As we continue to stumble into 2021, initially disappointed that our low expectations for a relatively better year lasted only six days, our editorial staff hews to the clamor for a calming retrospective on legal happenings in the tail end of 2020, for tips on significant changes for 2021, and for updates on the Paycheck Protection Program. We aim to please.
Lengthier descriptions of the rule changes are here, here, and here.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
More in depth analysis of the GameStop oddity is here, here, and here. Related, but more obscure commentary regarding Robinhood and its call to update the process for settling stock trades, is here. If you are an executive bored with running your company’s business and, inspired by GameStop, want instead to focus on how to take advantage of an unlikely irrational run on your company’s stock, see here; while you scheme, however, keep in mind the SEC’s required disclosures when raising money during a period of stock volatility, embedded in its sample comment letter here. Finally, in case you’re wondering whether there are securities laws or other legal restrictions on a bunch of yahoos who drive up a stock price, simultaneously creating and wiping out fortunes for no rationale reason: “no.”
The rule also modifies the accredited investor definition to include the concept of “spousal equivalent” whose assets or income can be included in rule thresholds, and clarifies that a limited liability company (in addition to a non-profit, business trust, partnership, and corporation) with assets over $5,000,000 and not formed specifically to invest in securities is accredited (practitioners generally were already comfortable this was the case, but clarity is always helpful).
Generally speaking, changes to the accredited investor definition are not particularly significant and incrementally expand the safe harbor to those in the securities business. In other words, not much help for typical, cash-starved growth companies or for poor investors clamoring to gamble on private company equities. The changes to the definition of a QIB are also limited, and merely add Rural Business Investment Companies and institutional accredited investors defined in Regulation D.
To take a step back, if two securities offerings are “integrated,” the combined offering must satisfy all the exemption criteria of a single exemption. If they don’t, a string of offerings may suddenly be non-exempt, giving every investor rescission rights, branding the issuer a “bad actor” unable to rely on issuer exemptions for two years, and exposing the issuer and other offering participants to liability under federal and state securities laws. Traditional integration analysis is based on five factors: whether (1) different offerings are part of a single plan of financing; (2) the offerings involve issuance of the same class of security; (3) the offerings are made at or about the same time; (4) the same type of consideration is to be received in each offering; and (5) the offerings are made for the same general purpose. The analysis is wickedly difficult to apply, and determinations are guided heavily by an issuer’s (and counsel’s) tolerance for risk. The SEC has occasionally tinkered with making the analysis easier. On the heels of creating new offering exemptions in 2015, including exempt offerings that for the first time permitted general solicitations, the SEC took some (for it) dramatic steps to clarify its integration analysis. (See here.)
Its latest release provides additional clarity, and gives guideposts to ensure offerings are not integrated and some comfort that if you inadvertently screw up, you may have nonetheless stumbled into a safe harbor or have a good faith argument that offers should not be integrated.
New integration Rule 152 sets forth a general principal for integration analysis and establishes discrete safe harbors. Rule 152 supplements, and does not overturn, the five-factor test or other established integration analysis guideposts. Under the general principle, if a safe harbor does not apply, an issuer may determine offerings are not integrated if it determines each offer meets exemption requirements:
Safe harbors to integration abound:
Rule 502 specifies when offers “commence” and when they “terminate” for purposes of integration analysis. It also modifies integration clauses in other rules to reference Rule 152.
The SBA and Treasury Department are the best sources for information about PPP loans (see here and here), but a few highlights:
1As a plus, fresh-faced law firm associates will no longer have to speculate why an issuer disclosed it has sufficient liquidity for at least the next 12 months, before eventually deciding the disclosure is negative assurance that the company is a going concern under audit standards. Now the 12-month requirement is RIGHT IN THE RULE!
2To be clear, now “former President Trump.”
3The ineligibility of public companies is a clear reaction to public outrage that “public companies” got PPP loans, which we’ve frankly never understood. (Why do people hate dishwashers who work for Ruth’s Chris?) But even this ineligibility criteria isn’t clear since it applies to “an issuer” and not necessarily to a wholly owned subsidiary of an issuer. Congress specifically instructed the SBA to ignore public issuer affiliation for news and broadcast organizations, which could be read as an invitation for the SBA to apply affiliation rules to all other potential borrowers including those who are currently excluded from affiliation rules like restaurant companies. The SBA did not unequivocally do that, and its interim rules are a bit of a mess and state that a borrower is ineligible if:
“viii. Your business is an issuer, the securities of which are listed on an exchange registered as a national securities exchange under section 6 of the Securities Exchange Act of 1934 (15 U.S.C. 78f) 32 (SBA will not consider whether a news organization that is eligible under the conditions described in subsection 1.f. and 1.g.vi. is affiliated with an entity, which includes any entity that owns or controls such news organization, that is an issuer.”
It’s nonsense for “a business” to be “an issuer,” but that sloppy language could be read to apply affiliation rules to everyone except news organizations. That seems a stretch, however, and it’s certainly not clear (a) whether that’s what was intended with respect to any borrower or (b) even if intended, whether that was meant to override the exclusion from affiliation rules that apply to hospitality companies exempted from affiliation rules under the original PPP statute (we think, "not").
4It’s not entirely clear whether the aggregate corporate group cap for first and second draw PPP loans is $24 million or whether the original $20 million corporate group cap applies. The $20 million cap purports to limit “PPP loans in the aggregate” (see the May 2020 interim final rule, here, and the January 2021 interim final rule, here); however, we think the better reading is that the $4 million cap adds to the $20 million cap. That makes aggregate corporate group caps symmetrical to individual borrower caps—$10 million per first draw PPP loan plus $2 million per second draw PPP loan.