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

The Consumer Financial Protection Bureau, or CFPB, has released a bulletin clarifying that financial institutions under Bureau supervision may be held responsible for the actions of the companies with which they contract. The Bureau will take a close look at service providers’ interactions with consumers. The CFPB stated it will hold all appropriate companies accountable when legal violations occur.

The bulletin states the Bureau’s expectation that supervised financial institutions have an effective process for managing the risks of service provider relationships. The CFPB recommends that supervised financial institutions take steps to ensure that business arrangements with service providers do not present unwarranted risks to consumers.

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

The Bureau of Consumer Financial Protection, or CFPB, is proposing to amend Regulation Z, which implements the Truth In Lending Act, and the official interpretation to the regulation, which interprets the requirements of Regulation Z. Regulation Z generally limits the total amount of fees that a credit card issuer may require a consumer to pay with respect to an account, limiting fees to 25 percent of the credit limit in effect when the account is opened. Regulation Z currently states that this limitation applies prior to account opening and during the first year after account opening. The proposal requests comment on whether to amend Regulation Z to apply the limitation only during the first year after account opening.

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

Section 929Y of the Dodd-Frank Act directed the SEC to solicit public comment and then conduct a study to consider extending a private right of action for transnational securities fraud.  The SEC has published the resulting study.

The provision was in response to the Supreme Court decision in Morrison v. National Australia Bank which concluded that there is no “affirmative indication” in the Exchange Act that Section 10(b) applies extraterritorially. Finding no affirmative indication of an extraterritorial reach, the Court adopted a new transactional test under which Section 10(b) reaches the use of a manipulative or deceptive device or contrivance only in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States.

In connection with release of the study, Commissioner Luis A. Aguilar released the following statement:  “Today the Commission has authorized that a Study expressing the views of the Staff be sent to Congress. However, my conscience compels me to write separately to record my views on the Study. I write to convey my strong disappointment that the Study fails to satisfactorily answer the Congressional request, contains no specific recommendations, and does not portray a complete picture of the immense and irreparable investor harm that has resulted, and will continue to result, due to Morrison v. National Australia Bank, Ltd.”

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 issued a series of frequently asked questions on Exchange Act registration under the JOBS Act.

Anyone who registered under the Exchange Act  before they were required to will be sorry.  The FAQs state with respect to issuers that are not bank holding companies:

  • If an issuer triggered a  registration obligation before April 5, 2012, but would not trigger such obligation under the JOBS Act, then the issuer is no longer subject to a Section 12(g) registration obligation with respect to that class.  Therefore, if the issuer has not filed an Exchange Act registration statement, it is no longer required to do so.
  • If the issuer has filed an Exchange Act registration statement and the registration statement is not yet effective, then the issuer may withdraw the registration statement.
  • If the issuer has registered a class of equity security under Section 12(g), it would need to continue that registration.

Section 503 of the JOBS Act requires the Commission to revise the definition of “held of record” to exclude, from the holder of record calculation, persons who received the securities pursuant to an employee compensation plan in transactions exempted from the registration requirements of Section 5 of the Securities Act.  Issuers however are not required to wait for SEC rulemaking before excluding holders who acquired securities through exempt employee benefit plans.  Issuers may also exclude former employees who received securities in exempt benefit plan transactions.

The FAQs also address questions with respect to bank holding companies.

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

The SEC has announced the formation of a new Investor Advisory Committee required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The 21-member committee replaces the advisory committee that was disbanded after the Dodd-Frank Act became law. Section 911 of the Dodd-Frank Act established the new committee to advise the Commission on regulatory priorities, the regulation of securities products, trading strategies, fee structures, the effectiveness of disclosure, and on initiatives to protect investor interests and to promote investor confidence and the integrity of the securities marketplace. The Dodd-Frank Act authorizes the committee to submit findings and recommendations for review and consideration by the Commission.

Members of the newly formed committee were nominated by all five sitting Commissioners and represent a wide variety of interests, including senior citizens and other individual investors, mutual funds, pension funds, and state securities regulators.

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 has issued a report entitled “Capital Raising in the U.S.: the Significance of Unregistered Offerings Using the Regulation D Exemption.”  The report is dated February 2012 and therefore predated the JOBS Act.

The report presents an analysis of the information extracted from Form D filings received by the SEC since the beginning of 2009. The results are intended to inform the Commission on the amount and nature of capital raised through unregistered offerings claiming a Regulation D exemption, and to provide some preliminary perspective on the state of competition and regulatory burden in capital markets.

Some highlights of the report include:

  • The median Reg D offering is modest in size: approximately $1 million.
  • Both Rule 505 and Rule 506 (the most frequently used exemption in the Reg D filings) allow an issuer to sell securities to an unlimited number of accredited investors and up to 35 non-accredited investors.  The average amount of non-accredited investors in the Reg D offerings over the entire period is 0.1, while the median is 0. In fact, in approximately 90% of the offerings there are no non-accredited investors.
  • Capital raised through Reg D offerings is more than twice as large as public equity offerings as well as each other category of unregistered offerings.
  • Less than one-third (29%) of issuers are pooled investment funds (i.e. hedge funds, private equity funds and the like), of which a little more than half (55%) are hedge funds (i.e., 16% of all Reg D offerings are by self-reported hedge funds).
  • Excluding hedge funds and other investment funds, issuers of private offerings tend to be small. Although a significant number of issuers decline to disclose their sizes (50%), for those that do, most have revenue of less than $1 million. Only 1.8% of all new offerings are by issuers that report more than $100 million in revenues.

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

 

The SEC has issued a number of frequently asked questions outlining the interaction between confidential registration statements permitted under the JOBS Act and the balance of the registration and offering process.  We expect  many of these FAQs will be subsequently incorporated into the SEC’s rules with perhaps some adjustments as the process becomes more formalized.  The FAQs warn that the FAQs are not rules, regulations or statements of the Commission. and that the Commission has neither approved nor disapproved these FAQs.

Some of the more interesting points of the FAQs are:

No Press Releases.  The Rule 134 safe harbor for a press release announcing an offering is not available until the issuer files a registration statement that satisfies the requirements of Rule 134. The confidential submission of a draft registration statement does not constitute the filing of a registration statement.

Filing Fees:  The filing fee is due when the registration statement is first filed publicly on EDGAR.

Contents of Draft Registration Statement.  As the confidential submission of the draft registration statement does not constitute a “filing” for purposes of Securities Act Sections 5(c) and 6(a), it is not required to be signed or to include the consent of auditors and other experts.  The SEC expects draft registration statements to be substantially complete at the time of initial submission, including a signed audit report of the registered public accounting firm covering the fiscal years presented in the registration statement and exhibits.  The staff will defer review of any draft registration statement  that is materially deficient.

When to Publicly File the Registration Statement.  The confidential submissions have to be publicly filed at least 21 days before the issuer conducts a “road show” as defined in Rule 433(h)(4). That rule defines “road show” as “an offer…that contains a presentation regarding an offering by one or more members of the issuer’s management…and includes discussion of one or more of the issuer, such management, and the securities being offered.”   It is possible that there may be meetings with potential investors under the new test-the-waters communications provisions of the JOBS Act that could also be viewed as coming within the Rule 433(h)(4) definition of road show, which could theoretically trigger a requirement to file the registration statement 21 days before those meetings.  However, the staff will not treat test-the-waters communications under the JOBS Act as a road show. Please note that test-the-waters communications are limited to communications with QIBs and institutional accredited investors.

How Are the Confidential Submissions Made Publicly Available?  Confidential submissions should be filed as exhibits to the first registration statement filed on EDGAR, with each confidential submission filed as a separate Exhibit 99.

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

The Consumer Financial Protection Bureau, or CFPB, has outlined rules it is considering that it believes will help protect mortgage borrowers from being hit by costly surprises or getting the runaround from their mortgage servicer. The CFPB plans to formally propose rules this summer and finalize them in January 2013.

The rules under consideration include requirements for:

  • Clear monthly mortgage statements
  • Warning before interest rate adjustments
  • Options for avoiding costly “force-placed” insurance
  • Early information and options for avoiding foreclosure

Another facet of the rules being considered would require servicers to provide delinquent borrowers (or borrowers who are asking for help to avoid delinquency) with direct, easy, ongoing access to employees who are dedicated and empowered to help troubled borrowers.

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

One of the JOBS Act questions of the day seems to be this:  I’m an entrepreneur with a private company.  I understand the SEC has to take steps to lift the ban on general solicitations for Regulation 506 offerings before I can advertise the sale of securities in connection with a Rule 506 placement.  Is there anything I can do now?

It’s a fact specific question that needs to be discussed with your legal counsel, but fortunately, there is guidance for this question, which will be satisfactory to some but not all.  The SEC has previously adopted Rule 169 that is obliquely entitled “Exemption from sections 2(a)(10) and 5(c) of the Act for certain communications of regularly released factual business information.”  Technically, the rule only applies prior to the time an SEC registered offering is made, but it is often applied by analogy to activities in connection with private offerings.

Rule 169 provides a non-exclusive safe harbor for private companies  for certain communications containing “factual business information” if the following conditions are satisfied:

  • The issuer has previously released or disseminated information of the type described in this section in the ordinary course of its business;
  • The timing, manner, and form in which the information is released or disseminated is consistent in material respects with similar past releases or disseminations;
  • The information is released or disseminated for intended use by persons, such as customers and suppliers, other than in their capacities as investors or potential investors in the issuer’s securities, by the issuer’s employees or agents who historically have provided such information; and
  • The issuer is not an investment company registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of the Investment Company Act of 1940.

“Factual business information” means:

  • Factual information about the issuer, its business or financial developments, or other aspects of its business; and
  • Advertisements of, or other information about, the issuer’s products or services.

Factual business information wouldn’t include forward looking information about potential business results or anything that relates to the offering and sale of securities.

So putting it all together, it means if you have done similar advertisements or press releases before, the frequency of the advertisements and press releases do not change and the information is factual and historical and not forward looking, and does not mention the sale of securities, you should be OK.  A blitz of adds or press releases not in accordance with past practice or on crowdfunding web sites, even if a sale of securities is not mentioned, would be a different question.

After reading the foregoing, many may ask “But I am a start-up, I have never done advertising or press releaes before, is there anything I can do?”  The less satisfying answer to that is Rule 169 is only a non-exclusive safe harbor and there are permissible activities outside of the Rule.  Sure advertisements and press releases in the normal course of business would be acceptable, but paid placements on web sites whose primary purpose is attracting potential investor interest would be hard to justify.  Line drawing should be done in consultation with qualified securities counsel.

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

President Obama signed the JOBS Act today, April 5, 2012.  “Ready, set, crowdfund!” was the constant drum beat on Twitter.

In one of the most perplexing moments of the day, the White House released a statement which said “The President is directing the Treasury Department, Small Business Administration and Department of Justice to closely monitor the implementation of this legislation to ensure that it is achieving its goals of enhancing access capital while maintaining appropriate investor protections. These agencies, consulting closely with the SEC and key non-governmental stakeholders, will report their findings to the President on a biannual basis, and will include recommendations for additional necessary steps to ensure that the legislation achieves its goals.”  So it is the SEC vs the SBA?

The immediate SEC response on signing day was rather tepid.  We know they know the JOBS Act was signed, because they released a statement outlining a procedure to use for submitting registration statements for confidential review pursuant to the JOBS Act.  The review is free as no fee is required. Perhaps there is no statutory mechanism to impose a fee on a draft.  Since only a “draft” need be submitted, its not clear if it needs to be signed, and whether you need accountants consents and the usual attendant detail.  The SEC statement says “Please note that this submission is not a public filing and that a registration statement submitted through this process is not filed for purposes of Section 5 of the Securities Act of 1933.”  For crowdfunders, I believe that is SEC speak meaning no oral offers to sell securities may be made at this time, the draft canot be provided to anyone or otherwise published, and don’t even think about posting anything on your web site relating to the sale of securities.

A group has been formed to establish a self-regulatory organization for crowdfunding portals.  The idea is regulation light, and avoid the jaws of FINRA.  The National Crowdfunding Association has been formed to promote best practices.

Services for crowdfunders are springing up like weeds.  One offers real-time planning, reporting, analysis, compliance, transparency and GAAP compliant financial statements.  Another offers to create and publish via a crowdfunding portal a complete offering package that will comply with SEC rules.

And the general solicitations have begun.  One offers potential shareholders a ground floor opportunity and is referred to on Twitter as perhaps the next Google.  Another appears to offer entrepenuers an online news release site which some have chosen to use to seek funding.  We are not yet advising clients to place adds related to the sale of securities on the Interweb.

The barn doors are open.  The clowns are running the circus.  Choose your metaphor.  Investors and those seeking capital are advised to proceed with caution.

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