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

The SEC published its 2015 Annual Report on the Dodd-Frank Whistleblower Program.  The report indicates the SEC received 3,923 tips in fiscal year 2015, compared to 3,620 tips in fiscal year 2014.  From fiscal year 2012, the first year for which the SEC has full-year data, to fiscal year 2015, the number of whistleblower tips received by the Commission has grown more than 30%.

In separate testimony before Congress, SEC Chair Mary Jo White said “The SEC’s Whistleblower program continues to have a transformative impact on our enforcement program. The SEC’s Office of the Whistleblower is currently tracking over 700 matters in which a whistleblower’s tip has caused a matter under investigation or an investigation to be opened, or which have been forwarded to Enforcement staff for consideration in connection with an existing investigation.”

Of note is the amount of time the SEC spends on spurious whistleblower claims for awards. According to the report, one individual filed 25 claims where the claimant knowingly and willfully made false, fictitious, and fraudulent statements.  This individual’s claims for award failed to include even a remote factual nexus to the covered actions for which the individual applied.  SEC staff repeatedly explained to the claimant the rules governing the whistleblower program and the deficiencies of the claimant’s submissions.  The claimant, however, refused to withdraw any of the award claims.  Further, the claimant’s submission of frivolous claims harmed the rights of legitimate whistleblowers and hindered the Commission’s implementation of the whistleblower program by, among other things, delaying the Commission’s ability to finalize meritorious awards to other claimants and consuming significant staff resources.

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.

SEC Chair Mary Jo White gave testimony before the House of Representatives Committee on Financial Services.  Ms. White stated the staff is “engaged in a comprehensive review of the “accredited investor” definition. That review and the feedback received through that process will inform the SEC’s consideration of whether to change the definition of accredited investor, including whether net worth and annual income should be used as tests for determining whether a natural person is an accredited investor, and at what levels. As part of that review, the staff also plans to independently evaluate alternative criteria for the definition suggested by the public or other interested parties, giving careful consideration to both the need to facilitate capital formation and the need to protect investors.”

According to an InvestmentNews article Ms White said the staff study “would be released sometime in the next three to four months” and the SEC will move ahead “relatively soon” in its review of rules governing who can invest in unregistered securities.

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 SEC has qualified the Regulation A+ offering of Elio Motors which plans to make small cars costing about $7,000.  Elio plans a maximum offering size of $25 million.  The offering is being made through the facilities of StartEngine, which appears to be a slick new Regulation A+ platform.

The minimum purchase is 50 shares for $600.

How much does one of these cost to do?  The SEC filings disclose the following:

  • Legal fees:       $110,000
  • Audit fees:      $25,000
  • StartEngine:    $20 per investor in cash plus warrants
  • Specified broker-dealer administrative services:
    • $2.00 per domestic investor for the anti-money laundering check and bad actor checks
    • A fee equal to 1.0% of the gross proceeds from the sale of the shares offered
    • $225 for escrow account set up and a monthly administration fee of $25 per month
    • Up to $15.00 per investor (depending on whether subscription is by ACH or wire) for processing incoming funds, and $15.00 per wire for outbound funds to Elio upon the closing of the offering
    • A technology service fee of $2.00 for each subscription agreement executed via electronic signature
    • Itemized fees are capped at $399,690 for the minimum subscription amount required to close and up to $953,790 for the maximum amount including oversubscription

See our previous analysis of Regulation A+ offerings that have been qualified here.

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.

ISS has issued the following policy updates for 2016.

Overboarding

Current ISS policy considers a director “overboarded” if he or she sits on more than six public company boards – or if he or she is also a CEO, more than three public company boards (not counting subsidiaries of the CEO’s “home board”). However, the increasing demands on public company directors over the decade since that framework was first developed led ISS to review its overboarding policy.

Under the updated ISS policy, directors who are not CEOs will be considered overboarded if they sit on more than five, down from six, public company boards. However, ISS will not recommend withhold votes against such directors under this new policy for the first year, to allow those directors who sit on more than five public company boards to plan for an orderly transition if they wish to reduce their board commitments.

At this time, ISS has decided not to change the policy threshold at which a public company CEO will be considered “overboarded” (currently set at no more than two “outside” board seats for a CEO).

Proxy Access

ISS is using the policy development process to clarify the analytical framework it will use to analyze proxy access nominations. This framework is conceptually similar to the analytic framework ISS uses in analyzing proxy contests, but tailored more to the factors which might lead a shareholder to pursue change through proxy access nominations rather than a contested solicitation. Details will be included in a forthcoming ISS “FAQ” document.

Unilateral Governance Changes Which Adversely Affect Shareholder Rights

When a unilateral board amendment of the articles or bylaws adversely affects shareholder rights, current ISS policy provides for adverse vote recommendations on individual directors or the full board at the next annual meeting.  Recognizing that investors may have different expectations for established public companies versus those newly public, ISS is implementing two distinct policy responses. For established public companies, the updated policy generally calls for continuing to withhold votes from directors who have unilaterally adopted a classified board structure or implemented supermajority vote requirements to amend the bylaws or charter. For newly-public companies which have taken action to diminish shareholder rights prior to or in connection with the IPO, the updated policy calls for a case-by-case approach in subsequent years, with significant weight given to shareholders’ ability to change the governance structure in the future through a simple majority vote, and their ability to hold directors accountable through annual director elections. A public commitment by the company to put the adverse provisions to a shareholder vote within three years of the IPO can be a mitigating factor.

Compensation of Externally-Managed Issuers

Insufficient disclosure of compensation arrangements for executives at an externally-managed issuer (EMI) is not currently considered a problematic pay practice under ISS policy.  Under the revised policy, an EMI’s failure to provide sufficient disclosure for shareholders to reasonably assess compensation for the named executive officers will be deemed to be a problematic pay practice, and generally warrant a recommendation to vote against the say-on-pay proposal.

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 SEC announced that an investment advisory firm, two owners, and a former chief compliance officer have agreed to settle charges that the firm again violated the custody rule after being reprimanded for violations only a few years before.

Sands Brothers Asset Management LLC and the two owners agreed to pay a $1 million penalty and will be suspended for a year from raising money from new or existing investors.  They also must have a compliance monitor for three years.

The custody rule requires firms to obtain independent verification of assets when they can access or control client money or securities so investors know they are protected from misuse or theft.  Sands Brothers and its two owners first landed in the SEC’s crosshairs in 2010 when they were subjects of an enforcement action for custody rule violations and agreed to settle the charges by paying a $60,000 penalty.  They faced new charges in an administrative proceeding instituted in October 2014 when the SEC Enforcement Division alleged the firm was repeatedly late in providing investors with audited financial statements of its private funds.

“There is no place for recidivism in the securities markets,” said Andrew M. Calamari, Director of the SEC’s New York Regional Office.  The owners “missed their opportunity to right a previous wrong and instead merely repeated their custody rule violations, so now they face more severe consequences.”

The defendants did not admit or deny the SEC’s charges.

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.

CFTC staff issued a preliminary report regarding the swap dealer de minimis exception. Under CFTC rules, market participants who exceed $8 billion in gross notional swap dealing activity over a twelve-month period are required to register with the Commission as swap dealers during the phase-in period currently in effect. This phase-in period is scheduled to end, and the threshold will fall, to $3 billion in December 2017, unless the Commission takes action to amend the de minimis exception.

The preliminary report discusses the background of the de minimis exception and swap dealer regulation, as well as the available swap data used in developing estimates of swap dealing activity. The preliminary report also discusses the potential effects of raising or lowering the threshold and several possible alternative approaches to the de minimis exception.

CFTC Commissioner J. Christopher Giancarlo said “The issuance of this report is a reminder that the CFTC botched the policy analysis in 2012 when it implemented its current swap dealer registration de minimis rules. Dodd-Frank’s remedy for swap dealer counterparty risk is to move more swaps from bilateral to central counterparty clearing, not to make it more burdensome to transact cleared swaps.”

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.

 

Registered statements are “declared effective” by the SEC; Regulation A+ offering documents are “qualified” by the SEC, and when it happens an EDGAR document called “QUALIF” is generated.  Per my review, the following Regulation A+ transactions that were filed after the effective date of the Regulation A+ rules have been qualified by the SEC.

Med-X, Inc.:  A Tier 2 offering for $15 million.

ralliBox, Inc.:   A Tier 2 offering for $3 million.

Groundfloor Finance Inc.:  This issuer has had two Tier 1 offerings qualified, the most recent for $1.5 million.

Costal Financial Corp.:  A merger proposal categorized as Tier 1 valued at $13 million.

Strategic Global Investments Inc.:  A Tier 1 offering for $2.8 million.

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.

At a recent conference focused on FCPA matters, Andrew Ceresney, Director, SEC Division of Enforcement, focused on the benefits of self-reporting and cooperating with the SEC on FCPA matters. Mr. Ceresney noted that the Enforcement Division has determined that going forward, a company must self-report misconduct in order to be eligible for the Division to recommend a deferred prosecution agreement or non-prosecution agreement to the Commission in an FCPA case.  He also stated he was hopeful that this condition on the decision to recommend a DPA or NPA will further incentivize firms to promptly report FCPA misconduct to the SEC and further emphasize the benefits that come with self-reporting and cooperation.

While it is now known where the SEC stands, in reality the Enforcement Division’s position just implements historical practice. In each FCPA case where the SEC has previously entered into a DPA or NPA, the company involved self-reported the violations, and then provided significant cooperation throughout the investigation.

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 SEC has released an updated draft EDGAR filer manual. According to the draft manual, EDGAR will be updated to include the following new submission form types required by Regulation Crowdfunding:

  • C: Offering Statement
  • C-W: Offering Statement Withdrawal
  • C-U: Progress Update
  • C-U-W: Progress Update Withdrawal
  • C/A: Amendment to Offering Statement
  • C/A-W: Amendment to Offering Statement Withdrawal
  • C-AR: Annual Report
  • C-AR-W: Annual Report Withdrawal
  • C-AR/A: Amendment to Annual Report
  • C-AR/A-W: Amendment to Annual Report Withdrawal
  • C-TR: Termination of Reporting
  • C-TR-W: Termination of Reporting Withdrawal

Issuers can access these submission form types from the “Regulation Crowdfunding” link on the EDGAR Filing Website. Additionally, issuers may construct XML submissions for these submission form types by following the “EDGAR Form C XML Technical Specification” document located on the SEC’s Public Website.

According to the filer manual, the new functionality will be present in EDGAR on December 14, 2015. However, Regulation Crowdfunding is not effective for the most part until 180 days after the regulation is posted in the Federal Register.

The draft filer manual is posted before Commission approval of potential regulatory changes in the manual, and is provided by the SEC as a service to its filing community to assist filers, agents, and software developers in their preparation of responses to potential changes the staff anticipates. Since this is a draft manual, the SEC retains the right to change any part of the manual before the new system release is made final.

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 Municipal Securities Rulemaking Board, or MSRB, published its first Compliance Advisory for Municipal Advisors, developed to assist municipal advisors with understanding and implementing the regulatory framework created by the MSRB as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The new compliance advisory highlights fundamental regulatory requirements for municipal advisors as developed by the MSRB and identifies potential risks associated with a failure to implement adequate compliance controls. The advisory does not include all municipal market risks and is not intended to address all the requirements of each MSRB rule or other federal securities laws applicable to municipal advisors.

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.