Compliments of our colleague Sanjay M. Shirodkar.

The SEC is open for business – first come, first served.

The Division of Corporation Finance is returning to normal operations. The SEC staff has indicated that, absent compelling circumstances, it expects to address matters in the order in which they were received. Staff members are available to answer questions relating to filings and other federal securities law matters, but their response take some time.

The SEC Staff has created an avenue for expedited basis assistance. Such requests should be directed to
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One of the more interesting phenomena in early-stage investing is the recent emergence of initial coin offerings (“ICOs”), token generation events (“TGEs”), or similar distributed ledger or blockchain-enabled means for raising capital. Much has been written, including by many skilled lawyers in the technology sector, about whether the tokens issued in these structures involve “securities” – and, frankly, some of it is unhelpful. Hungry for something that seems like crowdfunding, but that actually works to raise meaningful capital for promising technology initiatives, many in the technology space really want these
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Every so often a public company finds itself unable to file periodic reports for a protracted time.  For example, a company may upgrade auditors and the new firm may advise of the need to re-audit prior years, which can take significant time.  Until there is a reliable starting point for financial statements, new filings are in limbo.  As time marches on, the older missed filings have less and less signficance to investors but would still entail the same amount of effort and expense to complete as any periodic report.

Over
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The SEC has proposed rules requiring listed issuers to adopt and comply with written “clawback” policies. These policies would need to provide that, if a listed issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer with any financial reporting requirement under the securities laws, then the issuer will recover the amount of any incentive-based compensation erroneously awarded to an executive officer. The listed issuer would also be required to disclose its clawback policy, disclose information about actions taken pursuant to its policy, and file its policy as an exhibit to its annual report.
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Yesterday the SEC issued its long-awaited “pay-versus-performance” rule proposal. The rules would add a new paragraph (v) to Item 402 of Regulation S-K. In short, the proposed rules would require a new table comparing “executive compensation actually paid” to the “total shareholder return” (TSR) of the company and its peers, as well as a discussion of the relationship between these amounts.

Here is a quick summary of the main requirements of the proposal:


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In light of the SEC’s first enforcement action against a company for impeding whistleblower activity in violation of Rule 21F-17, employers may wish to consider clarifying in their agreements, policies and practices that involve confidentiality obligations that employees may provide truthful information to the SEC or other governmental agencies concerning potential violations of law.

Rule 21F-17, adopted pursuant to the Dodd-Frank Act, provides in relevant part:

(a) No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement … with respect to such communications.

KBR, a Houston-based global technology and engineering firm, had a practice of conducting internal investigations in response to complaints regarding potential illegal or unethical conduct, which included interviewing employees (including those who had lodged a complaint). KBR required witnesses in these internal investigations to sign a confidentiality statement that included the following language:

I understand that in order to protect the integrity of this review, I am prohibited from discussing any particulars regarding this interview and the subject matter discussed during the interview, without the prior authorization of the Law Department. I understand that the unauthorized disclosure of information may be grounds for disciplinary action up to and including termination of employment.

The SEC acknowledged that it was not aware of any employee in fact being prevented from communicating directly with SEC staff, or of KBR taking any action to enforce these confidentiality statements. Nevertheless, the SEC concluded that that the language in the confidentiality statement impeded communications with the SEC staff about potential securities violations by requiring permission from KBR’s legal department or face the prospect of discipline.
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We have previously blogged about the SEC’s July 2013 rule change that disqualifies certain “bad actors” from using Rule 506. Thankfully, Rule 506 permits the SEC to determine, upon a showing of good cause, that it is not necessary under the circumstances to deny availability of Rule 506. The SEC has recently issued a policy statement explaining how it will evaluate whether a party seeking a waiver has shown good cause that it is not necessary under the circumstances that the exemptions be denied.

Background

Other securities offering exemptions, including Rule 505 and Regulation A, have had bad actor disqualifications for many years, and the SEC has also had the authority to grant waivers under these exemptions using a similar “good cause” standard. In fact, based on this interesting article from Urska Velikonja, the SEC granted waivers nearly 200 times between July 2003 and December 2014. However, because Rule 506 is so much more widely used in mainstream private securities offerings, significant attention to waivers of bad actor disqualifications emerged as the first waivers were granted under Rule 506 (such as those granted to Oppenheimer and H.D. Vest). The attention to the issue culminated in several SEC commissioners publicly expressing diverging views about the proper use of waivers, including in speeches by SEC Commissioners Daniel Gallagher, Kara Stein and Michael Piwowar and SEC Chair Mary Jo White. This ultimately led to the SEC issuing its recent policy statement to bring consistency to how such waivers are granted, whether under Regulation A, Rule 505 or Rule 506.
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Today, the U.S. Supreme Court issued its anticipated Omnicare decision, which addresses the standard of liability applied to expressions of opinion in a registration statement for a public offering. While there will be clamoring about Omnicare (it is somewhat rare for the Supreme Court to issue securities law decisions), in my opinion the case does not involve a fundamental shift in how disclosure is drafted, although it does invite a few drafting and diligence strategies.

Statutory Backdrop

Section 11 of the Securities Act of 1933 permits purchasers of securities to sue for damages if a registration statement, at the time it became effective:

  • contained an untrue statement of a material fact; or
  • omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading.

In contrast with other types of securities liability, neither the untrue statements prong nor the omissions prong of Section 11 requires showing that a defendant acted with any intent to deceive or defraud.

Omnicare’s Opinions

Omnicare, the nation’s largest provider of pharmacy services for residents of nursing homes, filed a registration statement for a public offering of its common stock. In discussing the effects of various laws on its business model, including its acceptance of rebates from pharmaceutical manufacturers, the registration statement contained the following statements of opinion:

  • “We believe our contract arrangements with other healthcare providers, our pharmaceutical suppliers and our pharmacy practices are in compliance with applicable federal and state laws.”
  • “We believe that our contracts with pharmaceutical manufacturers are legally and economically valid arrangements that bring value to the healthcare system and the patients that we serve.”


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The SEC has recently issued interpretations regarding Rule 147.  This rule provides a safe harbor under Section 3(a)(11) of the Securities Act of 1933, as amended, which exempts from federal registration securities offered and sold only to persons resident within a single state or territory, in which the issuer is also resident.  While the exemption is a relatively simple idea at a high level, there can often be challenges in applying it, such as determining where a company resides or where an offer occurs.  Rule 147 provides bright line
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Bill Carleton has a good post regarding the recent comments from Keith Higgins, the Director of the Division of Corporation Finance, who spoke at the 2014 Angel Capital Association Summit.  Higgins discussed the SEC’s principles-based approach with respect to meeting the requirements of new Rule 506(c). 

Since the SEC’s adoption of new Rule 506(c) in September 2013 allowing general solicitation by issuing companies in certain circumstances, angel investors have been concerned about the accredited investor verification standards set forth in those new rules.  The debate has centered around what actions
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