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Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE
The SEC has withdrawn proposed rules captioned “Substantial Implementation, Duplication, and Resubmission of Shareholder Proposals Under Exchange Act Rule 14a-8″. In conjunction therewith the SEC announced “The Commission does not intend to issue final rules with respect to these proposals.”
The SEC also withdrew 13 other proposed rules related to the Division of Investment Management and Division of Trading and Markets.
The SEC announced today that it will host a roundtable on June 26, 2025, to discuss executive compensation disclosure requirements. The roundtable’s agenda and speakers will be disclosed at a later date.
Concurrently with the announcement of the roundtable, SEC Chairman Paul S. Atkins issued a statement regarding the roundtable, including questions for the staff to consider. Chairman Atkins noted “While it is undisputed that [the executive compensation rules], and the resulting disclosure, have become increasingly complex and lengthy, it is less clear if the increased complexity and length have provided investors with additional information that is material to their investment and voting decisions.”
The nine questions posed by Chairman Atkins pretty much cover the waterfront on the patchwork of disclosure requirements implemented by the SEC over the years. The topics include compensation discussion and analysis, say-on-pay, pay versus performance and perquisites. Interested persons can submit comments as noted in the two statements.
Amongst the issues discussed in a Delaware Chancery Court opinion in a case captioned In re Plug Power Inc. Stockholder Derivative Litigation, was whether SEC comment letters formed a basis for a Caremark Claim.
The Company received five comment letters from the SEC between mid-2018 and early 2021. The letters were dated September 5, 2018, April 24, 2019, June 20, 2019, December 16, 2020, and February 10, 2021. The Company responded to the letters on September 19, 2018, May 8, 2019, July 5, 2019, and January 14, 2021.12 The allegations reflect that the Audit Committee discussed SEC letters during that period, although there was scant mention of those letters in the minutes.
The comment letters inquired into the following, among other things:
Caremark claims can be brought in one of two ways if a plaintiff alleges particularized facts that establish:
To support their information systems claim the Plaintiffs argued:
The Court noted that Delaware law does not dictate what structure a reporting system must take. Rather, under Delaware law, “how directors choose to craft a monitoring system in the context of their company and industry is a discretionary matter.” That is, the law requires courts to exercise good faith oversight, “not to employ a system to the plaintiffs’ liking.”
Turning toward the allegation that the Audit Committee discussions were not sufficiently robust, the Court noted the “absence of regular board-level discussions on the relevant topic” “alone is not enough for the [c]ourt to conclude a board of directors acted in bad faith.” Plaintiffs’ disagreement with the adequacy of the Audit Committee’s or Board’s consideration of the SEC comment letters did not mean that the Board failed to make a good-faith effort to establish a system.
As to the Plaintiff’s red flag allegations, the Court doubted receipt of an SEC comment letter alone was a red flag. Even if the comment letters constituted a red flag, it was not reasonable to conclude based on the facts alleged that the Board ignored them in bad faith. Plug Power’s system in place worked to some degree—Plug Power responded promptly to each of them and the Audit Committee received reports about them.
Finally, the Court noted the Plaintiff’s had not specifically plead any corporate trauma resulting from the comment letters. Even assuming for purpose of the analysis that Plaintiffs adequately pled a corporate trauma, they have not proffered any theory that connects the dots between the Board’s alleged conduct and that harm.
Accordingly, the Court dismissed the Caremark claim pursuant to Rule 12(b)(6).
Govern Walz has signed legislation that includes the following changes to the Minnesota Business Corporation Act:
The legislation will become effective August 1, 2025.
As part of an effort to provide greater clarity on the application of the federal securities laws to crypto assets, the SEC’s Division of Corporation Finance has provided its views about the application of certain disclosure requirements under the federal securities laws to offerings and registrations of securities in the crypto asset markets.
Detailed guidance covers the following topics:
The SEC staff has promulgated new views on stablecoins. Specifically, the staff statement addresses stablecoins that are designed to maintain a stable value relative to the United States Dollar, or “USD,” on a one-for-one basis, can be redeemed for USD on a one-for-one basis (i.e., one stablecoin to one USD), and are backed by assets held in a reserve that are considered low-risk and readily liquid with a USD-value that meets or exceeds the redemption value of the stablecoins in circulation. The SEC staff statement refers to the types of stablecoins addressed by this statement as “Covered Stablecoins.”
The staff notes that Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act each defines the term “security” by providing a list of various financial instruments, including “stock,” “note,” and “evidence of indebtedness.” Because Covered Stablecoins share some characteristics with a note or other debt instrument, the staff believes is it appropriate to analyze them under the test set forth in Reves v. Ernst & Young.
Under Reves, while a note is presumed to be a security, that may be rebutted by showing that the note strongly resembles one of the several types of notes issued in connection with typical commercial transactions and, accordingly, are properly excepted from the definition of security. After reviewing relevant factors, the staff concluded on balance, Covered Stablecoins are not securities under Reves because:
According to the staff the offer and sale of Covered Stablecoins is to advance a commercial or consumer purpose.
The Staff also conducted further analysis of the offer and sale of Covered Stablecoins under the “investment contract” test set forth in Howey. The “Howey test” is used to analyze arrangements or instruments not listed in Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act based on their “economic realities.”
According to the staff in evaluating the economic realities of a transaction, the test is whether there is an investment of money in a common enterprise premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. The staff notes that since Howey, the Supreme Court has contrasted the motivations of investors – those who are attracted to a scheme by the “prospects of a return on their investment” – with the motivations of consumers – those who are “motivated by a desire to use or consume the item purchased.” The staff asserts that while the federal securities laws apply to transactions in investments, they do not apply to consumer transactions.
The staff concludes that buyers do not purchase Covered Stablecoins with a reasonable expectation of profit derived from the entrepreneurial or managerial efforts of others because these instruments are not marketed as investments or with any emphasis on the potential for profit. Rather, buyers are motivated to use or consume Covered Stablecoins as so-called “digital dollars” in the same way one would use USD. Accordingly, it is the staff’s view that Covered Stablecoins are not offered or sold as investment contracts.
The SEC announced that the Commission had voted to end its defense of the rules requiring disclosure of climate-related risks and greenhouse gas emissions.
SEC Acting Chairman Mark T. Uyeda said, “The goal of today’s Commission action and notification to the court is to cease the Commission’s involvement in the defense of the costly and unnecessarily intrusive climate change disclosure rules.”
In a dissenting statement, SEC Commissioner Caroline A. Crenshaw said “By way of politics, the current Commission would like to dismantle that rule. And they would like to do so unlawfully. The Administrative Procedure Act (APA) governs the process by which we make rules. The APA prescribes a careful, considered framework that applies both to the promulgation of new rules and the rescission of existing ones. There are no backdoors or shortcuts. But that is exactly what the Commission attempts today.”
The SEC looked favorably on designated crypto mining activities by stating that such activities are not securities. Specifically, the SEC addressed “proof-of-work” activities. According to the SEC, Proof-of-work (“PoW”) is a consensus mechanism that incentivizes network transaction validation by rewarding network participants, called “miners,” who operate nodes adding computational resources to the network. PoW involves validating transactions on a network and adding them in blocks to the distributed ledger. The “work” in PoW is the computational resources that miners contribute to validate transactions and add new blocks to the network. Miners do not have to own the network’s Covered Crypto Asset to validate transactions.
The statement suggests solo mining is not a security. It says “A miner’s Self (or Solo) Mining is not undertaken with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. Rather, a miner contributes its own computational resources, which secure the network and enable the miner to earn Rewards issued by the network in accordance with its software protocol.”
The statement also suggests pooled mining activities are not securities. It says “Likewise, when a miner combines its computational resources with other miners to increase their chances of successfully mining new blocks on the network, the miner has no expectation of profit derived from the entrepreneurial or managerial efforts of others. By adding its own computational resources to a mining pool, the miner merely is engaging in an administrative or ministerial activity to secure the network, validate transactions and add new blocks, and receive Rewards.”
Democratic Commissioner Caroline A. Crenshaw did not seem impressed. She stated:
“In short, the statement leaves us exactly where we started: with a facts and circumstances application of Howey. For the sake of investors, other market participants, and the markets themselves, I hope that readers do not mistake it for something more than it is. The meme coin statement issued by the staff similarly cautioned (again, buried in a footnote) that its discussion was limited to what it called “typical” meme coin offers and that a determination as to any specific coin would require a facts and circumstances analysis under Howey. Predictably, these cautionary footnotes were largely ignored and the statement was widely reported as a wholesale exemption for meme coins. I hope that the statement on crypto mining is more accurately understood for what it is and is not. Beware of any headlines that herald a wholesale exemption for mining. And mine the fine print.
Finally, buried in the footnotes, the statement reveals its true limitation: one actually would have to conduct a Howey analysis to know if a specific mining arrangement constitutes an investment contract. In fact, the footnote accurately notes that to make a “definitive determination” under Howey, one would need to analyze the economic realities and real-world arrangements, including “the way in which pool members may be compensated, how miners or other persons may participate in mining pools, or the activities conducted by pool operators,” and other “facts relating to the specific Mining Activity.””
The SEC announced that its Division of Corporation Finance is further facilitating capital formation by enhancing the accommodations available to companies for nonpublic review of draft registration statements.
The enhanced accommodations include:
The SEC Staff at the Division of Corporation Finance issued a statement which said “It is the Division’s view that transactions in the types of meme coins described in this statement, do not involve the offer and sale of securities under the federal securities laws.”
What types of meme coins were described? “A “meme coin” is a type of crypto asset inspired by internet memes, characters, current events, or trends for which the promoter seeks to attract an enthusiastic online community to purchase the meme coin and engage in its trading. Although individual meme coins may have unique features, meme coins typically share certain characteristics. Meme coins typically are purchased for entertainment, social interaction, and cultural purposes, and their value is driven primarily by market demand and speculation. In this regard, meme coins are akin to collectibles. Meme coins also typically have limited or no use or functionality. Given the speculative nature of meme coins, they tend to experience significant market price volatility, and often are accompanied by statements regarding their risks and lack of utility, other than for entertainment or other non-functional purposes.”
According to the Staff, the described meme coins do not meet the definition of an investment contract: “The offer and sale of meme coins does not involve an investment in an enterprise nor is it undertaken with a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. First, meme coin purchasers are not making an investment in an enterprise. That is, their funds are not pooled together to be deployed by promoters or other third parties for developing the coin or a related enterprise. Second, any expectation of profits that meme coin purchasers have is not derived from the efforts of others. That is, the value of meme coins is derived from speculative trading and the collective sentiment of the market, like a collectible. Moreover, the promoters of meme coins are not undertaking (or indicating an intention to undertake) managerial and entrepreneurial efforts from which purchasers could reasonably expect profit.”
SEC Commissioner Caroline A. Crenshaw disagrees with the Staff statement: “Today’s guidance from the Division of Corporation Finance turns that concept on its head. It advances an incomplete, unsupported view of the law to suggest that an entire product category is outside the bounds of SEC jurisdiction.”
Further: “The guidance offers no clear definition from law or even a basic dictionary. It generally describes a meme coin as an asset reflective of online or social trends, of speculative value, that tends to experience high volatility. But these are near universal hallmarks of crypto assets. The lack of a useful definition alone makes the value of this guidance questionable, except perhaps as a roadmap for crypto enterprises looking to evade oversight by labeling themselves as a meme coin.”
