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

The SEC has issued a no-action letter to Pocketful of Quarters, Inc., or PoQ, regarding the sale of gaming tokens called Quarters to be used on the Quarters Platform to play Participating Games.

In its no-action request, PoQ notes that the economics of the video gaming industry have transitioned from games and gaming systems with relatively high initial costs to the consumer but which are generally free to play once purchased, to offerings that are free to play and instead generate revenue by inducing gamers to make ongoing in-game purchases using native in-game currencies.

PoQ also notes gamers are spending an increasing amount of money and time to buy or “earn” these in-game currencies, and they frequently wind up failing to consume all of their hard-spent and/or hard-earned value. Gamers’ inability to efficiently use their in-game currencies stems from the fact that current in-game currencies are not compatible across different games, which results in gamers often abandoning their purchased or earned in-game currencies and starting from scratch when they decide to play a new game.   To prevent the loss of value resulting from in-game currency fragmentation, improve player experience, and enhance gameplay behavior, PoQ has financed and developed the Quarters Platform for gamers that leverages the benefits of blockchain technology.

In granting no-action relief that the sale of Quarters does not need to be registered, the SEC noted, among other things, that:

  • PoQ will not use any funds from Quarters sales to build the Quarters Platform, which has been fully developed and will be fully functional and operational immediately upon its launch and before any of the Quarters are sold;
  • the Quarters will be immediately usable for their intended purpose (gaming) at the time they are sold;
  • PoQ will implement technological and contractual provisions governing the Quarters and the Quarters Platform that restrict the transfer of Quarters to PoQ or to wallets on the Quarters Platform;
  • gamers will only be able to transfer Quarters from their Quarters Hot Wallets for gameplay to addresses of Developers with Approved Accounts or to PoQ in connection with participation in e-sports tournaments;
  • Quarters will be made continuously available to gamers in unlimited quantities at a fixed price;
  • there will be a correlation between the purchase price of Quarters and the market price of accessing and interacting with Participating Games; and
  • PoQ will market and sell Quarters to gamers solely for consumptive use as a means of accessing and interacting with Participating Games.

ISS has prepared a whitepaper that analyzes trends in director overboarding. The whitepaper notes that in the 2019 proxy season, “overboarding” became a center-stage issue for many companies and investors. Several large asset managers, including Vanguard, BlackRock, and LGIM, enhanced their voting guidelines to apply stricter criteria, while some directors serving on multiple public company boards faced significant opposition to their elections.

ISS tested the potential impact of overboarding on company performance using several different scenarios.  ISS used its proprietary EVA based methodology in the tests. ISS used two metrics of profitability based on this methodology: EVA Margin and EVA Momentum over a three-year period.  Companies that had at least one overboarded director (in either of the two categories) above) for the past three consecutive years exhibited median EVA Margin and EVA Momentum levels at approximately half of companies with no overboarded directors in 2019.

The SEC announced charges against Facebook Inc. for making misleading disclosures regarding the risk of misuse of Facebook user data.  According to the SEC, for more than two years, Facebook’s public disclosures presented the risk of misuse of user data as merely hypothetical when Facebook knew that a third-party developer had actually misused Facebook user data.  In connection with the case the SEC made known its view that public companies must identify and consider the material risks to their business and have procedures designed to make disclosures that are accurate in all material respects, including not continuing to describe a risk as hypothetical when it has in fact happened.

Facebook has agreed to pay $100 million to settle the charges.  Facebook did not admit or deny the SEC’s allegations

According to the SECs complaint, protecting user data is critical to Facebook’s business, and Facebook had identified the potential for improper access to and misuse of user data as a significant risk.  The complaint alleges Facebook did not maintain disclosure controls and procedures designed to analyze or assess incidents involving misuse of user data for potential disclosure in the company’s periodic filings.

The complaint notes that Facebook identified trends and events for possible disclosure through a series of quarterly meetings to prepare for the company’s earnings announcements. This process relied on the employees and managers who attended these meetings to identify issues that might need to be disclosed. Although several employees in Facebook’s legal, policy, and communications groups who attended these meetings during the relevant period were aware of the improper transfer of data, that incident was never discussed. Facebook also did not share information regarding the incident with its independent auditors and outside disclosure counsel in order to assess the company’s disclosure obligations.

Facebook had no specific mechanism to summarize or report violations of its relevant policies to employees responsible for ensuring the accuracy of Facebook’s filings with the Commission according to the complaint. For example, the Facebook employees responsible for monitoring violations of the company’s relevant policies were not provided with the draft disclosures pertaining to the misuse of user data.

The complaint therefore concludes Facebook senior management and relevant legal staff did not assess the scope, business impact, or legal implications of the researcher’s improper transfer of data, including whether or how it should have been disclosed in Facebook’s public filings or whether it rendered, or would render, any statements made by the company in its public filings misleading. As a result, the SEC states Facebook filed materially misleading periodic reports with the SEC and knew, or should have known, that its risk factor were materially misleading.

The complaint also alleges Facebook’s communications group provided misleading quotes to reporters inquiring about the incident.  Facebook’s communications group provided the following quote to reporters: “Our investigation to date has not uncovered anything that suggests wrongdoing.” The SEC stated this was misleading because Facebook had, in fact, determined that use of the data by the third party violated the company’s relevant policies. The quote served to reinforce the misleading impression in Facebook’s periodic filings that the company was not aware of any material developer misuse of user data.

Institutional Shareholder Services Inc.  has launched its Annual Policy Survey.  The survey is a key component of ISS’ annual benchmark policy development process, looking at potential policy changes globally for 2020 and beyond. Institutional investors, companies, corporate directors, and all other market constituents are invited to respond to the survey.

In a change from recent years, this year’s questions will be posed within a single survey, with a more limited number of questions, to help streamline the process for respondents. Topics this year cover a broad range of issues.

Board Gender Diversity.   The focus is on the importance of gender diversity and what mitigating factors will be considered before a negative recommendation will be made.

Director Over-Boarding.   ISS wants to know respondents’ views on when an overbranding policy should be triggered, and more specific information with respect to over-boarding by CEOs.

Combined Chairman and CEO Posts.   ISS inquires about which circumstances strongly suggest an independent chair is appropriate.

Director Accountability Relating to Climate Change Risk.   The focus is on the importance of climate change in risk factor assessments and ISS recommendations if a company is not effectively reporting on addressing climate change risk.

Sun-Setting of Multi-Class Capital Structures in the U.S.  ISS wants to know the maximum term for a sun-set provision.

Executive Compensation:  As ISS research will begin to include an economic value added (EVA) component into its pay-for-performance analysis, ISS inquires whether prior used GAAP metrics should be included in its reports for comparison purposes.

After analysis and consideration of the survey responses and other inputs, ISS will, as in prior years, open a public comment period for all interested market participants on the final proposed changes to ISS’ policies for next year.

The survey will close on August 9, 2019.

 

The Long-Term Stock Exchange, or LTSE, has filed a rule proposal designed to create long-term value for listed issuers. As of yet, I do not believe there are any companies listed on the LTSE, but it was only recently approved as a stock exchange.  The rule proposal outlines the following proposed policies:

Long-Term Stakeholder Policy: The proposed rules would require that each LTSE-Listed Issuer adopt and publish a Long-Term Stakeholder policy explaining how the issuer operates its business to consider all of the stakeholders critical to its long-term success. At a minimum, this policy must include a discussion of:

  • the stakeholder groups the LTSEListed Issuer considers critical to long-term success,
  • the LTSE-Listed Issuer’s impact on the environment and its community,
  • the LTSE-Listed Issuer’s approach to diversity and inclusion,
  • the LTSE-Listed Issuer’s approach to investing in its employees, and
  • the LTSE-Listed Issuer’s approach to rewarding its employees and other stakeholders for contributing to the LTSE-Listed Issuer’s long-term success.

Long-Term Strategy Policy:  The proposed rules would require that each LTSE-Listed Issuer adopt and publish a Long-Term Strategy Policy explaining how the LTSE-Listed Issuer prioritizes long-term strategic decision-making and long-term success.  The Long-Term Strategy Policy must define the LTSE-Listed Issuer’s long-term time horizon, and include a discussion of how this time horizon relates to the LTSE-Listed Issuer’s strategic plans, how the LTSEListed Issuer aligns success metrics with that horizon, and how it implements long-term prioritization throughout the organization.

Long-Term Compensation Policy:  The proposed rules would require that each LTSE-Listed Issuer adopt and publish a policy explaining the LTSE-Listed Issuer’s alignment of executive financial and non-financial compensation and of board compensation with the LTSE-ListedIssuer’s long-term success and long-term success metrics.

Long-Term Board Policy:  The proposed rules would require that each LTSE-Listed Issuer adopt and publish a policy explaining the engagement of the LTSE-Listed Issuer’s board of directors in the LTSE-Listed Issuer’s long-term focus, including discussion of whether the board and/or which board committee(s), if any, have explicit oversight of and responsibility for long-term strategy and success metrics.

Long-Term Investor Policy:   The proposed rules would require that each LTSE-Listed Issuer adopt and publish a policy explaining how the LTSE-Listed Issuer engages with long-term investors.

The SEC published a statement that encourages market participants to proactively manage their transition away from LIBOR and outlines several potential areas that may warrant increased attention during that time. It is expected that parties reporting information used to set LIBOR will stop doing so after 2021.

As LIBOR is used extensively in the U.S. and globally as a benchmark rate to set interest rates for various commercial and financial contracts, the discontinuation of LIBOR could have a significant impact on financial markets and may present a material risk for market participants, including public companies, investment advisers, investment companies, and broker-dealers. These risks will be exacerbated if the work necessary to effect an orderly transition to an alternative reference rate is not completed in a timely manner.

The statement encourages market participants to identify existing contracts that extend past 2021 to determine their exposure to LIBOR and to consider whether contracts entered into in the future should reference an alternative rate to LIBOR or include effective fallback language. The statement also contains specific guidance for how registrants might respond to risks associated with the discontinuation of LIBOR.

The SEC  encourages companies to consider the following guidance:

  • The evaluation and mitigation of risks related to the expected discontinuation of LIBOR may span several reporting periods. Consider disclosing the status of company efforts to date and the significant matters yet to be addressed.
  • When a company has identified a material exposure to LIBOR but does not yet know or cannot yet reasonably estimate the expected impact, consider disclosing that fact.
  • Disclosures that allow investors to see this issue through the eyes of management are likely to be the most useful for investors. This may entail sharing information used by management and the board in assessing and monitoring how transitioning from LIBOR to an alternative reference rate may affect the company.  This could include qualitative disclosures and, when material, quantitative disclosures, such as the notional value of contracts referencing LIBOR and extending past 2021.

Blockstack previously announced they expected to be the first Regulation A qualified ICO. I blogged that this was a likely a correct prediction. It turns out it was true as the SEC has qualified the ICO. See the Company’s blog post here.

Again, I am not touting or endorsing the offering.

It’s also worth noting that although the SEC qualified the offering, it does not mean the offering will be successful. As in investors have to buy it.

In my blog, I noted some of the responses to SEC comments, which some may find helpful. I caution the energetic entrepreneur that a cut and paste of the Blockstack offering with a name change probably won’t fly. Blockstack, according to press reports, spent $2 million on this effort, and the next one may be somewhat cheaper, but maybe not significantly.

 

 

Five federal financial regulatory agencies adopted a final rule to exclude community banks from the Volcker Rule, consistent with the Economic Growth, Regulatory Relief, and Consumer Protection Act.

The Volcker Rule generally restricts banking entities from engaging in proprietary trading and from owning, sponsoring, or having certain relationships with hedge funds or private equity funds. Under the final rule, which is unchanged from the proposal, community banks with $10 billion or less in total consolidated assets and total trading assets and liabilities of 5 percent or less of total consolidated assets are excluded from the Volcker Rule.

The final rule also permits a hedge fund or private equity fund, under certain circumstances, to share the same name or a variation of the same name with an investment adviser as long as the adviser is not an insured depository institution, a company that controls an insured depository institution, or a bank holding company.

The rule will be effective upon publication in the Federal Register.

The final rule was issued by the Federal Reserve Board, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission.

FASB has issued an Invitation to Comment, or ITC,  as part of FASB’s project on certain identifiable intangible assets acquired in a business combination and subsequent accounting for goodwill. In previous outreach, the FASB staff received mixed feedback from users, preparers, and practitioners of financial reports on this topic. Consequently, it is presently unclear whether the benefits justify the costs for public business entities, or PBEs. Because the Board has not received conclusive feedback about whether a change to financial reporting is warranted and, if so, whether cost-effective solutions that maintain or improve decision usefulness are feasible, the FASB staff issued the ITC to solicit additional feedback. FASB requests input on:

  • Whether changes to financial reporting should be addressed by the Board,
  • Whether and how to proceed with simplifications and/or improvements to these topics, and
  • How optionality in the accounting for intangible assets and goodwill is viewed.

In a public statement, SEC Chairman Jay Clayton discussed the historical interplay between settlement offers and related waiver requests.  Chair Clayton noted:

“Although settlement offers and waiver requests have generally been made contemporaneously, and resolution of both often is critical to achieving the necessary level of certainty, in recent years, the Commission has considered these matters almost exclusively on a segregated basis. Considering a settlement offer and a related waiver request as if they are two separate and unconnected events can add complexity, including because such a formulaic separation often is inconsistent with appropriate consideration of the substance and interconnected nature of the matters at issue and undermines factors that drive appropriate settlements. The complexity added by such a separation can substantially complicate and lengthen the negotiating process, which, among other consequences, may not lead to the best outcome for investors and can unnecessarily tap Commission resources.”

Going forward, Chairman Clayton noted that a settling entity can request that the settlement offer and waiver request can be simultaneously addressed by the Commission:

“Recognizing that a segregated process for considering contemporaneous settlement offers and waiver requests may not produce the best outcome for investors in all circumstances, I believe it is appropriate to make it clear that a settling entity can request that the Commission consider an offer of settlement that simultaneously addresses both the underlying enforcement action and any related collateral disqualifications. To be more specific and to discuss the issue in context, an offer of settlement that includes a simultaneous waiver request negotiated with all relevant divisions (e.g., Enforcement, Corporation Finance, Investment Management) will be presented to, and considered by, the Commission as a single recommendation from the staff. This approach will honor substance over form and enable the Commission to consider the proposed settlement and waiver request contemporaneously, along with the relevant facts and conduct, and the analysis and advice of the relevant Commission divisions to assess whether the proposed resolution of the matter in its entirety best serves investors and the Commission’s mission more generally.”

As to process, Chairman Clayton stated:

“I have consulted with the Office of the General Counsel and the Division of Enforcement regarding the mechanics of the Commission’s consideration of a simultaneous offer of settlement and waiver request. Based on these discussions, I generally expect that, in a matter where a simultaneous settlement offer and waiver request are made and the settlement offer is accepted but the waiver request is not approved in whole or in part, the prospective defendant would need to promptly notify the staff (typically within a matter of five business days) of its agreement to move forward with that portion of the settlement offer that the Commission accepted. In the event a prospective defendant does not promptly notify the staff that it agrees to move forward with that portion of the settlement offer that was accepted (or the defendant otherwise withdraws its offer of settlement), the negotiated settlement terms that would have resolved the underlying enforcement action may no longer be available and a litigated proceeding may follow.”