearly playing it safe, and appropriately so, given the significant downside of a misstep in an uncertain area.
Zipcar also played it safe in January 2013 when it filed an 8 K disclosing a tweet by its CEO that contained a link to a newspaper article favorable towards the company. This took place after Zipcar had announced that it was being acquired by Avis Budget Group for $500 million and was as a result subject to the proxy solicitation rules.

Social Media and “Gun Jumping”. Another extension of the federal securities laws to social media is in the context of a public offering of stock. A public offering could be a sale of securities for cash or an acquisition of another company where some portion of the purchase price consists of securities. A company engaged in a public offering is subject to numerous regulations under the Securities Act of 1933, as amended, including prospectus delivery requirements and “gun jumping” rules. As a result, any written statement promoting the value of the company or its stock is considered to be an offer of the stock and thus may need to be included as part of the prospectus filed with the SEC in registering the offering.

Similar to the proxy solicitation context, the SEC has defined very broadly the type of conduct that constitutes an offer for disclosure filing purposes. The most famous example of this was when the co-founders of Google gave a wide-ranging interview to Playboy magazine on the eve of the Google IPO. The company succumbed to SEC pressure and filed the interview in its entirety as part of the prospectus, rather than accepting a ‘cooling off period’ delay of the offering to let the impact of the information in the interview subside.
Securities practitioners now recognize that statements on social media could constitute an offer of securities that are in registration, just as easily as any other public written pronouncements. As a result, it has become more common practice for securities lawyers representing issuers that are engaged in public offerings of securities, whether in the context of a merger or capital raising transactions, to warn their clients to stay off of social media with any discussion regarding the transaction taking place or the value of the company. This is similar to the realization by securities lawyers from an earlier era that a company undertaking an IPO needed to scrub its website to remove any information that might be considered as promoting its securities.
The applicability of SEC disclosure regulations to social media is continuing to expand as the popularity of this media explodes, along with its influence on the flow of information in the capital markets. Caution is advisable as the SEC continues to refine its positions on how to treat the impact of that phenomenon.

Posted on Friday, May 17 2013 at 8:15 pm by

This is the short link.">NASDAQ WITHDRAWS PROPOSED RULE REQUIRING ISSUERS TO MAINTAIN INTERNAL AUDIT FUNCTION

As discussed in our March 14 entry, NASDAQ recently proposed a new rule that would require listed companies to establish and maintain an internal audit function, which would make the NASDAQ listing requirement similar to the NYSE in this regard.  However, after receiving comments from issuers and others, NASDAQ has opted to withdraw the proposed rule while it further considers the comments it received. 

In comments sent to NASDAQ, issuers complained primarily of the cost of complying with the new rule, particularly for small market cap issuers or for issuers that lack the complexity or volume of transactions to necessitate an internal audit function .  Additionally, NASDAQ received comments stating that the new rule was redundant with SOX rule 404 and would defeat the purpose of the exemption given to smaller reporting companies from SOX 404(b) compliance.  Some commenters also expressed concerns that the requirements under the proposed rule lacked appropriate flexibility.  

NASDAQ noted that it intends to revise and resubmit the proposed rule taking into account comments received.  NASDAQ stated that it is important for listed companies to have “appropriate mechanisms and processes in place to review risks and the system of internal controls.”  Based on this, when NASDAQ revises the rule there may be an exemption based on market cap or the complexity of the business, or an attempt to add flexibility to the compliance process.

We will continue to follow any new developments and will update you accordingly.

Posted on Thursday, May 16 2013 at 2:28 pm by

This is the short link.">The Role of the Board of Directors in Strategic Planning

In light of the number of bank failures since 2009, the regulatory focus on risk management and the increased regulatory burden imposed on community banks by recent legislation and implementing regulations, there has been a greater focus on the roles and responsibilities of bank directors when it comes to leadership of the bank. The fundamental duties of directors re-main the same – the duty of care and the duty of loyalty. However, the banking industry and the environment in which banks operate are changing on a continuing basis and this makes it essential that community banks have a clear strategic plan. more

This article is authored by Kilpatrick Townsend partner Chris Gattuso

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