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On October 16, 2020, the SEC adopted amendments to codify and modernize certain aspects of the auditor independence framework. The rule proposal was published in December 2019. The current audit independence rules were created in 2000 and amended in 2003 in response to the financial crisis facilitated by the downfall of Enron, WorldCom and auditing giant Arthur Andersen, and despite evolving circumstances have remained unchanged since that time. The regulatory structure lays out governing principles and describes certain specific financial, employment, business, and non-audit service relationships that would cause an auditor not to be independent. Like most SEC rules, the auditor independence rules require an examination of all relevant facts and circumstances.
Somewhere, way in the back of your closet, you may have a white cotton sport jacket or a business suit with shoulder pads. They’re garish, woefully out of style, but you can still remember when they were the height of couture, and wearing them felt so very natural. Every time you considered parting with these treasures from the past, you just couldn’t pull the trigger. For reasons unknown, style being a fickle mistress, you wake up one day and you see one or two of the “in” crowd wearing parachute pants and moon shoes with Velcro closures. Voila, everything old is new again.
In a year of numerous regulatory amendments and proposals, COVID-newsworthy capital markets events, and endless related topics, and with only one blog a week, this one is a little behind, but with proxy season looming, it is timely nonetheless. In July 2020, the SEC adopted controversial final amendments to the rules governing proxy advisory firms. The proposed rules were published in November 2019. The final rules modified the proposed rules quite a bit to add more flexibility for proxy advisory businesses in complying with the underlying objectives of the rules.
Palm Beach Securities Attorney Laura Anthony Provides a Global Perspective on US Public Markets There was a time when a midnight coup in some far-off land sent US investors scurrying for the sidelines. Hackneyed invest-in-gold-now ads appeared everywhere, from out of nowhere, and cash poured into money market accounts with the veracity of melting snow in an Aspen avalanche. The Venezuelan government is so disordered that it’s unlikely even Venezuelans know who’s running the show. North Korea unabashedly touts their nuclear weapons capabilities like Ralphie Parker with an official Red Ryder carbine action air rifle.
Palm Beach Securities Attorney Laura Anthony Examines the Coronavirus Outbreak as it Relates to the Public Markets The possibility of a global pandemic virus spreading out of control is indeed terrifying. There is a very specific feeling of helplessness that accompanies fighting an enemy that is invisible, relentless and able to move among us silently, without remorse or hesitation. The investing public is rarely concerned about other catastrophes such as earthquakes that can spawn tidal surges, dirty bombs or even war.
Corporate Finance Attorney Laura Anthony Explains There’s an old adage in the financial industry: “In an up market, everyone is a genius.” The saying is dated and a bit cynical, but everyone still understands the message. The problem is that it simply isn’t true. It should more accurately be phrased: “In an up market, everyone thinks they can’t be taken.” There’s one particular hazard that rears its head in a bull market: financial scalawags take advantage of the over-eager investment public and pitch an array of bogus financial instruments. Ultimately, whether it’s life insurance policies that have been bundled or foreign government backed bonds, it all comes down to the Ponzi.
Corporate Finance Attorney Laura Anthony Discusses Staying Ahead of the Curve as New Business Sectors Emerge Every profession has its own specific demands, many of which seem daunting to those in another line of work. Physicians are required to work in close contact with patients infected with increasingly virulent pathogens. Fund managers must make decisions that can result in exhilarating success or dismal failure, and attorneys must consider every possible plan of action in helping advise their clients on which option will result in the most beneficial outcome.
Only a select few recognize sweeping socioeconomic change as it is occurring. The rest of the world only sees it in hindsight. Paradigm Shift: an important change that happens when the usual way of thinking about or doing something is replaced by a new and different way. – Merriam-Webster Scholars and luminaries held fast to the belief that the foundation of Western civilization was comprised of certain building blocks that were impervious to change. Eastern and Western philosophy would never integrate; innovation and invention were exclusively the progeny of large corporations; and the concept of replacing hard currency with a virtual, electronic counterpart was nothing short of science fiction.
Pandemic flu outbreaks and civil unrest are like a protein-rich diet for US public markets. Analysts can slide beads around on abacuses all day, postulate theories and attempt to explain it, but the resiliency of the US markets defies rationale. New Year’s Day 2020 was a day like any other. COVID-19 had yet to come ashore. No one dreamed that curfews, home-schooling and self-quarantining would become commonplace by the second week of March. As for the recent coast-to-coast wave of civil unrest, Nostradamus himself couldn’t have called that one. Yet these things occurred.
Regardless of the economic climate, the effectiveness of any law firm is determined by the proficiency of their support staff. In turn, the proficiency of a law firm’s support staff is determined by establishing a clearly defined hierarchy, understanding the strengths and specialties of each admin and maintaining effective communications between the admin team and Senior Partners. These days, the importance of being prepared is more valuable than ever. We have been shown in no subtle manner that the fundamental business environment we operate in can change entirely without forewarning. The cliched, go-to axiom “expect the unexpected” can be more accurately revised: “prepare for the unexpected.”
According to attorney Sally Kane, business journalist, attorneys experience an amount enormous job stress, moreso than professionals in other fields. Due to prolonged stress, most attorneys will eventually be forced to cope with career burnout to one extent or another. Deadlines, billing pressures, client demands, long hours, changing laws, and other demands all combine to make the practice of law one of the most stressful jobs out there. Throw in rising business pressures, evolving legal technologies, and climbing law school debt and it’s no wonder lawyers are stressed.
One year after proposing amendments to the financial statements and other disclosure requirements related to the acquisitions and dispositions of businesses, in May 2020 the SEC adopted final amendments (see here for my blog on the proposed amendments HERE). The amendments involved a long process; years earlier, in September 2015, the SEC issued a request for public comment related to disclosure requirements for entities other than the reporting company itself, including subsidiaries, acquired businesses, issuers of guaranteed securities and affiliates, which was the first step culminating in the final rules (see HERE).
Now that the market can review and dissect two quarters of COVID-related disclosures and reporting companies are gearing up for third-quarter reporting, COVID disclosures are no longer pure speculation. Following the two official guidelines released by the SEC (Disclosure Guidance Topic No. 9A which supplemented the previously issued Topic No. 9), a new CD&I issued on COVID-19 executive employment benefits, and numerous unofficial statements and speeches on the topic, the investment community and reporting companies are navigating the areas that require the most attention and thoughtful disclosure. Not surprisingly, the areas requiring the greatest consideration are management, discussion and analysis (including human capital disclosures and forecasting), risk factors, and internal controls over financial reporting.
In March 2019, the SEC adopted amendments to Regulation S-K as required by the Fixing America’s Surface Transportation Act (“FAST Act”) (see HERE). Among other changes, the amendments allow companies to redact confidential information from most exhibits without filing a confidential treatment request (“CTR”), including omitting schedules and exhibits to exhibits. Likewise, the amendments allow a company to redact information that is both (i) not material, and (ii) competitively harmful if disclosed without the need for a confidential treatment request. The enacted amendment only applies to material agreement exhibits under Item 601(b)(10) and not to other categories of exhibits, which would rarely contain competitively harmful information.
International Business Operations In December 2019, the SEC Division of Corporation Finance issued CF Disclosure Guidance: Topic No. 8 providing guidance related to the disclosure of intellectual property and technology risks associated with international business operations. The global and technologically interconnected nature of today’s business environment exposes companies to a wide array of evolving risks, which they must individually examine to determine proper disclosures using a principles-based approach. A company is required to conduct a continuing analysis on the materiality of risks in the ever-changing technological landscape to ensure proper reporting of risks. To assist management in making these determinations, the SEC has issued additional guidance.
Major Changes for OTC Markets Companies Despite an unusual abundance of comments and pushback, on September 16, 2020, one year after issuing proposed rules, the SEC has adopted final rules amending Securities Exchange Act (“Exchange Act”) Rule 15c2-11. The primary purpose of the rule amendment is to enhance retail protection where there is little or no current and publicly available information about a company and as such, it is difficult for an investor or other market participant to evaluate the company and the risks involved in purchasing or selling its securities. The SEC believes the final amendments will preserve the integrity of the OTC market, and promote capital formation for issuers that provide current and publicly available information to investors.
Although many aspects of an IPO are unaffected by a pandemic, assuming the capital markets continue to have an appetite for public offerings, the grueling road show has gone virtual, and it may be here to stay. An old-fashioned road show involved an intense travel schedule and expensive setup. The new virtual road show can be completed in half the time and a fraction of the price, and interestingly, the IPO’s that have been completed since March 2020, have all priced their deals at the midpoint or higher of their ranges. The lack of face-to-face presentations is not hurting the deals.
Economy Change is never invited and then welcomed with open arms. Change is inevitable, so it simply thrusts itself upon us. Facetime, Skype and various other audiovisual conferencing platforms were considered contingency options only a few months ago. They were used somewhat begrudgingly when flights were canceled or schedules conflicted. Although many forward-thinking micro-managers used them as primary forms of conferencing, there were plenty who did not. Those who once considered audiovisual conferencing as “second best” to the real thing have been forced to re-evaluate their perspective.
Pubco CEO, officers and directors fall into two camps: “Going public was the best decision we ever made,” and “If we knew then what we knew now, we would have stayed private.” There is a very simple reason that going public transactions like IPO’s and reverse mergers go bad. The control persons who decided to access the public markets were most likely authorities and experts in their respective fields – biotechnology, communications, transportation and entertainment. However, they lacked a fundamental understanding of what is involved in going public, and successfully staying public. Taking a private company public is nothing short of creating a new company on top of an existing company. The private company was built with careful planning, persistence, and the ability to adapt. The formation of the public version of the subject company requires just as much meticulous effort.
The NYSE MKT is the small- and micro-cap exchange level of the NYSE suite of marketplaces. The NYSE MKT was formerly the separate American Stock Exchange (AMEX). In 2008, the NYSE Euronext purchased the AMEX and in 2009 renamed the exchange the NYSE Amex Equities. In 2012 the exchange was renamed to the current NYSE MKT LLC. The NASDAQ and NYSE MKT are ultimately business operations vying for attention and competing to attract the best publicly traded companies and investor following. The NYSE MKT homepage touts the benefits of choosing this exchange over others, including “access to dedicated funding, advocacy, content and networking and the industry’s first small-cap services package.”
The topic of reporting requirements and distinctions between various categories of reporting companies has been prevalent over the past couple of years as regulators and industry insiders examine changes to the reporting requirements for all companies, and qualifications for the various categories of scaled disclosure requirements. As I’ve written about these developments, I have noticed inconsistencies in the treatment of smaller reporting companies and emerging growth companies in ways that are likely the result of poor drafting or unintended consequences. This blog summarizes two of these inconsistencies.
The SEC Division of Corporation Finance (CorpFin) reviews and comments upon filings made under the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”). The purpose of a review by CorpFin is to ensure compliance with the disclosure requirements under the federal securities laws, including Regulation S-K and Regulation S-X, and to enhance such disclosures as to each particular issuer. CorpFin will also be cognizant of the antifraud provisions of the federal securities laws and may refer a matter to the Division of Enforcement where material concerns arise over the adequacy and accuracy of reported information or other securities law violations, including violations of the Section 5 registration requirements. CorpFin has an Office of Enforcement Liaison in that regard
As merger and acquisition (M&A) transactions completed its most active year since the financial crisis, it is helpful to go back to basics. Activity has been prevalent in all market sectors, including large, mid and small cap and across all industries, including biotech, financial services, technology, consumer goods and services, food and beverage and healthcare, among others. Although I’ve written about M&A transactions multiple times, this will be the first time I’ve given a broad overview of the forms that an M&A transaction can take.
On May 11, 2016, the Financial Crimes Enforcement Network (“FinCEN”) issued new final rules under the Bank Secrecy Act requiring financing institutions, including brokerage firms, to adopt additional anti-money laundering (AML) procedures that include specific due diligence and ongoing monitoring requirements related to customer risk profiles and customer information. In addition, the new rules require financial institutions to collect and verify information about beneficial owners and control person of legal entity customers.
Remarkably Effective and Widely Misunderstood Introduction A recent article in the Wall Street Journal by Ruth Simon revealed that, “Roughly a year after the passage of new rules making it easier for fledgling businesses to tap U.S. capital markets, just a handful of them have succeeded in doing so. A Phoenix-based startup that makes three-wheeled vehicles raised roughly $17 million through one such mini-IPO, in which small companies can raise as much as $50 million by issuing securities. Two other companies together have raised nearly $70 million for real estate investments, while a community bank with operations in three Southern states has issued stock for a merger deal.”
On July 30, 2018, the Financial Industry Regulatory Authority (FINRA) published a Special Notice seeking public comments on how FINRA can support fintech developments including those related to data aggregation services, supervisory processes, including with the use of artificial intelligence, and the development of a taxonomy-based, machine-readable rulebook. The Special Notice, and fintech in general, necessarily includes blockchain technology, a topic FINRA has been examining for a few years now. Last July, FINRA held a Blockchain Symposium to assess the use of distributed ledger technology (DLT) in the financial industry, and earlier in January 2017 FINRA issued a report entitled “Distributed Ledger Technology: Implications of Blockchain for the Securities Industry” on the topic.
According to Wikipedia, a rainmaker is a business person “who brings in new business and wins new accounts almost by magic.” Even if the sources of new business activity are not readily apparent, the definition goes on, rainmaking involves generating “substantial new business or additional cash flow from sources sometimes outside established business channels, sometimes by connecting with people in non-traditional or hidden markets.” The definition could easily include: “see also attorney Laura Anthony.” In a contemporary business context, the term rainmaker is applied almost exclusively to law firms. These attorney-closer hybrids are rare indeed, and without them even the most intelligent and innovative collectives of legal minds will never be matched with the appropriate clientele.
According to Wikipedia, a rainmaker is a business person “who brings in new business and wins new accounts almost by magic.” Even if the sources of new business activity are not readily apparent, the definition goes on, rainmaking involves generating “substantial new business or additional cash flow from sources sometimes outside established business channels, sometimes by connecting with people in non-traditional or hidden markets.” The definition could easily include: “see also attorney Laura Anthony.” In a contemporary business context, the term rainmaker is applied almost exclusively to law firms. These attorney-closer hybrids are rare indeed, and without them even the most intelligent and innovative collectives of legal minds will never be matched with the appropriate clientele.
The new Regulation A/A+, which went into effect on June 19, 2015, is now three years old and continues to develop and gain market acceptance. In addition to ongoing guidance from the SEC, the experience of practitioners and the marketplace continue to develop in the area. Nine companies are now listed on national exchanges, having completed Regulation A+ IPO’s, and several more trade on OTC Markets. The NYSE even includes a page on its website related to Regulation A+ IPO’s. As further discussed herein, most of the exchange traded companies have gone down in value from their IPO offering price, which I and other practitioners attribute to the lack of firm commitment offerings and the accompanying overallotment (greenshoe) option.
Attorney Laura Anthony Analyzes the Crypto Debate Is it a security or is it a utility, currency, commodity or some other digital asset? That question has been continuously raised by those working with digital assets such as cryptocurrencies, virtual coins and tokens, including by digital asset issuers and companies that run platforms for the issuance or trading of such digital assets. Although the first and easy answer is that if a digital asset is being issued today, it is most assuredly a security upon issuance that needs to comply with the federal securities laws, the answer is not always that straightforward for digital assets that have been in the marketplace for a period of time, such as bitcoin and ether, or for new digital assets that are carefully being constructed to fall outside the purview of a securitized token.
On April 3, 2018, Spotify made a big board splash by debuting on the NYSE without an IPO. Instead, Spotify filed a resale registration statement registering the securities already held by its existing shareholders. The process is referred to as a direct listing. As most of those shareholders had invested in Spotify in private offerings, they were rewarded with a true exit strategy and liquidity by becoming the company’s initial public float.
DLT involves a distributed database maintained over a network of computers where information can be added by the network participants. Each added layer of information or data is referred to as a block. The network participants can share and retain identical cryptographically secured information and records. DLT uses either a public or private network. A public network is open and accessible to anyone that joins, without restrictions. All data stored on a public network is visible to anyone on the network, although it is encrypted.
More than a few unprofitable companies completed IPOs in 2019. The in-the-red frenzy fizzled out by the fall and some underwater issuers postponed or entirely scrapped their plans to go public. The topic has been beaten to death by financial wizards and industry analysts. Every conceivable opinion, outrage and examination has been chronicled and published. Now is the time to live and learn, then move forward.
In the 4th quarter of 2018, the SEC finalized amendments to the disclosure requirements for mining companies under the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”). See http://securitieslaw-blog.com/2019/02/05/updated-disclosures-for-mining-companies/?hilite=%27mining%27. In addition to providing better information to investors about a company’s mining properties, the amendments were intended to more closely align the SEC rules with industry and global regulatory practices and standards as set out in by the Committee for Reserves International Reporting Standards (CRIRSCO). The amendments rescinded Industry Guide 7 and consolidated the disclosure requirements for registrants with material mining operations in a new subpart of Regulation S-K.
