Securities Law Blog

Publicly traded companies making strategic pivots from their current primary business focus may be unintentionally becoming “shell companies” if they dispose or monetize their legacy business assets before, upon completion of, or shortly after their pivot. The NYSE is also considering suspensions for companies changing their primary business focus after listing.

A debt initial public offering (IPO) provides a viable alternative to the challenging traditional equity IPO to gain access to public markets for growth capital. For the right company at the right time under the right circumstances, it might make sense.

Consideration of a More Measured Approach for Smaller Public Companies

The SEC has expanded Rule 35d-1 of the Investment Company Act of 1940, known as the “Names Rule,” to require a fund to invest at least 80% of its assets in the manner suggested by its name, focusing on funds that advertise themselves as ESG or sustainable funds. Public companies should also hear the SEC’s message.

Regulation A issuers may be younger, smaller and less profitable than more established Form S-1 issuers, but they must still comply with numerous specific SEC regulations governing disclosures and procedural rules during ongoing public offerings. By enforcing Regulation A rule violations against ten microcap companies, the SEC has made clear that, despite any relaxation of restrictions on these offerings, well-established SEC rules apply to Regulation A offerings as much as they do to traditional registered offerings.

On May 16, 2023, the SEC announced settlements with ten ...

FINRA, NYSE and NASDAQ issue alerts to their members on the recent trend of significant unusual price increases on the day of or shortly after the IPOs of small-cap issuers, most of which involve issuers with operations in China and other foreign countries, as part of so-called “ramp and dump” schemes, and place the obligation to battle the schemes on underwriters as “gatekeepers to the public markets.”

We continue to see a strong interest among executive officers and directors in adopting Rule 10b5-1 sales plans, despite the current market downturn.  With economic uncertainty, a recent SEC enforcement action should be of note to insiders when adopting and structuring a 10b5-1 plan.

Investors need to understand the purposes for which an issuer’s net proceeds from a public offering are intended to be used. However, it appears lately that many issuers are routinely providing little specificity with regard to the allocation of their proposed net proceeds. Perhaps some issuers believe that the specific information required pursuant to Item 504 of Regulation S-K forces them to publicly reveal business plans that might put them at a competitive disadvantage. Even so, whether or not an issuer has a specific plan for its offering proceeds in place, there are many instances requiring special Use of Proceeds disclosure that an issuer may overlook.

On December 9, 2021, the SEC Office of the Advocate for Small Business Capital Formation released its 2021 annual report condensing a treasure trove of data related to exempt and registered offerings by small businesses for the period July 1, 2020 to June 30, 2021 and providing related policy recommendations to support such businesses.

The SEC and OTC Markets Group follow through on prohibiting brokerage firms from quoting prices for OTC stocks for which brokers don’t have current, and thus reliable, financial information. Shareholders and investors of more than 2,000 publicly traded OTC Pink No Information companies (about 16% of all OTC companies and 18% of all OTC Pink companies) will now find it more difficult to buy and sell those stocks on the Expert Market.

The SEC has recently permitted public companies with remote-first operations to circumvent the requirement that they report an address and phone number for their principal executive offices on the cover page of their Form S-1 registration statements. Is this a reflection of the “new normal” and, if so, has the SEC answered through these filings the fundamental question whether there is any longer a purpose for disclosing the location of a registrant’s principal executive offices?

Attacking information asymmetry between management and shareholders, the SEC charged eight companies for failing to disclose in Form 12b-25 filings that their reason for seeking a delayed annual or quarterly report was an anticipated restatement or correction of prior financial reporting. Public companies should be reminded that all filings – even arguably minor ones like Form NT – must be truthful and complete.

Spencer Feldman's article first appeared in Law360 (April 9, 2021, subscription required)

The SEC’s new release amends the rules governing “integration” permitting private placements and registered public offerings to occur shortly before, after or at the same time with each other. The amendments replace the SEC’s prior five-factor test with practical updates for today’s markets that particularly benefit smaller publicly traded companies.

Recognizing the longstanding need for a new approach to the regulation of finders who help smaller businesses raise early stage capital, the SEC has published a notice of a proposed exemptive order and request for comment to formalize the regulatory status of unregistered finders. The proposed finders exemption from broker-dealer registration would facilitate a role for unregistered finders in the capital-raising process and clarify the circumstances under which issuers can legally compensate finders who comply with specified conditions. The author’s thoughts on the proposed finders exemption follow a summary of the rule proposal.

Public companies and first-time issuers will pay about 16% less to register their securities with the SEC starting next month.

On August 26, 2020, the SEC adopted amendments to its business, legal proceedings and risk factors disclosure rules. All public companies, particularly smaller ones, can benefit from the SEC’s continuing commitment to a principles-based and company-specific approach to disclosure in registration statements, periodic reports and certain proxy statements filed with the SEC.   

Despite the continuing coronavirus global pandemic, business marches on, including compliance with applicable regulatory requirements. Regulatory bodies recognize that the reduced staffing, “social distancing” and other factors could hamper efforts to comply with various regulations. The U.S. Securities and Exchange Commission (“SEC”) has acted to ameliorate certain of the burdens publicly traded companies are currently facing. In addition, companies need to take into account the effects of COVID-19 on their businesses and regulatory disclosures, and we have highlighted certain significant considerations in this client alert.

In Casper Sleep’s initial public offering prospectus, the company states that the use of third-party paid marketing programs to promote its products presents the possibility of negatively affecting its reputation and subjecting it to fines and other penalties.

The SEC proposes rules to add a new category for individuals to qualify as accredited investors based on professional certifications and designations or credentials that show “financial sophistication.”  The SEC requests public input on exactly which industry exams, academic degrees and levels of job experience should be considered.   

This article was originally published by Bloomberg Law, October 2019.

While the SEC favors a more flexible principles-based approach to disclosure of business descriptions and risk factors as determined by a company’s management, a lack of bright-line, quantitative rules to specify when disclosure is required may lead to second guessing by regulators, among others.

The SEC staff will be actively monitoring the extent to which public companies and other market participants are identifying and addressing risks associated with the expected discontinuation of LIBOR, a common system of interest rates for financial transactions, past 2021.

The SEC’s Office of Investor Education and Advocacy warns investors to be skeptical of endorsements from famous influencers marketing new investment opportunities.

Prof. McClane’s extensive 20-year study of IPOs finds that, although boilerplate - as a substitute for specific disclosure and costly information gathering - may be an efficient (and perhaps strategically vague) means by which to make disclosure, efficiency comes at a high price to IPO issuers due to information-related costs such as underpricing and securities litigation.

Fraudsters may use SEC forms and filings to falsely claim SEC registration or that an offering was approved by the SEC. Don’t confuse that with the actual vetting by the SEC staff of disclosure during the review process and acceleration of effectiveness of a registered securities offering.

Letters to prospective investors like those included in the Lyft and Uber IPO prospectuses may be symbolic gestures by founders, chairpersons and CEOs to lead the selling effort, but nonetheless provide an insight into the unique mission, core beliefs and “karma” of today’s newest IPO companies, with the SEC closely monitoring the bounds of this informal disclosure.

The proposal would allow companies to more effectively consult with potential institutional investors to better identify acceptable offering terms in advance of a public offering, as compared to the current practice of repeated registration statement amendments to calibrate the public markets.

Companies need to contribute to society, says BlackRock Chairman and Chief Executive Officer Larry Fink, to deliver long-term financial growth and profitability and, ultimately, to attract and retain the support of institutional investors.

In order to avoid undue delay caused by the current partial government shutdown, issuers may wish to remove the “delaying amendment” on the face of their registration statements to become effective automatically after a 20-day statutory period following the filing. The SEC’s operations plan for the shutdown also includes this suggestion. Lack of the SEC’s normal review and clearance of registration statements raises policy questions.

Regulation A would be a logical choice for smaller, non-exchange traded public companies, particularly for broadly disseminated public offerings of their shares to “uplist” to Nasdaq and for subscription rights offerings to their shareholders.

Smaller publicly-traded companies that do not meet the public float requirements for Form S-4 incorporation by reference face an expensive and time-consuming public M&A process; the SEC’s focus on capital formation by smaller public companies should not overshadow efforts to aid in their future growth through acquisitions.

Acknowledging that there are substantial, but non-traditional relationships between workers and their 21^st century companies, Airbnb makes its case to broaden the exemption from registration that allows private companies to issue compensatory equity to employees to also extend to contractors such as hosts on its network.

Rep. Jeb Hensarling’s op-ed in The Wall Street Journal highlights five key capital formation bills that are now being considered to build a steady stream of small businesses for strong long-term economic growth and to restore U.S. competitiveness.

To promote capital formation by reducing compliance costs for smaller public companies, the SEC expands the pool of registrants that can take advantage of the scaled disclosure accommodations under SEC regulations.

There is a continuing debate about contributing factors to a declining IPO market with some pointing to the high level of IPO costs, particularly underwriting fees. Narrative disclosure of these costs may serve to make issuers more aware of those costs (as compared to those of alternative capital formation strategies) and may lead to calibrating those levels more closely in relation to the costs of taking a company public.

Younger companies increasingly seek clarity into their corporate social responsibilities by adopting a public benefit corporation structure and opting to be designated as a certified B corporation.

Corporate officers and directors are deemed to have signed a registration statement in reliance upon valid powers of attorney, but there may be a new concern.

On February 21, 2018, the SEC published interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents.  Below is a summary outlining this new disclosure category which impacts all public companies, regardless of their size, and applies to all prospectuses and periodic reports filed with the SEC.

Commissioner Jackson acknowledges that dual-class stock may benefit investors early in a company’s life cycle, but expresses concern that such benefit over time is both un-American and hurts a company’s trading value.

New staff interpretative guidance clarifies for publicly traded companies and their auditors and legal and tax advisors the applicability of reporting the impact of a change in tax rates on deferred tax assets under Item 2.06 of Form 8-K.

Public companies need to be proactive and forward-thinking on their disclosure obligations when confronted with internal investigative findings that a director, executive officer or key employee engaged in sexual misconduct.

If your company’s databases “may be” subject to unauthorized access, the SEC is likely to remind you of your disclosure obligations relating to cybersecurity risks and cyber breaches, including their costs and associated consequences.

The SEC’s FAST Act Modernization and Simplification of Regulation S-K release would leave the decision about omission of proprietary information in an SEC filing to the registrant, without filing a confidential treatment request.  This accommodation is not without potential issues.

In an exceptionally thoughtful column using the recent Social Capital Hedosophia SPAC IPO as his test case, author James Mackintosh suggests it's time to fix IPOs with smarter lock-ups, an auction process variant for price setting and more say by issuers over who gets stock.

Public companies and first-time issuers will pay 7.4% more to register their securities with the SEC starting next month.

This post first appeared in Securities Regulation Daily, a Wolters Kluwer publication, on August 29, 2017.

Item 401 of Regulation S-K requires that companies disclose the business experience of its directors, officers, nominees and significant employees in order for investors and stockholders to evaluate the management of a public company

This blog post highlights what we believe are the 20 most interesting statistics in the DERA’s report on registered initial public offerings and secondary equity offerings, and exempt Regulation D, Regulation A and Crowdfunding offerings.

U.S. federal securities laws apply to offers, sales and trading of digital securities in virtual organizations the same as in everyday stock sales.

The SEC staff frequently comments during its review process about the lack of an established corporate governance structure, such as board member independence and board committee composition, by OTC quoted issuers, even if not required by SEC and national securities exchange rules.

Former SEC Chairman Harvey L. Pitt takes a guess that one day we may see five to six pages-long summary disclosure documents with hyperlinks to the detailed information of issuers in previously filed periodic reports.

Orchard Platform’s electronic trading platform appears to have found safe legal ground at last to effect “securities” transactions in marketplace loans.

Special situations such as spin-offs and rights offerings offer alternative and potentially “cleaner” paths for micro- and small-cap issuers to become independent publicly traded companies.

Spotify and similar subscription-driven publishers have unique business advantages that make a direct listing potentially as attractive as a traditional IPO – a large customer base of potential investors and knowledge of direct response digital marketing techniques.

In compliance with Section 17(b) of the Securities Act of 1933, any and all compensation received from a specific company must be publicly stated in all research reports and other correspondence, with the amount and paying party disclosed.

The SEC’s final rules effectuate inflation adjustments required under the JOBS Act and make other helpful technical rule and form amendments.

Greenlight’s proposal - rejected by GM – argues for a dual-class common stock structure at GM consisting of dividend shares and capital appreciation shares to appeal to different investors in order to invigorate demand for the company’s shares.

The public meeting will be live streamed on the SEC website and agenda includes the current hot topic of unequal voting rights of shares.

The Snap founders’ overwhelming and much talked-about control of the company appears to be a reaction to onerous venture capital investment terms that they did not understand and diluted their power and were simply called “standard” by their lawyers.

Rights offerings have evolved into a transformative corporate transaction providing an opportunity to raise capital from existing shareholders first, then from the general public, via a streamlined registration on Form S-1 or shelf takedown with a built-in best efforts standby underwriting for outside investors.

Domino’s “Piece of the Pie Rewards” program is turning customers into shareholders.

At least half a dozen U.S. coal firms are preparing or exploring public offerings, according to The Wall Street Journal, kicking off the biggest wave of coal IPOs in two decades.

Airbnb and Uber, among others, have strong incentives to push back against laws and regulations with asymmetric costs and benefits.

Despite rising stock prices in 2016, it was a down year for the number and dollar-volume of IPOs, and a decline in the number of U.S.-listed public companies. The Wall Street Journal is concerned about the causes and effects of the IPO slump.

Print out and save these pages containing important SEC reporting deadlines for upcoming filings by calendar - fiscal year end public companies.

With three classes of shares – non-voting shares, one-vote shares and super-voting shares - Under Armour is experiencing an unusually wide spread in the market prices of its traded shares and it may not be because of the difference in voting rights.

Morgan Stanley’s Michael Grimes sees a robust, pent-up IPO market for 2017 and a big part of his prediction is based on buyers redeploying capital from M&A buyouts.

Effective immediately, companies do not need to include so-called “Tandy” representations in their responses to SEC staff comments on periodic reports and registration statements.

With the aim of generating greater interest in smaller public companies with wider trading increments.

California now accounts for a fifth of all public companies and, with Massachusetts, New York and Texas, 40% of all public companies; California, New York and Texas account for a third of the Fortune 500.

Public companies and first-time issuers will pay 15% more to register their securities with the SEC starting next month.

Chair White discusses SEC efforts to provide more transparency on environmental, social and governance matters in public company periodic reports.

Boards of directors of small- and micro-cap issuers should consider adopting stock ownership guidelines to align the interests of its directors with the interests of stockholders and further promote the company’s commitment to sound corporate governance.

Recent IPOs by Twilio and Line are leading a revival for the tech IPO market this year.

As recommended by the SEC’s Advisory Committee on Small and Emerging Companies and the Forum on Small Business Capital Formation, the SEC has proposed expanding the pool of registrants that can take advantage of the scaled disclosure accommodations under SEC regulations.

The SEC has established four categories of filers with varying public float thresholds that are determined as of June 30 for reporting companies with calendar-fiscal years.

The SEC publishes 51 pages of unregistered soliciting entities that have been the subject of a variety of investor complaints.

Seeking public comment on how the SEC’s business and financial disclosure requirements in Regulation S-K can best be modernized from both an optimal content and scope and a presentation and delivery perspective.

Mark Cuban is pushing companies to go public earlier during their hyper-growth phase to spur more active equity capital markets.

The SEC’s whistleblower program provides substantial bounties for reporting alleged corporate fraud and stock manipulation.

Smaller reporting companies and emerging growth companies can save time and money knowing which sections of their Form 10-K and annual proxy statement can be omitted under SEC rules.

Nasdaq is now conducting a survey among market participants for a new rule that could prohibit directors receiving third party payments from being considered independent.

Chair Mary Jo White addressed the 45th annual “SEC Speaks” program to highlight what the SEC accomplished in 2015 and what the SEC is already advancing in 2016

Over the past few months, we have been increasingly asked by our corporate clients with pending IPO registration statements and by publicly traded companies with short-term funding needs to advise them on the spectrum of alternative sources of financing due to the current substantial volatility in stock trading and the resulting virtual standstill in their ability to access active public capital markets. 

The 2016 Disruptive Growth & Healthcare Conference will be held Wednesday, February 10 and Thursday, February 11 at Convene, 730 Third Avenue, New York City.

The SEC embraces regulatory simplification mandated by the FAST Act with two new rules that address the timing and cost challenges faced by smaller publicly traded companies.

This post discusses the SEC’s approval of two interim final rules mandated by the capital markets aspects of the Fixing America’s Surface Transportation Act, signed into law on December 4, 2015.  These rules address the timing and cost challenges faced by smaller publicly traded companies and are designed to ease disclosure requirements in connection with IPOs of emerging growth companies and certain registration statements filed by smaller reporting companies.

Proposed Rule 147 amendments would establish a new Securities Act exemption for intrastate offerings of securities by companies doing business in-state, including offerings relying upon newly adopted and proposed crowdfunding provisions of state securities laws.

On October 23, 2013, the U.S. Securities and Exchange Commission (the "SEC") proposed for comment amendments to the Securities Act of 1933, as amended (the "Securities Act"), to implement "Regulation Crowdfunding" in accordance with Title III of the Jumpstart our Business Startups (JOBS) Act.