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

In 2006, the media conglomerate News Corporation, referred to as Old News Corp, entered into a Settlement Agreement to settle stockholder litigation filed in Delaware in 2005. Subject to certain exceptions, the Settlement Agreement prevents Old News Corp during a period of twenty years from maintaining a stockholder rights plan for longer than one year without obtaining stockholder approval.

In 2013, Old News Corp transferred its newspaper and publishing business into a wholly-owned subsidiary, referred to as New News Corp, and then spun off New News Corp to its stockholders pursuant to the terms of a Separation and Distribution Agreement. After the spin-off, Old News Corp was renamed Twenty-First Century Fox, Inc., which is now a broadcast and media company.

In June 2013, the board of New News Corp adopted a one-year rights plan. In June 2014, the board extended that plan for an additional year without obtaining stockholder approval. In an action commenced in Delaware, a stockholder of New News Corp alleges that New News Corp, which was formed years after the Settlement Agreement was signed and is not a party to the Settlement Agreement, is nonetheless bound by that agreement as a transferee or assignee of Old News Corp and, thus, that the 2014 extension of New News Corp’s rights plan was not permissible under the Settlement Agreement.

The court found paragraph 36 of the Settlement Agreement, which is governed by Delaware law, defines the universe of persons to be bound by the terms of the Settlement Agreement:

This Settlement shall be binding upon and shall inure to the benefit of the parties (and, in the case of the benefits, all Released Persons) and the respective legal representatives, heirs, executors, administrators, transferees, successors and assigns of all of such foregoing persons and upon any corporation, partnership, or other entity into or with which any party or person may merge or consolidate.

The court noted paragraph 36 expressly provides that the Settlement Agreement is to be binding on any entity into which Old News Corp merges or with which it consolidates, demonstrating that the parties knew how to specifically address the effect that certain significant corporate transactions would have on Old News Corp’s obligations under the Settlement Agreement. Paragraph 36 did not specifically reference other obvious forms of significant corporate transactions that may involve Old News Corp, namely asset transfers or spin-offs. Applying the interpretive principle that “the expression of one thing is the exclusion of another,” the court found the plain terms of Paragraph 36 suggest that the parties to the Settlement Agreement, which was negotiated by sophisticated counsel experienced in corporation transactions, did not intend for that contract to be binding on the recipient of assets in an asset transfer and spin-off transaction.

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 Board of Governors of the Federal Reserve Board has modified its Small Bank Holding Company Policy Statement to facilitate the sale of smaller community banks.

Under the final rule, a holding company with less than $1 billion in total consolidated assets may qualify under the policy statement, provided it also complies with the qualitative requirements. This new asset limit is set by statute.

Previously, only bank holding companies with less than $500 million in total consolidated assets that complied with the qualitative requirements could qualify under the policy statement.

The quantitative requirements are the bank holding company:

  • was not engaged in significant nonbanking activities either directly or through a nonbank subsidiary;
  • did not conduct significant off-balance sheet activities (including securitization and asset management or administration) either directly or through a nonbank subsidiary;  and
  • did not have a material amount of debt or equity securities outstanding (other than trust preferred securities) that are registered with the Securities and Exchange Commission.

Under the policy statement, holding companies that meet the qualitative requirements may use debt to finance up to 75 percent of the purchase price of an acquisition (that is, they may have a debt-to-equity ratio of up to 3.0:1), but are subject to a number of ongoing requirements. The principal ongoing requirements are that a qualifying holding company:

  • reduce its parent company debt in such a manner that all debt is retired within 25 years of being incurred;
  • reduce its debt-to equity ratio to .30:1 or less within 12 years of the debt being incurred;
  • ensure that each of its subsidiary insured depository institutions is well capitalized; and
  • refrain from paying dividends until such time as it reduces its debt-to-equity ratio to 1.0:1 or less.

The policy statement also specifically provides that a qualifying bank holding company may not use the expedited procedures for obtaining approval of acquisition proposals or obtaining a waiver of the stock redemption filing requirements applicable to bank holding companies under the Regulation Y unless the bank holding company has a pro forma debt-to-equity ratio of 1.0:1 or less.

The Fed has generally discouraged the use of debt by bank holding companies to finance the acquisition of banks or other companies because high levels of debt can impair the ability of the holding company to serve as a source of strength to its subsidiary banks. The Fed has recognized, however, that small bank holding companies have less access to equity financing than larger bank holding companies and that the transfer of ownership of small banks often requires the use of acquisition debt. Accordingly, the Fed adopted the policy statement to permit the formation and expansion of small bank holding companies with debt levels that are higher than typically permitted for larger bank holding companies.

Consistent with the proposed rule, the final rule applies the revised policy statement to savings and loan holding companies.

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 Commodity Futures Trading Commission (CFTC) is increasingly taking action on inaccurate reporting by market participants.  In the past year, the CFTC has entered into three settlements with market participants for filing inaccurate reports.

Recently, the CFTC settled with ICE Futures U.S., Inc. for $3 million for inaccurately filing clearing member reports and record data on transactions.  In the Matter of: ICE Futures U.S., Inc., CFTC Docket No. 15-17, Issued March 16, 2015. (ICE Settlement).  In approving the settlement, CFTC Enforcement Director Aitan Goelman said, “The CFTC cannot carry out its vital mission of protecting market participants and ensuring market integrity without correct and complete reporting by registrants, including DCMs (Designated Contract Markets). Today’s action makes clear that registrants who fail to meet their reporting obligations will be held accountable …”  CFTC Orders ICE Futures U.S., Inc. To Pay at $3 Million Civil Monetary Penalty for Recurring Data Reporting Violations, March 16, 2015 at p. 1 (press release).

The CFTC is particularly concerned with continuing to file inaccurate reports after the CFTC has brought the inaccuracy to the market participant’s attention.  In the ICE Futures case, “[m]any of the inaccurate and incomplete reports made by ICE Futures U.S. occurred after Commission staff informed ICE Futures U.S. of the reporting problems and requested that the problems be corrected.”  ICE Settlement at 2.   While noting that ICE Futures U.S. ultimately “did fully cooperate fully with the Department of Enforcement’s Investigation” and “took corrective action to address these reporting deficiencies,” initially ICE Futures U.S. “did not respond in a timely and satisfactory manner to inquiries from Commission [CFTC] staff.”  Id. at 5.  Director Goelman would conclude, “the CFTC takes a particularly dim view of reporting violations that continue over many months, especially after CFTC staff has repeatedly alerted the registrant in question to the problems in its reporting.”  Press release at 1.

In the first case of its kind, the CFTC has accused Kraft Food Groups, Inc. and former parent Mondelez Global LLC with manipulation pursuant to Section 6(c)(1) of the Commodities Exchange Act and Regulation 180.1 promulgated thereunder.  Regulation 180.1 makes it unlawful to recklessly employ manipulative devices.  Most would have though enforcement would have been directed at high frequency traders and not actual users of commodities like Kraft.

The CFTC alleges Kraft purchased $90 million in of wheat futures which, according to the CFTC, was far in excess of Kraft’s commercial needs.  The CFTC alleges Kraft desired the market to believe that it would take delivery of a portion of the wheat, which would lower the cash price of the wheat.

As explained in this article, Kraft’s indication that it intended to take delivery of wheat under its wheat contracts not only drove up the price of those contracts; it also drove down the price of other cash wheat delivery. The idea seems to be that the wheat growers and wholesalers who normally sold wheat to Kraft would see that Kraft was getting wheat delivered from its CBOT contracts, and would panic and dump their wheat for cheap since their big customer was looking elsewhere.

Kraft allegedly made $5.4 million dollars in the trades.  Even if the CFTC were successful in imposing triple damages as alleged in the complaint, market observers do not see this as bet the company litigation for Kraft given its size and the action may be settled.

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 its first enforcement action against a company for using improperly restrictive language in confidentiality agreements with the potential to stifle the whistleblowing process.

For those who follow this area, it was not a big surprise as the SEC has been known to be trolling for defendants to make a point.  I wouldn’t be surprised if there are others in the SEC’s cross hairs now, and if not, there soon will be soon.

More specifically, defendant KBR, Inc. used confidentiality statements in conjunction with internal investigations.  The statement provided as follows:

I understand that in order to protect the integrity of this review, I am prohibited from discussing any particulars regarding this interview and the subject matter discussed during the interview, without the prior authorization of the Law Department. I understand that the unauthorized disclosure of information may be grounds for disciplinary action up to and including termination of employment.

It’s important to note that the SEC was unaware of any instances in which:

  • a KBR employee was in fact prevented from communicating directly with SEC staff about potential securities law violations, or
  •  KBR took action to enforce the form confidentiality agreement or otherwise prevent such communications.

According to the SEC, the language found in the form confidentiality statement impedes  communications to the SEC by prohibiting employees from discussing the substance of their interview without clearance from KBR’s law department under penalty of disciplinary action.  As a result, according to the SEC, this language “undermines the purpose” of Section 21F and Rule 21F-17(a), which is to “encourage[e] individuals to report to the Commission.”

Without admitting or denying the findings, KBR chose to settle the action by paying a civil monetary penalty of $130,000.  In addition, among other things, KBR undertook to revise the form of confidentiality statement as follows:

Nothing in this Confidentiality Statement prohibits me from reporting possible violations of federal law or regulation to any governmental agency or entity, including but not limited to the Department of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General, or making other disclosures that are protected under the whistleblower provisions of federal law or regulation. I do not need the prior authorization of the Law Department to make any such reports or disclosures and I am not required to notify the company that I have made such reports or disclosures.

Can KBR claim unfair surprise by this enforcement action?  Absolutely.  The adopting release (page 201) only provides “Thus, an attempt to enforce a confidentiality agreement against an individual to prevent his or her communications with Commission staff about a possible securities law violation could inhibit those communications . . “  The proposing release (page 85) is pretty much the same and adds “The proposed rule would not, however, address the effectiveness or enforceability of confidentiality agreements in situations other than communications with the Commission about potential securities law violations.”  There is nothing here regarding the mere existence of a confidentiality agreement outside of trying to enforce it, and the rule is directed at communications with the SEC and not other law enforcement agencies.

Nonetheless, rather than encourage a tangle with the SEC, most will want to revise their confidentiality agreements, or adopt a policy, to make sure certain reporting will not violate law.  The revised KBR statement may not necessarily be the model to follow.  I note that, in the absence of other statutory restrictions, a carve out permitting reporting to the SEC only will satisfy the text of Rule 21F-17, and broader restrictions on reporting are not covered by the Rule.  Nonetheless, employers should be aware that broad restrictions may violate public policy as noted in footnote 82 in the proposing release.

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 charged the former CEO of Silicon Valley-based technology firm Polycom Inc. with using nearly $200,000 in corporate funds for personal perks that were not disclosed to investors. It’s the second enforcement action in this area that I recall, the other one occurred in 2011 and is discussed here.

The complaint begins by alleging a fairly pedestrian scheme of submitting false expense reports for meals and such and claiming customers or others were in attendance, when actually it was friends and family and the like.  Later the allegations turn more scandalous, describing in intimate detail $85,000 in trips to Bali, Indonesia and South Africa with the alleged perpetrators’ friends and wife and, in other cases, girlfriend. The trips were described as “site inspections” in advance of company sponsored events. The charges for the site inspections were allegedly buried in the event planning company’s invoices.

The complaint notes Polycom did not disclose activities such as the above in executive compensation disclosure.  By year the omissions are not stunning in nature.  According to the complaint, the compensation disclosures omitted approximately  $15,435 in 2010; approximately $28,478 in 2011; approximately $115,683 in 2012; and approximately $30,474 in 2013.  Nonetheless, this may lead many to scratch their head wondering why this is the best the SEC can come up with given the allegedly abusive nature of the conduct.  The reason is the SEC only has authority to enforce its own rules in civil actions and not pursue other serious charges.

Among other things, the complaint alleges the CEO filed false certifications on Form 10-K, even though the proxy statements were filed after that date.  Some refer to this as reverse incorporation by reference.  The certifications in the Form 10-K attach automatically to the later filed proxy statement, because the 10-K incorporates the later filed proxy.

Polycom discovered the activities, an internal investigation was conducted and its audit committee confronted the CEO according to the SEC.  As a result of the falsification of corporate records and his efforts to conceal the personal nature of his expenses, as alleged in the complaint, despite diligence, the SEC did not have reason to question the accuracy of Polycom’s statements about the CEO’s compensation or perks. On the other hand, the SEC alleged the CEO asserted his Fifth Amendment privilege against self-incrimination when asked questions about his expense report submissions, reimbursement by Polycom for personal charges, and Polycom’s executive compensation disclosures.

Polycom settled related  allegations without omitting or denying the findings. The SEC order notes, among other things, that Polcom filed erroneous proxy statements and inaccurate annual reports, and that Polycom failed to implement adequate internal controls.  According to the SEC Polycom incorrectly recorded the CEO’s personal charges as business expenses, and not compensation, and its books, records and accounts did not, in reasonable detail, accurately and fairly reflect its dispositions of assets.

Polycom agreed to cooperate in any and all investigations, litigations or other proceedings relating to or arising from the matters described in the SEC order. In addition it agreed to pay a civil money penalty in the amount of $750,000.

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.

 

On March 26, 2015, the SEC settled charges against 22 parties relating to arrangements by which companies not registered as broker-dealers purchased securities on behalf of Global Fixed Income, LLC (GFI) and received transaction-based compensation. The settlement generally requires each of the participants to pay disgorgements of profits and civil monetary penalties.

According to the SEC’s press release announcing the settlement, “Global Fixed Income essentially hired firms to act as brokers on its behalf and purchase billions of dollars of newly issued bonds to increase profitability in the bond market, yet none of the firms or their employees were registered to legally act as brokers.”

GFI, owned solely by Charles Perlitz Kempf, regularly purchased new issues of corporate bonds.   Because the new issues were often subject to limitations on the amount of the issue that could be allocated to each purchaser, GFI sought to increase its allocation by enlisting third parties to act as straw purchasers (the “purchasers”). GFI would transfer funds to accounts controlled by the purchasers, and the purchasers would purchase allocations of the new issues in their own names but on behalf of GFI and then transfer the securities to GFI. In turn GFI would sell the securities into the secondary market at a profit, and the profits would be split between GFI and the purchasers. All of these arrangements were set forth in written agreements between GFI in the purchasers. In some cases, the agreements even included representations by GFI that the purchaser was not required to register as a broker-dealer as a result of the arrangement.

The purchasers were not registered broker-dealers, although several of the purchasers were registered representatives of broker-dealers (the SEC found the GFI arrangements to be outside the scope of their duties as registered representatives). The SEC charged that these arrangement clearly amounted to effecting transactions in securities in exchange for transaction-based compensation in violation of Section 15 of the Securities Exchange Act.

Over a three year period, $4.8 billion in securities were purchased on behalf of GFI in approximately 2,500 trades by the purchasers, and the purchasers were paid an aggregate of $9.7 million in transaction-based compensation as a result. For their troubles, the parties must collectively pay $5 million in disgorgement of profits ($2.4 million of which must be paid by GFI and Kempf) and $1 million in civil penalties ($500,000 by GFI, $50,000 by each other entity, and $5,000 by each individual). In addition, Kempf has been banned from associating with a registered entity and being involved in a penny stock offering for a period of one year.

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 CFTC’s Division of Swap Dealer and Intermediary Oversight issued a no-action letter to futures commission merchants, swap dealers and major swap participants, referred to as registrants, that provides relief from certain requirements under Regulation 3.3(f).  The Regulation requires registrants to give the Commission their Chief Compliance Officer, or CCO, annual report not more than 60 days after the end of their fiscal year.

The letter grants registrants an additional 30 days to provide their annual reports to the Commission. The letter further states that the relief will remain in effect until the adoption of a rule or rule amendment that modifies the timing requirements of Regulation 3.3(f)(2), and that the Division retains the authority to condition further, modify, suspend, terminate, or otherwise restrict the terms of the no-action relief provided, in its discretion.

The no-action letter request was submitted by the Futures Industry Association and International Swaps and Derivatives Association.  Although those organizations did not request it, the CFTC extended the relief to major swap participants.

In granting the relief the CFTC recognized that the work and time that a CCO dedicates to the preparation of the annual report has value apart from informing the Commission as to the status of compliance at the registrant. The CFTC believes an additional 30 days will allow CCOs to devote sufficient time and resources to the creation of a report that facilitates an in-depth, substantial discussion on the state of the compliance program with the registrant’s senior management or board of directors.

It was also noted that futures commission merchants and swap dealers that are dually registered as broker-dealers have an annual report requirement as well under FINRA’s broker-dealer rules that occurs on or near 90 days after their fiscal year-end.  A common deadline will increase the accuracy of all reports.

 

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 adopted amendments to Regulation A and other rules and forms to implement Section 401 of the JOBS Act. Section 401 of the JOBS Act added Section 3(b)(2) to the Securities Act of 1933, which directed the SEC to adopt rules exempting from the registration requirements of the Securities Act offerings of up to $50 million of securities annually.  The exemption is commonly referred to as Regulation A+.

The adopting release spans at least 347 pages before you arrive at the text of the rules and the proposed forms.  Because of its length and complexity, a high level overview follows.

Offering Limits

Regulation A+ establishes two tiers of offerings.  Tier 1 has an annual offering limit of $20 million, including no more than $6 million on behalf of selling securityholders that are affiliates of the issuer.  Tier 2 has an annual offering limit of $50 million, including no more than $15 million on behalf of selling securityholders that are affiliates of the issuer.

Sales by Selling Securityholders

The regulation limits sales by selling securityholders in an issuer’s initial Regulation A+ offering and any subsequently qualified Regulation A offering within the first 12-month period following the date of qualification of the initial Regulation A offering to no more than 30% of the aggregate offering price.

Investment Limitations

Regulation A+ limits the amount of securities that an investor who is not an accredited investor under Rule 501(a) of Regulation D can purchase in a Tier 2 offering to no more than:

  • 10% of the greater of annual income or net worth (for natural persons)
  • 10% of the greater of annual revenue or net assets at fiscal year-end (for non-natural persons).

This limit does not apply to purchases of securities that will be listed on a national securities exchange upon qualification.

Issuers may rely on a representation of compliance with the investment limitation from the investor, unless the issuer knew at the time of sale that any such representation was untrue.  Taking a different approach than required by Rule 506(c) which permits general solicitation in public offerings, the SEC stated it is “cognizant of the privacy issues and practical difficulties associated with verifying individual income and net worth”  and, therefore, it was not “requiring investors to disclose personal information to issuers in order to verify compliance.” The SEC also noted that requiring issuer verification may result in unintended consequence of dissuading issuers from selling to nonaccredited investors in Tier 2 offerings by increasing compliance uncertainties and obligations.

Integration

Under the final rules, offerings pursuant to Regulation A will not be integrated

with:

  • prior offers or sales of securities; or
  • subsequent offers and sales of securities that are:
    • most registered offerings under the Securities Act;
    • made pursuant to Rule 701 under the Securities Act which relates to benefit plans;
    • made pursuant to an employee benefit plan;
    • made pursuant to Regulation S, which are offerings outside of the United States;
    • made pursuant to the JOBS Act crowdfunding exemption; or
    • made more than six months after completion of the Regulation A+ offering.

Exchange Act Registration

Regulation A+ conditionally exempt securities issued in a Tier 2 offering from the mandatory registration requirements of Section 12(g) of the Exchange Act, for so long as the issuer:

  • engages the services of a transfer agent that is registered with the Commission under Section 17A of the Exchange Act;
  •  remains subject to a Tier 2 reporting obligation;
  •  is current in its annual and semiannual reporting at fiscal year-end; and
  • had a public float of less than $75 million as of the last business day of its most recently completed semiannual period, or, in the absence of a public float, had annual revenues of less than $50 million as of its most recently completed fiscal year.

An issuer that exceeds either of the thresholds set forth in the last bullet point would be granted a two-year transition period before it would be required to register its class of securities pursuant to Section 12(g), provided it timely files all required ongoing reports during the transition period.  Registration would only be required if  the issuer exceeded the threshold in Section 12(g) of the Exchange Act ($10 million in assets and held by more than 2,000 persons or 500 persons who are not accredited investors).

Offering Statements

Offering statements must be qualified by the SEC before sales may be made pursuant to Regulation A.  Regulation A+ permits the offering statements to be declared qualified by a “notice of qualification” issued by the Division of Corporation Finance, pursuant to delegated authority, rather than requiring the Commission itself to issue an order.  The notice of qualification is analogous to a notice of effectiveness in registered offerings.

The regulation requires issuers to file offering statements with the SEC electronically on EDGAR.  Issuers have the option of  non-public submission of offering statements and amendments for review by Commission staff before filing such documents with the Commission, so long as all such documents are publicly filed not later than 21 calendar days before qualification.

Tier 1 and Tier 2 issuers must file balance sheets and related financial statements for the two previous fiscal year ends (or for such shorter time that they have been in existence).

Tier 2 issuers must include financial statements in their offering statements that are audited in accordance with either the auditing standards of the AICPA (i.e., U.S. Generally Accepted Auditing Standards) or the standards of the PCAOB.

Tier 1 and Tier 2 issuers must include financial statements that are dated not more than nine months before the date of non-public submission, filing, or qualification, with the most recent annual or interim balance sheet not older than nine months. If interim financial statements are required, they must cover a period of at least six months.

Part I of the offering statement will require certain basic information about the issuer, certifications as to eligibility to use Regulation A+ (including no bad actor disqualifications), whether it is a Tier 1 or Tier 2 offering, the amount and type of securities offered, anticipated fees, and the names of audit and legal service providers. Part I will be an eXtensible Markup Language (XML) based fillable form.  The XML based form will not require the issuer to purchase or maintain additional software or technology.

Part II of the offering statement will be a text file attachment containing the body of the disclosure document and financial statements, formatted in HyperText Markup Language (HTML) or American Standard Code for Information Interchange (ASCII) to be

compatible with the EDGAR filing system.  Part II will contain information on  risk factors, dilution, the plan of distribution and selling securityholders, use of proceeds, business operations, MD&A type information, identification of directors and executive officers, compensation information, ownership information, related party transactions and the like.

Part III of the offering statement will be text attachments, containing the signatures, exhibits index, and the exhibits to the offering statement, formatted in HTML or ASCII.  As adopted, issuers will be required to file the following exhibits with the offering statement: underwriting agreement; charter and by-laws; instrument defining the rights of securityholders; subscription agreement; voting trust agreement; material contracts; plan of acquisition, reorganization, arrangement, liquidation, or succession; escrow agreements; consents; opinion regarding legality; “testing the waters” materials; appointment of agent for service of process; and any additional exhibits the issuer may wish to file.

The rules provide for scaled disclosure for Tier 1 issuers in certain circumstances, particularly in the compensation area.  MD&A type disclosures are not scaled between Tier 1 and 2 issuers, but are not as extensive as required by Item 303 of Regulation S-K.

Ongoing Reporting

Tier 1 issuers must provide information about sales in such offerings and to update certain issuer information by electronically filing a Form 1-Z exit report with the SEC not later than 30 calendar days after termination or completion of an offering.

Tier 2 issuers must file electronically with the Commission on EDGAR annual and semiannual reports, as well as current event reports.  Tier 2 issuers must also file electronically a special financial report to cover financial periods between the most recent period included in a qualified offering statement and the issuer’s first required periodic report.

Relationship to State Securities Laws

The final rules provide for the preemption of state securities law registration and qualification in Tier 2 offerings because all sales are made to “qualified purchasers.” A qualified purchaser is defined to be any person to whom securities are offered or sold in a Tier 2 offering.

The final definition of “qualified purchaser” does not include offerees in Tier 1 offerings.  The final rules permit Regulation A issuers to test the waters and make offers in the pre-qualification

period at the federal level, but the states retain oversight over how these offerings are conducted at the state level.

States also retain authority to:

  • investigate and bring enforcement actions with respect to fraudulent transactions;
  • require the filing of any documents filed with the SEC “solely for notice purposes and the assessment of any fee;” and
  • enforce filing and fee requirements by suspending offerings within a given state.

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 testimony before a Senate committee, Federal Reserve Governor Daniel K. Tarullo suggested the threshold for the Volcker rule should be raised.  He noted the Volcker rule and the incentive compensation requirements of Section 956 of the Dodd-Frank Act are directed at concerns generally present only with larger institutions, but the Volcker rule by its terms applies to all banking organizations, and the incentive compensation provisions apply by their terms to all banking organizations with $1 billion or more in assets.   Governor Tarullo testified the threshold could be raised to $10 billion, noting that requiring smaller banks to comply is not worth whatever incremental prudential benefits that might be gained.

Governor Tarullo also discussed the $50 billion level established by Section 165 of the Dodd-Frank Act.  The import of this threshold is to require enhanced prudential standards and supervisory stress testing for banking organizations whose assets exceed that amount.  He noted the difficulty of customizing supervisory stress testing for banks under $70 billion.  Governor Tarullo stated the Fed derives some supervisory benefits from inclusion of these banks toward the lower end of the range in the supervisory stress tests.  However, he stated those benefits are relatively modest, and the Fed believes it could probably realize them through other supervisory means.

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 more than 520 attorneys and 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.