In Case You Missed It - Interesting Items for Corporate Counsel - January 2020

Stoel Rives LLP

Stoel Rives LLP

  1. The SEC proposed to amend the definition of “accredited investor” here. For those who have consciously avoided knowing anything about securities law, and who presumably are reading this client alert by accident, the offer and sale of securities to accredited investors under SEC Regulation D (Rule 506) is the exemption from registration with the SEC and state securities agencies. (An estimated $1.7 trillion was raised in the U.S. in 2018 under Rule 506, dwarfing all other exempt capital-raises, and significantly more is raised in Rule 506 sales than in registered sales.) Considering its importance to U.S. capital markets, any tinkering with the accredited investor definition is potentially a huge deal. But these proposed changes aren’t. That’s because the SEC did not do what some had feared and some had expected – increase the dollar thresholds for the income and net worth tests that tell you when you are rich enough to be accredited. (Roughly speaking, you qualify if you have $200,000 in annual income or $1,000,000 in net worth. Those thresholds haven’t changed since the definition was adopted in 1982, and in the meantime, the percentage of Americans who are accredited investors based on income has grown from 0.5% to 8.9% and based on net worth has grown from 1.4% to 9.4%.) Instead, the proposed rules expand the definition to add entities, including any entity that owns over $5 million in investments, and to add individuals, including those with certain professional certifications, “knowledgeable employees” of investment funds, and those who have a “spousal equivalent” whose income or net worth puts them over the top of quantitative thresholds. The rules also would expand the list of “qualified institutional buyers” to which resales of securities are exempt from registration under Rule 144A. A redline that shows the proposed changes to the definitions is here. Considering how much time the SEC and others have already spent pondering and discussing potential changes to the definition (see, e.g., here, here, here, and here), it would be surprising if the final rules deviate much from the proposed rules.
  2. SEC Chair Clayton published a reminder to public company audit committees, here, that they have oversight responsibilities for, well, all kinds of stuff, and specifically should pay attention to management’s use of non-GAAP financial measures, risks associated with the discontinuation of LIBOR, and critical audit matters.
  3. Compared to prior months, the SEC has seemed practically spastic in the last month. It:
    • Approved changes to FINRA Rule 5110 intended to make secondary offerings cheaper and easier, here.
    • Proposed changes to auditor independence standards, here.
    • Published guidance about the disclosure of intellectual property and technology risks associated with international operation, here, and confidential treatment requests, here.
    • Proposed Dodd-Frank-mandated rules regarding resource extraction disclosures, here. (Some commentary on the rules, and their tortuous path, is here and here.)
  4. We reported last month that the SEC rejected NYSE proposals to make “direct offerings” easier, and predicted that that wasn’t the end of the story for proposed changes. Rarely are we so immediately gratified by our predictions. The NYSE proposed revised rules, here, which are similar to its original proposal but lower from $250 million to $100 million the amount of securities that can be sold to meet the NYSE’s market value requirements. One assumes the NYSE talked to the SEC beforehand to make sure its revised rules address whatever concerns the SEC had.
  5. The Committee on Sponsoring Organizations of the Treadway Commission (COSO) released guidance, here, on dealing with cybersecurity challenges and how you can apply COSO’s enterprise risk management framework, here, to protect against cyberattack.
  6. The Second Circuit held in Unites States v. Blaszczak, here, that criminal prosecution of insider trading cases under Title 18 does not require a showing that a tipper received a “personal benefit” from disclosing insider information, which the U.S. Supreme Court held in Dirks v. SEC is required for civil liability under the antifraud provisions of the Securities Exchange Act. Odd, of course, that it may be easier to convict someone of a crime than to find them liable in a civil suit, but recall that the criminal statute was adopted as part of the Sarbanes-Oxley Act in 2002, when congressional tempers were hot. Some analysis of the Blaszczak decision is here, here, and here.
  7. Also in litigation news, the U.S. District Court for the Eastern District of Louisiana reminds us, here, that (a) determining whether someone is a Section 16 officer is a substantive inquiry and simply calling someone a “consultant” or “not an officer” doesn’t magically resolve it and (b) although it’s rare for the SEC to challenge a company’s determination that someone is not a Section 16 officer, it can happen. (True, it typically happens when fraud allegations bring it to the fore, but it can happen.) Commentary is here.
  8. Finally, a few reminders about recent changes to annual report and proxy statement requirements (which, unless otherwise noted, were made in the final rule release here):
    • Update your Form 10-K cover page to capture technical changes (check it against the current SEC form, here).
    • Change “Section 16(a) Beneficial Ownership Reporting Compliance” to “Delinquent Section 16(a) Reports” but exclude the section altogether if you’ve got nothing to report. (See Regulation S-K, Item 405(a).)
    • Change “Executive officers of the registrant” to “Information about our Executive Officers” in Part I of your Form 10-K (see General Instruction to Regulation S-K, Item 401). You previously could exclude from your proxy statement information about your executive officers as long as you included it in Part I of your Form 10-K, but the revised instruction makes it even more clear you can do that.
    • Exclude, if you dare, the oldest comparative year in your MD&A if you’ve covered it in a prior report, and state that you’re excluding it and where you earlier covered it. (See Instruction 1 to Regulation S-K, Item 303(a). Predictably, adoption of this change has been slow, because “why?!?” and “I’m afraid!” Our own, unscientific informal check of filings to date suggests slightly more than 1/3 of filers have omitted the early year comparison, although a minority of those still include the early year data in a table even though they exclude the narrative disclosure.)
    • Exclude, if you care, the physical property description required by Regulation S-K, Item 102 if the property is not “material” to your business. Or leave it in, because changing what you’ve already done is work. (Previously, you were required to describe “principal ... and other materially important physical properties,” so arguably the revised requirement didn’t change anything.)
    • Change your exhibit page to:
      1. add as Exhibit 4.__ a description of the securities you have registered under Section 12 of the Securities Exchange Act (Regulation S-K, Item 601(b)(4)(vi) and accompanying instructions),
      2. update Exhibit 101 and add Exhibit 104 to reference “inline” data (if you are a large accelerated filer, you’ve got more time to comply if you are not),
      3. consider eliminating contracts without continuing obligations since there is no longer a two-year lookback for material agreements (Regulation S-K, Item 601(b)(10)(i)(A)), and
      4. consider whether you want to omit schedules or exhibits to material agreements (see Regulation S-K, Item 601(b)(5)), and, if you file them, recall that you may omit confidential information pursuant to SEC Rule 83 without filing a confidential treatment request (see Regulation S-K, Item 601(b)(10) and Item 601(a)(6)).
    • Consider the SEC’s guidance about the disclosure of IP and technology risks if you have international operations, here, and think about whether you should modify your risk factors to reference the California Consumer Protection Act.
    • FYI, if you’re a large accelerated filer, your upcoming annual report may be the first in which your auditors must report on “critical audit matters.” See here.
    • Include the new hedging disclosure requirement in your proxy statement by Regulation S-K, Item 407(i) (and see also Instruction 6 to Item 402(b)). See here. Among other things, consider whether to amend your insider trading policy to expand the group of people prohibited from hedging transactions in company shares to “all employees.” Most already prohibit hedging by “officers” or at least “executive officers,” and expanding the prohibition to employees may not harm them, since they may not have the inclination or sophistication to have set up such schemes in any case. That would certainly make your disclosure easy, although it’s also easy to disclose “Our anti-hedging policy does not apply to employees generally, and, except for the [officers and directors], engaging in hedging transaction by employees is discouraged but generally permitted.” Also consider whether to move the anti-hedging disclosure out of your Compensation Discussion & Analysis and instead include that “the policy described in [section x-reference] applies to [directors and officers].” (Moving it out of CD&A means that the policy with respect to general employees is not subject to the “say on pay” vote, but, depending on the policy and because the vote is non-binding, you may not care.)
    • If you considered a director nominee’s diversity (race, gender, etc.) in assessing their qualifications, and if the nominee consents to disclosure, identify those characteristics and how they were considered. (See Compliance and Disclosure Interpretation 116.11 here and, while you’re at it, CDI 133.13 here.)
    • Consider whether you should consider adding disclosure to specifically address proxy voting guidelines issued by (or otherwise try to suck up to) ISS (here) or Glass Lewis (here).

    A host of other guides to 2020 annual report and proxy statement matters are here, here, here, here, here, here, and here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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