Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

Rule 14a-8 under the Securities Exchange Act of 1934 allows shareholders to submit proposals for inclusion in a company’s proxy materials provided that: 1) the shareholder has continuously held securities of the company representing at least $2,000 in market value or 1% of the company’s voting securities for at least one year as of the date the shareholder proposal is submitted; and 2) the shareholder continues to hold the securities through the date of the meeting.  The SEC has released a number of legal bulletins in the past addressing various aspects of the shareholder proposal rule, most recently in October of 2011 with Staff Legal Bulletin 14F.  Today, the SEC released its latest guidance in the form of Staff Legal Bulletin 14G, which provided further clarifications on three topics.

Proof of Ownership and Securities Intermediaries

In Staff Legal Bulletin 14F, the SEC clarified that only DTC participants (as opposed to “introducing brokers” or banks that do not maintain custody of client funds and shares) can provide proof of ownership with respect to shares held in street name by shareholders.  Staff Legal Bulletin 14G makes clear that affiliates of DTC participants may also provide proof of ownership in satisfaction of the Rule 14a-8(b)(2)(i) requirement.

In situations in which a shareholder holds securities through an intermediary that is not a broker or bank, the shareholder must provide a proof of ownership letter from both the securities intermediary and a DTC participant or affiliate of a DTC participant that can verify the record ownership of the securities intermediary.

Specific Dates Required in Exclusion Notices

A company can exclude a shareholder proposal as a result of procedural defects if the company notifies the shareholder of the defect and the shareholder fails to correct the defect.  One of the most common defects is failure to provide attestation of ownership for the entire one year period including the date the proposal was submitted.  The SEC is now requiring companies to get more specific in their notices of defects to shareholders – the SEC will not concur in a no-action request to exclude a shareholder proposal based on a deficiency relating to the one year ownership period unless the notice of defect provided to the shareholder “identifies the specific date on which the proposal was submitted and explains that the proponent must obtain a new proof of ownership letter verifying continuous ownership of the requisite amount of securities for the one-year period preceding and including such date to cure the defect.”

References to Websites in Shareholder Proposals

A shareholder proposal that includes reference to a web address for further detail may be excluded under Rule 14a-8(i)(3) as vague and indefinite unless “shareholders and the company can understand with reasonable certainty exactly what actions or measures the proposal requires without reviewing the information on the website.”  If a proposal includes a reference to a website containing information that only supplements the information contained in the proposal, then the proposal is not in danger of being excluded as vague and indefinite.

A reference to a website in a shareholder proposal can itself (the website reference) be excluded as irrelevant to the subject matter of a proposal under Rule 14a-8(i)(3) if the website is not operational at the time of the proposal.  However, a reference to non-operational website is nevertheless permissible if the shareholder indicates that the website will be operational by the time the proxy materials are filed and provides the company with a copy of the materials that will be published on the website when it becomes operational.

When a company seeks to exclude a website reference because the content of the website has changed after submission of a proposal, the SEC will require a letter from the company describing its reasons for the exclusion, but may allow the company additional time to provide that letter (beyond the normal deadline of at least 80 calendar days prior to the filing of the definitive proxy materials).

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The SEC Staff as submitted to Congress a report on its authority to enforce Rule 12g5–1 to determine if new enforcement tools are needed to enforce the anti-evasion provision contained in subsection (b)(3) of the rule.  Rule 12g5-1(b)(3) states that “[i]f the issuer knows or has reason to know that the form of holding securities of record is used primarily to circumvent the provisions of Section 12(g) or 15(d) of the Act, the beneficial owners of such securities shall be deemed to be the record owners thereof.”  According to the SEC, the rule has been described by commentators as “a catch-all provision that is aimed at deterring the organization of holding companies, subsidiaries or trusts for the primary purposes of avoiding registration.”

The SEC staff noted  that Rule 12g5-1(b)(3) has two primary legal elements.

  • First, there must be a form of holding that exists primarily to circumvent the provisions of Section 12(g) or 15(d) of the Exchange Act.
  • Second, an issuer must know or have reason to know that a form of holding was being used primarily to circumvent the provisions of 12(g) or 15(d). Both elements must be present for the Commission to pursue a violation.

The SEC staff also observed that Rule 12g5-1(b)(3) has been invoked by the SEC or in private litigation sparingly and little precedent interpreting the rule is available.

The staff concluded by noting that current enforcement tools available to the SEC are adequate to enforce the anti-evasion provision of Rule 12g5-1. While difficult to detect at the outset, once the staff is alerted to a potential circumvention of Section 12(g), the current authority to investigate potential violations of the securities laws provides the staff with a wide variety of tools to gather facts.  The increase in the Section 12(g) threshold from 500 holders of record to 2000 included in the JOBS Act, according to the staff,  may reduce the motivation of issuers and others to engage in circumvention efforts, although it is possible that the requirement to register if the number of non-accredited holders of record exceeds 500 may mitigate that effect.

Check jobs-act-info.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

ISS has released its draft 2013 policies for comment.   Key changes are as follows:

For say-on-pay proposals, the summary of proposed changes provides:

  • Use company’s selected peers as an input to its peer group methodology, while maintaining an approach that includes company size and market capitalization constraints.
  • Potentially incorporate a comparison of realizable pay to grant date pay as part of the qualitative evaluation of pay-for-performance alignment.
  • Add pledging of shares as a factor that may lead to negative recommendations under the existing problematic pay practices evaluation.

For golden parachute proposals, the summary of proposed changes provides:

  • Include existing change-in-control arrangements maintained with named executive officers rather than focusing only on new or extended arrangements.
  • Place further scrutiny on multiple legacy problematic features in change in control agreements.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

 

 

 

Section 723(a)(2) of the Dodd-Frank Wall Street Reform and Consumer Protection Act amended Section 2(e) of the Commodity Exchange Act, or CEA to provide that “it shall be unlawful for any person, other than an [eligible contract participant, or ECP], to enter into a swap unless the swap is entered into on, or subject to the rules of, a board of trade designated as a contract market under section 5.”   On May 23, 2012, the Commodity Futures Trading Commission published jointly with the Securities and Exchange Commission (“SEC,” and together with the CFTC, “Commissions”) final rules further defining the term “eligible contract participant” and providing interpretations regarding ECP definitional issues.

In response to various requests for further clarifications and relief with respect to the application of section 2(e) in various circumstances, the CFTC Office of General Counsel, or OGC, has provided the following interpretations:

  •  swap guarantors generally must be ECPs;
  •  a non-ECP generally may not be jointly and severally liable for swap obligations; and
  • cash proceeds from a loan may be included within the calculation of total assets.

In addition, OGC has provided no-action relief, subject to certain condition with respect to the application of CEA sections 2(e) and 13(a) to:

  • certain ECP guarantee arrangements;
  • “anticipatory ECPs”; and
  • certain determinations regarding “amounts invested on a discretionary basis” under CEA section 1a(18)(A)(xi).

Swap Guarantee Arrangements

OGC will not recommend that the Commission commence an enforcement action against a guarantor (“Guarantor”) guaranteeing the swap obligations of a third party that is not an ECP (such third party, a “Guaranteed Swap Counterparty”) for violating CEA sections 2(e) or 13(a), or against a Guaranteed Swap Counterparty, for violating section 2(e) of the CEA, or against the beneficiary of the swap guarantee (“Beneficiary”) for violating CEA section 13(a), if:

  • the Guarantor is:
    • a corporation, partnership, proprietorship, organization, trust, or other entity that has a net worth exceeding $1 million; or
    • an indirect proprietorship that consists of an individual or, if permitted by applicable state law individuals, with:
      • a net worth (in the aggregate across all indirect co-proprietors, where applicable state law permits proprietorships comprised of more than one individual) exceeding $1 million; or
      • amounts invested on a discretionary basis, the aggregate of which is in excess of $5 million (in the aggregate across all indirect co-proprietors, where applicable state law permits proprietorships comprised of more than one individual); and
  • all of the following conditions applicable to a particular Guarantor and/or Guaranteed Swap Counterparty, respectively, are satisfied:
    • the Guaranteed Swap Counterparty enters into the swaps solely to manage the floating interest rate risk associated with a loan received, or reasonably likely to be received, by the Guaranteed Swap Counterparty in the conduct of its business;
    • in the case of all Guarantors other than a proprietorship Guarantor, the Guarantor is an owner of the Guaranteed Swap Counterparty and plays an active role in operating the business of such Guaranteed Swap Counterparty (other than performing solely clerical, secretarial or administrative functions);
    • in the case of a proprietorship Guarantor, if applicable state law contemplates proprietorships with more than one proprietor, the Guarantor and the Guaranteed Swap Counterparty are co-proprietors;
    • the Guarantor computes its net worth or amounts invested on a discretionary basis in accordance with generally accepted accounting principles (“GAAP”), consistently applied (provided that the value of real property can be determined using fair market value (“FMV”));
    • the Guaranteed Swap Counterparty enters into the guaranteed swaps only as a principal; and
    • the Beneficiary verifies that the Guarantor and Guaranteed Swap Counterparty satisfy the conditions of the no action position set forth herein.

Anticipatory ECPs

OGC will not recommend that the Commission commence an enforcement action against a (1) Guaranteed Swap Counterparty or other non-ECP swap counterparty for violating CEA section 2(e), (2) Guaranteed Swap Counterparty’s Guarantor for violating CEA sections 2(e) or 13(a), or (3) a Beneficiary or other swap counterparty to a non-ECP swap counterparty for violating CEA section 13(a), in connection with a swap entered into other than on or subject to the rules of a DCM prior to the borrower receiving the proceeds of a related loan in an amount sufficient for the Guaranteed Swap Counterparty or other non-ECP swap counterparty to achieve ECP status under CEA section 1a(18)(A)(v)(I), if:

  • the swap for which ECP status is necessary is intended to manage the Guaranteed Swap Counterparty’s or other non-ECP swap counterparty’s floating interest rate risk on the loan;
  • in the case of a swap entered into by a Guaranteed Swap Counterparty or other non-ECP swap counterparty to manage its floating interest rate risk on a loan that would, if disbursed, cause the Guaranteed Swap Counterparty or other non-ECP swap counterparty to qualify as an ECP under CEA section 1a(18)(A)(v)(I) but that has not yet closed, the Guaranteed Swap Counterparty or other non-ECP swap counterparty has received a bona fide loan commitment for such loan;
  • in the case of a construction loan or other loan disbursed in stages, the lender intends at the time of making the loan, or the related loan commitment to fund the entirety of the loan, subject only to the satisfaction of commercially reasonable closing conditions and/or the failure to occur, after loan disbursements have commenced, of any events set forth in the loan or swap documentation that would excuse the lender’s obligation to continue funding the loan (such as, for example, the borrower’s failure to make a payment), provided that such events are not designed to permit the lender to fail to fund the loan while leaving the swap in place; and
  • the loan is funded in an amount causing the Guaranteed Swap Counterparty or other non-ECP swap counterparty to qualify as an ECP under CEA section 1a(18)(A)(v)(I), unless it is not funded in such amount as a result of a failure to satisfy a commercially reasonable condition to closing the loan set forth in the bona fide loan commitment or an event set forth in the loan or swap documentation that would excuse the lender’s obligation to continue funding the loan (such as, for example, the borrower’s failure to make a payment)

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

Perhaps one of the most important questions since the Dodd-Frank Act is “What is a commodity pool”?  Close behind is “Who is a commodity pool operator”?  The CFTC has begun to shed light on these questions by issuance of interpretive guidance for equity REITS and securitization vehicles.

Equity REITS

The REIT guidance begins by reviewing the history from the CFTC’s point of view (foot notes omitted):

“In 1981, the Commission proposed and adopted the definition of “pool” in Commission Regulation 4.10(d), which provided that “pool” means “any investment trust, syndicate or similar form of enterprise operated for the purpose of trading commodity interests.” At that time there was no statutory definition of a commodity pool. The statutory definition of commodity pool, as it currently appears in Section 1a(10) of the CEA, is substantively identical to the Commission’s longstanding regulatory definition of the term “pool.”

From the time of its adoption in 1981, the Commission has declined to constrain the phrase “operated for the purpose of trading” to the narrowest of possible interpretations. The reasons that the Commission articulated for rejecting a narrow understanding of the phrase were grounded in its dual concerns for customer and market protection. The Commission noted in the Preamble to the 1981 rule that commenters were concerned that the definition was overly broad.  One commenter suggested a brightline percentage test as a function of commodity interests to other portfolio holdings to determine whether a collective investment scheme should be considered a pool. The Commission declined to set a specific percentage as a threshold over which an entity would be considered a commodity pool due to concerns that an entity which would not exceed the set trading level could still be marketed as a commodity pool to participants, who should be afforded the protections under Part 4 of the Commission’s regulations.”

Several other commenters suggested that the definition should be narrowed to only those funds whose “principal purpose” was the trading of commodity interests. The Commission rejected that suggestion because it could “inappropriately exclude from the scope of the Part 4 rules certain persons who are, in fact, operating commodity pools.” Thus, the Commission recognized that there may be entities whose primary business focus may be outside the commodity interest sphere, yet may still have a significant exposure to those markets, which may implicate the Commission’s concerns regarding both customer and market protection. The rejection of the more narrow “principal purpose” language further indicated the Commission’s determination to expand the constrained meaning of the phrase “operated for the purpose of.” There is no evidence in the legislative record to indicate that when Congress adopted a statutory definition of “commodity pool,” that is substantively identical to the Commission’s longstanding regulatory definition of “pool,” it intended for the Commission to modify its understanding of the scope of phrase “operated for the purpose of.”

The Commission affirmed and refined this interpretation in the preamble to the final rule entitled Commodity Pool Operators and Commodity Trading Advisors: Compliance Obligations. Explaining its amendments to Commission Regulations 4.5 and 4.13(a)(3) to include swaps in the trading thresholds, the Commission stated, “any swaps activities undertaken by a CPO would result in that entity being required to register because there would be no de minimis exclusion for such activity. As a result, one swap contract would be enough to trigger the registration requirement.” This statement is the Commission’s most recent guidance with respect to the relationship between an entity’s swaps activity and the requirement that its operator register as a CPO.”

The CFTC’s Division of Swap Dealer and Intermediary Oversight, or the Division, believes that REITs that primarily derive their income from the ownership and management of real estate and that use derivatives for the limited purpose of “mitigat[ing] their exposure to changes in interest rates or fluctuations in currency” are outside the definition of “commodity pool” under Section 1a(10) of the CEA and Commission Regulation 4.10(d).  However an equity REIT must satisfy the following criteria:

  • The REIT primarily derives its income from the ownership and management of real estate and uses derivatives for the limited purpose of “mitigat[ing] their exposure to changes in interest rates or fluctuations in currency”;
  • The REIT is operated so as to comply with all of the requirements of a REIT election under the Internal Revenue Code, including 26 U.S.C. §856(c)(2) (the 75 percent test) and 26 U.S.C. §856(c)(3) (the 95 percent test); and
  • The REIT has identified itself as an equity REIT in Item G of its last U.S. income tax return on Form 1120-REIT and continues to qualify as such, or, if the REIT has not yet filed its first tax filing with the Internal Revenue Service, the REIT has stated its intention to do so to its participants and effectuates its stated intention.

Securitizations

Here the proponent requesting guidance argues  that securitization vehicles do not satisfy the definition of commodity pool, and more specifically, that securitization vehicles do not meet the criteria articulated by the Ninth Circuit in Lopez v. Dean Witter Reynolds Inc.  The proponent stated that most securitization vehicles do not have multiple equity participants, do not have pro rata allocations of accrued profits or losses because the issued interests are in the form of debt or debt-like interests with a stated interest rate or yield and principal balance and a specific maturity date, and do not have a purpose of trading in swaps or other commodity interests. The proponent also asserted that securitization vehicles are “capital markets financings of sales finance or other financial asset inventory” as opposed to an investment trust.

The guidance notes the Division believes that, consistent with the Commission’s longstanding statements regarding the analysis of whether a fund is a pool, although the Lopez factors are useful, they are not dispositive and the failure of a fund to satisfy one or more of the factors does not mean that the fund is not a pool. The Division believes that it is required to evaluate the facts and circumstances presented in their entirety and determine whether a pooled investment vehicle possessing such characteristics should properly be considered to be a commodity pool. In attempting to make such an evaluation based on the characteristics presented, the Division tends to agree that certain entities that meet certain of the criteria identified are likely not commodity pools, such as securitization vehicles that do not have multiple equity participants, do not make allocations of accrued profits or losses, and only issue interests in the form of debt or debt-like interests with a stated interest rate or yield and principal balance and a specific maturity date. Other sorts of financings or investments, however, based on the descriptions provided by the proponent, do not preclude the issuer or, in the case of a covered bond, the related covered pool from being a commodity pool. Thus, the Division believes the request for relief for entities operating to some extent under any covered bond statute, entities involved in collateralized debt obligations, entities involved in collateralized loan obligations, any insurance-related issuances, and any other synthetic securitizations is overly broad and does not provide any assurance that the related entities or a portion of their assets, operations, or activities would not properly be considered a commodity pool (emphasis added).

Based on an evaluation of the facts and circumstances presented regarding securitization vehicles and their issuance of asset-backed securities, the Division has determined that certain securitization vehicles should not be included within the definition of “commodity pool” and its operator should not be included within the definition of “commodity pool operator.” The Division has determined that the criteria for exclusion include the following:

  • The issuer of the asset-backed securities is operated consistent with the conditions set forth in Regulation AB, or Rule 3a-7, whether or not the issuer’s security offerings are in fact regulated pursuant to either regulation, such that the issuer, pool assets, and issued securities satisfy the requirements of either regulation;
  • The entity’s activities are limited to passively owning or holding a pool of receivables or other financial assets, which may be either fixed or revolving, that by their terms convert to cash within a finite time period plus any rights or other assets designed to assure the servicing or timely distributions of proceeds to security holders;
  • The entity’s use of derivatives is limited to the uses of derivatives permitted under the terms of Regulation AB, which include credit enhancement and the use of derivatives such as interest rate and currency swap agreements to alter the payment characteristics of the cash flows from the issuing entity;
  • The issuer makes payments to securities holders only from cash flow generated by its pool assets and other permitted rights and assets, and not from or otherwise based upon changes in the value of the entity’s assets; and,
  • The issuer is not permitted to acquire additional assets or dispose of assets for the primary purpose of realizing gain or minimizing loss due to changes in market value of the vehicle’s assets.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The SEC’s Office of Compliance Inspections and Examinations (OCIE) released an industry letter today directed at senior executives and principals of firms that are newly registered as investment advisers as a result of the Dodd-Frank Act.  As a reminder, the Dodd-Frank Act repealed the “private adviser exemption” in the Investment Advisers Act of 1940 and implemented a new exemption that applies to firms that advise only private funds and have assets under management of less than $150 million (highlights of our prior coverage here, here, and here).  As a result, many previously exempt investment advisers are being forced into SEC registration.

The letter provides an introduction to the National Exam Program, or NEP (the examination arm of the OCIE), and explains the “Presence Exam” initiative, under which NEP staff will conduct “focused, risk-based examinations” of newly registered advisers to private funds over the course of the next two years.  The Presence Exam initiative consists of three phases: Engagement, Examination, and Reporting.

Engagement: The first phase of the program is described as a “nationwide outreach to inform newly registered firms about their obligations” under the Investment Advisers Act of 1940 and related rules, and to make firms more familiar with NEP and OCIE.  In connection with the outreach initiative, the letter refers to various resources and materials available on the SEC’s website, such as the Information for Newly-Registered Investment Advisers page.  You can find additional materials here, under the heading “Investment Adviser Regulation.”

Examination: Firms that are selected for examination will receive a visit from the NEP for an on-site examination focused on higher-risk areas of the investment adviser business.  Several of the areas of the business that OCIE considers “higher-risk” are described in the letter, along with information about the focus of examinations on particular topics.  Here is a sampling:

  • Marketing –evaluation of whether the adviser has made false or misleading, manipulative, or fraudulent statements in its advertising materials
  • Portfolio Management – evaluation of a firm’s decision making processes with respect to topics such as allocation of investment opportunities
  • Conflicts of Interest – evaluation of the procedures and controls a firm uses to identify, mitigate, and manage conflicts of interest in areas such as allocation of investments, fees and expenses, outside business activities and personal securities trading, and transactions with affiliated parties

Reporting Phase: At the conclusion of the two-year initiative, the NEP will report findings to the SEC and the public, describing common issues, problems, and trends that were identified through its Presence Exams of newly registered investment advisers.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The Federal Deposit Insurance Corporation, or FDIC, adopted a final rule regarding company-run stress testing required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The rule applies to covered institutions with total consolidated assets greater than $10 billion.

The final rule implements section 165(i)(2)(A) of the Dodd-Frank Act, which requires all financial companies with total consolidated assets of more than $10 billion that are regulated by a primary federal financial regulatory agency to conduct an annual company-run stress test. The final rule requires institutions with assets greater than $50 billion to begin conducting annual stress tests this year, although the FDIC reserves the authority to allow covered institutions above $50 billion to delay implementation on a case-by-case basis where warranted. The rule delays implementation for covered institutions with total consolidated assets between $10 billion and $50 billion until October 2013.

For institutions with assets greater than $50 billion that are required to begin stress testing this year, the FDIC anticipates releasing stress-testing scenarios in November. Institutions will use their data as of September 30, 2012, to conduct the stress test. Results are due in January 2013.

The FDIC Board also approved a final rule that refines the deposit insurance assessment system for insured depository institutions with more than $10 billion in assets. The final rule amends the definitions used to identify concentrations in higher-risk assets to better reflect the risk posed to institutions and the FDIC.

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

 

In 2011, 52% of Dex One Corporation’s shareholders voted against Dex One’s 2010 executive compensation as disclosed in its proxy statement.  Plaintiff Brad Haberland subsequently commenced a derivative action claiming, among other things, that Dex One’s directors breached their fiduciary duties when the directors failed to alter or amend the compensation plan after the failed say-on-pay advisory vote.

The United States District Court, E.D. North Carolina, Western Division dismissed the claim.  In so doing, the court referred to the plain language of the Dodd-Frank Act which states “The shareholder vote referred to in subsection[] (a),” however, “shall not be binding on the [corporation] or the board of directors of [the corporation], and may not be construed. . . as overruling a decision by such [corporation] or board of directors [,]. . . to create or imply any change to the fiduciary duties of such [corporation] or board of directors[,] . . . [or] to create or imply any additional fiduciary duties for such [corporation] or board of directors. . . .”

Check dodd-frank.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The SEC has consistently issued several comments in connection with registration statements filed by “emerging growth companies” under the JOBS Act.  It’s clear at least for now that the SEC will ask to see any test-the-waters communications with QIBs and institutional investors as well as research reports that are distributed by underwriters participating in the offering.  From a review of responses to comments submitted by issuers, it appears that issuers and underwriters are not taking advantage of these provisons of the JOBS Act.

Some frequent comments are:

Since you appear to qualify as an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (“the Act”), please disclose in the beginning of your registration statement that you are an emerging growth company and revise your registration statement to:

(i) Describe how and when a company may lose emerging growth company status;

(ii) Briefly describe the various exemptions that are available to you, such as exemptions from Section 404(b) of the Sarbanes-Oxley Act of 2002 and Section 14A(a) and (b) of the Securities Exchange Act of 1934; and

(iii) State your election under Section 107(b) of the Act:

  • If you have elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the Act, include a statement that the election is irrevocable; or
  • If you have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2)(B) of the Act, provide a risk factor explaining that this election allows you to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. Please state in your risk factor that, as a result of this election, your financial statements may not be comparable to companies that comply with public company effective dates. Include a similar statement in your critical accounting policy disclosures.

In addition, consider describing the extent to which any of these exemptions are available to you as a Smaller Reporting Company.

*************

Also, please supplementally provide us with any written materials that you or anyone authorized to do so on your behalf provides in reliance on Section 5(d) of the Securities Act to potential investors that are qualified institutional buyers or institutional accredited investors.  Similarly, please supplementally provide us with any research reports about you that are published or distributed in reliance upon Section 2(a)(3) of the Securities Act of 1933 added by Section 105(a) of the Jumpstart Our Business Startups Act by any broker or dealer that is participating or will participate in your offerings.

*************

You disclose on page 1 that you are an emerging growth company, as defined in the Jumpstart Our Business Startups Act, and that you have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(2)(B) of the Act. Please include a statement in your critical accounting policy disclosures to disclose that as a result of this election, your financial statements may not be comparable to companies that comply with public company effective dates.

***************

We note your response to comment 14 in our letter dated July 19, 2012, but we continue to believe that TS Holdings does not qualify as an emerging growth company. Accordingly, please remove this risk factor and any additional references to the company’s emerging growth company status. Alternatively, please provide your analysis as to why you believe that TS Holdings is not a successor pursuant to Rule 12g-3 of the Exchange Act. In this regard, we note that Rule 12b-2 of the Exchange Act includes “the acquisition of control of a shell company” within the definition of successor and that JWCAC is a shell company.

Check jobs-act-info.com frequently for updated information on the JOBS Act, the Dodd-Frank Act and other important securities law matters.

The latest batch of Frequently Asked Questions regarding topics of general applicability under Title I of the JOBS Act – questions 42-54 – were released by the SEC on September 28, 2012.  Title I of the JOBS Act contains provisions relating to qualification as an emerging growth company (EGC), “test the waters” communications with certain investors, and scaled disclosure requirements for EGCs, “including, among other things, two years of audited financial statements in the Securities Act registration statement for an initial public offering of common equity securities, the smaller reporting company version of Item 402 of Regulation S-K, and no requirement for Sarbanes-Oxley Act Section 404(b) auditor attestations of internal control over financial reporting.”

A number of the questions (see 45, 46, 49, and 50) ask whether an EGC that has prepared only two years of audited financial statements in connection with an IPO of common equity securities can later be required to provide audited financial statements for an earlier period (i.e., a period prior to the earliest year included in the two years of audited financials).  The answer is typically “no.”  Filing two years of audited financials in connection with an IPO of common equity securities locks in, for some purposes at least, the earliest date for which audited financials will be required.

Here are the highlights:

An EGC can use the confidential draft registration statement procedure with respect to a merger or exchange offer that constitutes its initial public offering (IPO), and the rules relating to “test the waters” communications with qualified institutional buyers and institutional accredited investors allow such communications in the context of mergers or exchange offers. (Questions 42 and 43)

Question 44 provides guidance on disclosure requirements when an EGC has used the confidential draft registration statement submittal process with respect to an exchange offer or merger that constitutes its initial IPO of common equity securities, and you should visit the FAQ page directly for the details.

Question 47 provides guidance regarding how to determine if any of the EGC disqualifications are triggered following a forward acquisition or a reverse merger, based on the presentation of the constituents in post-transaction financial statements.  The SEC provides a useful chart in its answer, and you should take a look at the chart for further detail. (Question 47)

The scaled disclosure requirements under Section 7(a)(2)(A) of the Securities Act, which allow an EGC to present only two years of audited financial statements (instead of three), to comply with the smaller reporting company version of Item 402 of Regulation S-K, and to avoid SOX 404(b) auditor attestations in connection with a registration statement for its IPO of common equity securities, do not apply where the EGC’s IPO is of debt securities, rather than equity securities, nor do they apply when registration of a class of securities by an EGC is required because it has more than 2,000 shareholders or more than $10 million in assets.  However, after an EGC has conducted an IPO of common equity securities and presented only two years of audited financials, the SEC “would not object if the emerging growth company does not present audited financial statements for any period prior to the earliest audited period presented in connection with its IPO of common equity securities.”  (Question 48 and 49)

Similarly, if an EGC loses its EGC status, such that it would technically be required to provide selected financial data and the ratio of earnings to fixed charges in its registration statements and periodic reports, the SEC would not object if the former EGC failed to provide data for any period prior to the earliest period for which audited financials were provided when it was an EGC. (Question 50)

A subsidiary of a parent company can qualify as an EGC when the parent itself does not qualify as an EGC, even when the parent newly forms a subsidiary and transfers an existing business into the subsidiary for the purpose of conducting an IPO.  However, “the emerging growth company status of an issuer may be questioned if it appears that the issuer or its parent is engaging in a transaction for the purpose of converting a non-emerging growth company into an emerging growth company, or for the purpose of obtaining the benefits of emerging growth company status indirectly when it is not entitled to do so directly.”  It’s unclear exactly what this means, but the SEC counsels that issuers with specific questions on this point should contact the Office of the Chief Counsel for guidance. (Question 53)

If a company held an IPO of common equity securities prior to December 8, 2001 and was formerly an Exchange Act reporting company, but has since ceased to be a reporting company, and would now qualify as an EGC but for the prior IPO of common equity securities, the SEC will allow the company to take advantage of all of the benefits of an EGC notwithstanding the prior IPO. (Question 54)

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