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SEC Modernizes Framework for Exempt Offerings

In another 3-2 vote, on November 2, 2020 the SEC approved significant amendments to the framework for exempt offerings intended to harmonize and simplify the framework for exempt offerings under the Securities Act of 1933.  The amendments:

  • Simplified the “integration doctrine” that restricts the ability of issuers to move or switch from one exemption to another
  • Permit certain “demo day” and “test-the-waters” communications, and clarify other rules on communications
  • Increase the offering limits for certain offerings and individual investment
  • Harmonize certain disclosure and eligibility requirements and bad actor disqualifications

We have prepared a client alert describing the amendments that can be found here.

ISS releases FAQs addressing COVID-related compensation actions

ISS recently published FAQ guidance addressing how it will approach COVID-related pay decisions under its pay-for-performance qualitative evaluation.  The guidance reflects feedback from discussions with investors and its annual policy survey.

  • Temporary salary reductions have limited impact on ISS scoring unless incentive payout opportunities are also reduced, as base salaries typically represent a small portion of total pay.
  • Changes to bonus/annual incentive metrics, targets or measurement periods will be evaluated for reasonableness on a case-by-case basis in light of the justifications and rationale disclosed.  The guidance sets forth a non-exclusive list of factors to consider for disclosure.
    • Specified disclosure of board consideration of payout opportunities would also be needed where the reduced target falls below the prior year’s performance levels without commensurate reductions of payout opportunities.
  • Changes to in-progress long-term incentive awards will generally be viewed negatively, as they are intended to cover multiple years – particularly in the case of companies with poor quantitative pay-for-performance alignment.
  • Changes to 2020 long-term incentive awards may be viewed as reasonable, where clearly disclosed and modest. For example, switching to relative or qualitative metrics due to uncertainty in forecasts could be viewed as reasonable – but not shifts to predominantly time-vesting equity or short-term measurement periods.
  • Retention or one-time awards may be viewed as reasonable if (i) the rationale is clearly disclosed and furthers investor interests, (ii) reasonable in magnitude and represent an isolated practice, (iii) vesting conditions are strongly performance-based and properly linked to the underlying rationale,

SEC Puts SAFT Issuers On Notice (Again)

For the second time this year (see our previous reported here), a judge in the U.S. District Court for the Southern District of New York determined that an initial coin offering (“ICO”) involving the Simple Agreement for Future Tokens (“SAFT”) framework constituted an unlawful unregistered securities offering, establishing a daunting precedent for both potential and past SAFT issuers.  The most recent such ruling came on September 30, 2020, in response to dueling Motions for Summary Judgment in the SEC v. Kik Interactive Inc. case, as profiled further here.

SEC Proposes Limited Exemption for Persons Acting as “Finders” in Private Capital Transactions to Accredited Investors

The SEC announced on October 7, 2002 that it had approved, by vote of 3-2, a proposed limited conditional exemption for individuals acting as “finders” in private market transactions with accredited investors.  The text of the proposed exemption can be found here.

When small businesses engage in capital raising transactions in reliance on exemptions from registration under the Securities Act of 1933 (the “1933 Act”), they often look to “finders” to assist in identifying and, in some cases, soliciting potential investors.  Such finders (and issuers using them) must determine whether they are required to register as “broker dealers” under the Securities Exchange Act of 1934 (the “1934 Act”). In making that assessment, finders and issuers (and their legal counsel) have been left to parse through various no-action letters and SEC enforcement actions to discern the SEC’s regulatory position.  In that context, certain activities, as well as the presence of “transaction-based compensation” in these arrangements, have proved to be particularly nettlesome. The proposal would provide a non-exclusive safe harbor from broker registration, and would enable those who qualify to receive transaction-based compensation.

The proposal would be limited to natural persons, and would create two categories: Tier I Finders and Tier II Finders.  Both tiers would be subject certain conditions:

  • the issuer must not be required to file reports under the 1934 Act and must be conducting the offering in reliance on an applicable exemption from registration under the 1933 Act;
  • the finder must not engage in a “general

When What Goes Down Comes Up – Reporting NEO Compensation Restoration

As the COVID-19 pandemic unfolded, public companies took action in response to the impact and potential impact of the pandemic on their businesses and the economy.  The actions often included temporary compensation reductions (voluntary and otherwise) for a company’s principal executive officer, principal financial officer and/or named executive officers (collectively, “NEOs”).

As would be expected, many companies reported these changes under Item 5.02(e) of Form 8-K, which is triggered when a company enters into, adopts or materially amends a material compensatory plan or arrangement with NEOs or in which they participate.  Some companies, however, reported the reductions under Item 7.01 or 8.01 of Form 8-K or, sometimes, in a stand-alone press release or not at all.  As we previously noted in March, companies that did not report the reductions under Item 5.02(e) likely were comfortable that, based on their specific facts and circumstances, the decreases were not material to the executives’ compensation arrangements or, in the case of voluntary compensation reductions where employment agreements were in place, perhaps by analogy to SEC C&DI 117.13, that Item 5.02(e) was not triggered.

As we move into the final quarter of 2020, and in view of developments following the initial compensation reductions relative to the continuing effects of the pandemic, a number of industries and companies have had relatively positive financial performance in the face of the pandemic, and may have a more favorable business outlook or simply better visibility into the effects of the pandemic.  As a result, some companies have

SEC Staff Announces Temporary Procedures for Supplemental Materials and Rule 83 Confidential Treatment Requests

In light of health and safety concerns related to the pandemic, the SEC staff recently announced the availability of a temporary secure file transfer process for the submission of supplemental materials pursuant to Rule 418 under the Securities Act of 1933 or Rule 12b-4 under the Securities Exchange Act of 1934 and information subject to Rule 83 confidential treatment requests (“CTRs”).

From time to time companies provide supplemental materials to the SEC staff, typically when responding to SEC comments.  Rule 418 provides broad authority to the SEC and its staff to request information concerning a company, its registration statement, the distribution of its securities and market or underwriter activities. Rule 12b-4 provides similar authority with respect to registration statements and periodic or other reports. Both rules require the SEC to return supplemental materials upon request, provided the request is made at the time they are furnished to the staff and return of the materials is consistent with the protection of investors and FOIA.  Rule 418 also requires that the materials not have been filed in electronic format.

SEC Rule 83 provides a procedure by which persons submitting information may include a CTR for portions of that information where no other confidential treatment process applies. Typically, this is utilized when companies provide responses to SEC staff comments.  Rule 83 generally requires the submission of the information covered by the CTR separately from that for which confidential treatment is not requested, appropriately marked as confidential, and accompanied by

Repeating COVID-19 Risk Factor Updates in Your Second (and Third) Quarter 10-Qs

As previously noted, the SEC issued supplemental disclosure guidance near the end of the second quarter which, among other things, set forth dozens of questions for companies to consider as they assess and disclose the evolving impact of COVID-19 on their operations, liquidity and capital resources.

Many public companies with a December 31 fiscal year end included updated risk factors in their first quarter 10-Q filings, reflecting the uncertainties and adjusted risk profile in light of COVID-19.  Disclosure practices varied, with some companies including a small number of risk factors (or even a single risk factor) that updated previously disclosed risks in a global manner.  Other companies updated a small subset or suite of risk factors affected by COVID-19, and some may have updated all of their risk factor disclosure from the previous Form 10-K.

As companies assess their risk factor disclosure for the second (and third) quarters, it is important to consider that Item 1A of Part II of Form 10-Q requires disclosure of “any material changes from risk factors as previously disclosed in the registrant’s Form 10-K in response to Item 1A to Part 1 of Form 10-K.”  In other words, as a technical matter, companies don’t get the benefit in later quarters of relying on updates in previous 10-Q filings in the same fiscal year.  (Compare this requirement with, for example, the instruction to Part II, Item 1 as to Legal Proceedings, where disclosure in subsequent Form 10-Q filings in the same fiscal year are

Is There Life for SAFTs After the Telegram Case?

The final act in the saga between Telegram Group Inc. (“Telegram”) and the SEC was the June 26, 2020 court approval of the SEC’s settlement with Telegram, in which Telegram agreed to pay a civil penalty of $18.5 million and disgorge $1.224 billion to investors related to what the SEC claimed was an illegal unregistered public offering of securities.  This followed the court granting the SEC’s requested temporary restraining order in October 2019 (on an emergency basis) to prevent Telegram’s issuance of $1.7 billion in blockchain-based instruments (“digital assets”) known as “Grams.”

The abrupt termination of Telegram’s offering is particularly notable for the SEC’s treatment of the Simple Agreement for Future Tokens (“SAFT”) offering framework, which its designers thought was  a creative solution to conduct “initial coin offerings” (“ICOs”) without triggering U.S. securities registration requirements. The two-step transaction contemplated by SAFTs was envisioned as enabling startups to secure an initial infusion of cash by selling in a private placement to accredited investors the right to receive digital assets when they were issued in the future. The digital asset community has been watching the Telegram case, hoping SAFTs would be spared the enforcement scrutiny that the SEC gave to ICOs.  However, recent SEC enforcement activity, including the order in SEC v. Telegram, suggests the SEC is viewing SAFTs as another breed of ICO, and successfully persuading federal courts to join that viewpoint.

Designers of the SAFT framework touted it as a potential avenue to issue digital assets without requiring registration

Key themes emerge from SEC Investor Roundtable

On June 30, 2020, Jay Clayton, SEC chair, and Bill Hinman, Director of Corporation Finance, hosted an investor roundtable seeking input from investors on how to improve disclosures during this period of COVID-19.  The participants included Gary Cohn, Former Director of the National Economic Council; Glenn Hutchins, Chairman of North Island; Tracy Maitland, President and CIO of Advent Capital; and Barbara Novick, Vice Chairman and Co-Founder of BlackRock.

The discussion was wide-ranging, but several themes emerged:

  • While swift government action from the Federal Reserve and the CARES Act appears to have helped stabilize the economy and markets, investors expressed concern that the macro-economic picture remains very uncertain, particularly as certain government programs expire.
  • Investors want to see greater transparency as to how the company expects to perform in the near term, including with respect to such matters as cash flow, working capital and covenant compliance as well as key assumptions. For example, is the company’s ability to restore production dependent on schools reopening so that parents can return to work?  Or does the company’s supply chain depend on European travel being restored?
  • Glenn Hutchins noted that fewer than 10% of the S&P 500 have maintained earnings guidance. As a result, investors seek greater insight into the range of potential outcomes and the ability of companies to manage through different scenarios as well as a greater understanding if companies have “tools for adaptability” and an ability to adjust to changes in an uncertain environment. He cited the joint statement

A Detailed Analysis of the SEC’s Amendments to Financial Statement Requirements for Business Acquisitions and Dispositions

As we previously posted, the SEC recently adopted a number of amendments to the financial disclosure requirements for business acquisitions and dispositions by U.S. public companies including to (i) revise the requirements for financial statements and pro forma financial information for acquired businesses, (ii) revise the tests used to determine significance of acquisitions and dispositions giving rise to required financials, and (iii) permit certain expense omissions in those financial statements.

We have now prepared a client alert providing a more detailed analysis of the amendments, including descriptions of a number of changes incorporated in the final rule that differ from the SEC’s initial rule proposal.

The SEC stated in its adopting release that the amendments are intended to reduce the complexity of financial disclosure requirements for business acquisitions and dispositions, facilitate more timely access to capital, and reduce the complexity and costs to registrants to prepare the required disclosure.  As we note in our client alert, the result is that, as a practical matter, there will likely be fewer “significance” determinations and thus fewer historical and pro forma financial statement disclosures about acquired businesses.  And although the amendments are intended to streamline and simplify various aspects of the rules and filing requirements, these provisions of Regulation S-X remain highly complex. Registrants are advised to take great care in analyzing them in connection with the consummation of corporate transactions.

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