In Case You Missed It - Interesting Items for Corporate Counsel - November 2015

by Stoel Rives LLP
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  1. The SEC has finally adopted Regulation Crowdfunding, here, which was required by the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosures Act of 2012 (. . . seriously). Its 686 pages belie the elegant simplicity of the rule and its combination of cheap, speedy equity raising and simultaneous guarantee that no investor ever will lose money. Or at least that’s what we assume would be disclosed by a more thorough reading than we are willing to give it. A summary of our speedy review:
    More summaries are here, here, here, here, here, and here. Our favorite law firm client alert on the topic is the following, largely because “Chiller” font really grabs the eye but also for its brazenly honesty assessment.
    • Annual investment limits. Annual capital raises are limited to $1 million, but offerings are not integrated with other exempt offerings. Depending on annual income and net worth, an investor may invest between 5% and 10% of annual income or net worth, with a minimum of $2,000 and a maximum of $100,000. The investor limit applies to all crowdfunding offerings in the 12-month period, not to a specific offering. The rule allows debt or equity issuances.
       
    • Intermediaries. Offerings must be made only on the Internet by a single registered funding portal or registered broker-dealer, and advertising is limited to information to draw potential investors to the intermediary’s offering page. The offering platform must have specified functionality, including the ability of potential investors with accounts to communicate with each other. Funding portals must register on a new Form Funding Portal. Intermediaries have obligations to watchdog issuers and offerings, including responsibility to monitor issuer and investor compliance with the rules and to ensure investors acknowledge investment risks. An intermediary also must make specified disclosures, including about its compensation and financial interest in an issuer, and its system must adhere to specifications about accepting, processing, confirming, and cancelling investments.
       
    • Excluded issuers. Some issuers can’t use the rule, including those subject to the public reporting requirements of the ’34 Act, investment companies, foreign issuers, “bad actors,” those who failed to maintain crowdfunding reporting requirements, and development stage companies with no defined business plan.
       
    • Issuer disclosures. Issuers must file a Form C, which includes disclosure of use of proceeds, targeted offering size, price, business, directors and officers, ownership, indebtedness, related party transactions, other exempt offers by the issuer, risk factors, transfer restrictions, financial statements (the requirements for which vary depending on the target size of the offering), and MD&A. Material changes must be reported on a Form C/A, and annual reports on a Form C-AR are required 120 days after the end of the issuer’s fiscal year. An issuer may terminate its C-AR reporting obligations in specified circumstances, including if it has filed one C-AR and has fewer than 300 holders of record or if it has filed three C-ARs and has $10 million or less in assets.
       
  2. The same day it published final crowdfunding rules, the SEC also proposed rules to modify Rule 147 and Rule 504 to facilitate small capital raises , here.
    SEC action could be viewed as acknowledgment that the SEC’s crowdfunding rules are too burdensome to be particularly useful, but as evidence that the SEC won’t stand in the way of state crowdfunding exemptions, and, by the way, that Regulation D is a much better exemption. Commentary is here and here.
    • Rule 147, which is a safe harbor for “intrastate” offerings exempt from federal registration, has been of limited value because adverting that leaks to neighboring states foils the exemption. The SEC’s proposed rule would allow general advertising and solicitation as long as sales are made only to intrastate residents and as long as no more than $5 million is raised in a 12-month period, and specified limits on individual investors apply.
       
    • The SEC also proposed to increase the maximum capital raise under Rule 504 from $1 million to $5 million and to prohibit “bad actors” from relying on the rule.
       
  3. To emphasize that Regulation D is a much better exemption than Regulation Crowdfunding, or any other exemption, the SEC also updated its report on unregistered securities offerings in the U.S., here.
     
  4. In the wake of the 2015 proxy season:
    • Some law firm resources on what happened and what might happen in 2016, with such dire titles as “ Is Proxy Access Inevitable,” are here, here, and here.
       
    • Shearman & Sterling released its 13th Annual Survey on Corporate Governance & Executive Compensation, a review of practices by the 100 largest U.S. public companies, here.
       
    • The SEC published Staff Legal Bulletin 14H, here, to address when shareholder proposals may be excluded from a proxy statement under 14a-8(i)(7) and 14a-8(i)(9) following the turmoil from the Third Circuit’s decision in Trinity Wall Street v. Wal-Mart Stores, Inc. and the SEC's own earlier refusal to take a position on Whole Foods’ request to omit a shareholder proxy access proposal in favor of its own proposal. On the former, the SEC stated that it agreed with the concurring judge’s views regarding the “significant policy exception” to the ordinary business exclusion in Trinity and not with the new two-part test adopted by the majority. According to the SEC, “a proposal may transcend a company’s ordinary business operations even if the significant policy issue relates to the ‘nitty-gritty of its core business.’” On the latter, the SEC said it will only allow exclusion “if a reasonable shareholder could not logically vote in favor of both proposals.” In other words, proposals won’t be found conflicting unless they “directly conflict,” for example if the proposal by the company is to vote “yes” and the shareholder proposal is to vote “no.” Basically, the SEC changed is analytical framework so that very little will be excludable under 14a-8(i)(9). Commentary is here.
       
    • The SEC published two new CDIs on “unbundling” under Rule 14a-3(a)(3) in the M&A context, here.
       
  5. The D.C. Circuit Court of Appeals denied, here, the SEC’s and Amnesty International’s petitions, here and here, for an en banc rehearing of the Court’s earlier affirmation that requiring a company to disclose that its products were “not found to be DRC conflict free” is compelled speech that violates the First Amendment. The SEC also reacted to the U.S. District Court for the District of Massachusetts requiring the SEC to file an expedited process for resource extraction rule-making but doing just that, here. The SEC says it will adopt rules within 270 days, but emphasized that it is going to be super hard, in part because it is silly for Congress to push these types of rules onto the SEC to implement in the first place. (Fine, it didn’t actually say that, but we sense that’s what it meant.)
     
  6. In accounting news:
    • The Center for Audit Quality published its transparency barometer, here, noting that companies are increasingly disclosing more about the selection and oversight of their independent auditors.
       
    • PWC published its 2015 annual director survey, here.
       
    • The PCAOB’s Division of Registration and Inspections issued a “Staff Inspection Brief,” here, noting it will focus on three big areas of deficiency: internal control over financial reporting; assessing and responding to risks of material misstatement; and accounting estimates, including fair value measurements. It will also focus on areas affected by risk factors like issuer and industry characteristics, likely accounting issues encountered by the issuer (revenue recognition, you software companies), location of operations (like in shady areas of the world), considerations related to particular audit firms (what did we call PWC out on last time), and other relevant information (whatever else they like).
       
    • FASB issued proposed updated guidance on “materiality” in financial statement reporting. In an attempt to draw interest, it has titled one release “Qualitative Characteristics of Useful Financial Information,” here, and the other “Assessing Whether Disclosures Are Material,” here.
       
  7. Issuers have only until 8 p.m. EST November 13, 2015 to review and correct any erroneous data that ISS uses to calculate their Governance QuickScore, see here. Some commentary on QuickScore updates is here and here. ISS released its draft voting policies, available here, regarding board actions without shareholder approval, “overboarding,” and compensation at externally managed issuers. ISS previously released its policy survey results, available here. Notably the draft voting policies do not capture policy survey results on proxy access. A summary of the policy survey is here. Other commentary on ISS’s policy survey is here, here, and here.
     
  8. The U.S. Court of Appeals for the Second Circuit ruled, here, that an employee is protected under SEC whistleblower rules if fired after internally reporting a whistleblower claim. That diverges from the Fifth Circuit’s view that a report to the SEC is required before the protections apply. It also highlights that it’s a pretty good idea for the SEC to issue interpretive guidance to correct Circuit Court rulings: “We conclude that the pertinent provisions of Dodd-Frank create a sufficient ambiguity to warrant our deference to the SEC’s interpretive rule, which supports [former employees’] view of the statute.” Note too that a California District Court, here, followed the earlier Fifth Circuit holding in Asadi, here.
     
  9. The Network, which provides compliance software and services, released a White Paper, here, about whistleblowers, suggesting that you give them a hug. (And noting that 92% first report misconduct inside the company, only 20% report outside the company, and only 9% report to the government, and then mostly when they feel the company has retaliated against them.) The best thing about the report is, of course, the cover, because, we assume, being a whistleblower is quite like perching on a sun-dappled rock in the Scottish Highlands.
     
  10. Finally, and because when you’re important enough even the things you don’t do are a big deal, we note that the U.S. Supreme Court declined to hear the appeal of United States v. Newman, here, an insider trading case that held that the government must prove that a tippee knew or should have known of the personal benefit received by the tipper and that the benefits were sufficiently “consequential.” Some analysis of Newman and developments since it was decided is here. And just for the heck of it, an explanation of the classical theory of insider trading is here.

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