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

On Monday, the House of Representatives passed the Creating Financial Prosperity for Businesses and Investors Act (H.R. 6427) (the “Act”) by a vote of 398 to 2. The Act is actually a compilation of six measures that were previously considered and passed by the House in 2016, but that have thus far seen no action in the Senate.  Here is a summary of each piece of legislation, along with links to our prior coverage and to the actual text of each provision.

The Small Business Capital Formation Enhancement Act

Existing law requires the SEC to hold “an annual Government-business forum to review the current status of problems and programs relating to small business capital formation,” to invite other relevant federal agencies to participate, and to prepare summaries of the forum and any findings made by the forum for participants in the forum and appropriate committees of Congress. (15 U.S.C. 80c-1). The Small Business Capital Formation Enhancement Act would go a step further by requiring the SEC to review the findings and recommendations of the forum and, in the event that the forum submits a finding or recommendation to the SEC, to “promptly” respond by issuing a public statement evaluating the finding or recommendation and indicating what action, if any, the SEC intends to take in as a result.  Presumably, the SEC action could be to further study a particular matter, or to consider and propose a rule change, or to take no action at all.  The government-business forum has in the past recommended concepts that were included in the JOBS Act.   I’m not sure this bit of legislation, which adds all of 50 words to the end of an existing statute relating solely to SEC procedure, is quite worthy of its grand title.

Check out our prior coverage and the text of the measure.

The SEC Small Business Advocate Act

This piece of legislation would amend the Exchange Act to create a new Office of the Advocate for Small Business Capital Formation within the SEC. This new office would be charged with planning and executing the annual Government-Business Forum on Small Business Capital Formation and would also interface with small businesses to understand significant regulatory problems they may be having and advocate within the SEC for rule or policy changes to address those problems.  The office would also analyze the effect of newly proposed rules or regulations on small businesses.  The office would be headed by an individual appointed by the SEC (but not an employee of the SEC) and would produce an annual report on its activities that would be provided directly to various committees of Congress without any review or oversight by the SEC.  The SEC would also be required to adopt procedures ensuring an SEC response to any proposals from the office within three months of receipt.

The legislation would create the Small Business Capital Formation Advisory Committee, which would be tasked with providing the SEC with advice on the SEC’s rules, regulations, and policies relating to capital raising, trading in securities, and public reporting and corporate governance requirements, in each case with respect to privately held small businesses and public companies with a public float of less than $250 million. However, any advice regarding any aspect of the SEC’s enforcement program is expressly excluded from the scope of the committee’s mandate.  The SEC would be required to assess the recommendations from the committee and publicly disclose any action the agency takes as a result of those recommendations.  The committee would be made up primarily of persons representing small business interests who would be appointed by the SEC to four-year terms.  The legislation includes procedural rules for the working of the committee and provisions relating to salaries and reimbursement of travel expenses.

Check out our prior coverage and the text of the measure.

The Supporting America’s Innovators Act

There is currently an exemption from classification as an investment company for purposes of the Investment Company Act of 1940 for an issuer not involved in a public offering of its securities whose outstanding securities (other than short-term paper) are held by fewer than 100 persons.   The Supporting America’s Innovators Act would raise the number of holders to 250 for purposes of this exemption, but only for companies that meet the new definition of “qualifying venture capital fund.”  A qualifying venture capital fund would be defined as any venture fund (as defined under the Investment Advisers Act of 1940) with $10 million or less in invested capital, with that threshold amount subject to annual adjustment by the SEC to reflect changes in the Consumer Price Index.

Check out our prior coverage and the text of the measure.

The Fix Crowdfunding Act

The Fix Crowdfunding Act is designed to do two things: (1) provide a way for companies to receive the benefits of crowdfunding without having to deal with a large number of direct equity holders, and (2) change the conditional exemption from counting securities sold in a crowdfunded offering towards the Exchange Act registration thresholds.

The legislation would amend the Investment Company Act of 1940 to newly define “crowdfunding vehicle” to mean an entity whose purposes is limited by its charter documents to acquiring, holding, and disposing of the securities of a single issuer in one or more crowdfunding transactions conducted under Section 4(a)(6) of the Securities Act and Regulation Crowdfunding, and which meets the following requirements:

  • It must have only one class of securities;
  • Neither the crowdfunding vehicle itself nor any associated person of the crowdfunding vehicle may receive any compensation in connection with the purchase, holding, or sale of securities of the investment target;
  • The securities of the crowdfunding vehicle must have been issued in a crowdfunding transaction under Section 4(a)(6) and Regulation Crowdfunding in which the investment target was a co-issuer;
  • Both the crowdfunding vehicle and the investment target must be current in their respective disclosure obligations under Regulation Crowdfunding; and
  • The crowdfunding vehicle must be advised by an investment adviser registered under the Investment Advisers Act of 1940 or registered in its home state.

A crowdfunding vehicle would be exempt from the investment caps that apply to individual investors in crowdfunding offerings (the greater of $2,000 or 5% of the lesser of income or net worth if either income or net worth is below $100,000 OR 10% of income or net worth up to $100,000 if the lesser of income or net worth is equal to or greater than $100,000). In other words, the actual crowdfunding could occur in the crowdfunding vehicle, which could then make an investment into the target as a single investor.

The Exchange Act and related rules generally require an issuer to register its securities if it meets certain thresholds relating to its total assets or the number of its security holders. Section 12(g)(6) of the Exchange Act and Regulation Crowdfunding currently provide that security holders who acquired their securities in a crowdfunded offering don’t have to be counted for purposes of the registration threshold, PROVIDED, that the issuer is current on its required annual reports and it has engaged a transfer agent for its securities.  The Fix Crowdfunding Act would remove the conditional nature of the exemption (annual report and transfer agent) if the issuer had a public float for the last semi-annual period of at least $75 million, or (if the public float is $0 for such period) annual revenues of less than $50 million in the most recently completed fiscal year.

If you’re interested in the way this piece of legislation has evolved since its initial proposal and additional context, you should check out this article from Crowdfund Insider.

Check out our prior coverage and the text of the measure.

The Fair Investment Opportunities for Professional Experts Act

This legislation codifies the accredited investor definition (which is currently set forth in Rule 501 under the Securities Act) and adds two additional categories of accredited investors: (1) any person currently licensed or registered as a broker or investment adviser by the SEC, FINRA, an equivalent SRO, or state securities regulator, and (2) any person that is determined by SEC rule or regulation to have “demonstrable education or job experience to qualify such person as having professional knowledge of a subject related to a particular investment, and whose education or job experience is verified by the Financial Industry Regulatory Authority or an equivalent self-regulatory.” Of course, the scope of education-or-job-experience prong of the definition would be subject to rulemaking, which would likely be affected by numerous factors, including the political climate at the time of the rulemaking and the directive of the executive administration at the time.

Check out our prior coverage and the text of the measure.

The U.S. Territories Investor Protection Act

Section 6(a)(1) of the Investment Company Act of 1940 currently exempts any company organized or created under the laws of, and having its principal place of business in, Puerto Rico, the Virgin Islands, or any other possession of the U.S. The  U.S. Territories Investor Protection Act would remove this exemption, thus subjecting companies in U.S. territories to the Investment Company Act to the same extent as U.S. companies.  The legislation provides for a three year phase out period for companies that were covered by the exemption on the date it is enacted and allows the SEC to further delay application to such companies for an additional three-year period in its discretion.

Check out the text of the measure.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 13 cities, including Minneapolis, Mankato and St. Cloud, MN; Kansas City, St. Louis and Jefferson City, MO; Phoenix, AZ.; Denver, CO; Washington, D.C.; Decatur, IL; Wichita, KS; Omaha, NE; and Bismarck, ND.

The Securities and Exchange Commission announced that the parent company of United Airlines has agreed to pay $2.4 million to settle charges for providing  a public official with more convenient flight options. The parent company did not admit or deny the SEC’s findings.

According to the SEC’s order, United reinstated a nonstop flight between Newark, N.J., and Columbia, S.C., at the behest of David Samson, the then-chairman of the Port Authority of New York and New Jersey who sought a more direct route to his home in South Carolina. The route previously experienced poor financial performance and was canceled by Continental Airlines prior to its merger with United, and a preliminary financial analysis conducted after Samson began privately advocating for the route’s return revealed it would likely lose money again.

Nevertheless, the SEC’s order finds that United officials feared Samson’s influence could jeopardize United’s business interests before the Port Authority, including the approval of a hangar project to help the airline at Newark’s airport. The company ultimately decided to initiate the route despite the poor financial projections.  The same day that United’s then-CEO approved initiation of the route, the Port Authority’s board approved the lease agreement related to the hangar project.  United employees were told “no proactive communications” about the new route.

According to the SEC’s order, United circumvented its standard process for initiating new routes, and no corporate record at United accurately and fairly reflected the authorization to approve the money-losing flight route from Newark to Columbia. The route ultimately lost approximately $945,000 before it ceased again roughly around the time of Samson’s resignation from the Port Authority.

Samson has pleaded guilty to bribery in a criminal case announced in July by the U.S. Attorney’s Office in New Jersey. United entered into a non-prosecution agreement with the U.S. Attorney and paid $2.25 million.

Wow. So the books and records provisions can be interpreted like it’s the Domestic Corrupt Practices Act.  I wonder if it will become in vogue to self-report these sorts of issues and spawn another web of FCPA, Inc. like practices to advise on these matters.

The CFPB issued a bulletin warning supervised financial companies that creating incentives for employees and service providers to meet sales and other business goals can lead to consumer harm if not properly managed. According to the CFPB, tying bonuses or employment status to unrealistic sales goals or to the terms of transactions may intentionally or unintentionally encourage illegal practices such as unauthorized account openings, unauthorized opt-ins to overdraft services, deceptive sales tactics, and steering consumers into less favorable products. The CFPB bulletin outlines various steps that it believes institutions can and should take to detect, prevent, and correct such production incentives so that they do not lead to abuse of consumers.

 

As previously noted, National Fuel Gas had rejected a proxy access nominee submitted by GAMCO Asset Management Inc. because of non-conformance with National Fuel’s proxy access by-law. Many wondered what would happen next.  It didn’t take long to find out, as GAMCO has filed an amended Schedule13D which notes “Lance Bakrow informed GAMCO this morning that he has decided to withdraw him name as a candidate for Director of National Fuel Gas Company. GAMCO will not pursue Proxy Access.”

GAMCO Asset Management Inc. made the news when it became the first to submit a nominee for National Fuel Gas’ board of directors using a proxy access by-law.

National Fuel Gas has now rejected the nominee because the nomination, in National Fuel Gas’ view, was not made in accordance with the proxy access by-law.  National Fuel Gas said “Based on GAMCO’s past conduct and current actions, the Board has determined that (1) GAMCO possessed an intent to change or influence control of the Company when acquiring some if not all of the Proxy Access Request Required Shares; and (2) GAMCO continues to have the intent to change or influence control of the Company. As a result, GAMCO’s Notice does not comply with the proxy access provision of the Company’s By-Laws, and the Company will not include GAMCO’s proposal in the Company’s proxy materials.”

Section 72003 of the FAST Act directs the SEC to carry out a study of Regulation S-K’s requirements and to consult with the Commission’s Investor AdvisoryCommittee (the “IAC”) and Advisory Committee on Small and Emerging Companies. The SEC must then issue a report to Congress within 360 days of enactment of the FAST Act.  The report must be followed within 360 days by proposed rules to implement the recommendations made in the report.

Section 72003 of the FAST Act requires the report to include:

  • All findings and determinations made in carrying out the study.
  • Specific and detailed recommendations on modernizing and simplifying the requirements in regulation S–K in a manner that reduces the costs and burdens on companies while still providing all material information.
  • Specific and detailed recommendations on ways to improve the readability and navigability of disclosure documents and to discourage repetition and the disclosure of immaterial information.

The SEC has issued the report required by the FAST Act. Some of the detailed recommendations include:

  • Relocate “Risk Factors” from Item 503(c) to a new, separate item (Item 105) in Subpart 100 of Regulation S-K.
  • Eliminate the Item 512(d), (e), and (f) undertakings because they are obsolete.
  • Permit the omission of attachments and schedules filed with exhibits, unless they contain information that is material to an investment decision that has not been disclosed otherwise.
  • Revise Item 601(b)(21) to require disclosure of legal entity identifiers (“LEIs”) for the registrant and within the list of significant subsidiaries.
  • Require machine-readable tagging of all of the information presented on the cover page of a registrant’s periodic and current reports.
  • Require the use of hyperlinks whenever the rules call for the inclusion of a web address, provided the appropriate technology is available to prevent such hyperlinks from jeopardizing the security and integrity of the EDGAR system.

According to this Reuters article and a blog by Elm Sustainability Partners LLC, an informal deal for EU conflict minerals legislation has been reached. The final text will be voted on by the member states on December 7, 2016, with a vote in the plenary expected in the first half of 2017. The regulation would become effective in 2021.

Although OECD guidelines will be used, the structure is much different than the United States. Only importers of tin, tungsten, tantalum, gold and their ores are covered.  The legislation does not reach manufactured products on a mandatory basis.

The legislation will apply to companies with more than 500 employees but small volume importers will be exempt from these obligations. Reports indicate dentists and jewelers are exempt.

According to this report, large manufacturers will be encouraged to voluntarily report on their “due diligence” and sourcing practices using new performance indicators. They will also be encouraged to join an EU registry, designed to track mineral sourcing policies.

However, a review clause included in the regulation means mandatory measures could be brought in if the voluntary measures prove too be having too limited an impact, with reviews set to take place two years after the start of the new law and then every three years thereafter.

On November 9, 2016, the Minnesota Department of Commerce approved the first crowdfunding portal operator, VentureNear.com, under the crowdfunding legislation known as MNvest. As soon as the portal is populated with offerings, the online platform will allow companies to sell equity securities or promissory notes to Minnesota investors.  While online crowdfunding offers a novel approach to raising capital, the relative benefits and simplicity of other exemptions from federal and state securities laws may limit the appeal of MNvest among issuers (and their counsel).

MNvest

As we have covered before, here, here, and here, the MNvest regulatory regime is fairly onerous on issuers.  MNvest is unavailable unless (among other things):

  • The issuer is organized under the laws of Minnesota;
  • The issuer’s principal offices are located in Minnesota;
  • At least 80% of the issuer’s assets are located in Minnesota; and
  • At least 80% of the issuer’s gross revenues from its business operations are derived in Minnesota.

The above list eliminates MNvest for companies that, for example, prefer to organize in Delaware or have more than 20% of its operations or assets located out-of-state. Other restrictions that limit the appeal of MNvest include the requirement that investors are Minnesota residents, the $1 million annual cap on funds raised via MNvest, the requirement to conduct the offering via a third-party funding portal (or take the time and pay the expense of registering your own) and the limited scope of permitted advertising that present traps for the unwary.

Rule 506(c)

In contrast to MNvest, any company (subject to the bad actor disqualifications of course) can raise an unlimited amount of money and use general advertisements to do so by utilizing the Rule 506(c) exemption of Regulation D. Such 506(c) offerings are, however, limited to accredited investors (among other things).  Nevertheless, since general solicitation is permitted under Rule 506(c), it is some ways easier to “crowdfund” an offering, albeit “the crowd” can only be comprised of accredited investors.

Revised Rule 504

For issuers who prefer to stay local, Rule 504 intrastate offerings also offer an alternative to MNvest. In fact, as we covered here, the SEC recently revised Rule 504 to increase the annual offering amount in any 12-month period from $1,000,000 to $5,000,000.  To top it off, in states that require registration of the securities and require the public filing and delivery to investors of a substantive disclosure document before sale, general solicitation methods may be employed.

From a legal standpoint, with the bevy of alternatives to crowdfunding currently available (including those not mentioned above), it will be interesting to see whether platforms such as MNvest flourish.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 100 largest firms in the U.S., Stinson Leonard Street has offices in 13 cities, including Minneapolis, Mankato and St. Cloud, MN; Kansas City, St. Louis and Jefferson City, MO; Phoenix, AZ.; Denver, CO; Washington, D.C.; Decatur, IL; Wichita, KS; Omaha, NE; and Bismarck, ND.

Drew Kuettel is a member of the firm’s corporate finance group.  Drew works in the firm’s Minneapolis office and can be reached at andrew.kuettel@stinson.com or 612.335.1743.

ISS has announced its 2017 policy changes. Some key changes for the U.S. are discussed below.

Restrictions on Binding Shareholder Proposals.  ISS has adopted a new policy when shareholders do not have the ability to amend bylaws.  ISS will generally vote against or withhold from members of the governance committee if the company’s charter imposes undue restrictions on shareholders’ ability to amend the bylaws. Such restrictions include, but are not limited to: outright prohibition on the submission of binding shareholder proposals, or share ownership requirements or time holding requirements in excess of SEC Rule 14a-8. ISS will recommend a vote against on an ongoing basis.

Overboarded Directors:  ISS will recommend a vote against or withhold from individual directors who sit on more than five public company boards.  This isn’t a new policy per se; the one-year transition period from six to five public company boards is ending.

Stock Distributions: Splits and Dividends: Where there is a management proposal to increase capitalization in connection with a stock distribution or split, ISS will look to the “effective” increase.

Equity-Based and Other Incentive Plans.  ISS will consider dividends payable prior to vesting as a planned feature.  According to ISS, from an incentive and retention perspective, dividends on unvested awards should be paid only after the underlying awards have been earned and not during the performance/service vesting period. Under this new factor, full points will be earned if the equity plan expressly prohibits, for all award types, the payment of dividends before the vesting of the underlying award (however, accrual of dividends payable upon vesting is acceptable). No points will be earned if this prohibition is absent or incomplete (i.e. not applicable to all award types). A company’s general practice (not enumerated in the plan document) of not paying dividends until vesting will not suffice.

ISS also made modifications to the minimum vesting factor. First, an equity plan must specify a minimum vesting period of one year for all award types under the plan in order to receive full points for this factor. Second, no points will be earned if the plan allows for individual award agreements that reduce or eliminate the one-year vesting requirement.

Amending Cash and Equity Plans (including Approval for Tax Deductibility (162(m)) (formerly “Incentive Bonus Plans and Tax Deductibility Proposals (OBRA-Related Compensation Proposals).” This policy has been renamed and reorganized to more clearly differentiate the evaluation framework applicable to the various types of amendment proposals.

Shareholder Ratification of Director Pay Programs. This is a new policy.  ISS will recommend a vote case-by-case on management proposals seeking ratification of non-employee director compensation, based on the following factors:

  • If the equity plan under which non-employee director grants are made is on the ballot, whether or not it warrants support; and
  • An assessment of the following qualitative factors:
    • The relative magnitude of director compensation as compared to companies of a similar profile;
    • The presence of problematic pay practices relating to director compensation;
    • Director stock ownership guidelines and holding requirements;
    • Equity award vesting schedules;
    • The mix of cash and equity-based compensation;
    • Meaningful limits on director compensation;
    • The availability of retirement benefits or perquisites; and
    • The quality of disclosure surrounding director compensation.

Equity Plans for Non-Employee Directors.  ISS is attempting to clarify and broaden the various factors considered when assessing the reasonableness of non-employee director equity plans.  ISS is updating the list of factors to be considered by including new factors (including relative pay magnitude and meaningful pay limits) and simplifying the language for the factors already considered.

The updated policy clarifies that when a non-employee director equity plan is determined to be relatively costly, ISS’ vote recommendation will be case-by-case, looking holistically at all of the factors, rather than requiring that all enumerated factors meet certain minimum criteria. This updated policy aligns the considered factors with the same ones provided under ISS’ new policy on proposals seeking ratification of non-employee director pay programs.

Risk factors related to uncertainties resulting from possible policies that may be implemented by President-elect Trump have begun to appear in SEC filings:

TPI Composites, Inc. Form 10-Q:

The results of the 2016 United States presidential and congressional elections may create regulatory uncertainty for the wind energy sector and may materially harm our business, financial condition and results of operations.

Various legislation, regulations and incentives designed to support the growth of wind energy have been implemented or proposed by the United States government such as the Production Tax Credit for Renewable Energy (PTC) and the Clean Power Plan. In addition, states and foreign governments also have adopted various legislations, regulations and incentives also designed to support the growth of wind energy.

Donald Trump’s victory in the U.S. presidential election, as well as the Republican Party maintaining control of both the House of Representatives and Senate of the United States in the congressional election, may create regulatory uncertainty in the clean energy sector and wind energy sector in particular. During the election campaign, President-elect Trump made comments suggesting that he was not supportive of various clean energy programs and initiatives designed to curtail global warming. It remains unclear what specifically President-elect Trump would or would not do with respect to these programs and initiatives, and what support he would have for any potential changes to such legislative programs and initiatives in the Unites States Congress, even if both the House of Representatives and Senate are controlled by the Republican Party. If President-elect Trump and/or the United States Congress take action or publicly speak out about the need to eliminate or further reduce the PTC, the Clean Power Plan or other legislation, regulations and incentives supporting wind energy, such actions may result in a decrease in demand for wind energy in the United States and other geographical markets and may materially harm our business, financial condition and results of operations.

IMPINJ, INC. Form S-1:

Significant developments stemming from the recent U.S. presidential election or the U.K.’s referendum on membership in the EU could have a material adverse effect on us.

On November 8, 2016, Mr. Donald J. Trump was elected the next president of the United States. As a candidate, President-Elect Trump espoused antipathy towards existing trade agreements, like NAFTA, and proposed trade agreements, like TPP, greater restrictions on free trade generally and significant increases on tariffs on goods imported into the United States, particularly from China. Changes in U.S. social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment in the territories and countries where we currently develop and sell products, and any negative sentiments towards the United States as a result of such changes, could adversely affect our business. In addition, negative sentiments towards the United States among non-U.S. customers and among non-U.S. employees or prospective employees could adversely affect sales or hiring and retention, respectively.

On June 23, 2016, the United Kingdom held a referendum and voted in favor of leaving the European Union, or EU. This referendum has created political and economic uncertainty, particularly in the United Kingdom and the EU, and this uncertainty may last for years. Our business in the United Kingdom, the EU, and worldwide could be affected during this period of uncertainty, and perhaps longer, by the impact of the United Kingdom’s referendum. There are many ways in which our business could be affected, only some of which we can identify as of the date of this prospectus.

The referendum, and the likely withdrawal of the United Kingdom from the EU it triggers, has caused and, along with events that could occur in the future as a consequence of the United Kingdom’s withdrawal, including the possible breakup of the United Kingdom, may continue to cause significant volatility in global financial markets, including in global currency and debt markets. This volatility could cause a slowdown in economic activity in the United Kingdom, Europe or globally, which could adversely affect our operating results and growth prospects. In addition, our business could be negatively affected by new trade agreements between the United Kingdom and other countries, including the United States, and by the possible imposition of trade or other regulatory barriers in the United Kingdom. Furthermore, we currently operate in Europe through an Impinj subsidiary based in the United Kingdom, which currently provides us with certain operational, tax and other benefits. The United Kingdom’s withdrawal from the EU could adversely affect our ability to realize those benefits and we may incur costs and suffer disruptions in our European operations as a result. These possible negative impacts, and others resulting from the United Kingdom’s actual or threatened withdrawal from the EU, may adversely affect our operating results and growth prospects.