BCLP – US Securities and Corporate Governance – Bryan Cave Leighton Paisner

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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

Red flags for directors: SEC may take magnifying glass to disclosures involving significant judgments in COVID-19 era

In a fast-paced webinar, the Heartland NACD chapter recently explored the board’s role in SEC inquiries and discussed red flags for directors, as well as SEC trends and developments. Panelists included Terri Vaughan, a seasoned board leader; Lory Stone, an SEC enforcement attorney; and Terry Pritchard, an experienced securities litigator at Bryan Cave Leighton Paisner LLP.

During a discussion of red flags that should draw directors’ attention, Ms. Stone noted that the SEC may take a magnifying glass to disclosures involving significant judgements and estimates, particularly in the current economic conditions.  She quoted her former colleague Steven Peikin, previous Co-Director of the Division of Enforcement, who stated in a speech at a recent securities enforcement forum:

Recognizing that the economic impacts of any downturn may vary across different industries and sectors, the [SEC’s Coronavirus] Steering Committee has developed a systematic process to review public filings from issuers in highly-impacted industries, with a focus on identifying disclosures that appear to be significantly out of step with others in the same industry. We are also looking for disclosures, impairments, or valuations that may attempt to disguise previously undisclosed problems or weaknesses as coronavirus-related.

Other red flags discussed during the webinar included:

  • Tips/hotline reports, which should be closely examined by the board;
  • “Domineering” CEOs who may have unchecked power;
  • Auditor resignations, which should prompt the board to understand the reason for the resignation;
  • Management shake-ups, with abrupt terminations or resignations;
  • Government investigations;
  • Financial restatements;
  • Practice changes in judgment areas (debt restructuring, revenue recognition practices);

Second Circuit Case Shows How Confidentiality Pact May Support Insider Trading Charges

A recent decision by the U.S. Court of Appeals for the Second Circuit shows how an investor’s entering into a confidentiality agreement with an issuer of securities may support insider trading charges against the investor.

The decision, United States v. Kosinski, No. 18-3065 (2d Cir., Sept. 22, 2020), did not create new law in the Second Circuit.  But the court did reaffirm its earlier holding that by agreeing to keep confidential  information provided by an issuer, a trader had taken on a fiduciary-like duty to the issuer sufficient to support insider trading charges under section 10(b) of the Securities Exchange Act of 1934.  And it rejected the argument that to create the requisite duty, the agreement needed to have a no-trading provision as well as a confidentiality provision.

What creates a sufficient duty has been a hotly disputed issue in insider trading law in recent years.  It elicited heightened attention during the SEC’s case against billionaire Dallas Mavericks owner Mark Cuban, where the SEC’s charges were based in part on an alleged promise by Cuban to maintain confidentiality as to information provided by issuer Mamma.com.

But Cuban’s case did not resolve that issue as a legal matter.  Rather, the U.S. Court of Appeals for the Fifth Circuit, without addressing all of the legal questions posed,  held that the SEC had alleged enough to support a finding that Cuban had agreed both to maintain confidentiality and not to trade, so that the case could go to a jury.  It did,

SEC Announces Charges Against Fulton Financial Corporation and Interface, Inc., in Bellwether of Increased Earnings Management Enforcement Activity

On September 28, the SEC announced charges against two public companies, Interface, Inc. (“Interface”) and Fulton Financial Corporation (“Fulton”), for violations related to the reporting of improperly calculated earnings per share (“EPS”) that enabled the companies to meet or exceed consensus analyst estimates.  In the case of Interface, charges were also levied against the company’s former Chief Financial Officer (“CFO”) and Chief Accounting Officer (“CAO”) for directing subordinates to book unsupported, manual accounting entries that did not comply with generally accepted accounting principles (“GAAP”). These enforcement actions are a result of the implementation of an “EPS Initiative” by the Division of Enforcement that seeks to leverage risk-based data analytics to identify potential instances of accounting and disclosure violations, including those resulting from earnings management practices.

The SEC focused on accounting entries recorded on Interface’s books during the period from the second quarter of 2015 through the second quarter of 2016. The SEC alleged that Interface reported financial results that did not accurately reflect the company’s actual performance, and, instead, inflated income and EPS figures to show consistent earnings growth.  The alleged misstatements were found to be materially misleading because the earnings reported in two quarters enabled the company to meet consensus analyst EPS estimates when, had the unsupported accounting entries not been made, the company would have delivered results below analyst estimates. The SEC alleged that a lack of adequate internal controls over financial reporting created an environment in which the CFO and CAO (then-Corporate Controller) were able to direct

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 Amends Whistleblower Award Program Rules to Add Clarity, Efficiency and Transparency

On September 23, 2020, the SEC voted 3-2 to adopt long-awaited amendments to rules governing its Whistleblower Program. The amendments’ stated purpose is to provide greater clarity to whistleblowers, and increase the whistleblower program’s efficiency and transparency.  In addition, according to SEC Chairman Jay Clayton, the “rule amendments will help us get more money into the hands of whistleblowers, and at a faster pace.” Click here to read the Alert in full.

Divided SEC increases Rule 14a-8 shareholder proposal requirements

On September 23, 2020, a divided SEC adopted amendments to the Rule 14a-8 shareholder proposal rule by a 3-2 vote. The changes, among other things:

  • increased the stock ownership requirement for eligibility to submit a proposal,
  • strengthened certain procedural requirements, and
  • raised the thresholds to resubmit a proposal that was previously voted on by shareholders.

Click here for a client alert describing the amendments in more detail.

SEC Issues New COVID-19 Guidance: Health-Related or Personal Transportation Benefits May Be Perqs

The SEC Division of Corporate Finance yesterday issued new Regulation S-K guidance, CD&I 219.05, to help public companies determine whether benefits provided to executive officers because of COVID-19 should be disclosed as perquisites or personal benefits for purposes of executive compensation proxy disclosures.  Consistent with Release 33-8732A, the guidance confirms that an item provided because of the COVID-19 pandemic is not a perquisite or personal benefit if it is “integrally and directly related to the performance of the executive’s duties,” which depends on the particular facts.

The CD&I states:  “In some cases, an item considered a perquisite or personal benefit when provided in the past may not be considered as such when provided as a result of COVID-19. For example, enhanced technology needed to make the NEO’s home his or her primary workplace upon imposition of local stay-at-home orders would generally not be a perquisite or personal benefit because of the integral and direct relationship to the performance of the executive’s duties. On the other hand, items such as new health-related or personal transportation benefits provided to address new risks arising because of COVID-19, if they are not integrally and directly related to the performance of the executive’s duties, may be perquisites or personal benefits even if the company would not have provided the benefit but for the COVID-19 pandemic, unless they are generally available to all employees.”

Perqs have been, and will continue to be, an area of SEC focus.  We urge companies to carefully give thought

Kodak Releases Special Committee Report – Details Failures in Corporate Governance Practices

We previously blogged about the myriad issues arising in connection with the botched announcement by Kodak of a potential $765 million loan from the federal government as part of its coronavirus response measures, as well as insider stock transactions preceding and immediately following the announcement.  Kodak’s board formed a special committee to conduct an internal investigation.  Akin Gump, retained by the special committee to conduct the investigation, last week delivered its report of over 70 pages of factual findings and legal analysis, concluding that there were no violations of law or company policy, but identifying corporate governance issues requiring attention and remediation.  The company has posted the report on its website.

As we previously blogged, on July 27 the internal public relations team at Kodak released an alert to local media that Kodak would be making a big announcement the following day concerning a major initiative between Kodak and the federal government.  Stories immediately started circulating on social media and the websites of local network affiliates. Kodak then contacted the recipients of the advisory to tell them it was meant only as background and was not intended for publication.  The formal announcement followed before the market open on July 28 when Kodak and the U.S. International Development Finance Corp (DFC) jointly announced a ”letter of interest” contemplating a $765 million loan to Kodak to launch a new pharmaceutical business. Although the press release made clear that this was only a letter of interest and the loan was subject

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