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

On March 23, 2016, three bills affecting access to capital markets were introduced in the U.S. House of Representatives.

H.R. 4850: Micro Offering Safe Harbor

Representative Tom Emmer of Minnesota introduced this bill that would add a new type of exempt transaction under section 4 of the Securities Act of 1933. Representative Emmer’s “micro offerings” would be characterized as non-public offerings in which:

  • each investor has a pre-existing substantive relationship with an officer, director or 10% shareholder of the issuer;
  • the total issue involves no more than 35 purchasers; and
  • the total amount raised does not exceed $500,000.

It is not entirely clear how this new section would fit into the existing SEC regulatory framework under section 4 and the text of the bill does not provide the commission with any guidance on the matter.

H.R. 4854: Supporting America’s Innovators Act of 2016

This bill, introduced by Representative Patrick McHenry of North Carolina proposes to broaden the exemption from the definition of “investment company” under the Investment Company Act of 1940. The bill would exempt “qualifying venture capital funds” with less than 500 stakeholders.  A qualifying venture capital fund would be a venture capital fund (as defined by Investment Company Act § 203(l)(1)) that does not purchase more than $10 million in securities of any one issuer.

H.R. 4852: Private Placement Improvement Action of 2016

Scott Garrett, Representative for New Jersey’s fifth congressional district introduced this bill that would direct the SEC to revise its rules under Regulation D in order to simply the filing requirements. Among the proposed changes are:

  • eliminating requirement that filing a Form D is a prerequisite to the availability of the Rule 506 safe harbor;
  • requiring the SEC to notify states of the information contained in Form Ds filed on EDGAR;
  • prohibiting the SEC from requiring Issuers conducting Rule 506(c) offerings to file its general solicitation materials (but not prohibiting the SEC from requesting such materials in certain situations);
  • exempting private funds from the requirements of Rule 156; and
  • adding to the definition of accredited investor in Rule 501(c) to make “knowledgeable employees” of private funds accredited investors for Rule 506 purposes with respect to an offering of the private fund.

Earlier this month, on March 2, 2016, the House Financial Services Committee reported favorably on two bills that propose changes to the federal securities laws: the Main Street Growth Act (H.R. 4638) and the Fostering Innovation Act of 2015 (H.R. 4139).

Main Street Growth Act Seeks to Authorize “Venture Exchanges” to Promote Liquidity for Securities Sold in Regulation A Offerings

The Main Street Growth Act seeks to authorize national securities exchanges with the authority to establish special exchanges for the purpose of promoting liquidity to so-called “venture securities.” The bill would also exempt such exchanges from various regulations including:

  • Regulation NMS (17 C.F.R. §§ 242.600–.612);
  • Rule ATS (17 C.F.R. §§ 242.300–.303);
  • Requirements related to submitting data to securities information processors; and
  • Using decimal pricing.

The bill defines venture securities as: “(i) securities of an early-stage, growth company that are exempt from registration pursuant to section 3(b) of the Securities Act of 1933; and (ii) securities of an emerging growth company.”

An “early-stage, growth company,” in turn, would be issuers that have not conducted an IPO of any of its securities and with a market capitalization of less than $1 billion. Moreover, an issuer would not cease to be an early-stage, growth company until it maintains a market capitalization of over $1.5 billion for 12 consecutive months.

The text of the bill can be found here.

The Fostering Innovation Act of 2015 Seeks to Enlarge SOX § 404 Auditor Attestation Exemption For EGCs

This bill proposes to exempt temporarily emerging growth companies (EGCs) from the auditor attestation requirements regarding internal controls over financial reporting required by Sarbannes-Oxley § 404(b).

The exemption would expire upon the earlier of (i) ten years after the issuer files its registration statement, (ii) the end of the fiscal year in which the issuer’s gross revenues exceed $50 million or (iii) when the issuer becomes a large accelerated filer.

Since the JOBS Act bestows EGC status for a maximum of five years, this bill would potentially extend that treatment, albeit solely for SOX § 404(b), for up to an additional five years.

The text of the bill can be found here.

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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 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The Fix Crowdfunding Act has been introduced by Representative Patrick McHenry, who was one of the architects of the FAST Act provisions simplifying securities laws.

The Fix Crowdfunding Act increases the $1,000,000 issuer annual raise limit under the JOBS Act crowdfunding provisions to $5,000,000, addresses the liability of funding portals and allows single purpose funds, among other things.

The Act also provides “no enforcement action may be brought against a funding portal before May 16, 2021.” I’m not really a fan of the Feds moving in anytime and anywhere for any reason, and this looks like a bridge too far to me. But I will give Representative McHenry points for creativity.

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 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

On March 23, the U.S. House of Representatives voted favorably on the Standard Merger and Acquisition Reviews Through Equal Rules Act (the “SMARTER Act”), H.R. 2745. The bill, introduced by Representative Blake Farenthold of Texas’ 27th congressional district, would eliminate the differences in the procedures currently utilized by the FTC and DOJ when challenging proposed M&A transactions.

There are two main components to the bill. First, the bill would harmonize the differing preliminary injunction standards applicable to each agency by amending § 13(b) of the FTC Act and § 15 of the Clayton Act.  Second, and perhaps more controversial, the SMARTER Act would strip the FTC of its authority to initiate administrative proceedings to block nascent mergers under FTC Act § 5 and Clayton Act § 11 and instead only allow challenges via the judicial system.

Preliminary Injunctions

Under FTC Act § 13(b), the FTC is allowed to seek preliminary injunctions for suspected violations of the laws it administers. This section directs courts to grant such relief “upon a showing that, weighing the equities and considering the Commission’s ultimate success, such action would be in the public interest . . . .”

The DOJ, on the other hand, acting pursuant to Clayton Act § 15 may seek preliminary injunctions against proposed M&A transactions as well. Unlike the FTC Act, however, the Clayton Act does not provide a standard of review and therefore courts apply traditional equitable principles before enjoining a transaction.  This means the DOJ has the burden of establishing, among other things, that there is a substantial likelihood the transaction would lessen competition.

The FTC’s standard of review is arguably less burdensome than traditional principles governing preliminary injunctions since FTC Act § 15(b) only requires the FTC to make a showing that the injunction “would be in the public interest,” while the burden of establishing a likelihood of success on the merits is relieved and instead left to the court’s discretion.

The SMARTER Act would amend FTC Act § 13(b) to carve-out suspected Clayton Act § 7 violations from the FTC’s power to seek preliminary injunctions. Also, Clayton Act § 15 would be revised to clarify that, in addition to the DOJ, the FTC has the power to challenge unconsummated mergers under that provision.  Therefore, both agencies’ preliminary motions would be reviewed using the traditional equitable standards.

FTC Chairperson Edith Ramirez argued in front of the Senate antitrust subcommittee that in practice, courts apply the same standards notwithstanding the different statutory language and therefore an amendment to her Agency’s enabling act is unnecessary. FTC commissioner Maureen Ohlhausen, on the other hand, is on the record in support of such a change.

Administrative Challenges

The FTC, but not the DOJ, may also challenge proposed M&A transactions by initiating administrative proceedings pursuant to FTC Act § 5 and Clayton Act § 11. While the DOJ usually dismisses merger challenges after an unsuccessful preliminary injunction ruling, it has been the practice of the FTC to seek injunctions while also simultaneously initiating administrative actions.  While the FTC ha not continued to challenge administratively mergers in the face of a negative preliminary injunction ruling, they are not prohibited from doing so.  This approach has led to uncertainly in the marketplace due to the potential for the FTC to continue to challenge administratively a merger even if it is denied a preliminary injunction.  And, because both agencies receive merger notifications under the Hart-Scott-Rodino Act, proponents of the legislation argue that it is unfair to companies that face challenges from the FTC (rather than the DOJ) based on the availability of the dual adjudicatory avenues available to the FTC, but not the DOJ.

The SMARTER Act would strip the FTC of its administrative authority by amending FTC Act § 5 to exclude initiation of administrative proceedings on the basis of merger review pursuant to Clayton Act § 7. Therefore, if the SMARTER Act becomes law, both the DOJ and FTC would be limited to a judicial forum to challenge unconsummated mergers under Clayton Act § 7.

Prognosis

The White House strongly opposes the SMARTER Act and publically stated as much in the days leading up to the House vote.

Even if this bill is stymied in either the Senate or by President Obama, it is likely that the measure will resurface in a subsequent congress.

You can read the text of the bill here.

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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 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

In December 2014, the States of Nebraska and Oklahoma filed a motion for leave to file a complaint against the State of Colorado with the Supreme Court of the United States (SCOTUS).  The motion argued, among other things, that Colorado’s recreational marijuana laws are allegedly preempted by the Controlled Substances Act and they cause increase drug trafficking and other crimes in Nebraska and Oklahoma.  As such, Nebraska and Oklahoma sought leave from SCOTUS to file a complaint against Colorado on the same basis and to request that SCOTUS strike down and enjoin Colorado’s recreational marijuana laws.

On March 21, 2016, however, SCOTUS issued an order denying Nebraska and Oklahoma’s request.  The denial was without explanation.  Instead, it simply states that “[t]he motion for leave to file a bill of complaint is denied.”  More interesting, however, is the fact that Justice Thomas, joined by Justice Alito issued a dissenting opinion, arguing that the Court not only should have granted the motion and permitted the filing of a complaint, but that SCOTUS was constitutionally and statutorily obligated to do so.

Specifically, the dissent argued that Article III of the Constitution provides, in part, that “[i]n all Cases . . . in which a State shall be [a] Party, the supreme Court shall have original Jurisdiction.”  Further, and in accordance with that Constitutional provision, Congress has also statutorily provided that SCOTUS “shall have original and exclusive jurisdiction of all controversies between two or more States.”  See 28 U.S.C. § 1251(a).  As such, the dissent reasoned that because neither the Constitution nor the statute provides SCOTUS with discretion in exercising original jurisdiction over disputes between states, the Court was required to hear the case.

 

 

 

The SEC recently granted no-action relief to 15 of 18 companies related to shareholder proposals for proxy access.  The basis for the relief was the company had already adopted a proxy access by-law and therefore the shareholder proposal was excludable under Rule 14a-8(i)(10).

Shareholder proponent James McRitchie published a blog post suggesting this tactic will ultimately backfire.  According to Mr. McRitchie:

“Entrenched boards and managers who think they have won by gaming the system with unworkable proxy access bylaws will find only temporary ‘relief’ from shareholder action by filing for an exemption under Staff’s newly defined definition of ‘substantial implementation.’ We will be back next year and every year after that if necessary. Binding bylaw resolutions are much more prescriptive than precatory proposals. Gaming the system is likely to come back to haunt you because your hands will be tied when those resolutions pass… and they will.”

I’m confident Mr. McRitchie will be submitting proposals next year as he described but less confident his proposals will pass.

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 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

Rule 14a-4(a)(3) requires that the form of proxy “identify clearly and impartially each separate matter intended to be acted upon.”  The SEC has issued a Compliance and Disclosure Interpretation, or CDI, on how a registrant should describe a Rule 14a-8 shareholder proposal on its proxy card.

According to the CDI, the proxy card should clearly identify and describe the specific action on which shareholders will be asked to vote.  This same principle applies to both management and shareholder proposals.  For example, it would not be appropriate to describe a management proposal to amend a company’s articles of incorporation to increase the number of authorized shares of common stock as “a proposal to amend our articles of incorporation.”  Similarly, it would not be appropriate to describe a shareholder proposal to amend a company’s bylaws to allow shareholders holding 10% of the company’s common stock to call a special meeting as “a shareholder proposal on special meetings.”

The CDI gives several other examples of inadequate descriptions for other matters.

Unfortunately, the CDI does not tell us what an adequate description is, other than “A shareholder proposal to amend the company’s bylaws to allow shareholders holding 10% of the company’s common stock to call a special meeting.”  But proxy cards aren’t that well suited for lengthy descriptions.

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 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

U.S. Senators Tammy Baldwin (D-WI) and Jeff Merkley (D-OR) introduced legislation to increase transparency and strengthen oversight of activist hedge funds. According to the bill’s authors, the Brokaw Act is named for a small Wisconsin town that went bankrupt after an out-of-state hedge fund closed a paper mill that had provided good jobs to the town for over 100 years. The authors believe the activist hedge fund bought up the legendary Wausau Paper Company, forced out its executives and demanded short-term returns like buybacks at the expense of the company’s long-term future.

Principal changes of the Brokaw Act include requiring the SEC to revise its rules to:

  • Shorten the period for filing an initial Schedule 13D from 10 days to two business days.
  • Require short positions of over 5% to be disclosed.
  • Provide that beneficial ownership will include a pecuniary or indirect interest in shares.
  • Define “person” to include those engaged in coordinating actions.

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 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

U.S. Department of the Treasury’s Office of Financial Research, or OFR, has issued a brief titled “Mind the Gaps: What Do New Disclosures Tell Us About Life Insurers’ Use of Off-Balance-Sheet Captives?” The brief analyzes recent regulatory reforms to strengthen disclosure and asset quality standards for U.S. life insurers’ use of captive reinsurance. Because of limitations and exemptions, disclosure requirements apply to only 35 percent of the captive industry.

Beginning in 2000, state regulators increased the reserve requirements for a large portion of the life insurance industry. The changes affected term life and universal life policies with secondary guarantees. Many life insurers, regulators, and rating agencies later agreed the new requirements were excessive. As a result, some states allowed insurers to finance a portion of these reserves through captive reinsurance companies. In a captive reinsurance transaction, a life insurance company transfers risk to a captive reinsurer that is part of the same parent group.

OFR has raised concerns about insurers’ use of captives. Many states do not hold captives to the same standards as traditional insurers because captive insurance laws were initially developed to address self-insurance by corporations. Some states have allowed captives to fund their reserves with nontraditional assets, such as bank letters of credit and parental guarantees. These assets are not diverse, high-quality investments and could be riskier than traditional assets.

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 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The Dodd-Frank Act  requires “securitizers” to retain at least five percent of the underlying credit risk.  The Loan Syndications and Trading Association, or LSTA, challenged several aspects of the related rules jointly adopted by four regulators as contrary to law or arbitrary and capricious in the United States Court of Appeals for the District of Columbia Circuit.

The appeals court transferred the case to the District Court for lack of statutory authorization to review the rule.  The court noted the Exchange Act provides a limited grant of jurisdiction for appellate review.   Only rules implementing specific, enumerated  sections of the Exchange Act are entitled to direct review.  The section at issue  was not among them.

The parties argued that other statutes with direct review provisions provided authority for the court to review parts of the challenged rules. The court found those other statute did not authorize review of a rule adopted by multiple agencies.

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 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.