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SEC Penalizes Public Company for Misleading Disclosures of COVID-19 Impact

In its first enforcement action against a public company for misleading disclosures regarding COVID-19’s business impact, the SEC released a December 4 Order Instituting Proceedings against The Cheesecake Factory Inc. and accepted its offer of settlement for a civil penalty of $125,000.  The charges arose from conduct in the period as the COVID-19 pandemic was first spreading across the United States.

As recounted in the SEC’s Order, Cheesecake Factory repeatedly made 8-K current report filings in March and April 2020.  Those disclosures presented a misleading optimistic assessment that its restaurants were “operating sustainably at present” under an off-premises (takeout and delivery) dining model.  The Order further detailed that the restaurant chain’s “operating sustainably” assessment failed to account for corporate expenses, and its misleadingly positive portrayal was contrary to the reality that Cheesecake Factory was losing $6 million cash per week and its cash on hand could support only a few more months of operations.  Finally, in the latest iteration of “you cannot characterize as a possibility that which has already occurred,” Cheesecake Factory was penalized for the March disclosure that it was “evaluating additional measures to further preserve financial flexibility.”  This omitted that the company had already determined to take some measures, as exemplified by its late March notification to landlords that it would not be making April rent payments.

While just the first of its kind, this action is consistent with the Division of Corporation Finance’s March 25, 2020 Disclosure Guidance that cautioned reporting companies regarding disclosure

The SEC Experiments: Proposed Amendments to Include Certain Gig Workers in Compensatory Offerings under Rule 701 and Form S-8

The SEC recently voted to approve proposed amendments to Rule 701 and Form S-8 governing the offer or sale of securities to employees through compensation programs.  The proposed amendments provide for a temporary, five-year expansion of Rule 701 and Form S-8 to permit public and private companies to issue securities as compensation to certain “platform,” or “gig” workers, subject to various conditions.

Rule 701 provides an exemption from registration under the Securities Act of 1933, as amended, for the sale of securities by privately held companies to compensate employees, consultants, advisors and certain others under written compensatory benefit plans or written agreements.  Form S-8 is used by SEC reporting companies to register the sale of public company securities to employees, consultants and advisors.  Neither Rule 701 nor Form S-8 currently covers issuances to platform workers.

The proposed amendments to Rule 701 would allow a non-reporting company to offer and sell securities to “platform workers,” who are defined in the amended rules as workers who, pursuant to a written contract or agreement, provide services to an issuer or a third party through the issuer’s “internet-based marketplace platform or through another widespread, technology-based marketplace platform or system.”  The proposed amendments to Form S-8 would permit a reporting issuer to include that same category of workers in compensatory offerings registered on Form S-8.  The proposed amendments also include conditions that are designed to limit the possibility that the amended rules could result in offers and sales of securities for capital-raising, rather than

New Nasdaq Listing Proposal: Add Diverse Directors or Explain Why Not

Nasdaq yesterday announced a proposed new listing rule that would require all Nasdaq-listed companies to publicly disclose consistent, transparent board diversity statistics in a specified form of matrix.  In addition, the proposed rule would require Nasdaq-listed companies to have, or explain why they do not have, at least two diverse directors:  one woman and one person who self-identifies as either an underrepresented minority or LGBTQ.

Nasdaq believes its proposal would benefit investors and the public interest, citing in its SEC filing numerous empirical studies as support for its finding that diverse boards “are positively associated with improved corporate governance and financial performance.”  It also noted calls for diversity from institutional investors, corporate stakeholders and legislators.

If the rule is approved by the SEC, companies would be required to disclose board-level diversity statistics within one year of the SEC’s approval of the listing rule.  In addition:

  • All operating companies will be expected to have one diverse director within two years of the SEC’s approval of the listing rule (non-operating companies, such as asset-backed issuers, cooperatives, limited partnerships and investment management companies, as well as certain specified issuers of non-equity securities, would be exempt from the proposed rule).
  • Companies listed on the Nasdaq Global Select Market and Nasdaq Global Market will be expected to have a second diverse director within four years of the SEC’s approval.
  • Companies listed on the Nasdaq Capital Market will be expected to have a second diverse director within five years of the SEC’s

SEC Proposes Significant Amendments to Rule 701 and Form S-8 to Better Align with Current Employment Practices

The SEC recently approved proposed amendments to rules governing the offer or sale of securities to employees through compensation programs. The proposed changes to Rule 701 — which exempts sales of securities by privately held companies made to compensate employees, consultants and advisors — and Form S-8 – which is the form used to register the sale of public company securities to employees and others — are designed to modernize the framework for compensatory securities offerings in light of the significant evolution in such offerings and the composition of today’s workforce.

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

Good News: SEC Allows Electronic Signatures in Authentication Documents

The SEC recently approved amendments to Rule 302(b) of Regulation S-T, which governs the signing of “authentication documents” relating to typewritten signatures included in documents that are filed with the SEC electronically via EDGAR.  Current Rule 302(b) requires that, prior to or at the time of such a filing, each signatory manually sign a signature page (or other document) “authenticating, acknowledging or otherwise adopting his or her signature that appears in typed form within the electronic filing.”  Rule 302(b), as amended, will for the first time allow a signatory to use an electronic signature (as an alternative to a manual signature) on any such authentication document, provided certain requirements are met, as described below.

Effective Date.  The amendments will become effective upon publication in the Federal Register.  Following approval of the amendments, however, the SEC staff issued a statement indicating that, in light of COVID-19 concerns, early reliance on and compliance with amended Rule 302(b) is permitted.

Attestation Document (New).  Before using an electronic signature in an authentication document for the first time, a signatory will be required to manually sign a document attesting that he or she agrees that the use of an electronic signature in any authentication document will be the legal equivalent of such individual’s manual signature.

Electronic Signature Procedures.  In connection with the amendments, the SEC updated the EDGAR Filer Manual to set out the procedures that are required to be followed before an electronic signature may be used in an authentication document.  The electronic signing

Modernizing Regulation S-K Amendments – Transitional FAQs from the SEC

As covered in our blog post dated August 26, 2020, the SEC recently adopted amendments to Regulation S-K Items 101 (business description), 103 (legal proceedings), and 105 (risk factors) aimed at modernizing disclosure requirements.  The amended rules became effective on November 9, 2020.

The SEC Staff (the “Staff”) recently published three transitional FAQs addressing questions that have arisen regarding the amendments:

FAQ (1) – Applicability of Amended Items 101, 103 and 105 to Form S-3 Prospectus Supplements Filed on or after November 9, 2020.

  • The Staff confirmed that because Form S-3 requires only incorporation by reference – and not express disclosure – under Items 101 and 103, a registrant is not required to comply with amended Items 101 and 103 when, on or after November 9, 2020, it files a prospectus supplement to a Form S-3 registration statement that became effective prior to November 9, 2020. The registrant also is not required to amend the Form 10-K that is incorporated by reference into the Form S-3 to comply with amended Items 101 and 103.
  • The Staff noted that because Form S-3 requires that Item 105 disclosure be expressly included (i.e., the disclosure cannot be incorporated by reference), Securities Act Rule 401(a) would ordinarily require that the prospectus supplement comply with amended Item 105. The Staff indicated that it will not object, however, if the prospectus supplement is filed without amending the Form S-3 to comply with amended Item 105.  The registrant will, however, be required to comply with amended

New SEC Enforcement Priorities Likely Under Biden Administration

November 18, 2020

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BCLP Washington Partner Ashley Ebersole was quoted Nov. 13 by Compliance Week regarding possible new enforcement priorities at the Securities and Exchange Commission under a Biden administration. Much will hinge on selection of a new SEC chairman, as current Chairman Jay Clayton has announced his intent to step down at year end before his term officially is scheduled to end in June 2021. “Selection of the new SEC chair, whether from inside the agency or outside, will signal much in terms of the likely approach,” said Ebersole, a former SEC attorney. He also noted that compliance officers “should be prepared for a continued SEC enforcement focus on pursuing fraud involving Main Street investors, but also a likely redoubling of efforts to sanction conduct by financial institutions.”

SEC Modernizes Auditor Independence Rules to Focus on Actual Threats to Objectivity

The Securities and Exchange Commission (the “SEC”) recently adopted final amendments to the auditor independence requirements set forth in Rule 2-01 of Regulation S-X.  The SEC stated that the final amendments were based on recurring fact patterns that the SEC staff has observed over the years in which certain relationships and services triggered technical independence rule violations without necessarily impairing an auditor’s objectivity and impartiality.  These relationships either triggered non-substantive rule breaches or required potentially time-consuming audit committee review of non-substantive matters, thereby diverting time, attention, and other resources of audit clients, auditors, and audit committees from other investor protection efforts.

In the adopting release, the SEC stated that the amendments “…maintain the bedrock principle that auditors must be independent in fact and in appearance while…more effectively focusing the independence analysis on those relationships or services that are more likely to threaten an auditor’s objectivity and impartiality.”  The SEC anticipates that Rule 2-01, as amended, will make the auditor independence rules easier to apply and appropriately limit the situations in which auditors are not deemed to be independent.

The amendments include, among others:

  • In connection with determining whether auditor independence exists in the context of initial public offerings, an amendment shortening the applicable look-back period to cover the immediately preceding fiscal year (rather than the period covered by the registration statement, which can be up to three years);
  • In connection with identifying relationships that may preclude a finding of auditor independence, an amendment providing that a sister entity

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.

2021 Annual Shareholder Meetings – Avoiding a Super Spreader Event

As COVID-19 rages on, companies are again flocking to virtual annual meetings for the 2021 proxy season, but with one important difference:  the luxury of time.  Many companies are already exploring retention of virtual annual meeting providers and alternatives for video and real-time Q&A, as well as drafting fulsome disclosure about meeting logistics in their proxy materials to address concerns raised by investors, the SEC and others with respect to some pitfalls during the 2020 proxy season.

Service Providers and Technology.  For 2021, an issuer will have additional time to select an appropriate provider of a virtual meeting platform.  The most widely used vendor for hosting virtual meetings is Broadridge Financial Solutions, Inc., which reported that it hosted 1,494 virtual shareholder meetings during the first six months of 2020.  Other service providers, such as stock transfer agents, also provide such services.  A few companies have even arranged to facilitate the virtual component of an annual meeting via Zoom.

In 2020, some companies were caught off-guard by technology glitches.  For 2021, issuers should be in a position to anticipate technology issues and to put contingency plans in place to address them.  Issuers can follow best practices for virtual meetings by, for example, putting in place technical support lines for the duration of their meetings.

Format and Rules of Conduct (including Q&A).  Companies need to decide whether a meeting will be virtual-only, physical-only or a hybrid.  For any virtual component, they need to decide whether the access will be audio-only or

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