Securities Law

Archive for June 2012

Posted on Monday, June 25 2012 at 8:37 pm by

Social Media Usage Can Have Reg FD Implications

A recent news headline provided another reminder of both the power of social media to disseminate information, and the dangers of its casual use by public company employees. In this case, a cryptic twitter message led to the firing of a senior executive, perhaps because the tweet raised Regulation FD concerns, or perhaps because it reflected very poor judgment.

In mid-May 2012, Francesca’s Holdings Corporation announced the termination of its CFO after an internal investigation determined that he had improperly communicated company information over twitter. News reports at the time said the CFO posted a tweet that said “Board meeting. Good numbers = Happy Board” during a quiet period prior to the company’s planned earnings release. There is no report of involvement in the matter by the SEC at the time or since.

The exploding popularity of social media – with its temptations to make flippant and less than thoughtful comments, even though they are blasted out to a universe of recipients – should make public companies and their employees leery of using such channels to say anything about their companies. In addition to general concerns about the imprecision and potentially misleading nature of many such communications, there is the potential applicability of Regulation FD (fair disclosure), or Reg FD as it is commonly known. Reg FD prohibits the selective disclosure of material nonpublic information by senior executives and most other company representatives.

The SEC has brought actions under Regulation FD against 11 companies and 12 associated individuals since 2000. Only one of these actions resulted in a judicial decision: SEC v. Siebel Systems Inc., 384 F. Supp. 2d 694 (S.D.N.Y. 2005). In Siebel, the SEC alleged that private statements made by Siebel executives to investors at dinner meetings contained nuanced differences from existing public statements of the company and that this conduct constituted selective disclosure of material nonpublic information.

The U.S. District Court for the Southern District of New York dismissed the entire action on the grounds that the conduct of the Siebel officials did not constitute selective disclosure of material nonpublic information. The court explained that “[t]o be deemed to be material, the statements must contain information of reasonable specificity to impart a definite indicia of performance; and a statement is not material if it constitutes nothing more than a vague assertion on which no reasonable investor would rely.” Id. at 709 n.15.

It is an interesting question whether this, or any other, court would have interpreted the Francesca’s CFO’s brief message as specific enough to support a finding of liability. It seems that the CFO’s message of “Good Numbers,” given the timing and the source, would have been clear enough to cause a reasonable investor to rely on it.

On the other hand, it might be argued that the broad reach of twitter (and many other social media channels) prevents a communication via such media, regardless of its materiality, from being “selectively” disclosed. The practical reach of such channels may be greater than that of a press release or an official SEC filing. Legal recognition of that possible practical reality is not here yet, however. Reg FD defines “public disclosure” as either being included in an 8-K filing with the SEC or dissemination by “another method that is reasonably designed to provide broad non-exclusionary distribution of the information to the public.” Whether social media might satisfy this disclosure requirement has not been the subject of serious public debate to this point.

It is not known if the proactive termination by Francesca of its CFO was prompted by fear of a Reg FD investigation by the SEC or by a more generalized perception of very poor judgment for a company executive to casually disseminate confidential company information to the world. In either case, those in possession of a public company’s material inside information are well advised to guard that information closely, and to recognize that blasting it out via any social media channel is imprudent, at best.

Posted on Friday, June 22 2012 at 4:39 pm by

How “Confidential” is a Confidential Draft SEC Registration Statement Submitted under the JOBS Act?

As we previously discussed in our post on May 16th, the recently enacted Jumpstart Our Business Startups Act (JOBS Act) allows an “emerging growth company” to submit a draft of its IPO (or pre-IPO) registration statement for confidential non-public review and comment by the SEC. We thought we would share with you some potentially interesting questions-and-answers about the confidential submission process.

Will my confidential submission stay confidential forever? While the draft registration statement, amendments and related documents submitted to the SEC pursuant to this confidential submission and review process are initially confidential, they do not remain confidential if a company proceeds with the IPO or pre-IPO offering. The JOBS Act requires that companies publicly file with the SEC the initial confidential submission and all amendments thereto within 21 days prior to the road show (or in the case of an offering that doesn’t include a road show or similar investor communications, 21 days prior to the anticipated effectiveness of the registration statement). These prior confidential submissions should be included as exhibits to the company’s later publicly filed registration statement, if any.

As an example, see the recently filed Form S-1 registration statement of iWatt Inc. iWatt’s initial confidentially submitted draft Form S-1 registration statement is filed as Exhibit 99.1 to its publicly filed Form S-1. No amendments are filed as Exhibit 99.2 et seq., so it would appear iWatt did not submit any confidential amendments.

Will SEC comment letters and company responses remain confidential? Consistent with the SEC’s normal process for comment and response letters, these documents will be made publicly available after the completion of the offering. Specifically, SEC comment letters and company response letters exchanged in connection with the confidential review process will be posted to the SEC’s EDGAR website no earlier than 20 business days following the effective date of the registration statement.

If it won’t remain confidential, why bother submitting a confidential draft registration statement to the SEC? The confidential submission process allows the company to keep the registration statement and its exhibits out of the public domain until the company decides that it is ready to move forward with the offering, if at all. If it abandons the offering before committing to a road show, its submission remains confidential. In this manner, the company can avoid the risk of being perceived by the market as “damaged goods” by dint of abandoning its IPO.

Even if the company goes forward with the offering, and consequently makes its confidential submissions publicly available, we perceive some value to companies in not having to endure the intense microscope of the media on the sometimes painful SEC review process in real-time (although some would say that undergoing that process in the open is beneficial to investors). We note for instance that during its IPO process, Groupon made significant changes to its accounting practices, which drew much contemporaneous media scrutiny. While the JOBS Act confidential submission process ultimately exposes the changes a company may have made during the SEC review process, it only does so after the presumably successful completion of that process.

Can a company publicly announce it is pursuing an IPO while still taking advantage of the confidential submission process for its draft IPO registration statement? Yes. The SEC’s Rule 135 permits public notice of a registered offering, although the content of that notice is fairly limited—you cannot, for instance, identify the underwriters. A number of companies have issued press releases under Rule 135 announcing the confidential submission of a draft registration statement.

Can a company keep anything confidential in its filing or SEC correspondence if it goes forward with the offering? Yes, in a limited fashion. You can use the SEC’s longstanding Rule 406 to try to keep discrete portions of your filing confidential. With respect to SEC correspondence, you can seek to utilize the SEC’s Freedom of Information Act confidentiality procedures.

The traditional confidential treatment procedures are much more limited than the JOBS Act procedure. The JOBS Act permits emerging growth companies to keep an entire registration statement and its exhibits confidential (pending the pre-road show deadline for making them public) without requiring that the company offer any justification for such treatment. Rule 406 on the other hand requires the party requesting confidential treatment to state the grounds for such request and provide a detailed explanation of why, based on the facts and circumstances of the particular case, disclosure of the information is unnecessary for the protection of investors. The specified grounds upon which confidential treatment can be obtained are limited, with the most commonly used exemption being for trade secrets and privileged or confidential commercial or financial information the disclosure of which would cause substantial competitive harm to the company.

Confidential treatment under the traditional procedures can only be obtained for discrete portions of a filing, versus an entire registration statement or exhibit. A typical application of Rule 406 would be to request the omission of a pricing term from a material contract a company is filing as an exhibit to a registration statement.

* * * * * *

The SEC has posted other FAQs on confidential submissions here. Please contact us if you have any questions on the process.

Posted on Tuesday, June 19 2012 at 3:38 pm by

SEC’s Advisory Committee on Small and Emerging Companies Discusses JOBS Act

The Securities and Exchange Commission’s Advisory Committee on Small and Emerging Companies met on June 8, 2012, to discuss the recently enacted Jumpstart Our Business Startups (JOBS) Act.

This Committee began considering capital market regulatory issues when it was formed in September 2011, but this was its first meeting since the enactment of the JOBS Act. In prior meetings the Committee recommended: 1) relaxation or modification of the general solicitation ban in Regulation D Rule 506 offerings, 2) an increase in the number of record holders that would trigger public registration and periodic reporting, and 3) an increase in the Regulation A aggregate offering limit. Each of these concepts found their way into the JOBS Act.

The Committee discussed the JOBS Act’s removal of the ban on general solicitation in Regulation D Rule 506 offerings, specifically the requirement that an issuer must take “reasonable steps” to verify that all purchasers are accredited investors and the upcoming SEC rules that will provide guidance on that requirement. The Committee noted that, in determining what constitutes “reasonable steps,” the SEC should consider:

  • the possibility that fraud could be more prevalent in the online subscription context,
  • whether “check the box” investor questionnaires should suffice as verification that a person is an accredited investor, and
  • to what extent the SEC is allowed to regulate the mode/form of soliciting communications without running afoul of the statutory removal of the ban on general solicitation.

The Committee also considered issues arising from the JOBS Act’s increase in the number of shareholders that would trigger registration requirements, particularly the limit of 500 non-accredited shareholders for companies other than banks or bank holding companies. The Committee noted that the SEC is expected to:

  • address the appropriate level of diligence for issuers in performing their annual counting of accredited investors,
  • determine what constitutes an “employee” and “employee compensation” for purposes of the JOBS Act’s exclusion from this shareholder count persons who receive securities under a company employee compensation plan, and
  • consider whether savings and loans and other thrifts are “banks or bank holding companies” for purposes of the JOBS Act.

The Committee did not form any recommendations to the SEC in connection with the SEC’s ongoing implementation of the JOBS Act. Instead, the meeting served as an open forum for the exchange of ideas and possible concerns the SEC may encounter in connection with implementation of the JOBS Act in SEC rulemaking.

Background materials related to the Committee’s recent meeting are available on the SEC’s website at

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