SEC Amendments To Rules Governing Proxy Advisory Firms
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 (see HERE). 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.
The final rules, together with the amendments to Rule 14a-8 governing shareholder proposals in the proxy process, which were adopted in September 2020 (see HERE), will see a change in the landscape of this year’s proxy season for the first time in decades. However, certain aspects of the new rules are not required to be complied with until December 1, 2021.
The SEC has been considering the need for rule changes related to proxy advisors for years as retail investors increasingly invest through funds and investment advisors, in which the asset managers rely on the advice, services and reports of proxy voting advice businesses. It is estimated that between 70% and 80% of the market value of U.S. public companies is held by institutional investors, the majority of which use proxy advisory firms to manage the decision making and logistics of voting for thousands of proposals within a concentrated period of a few months. Proxy voting advice businesses provide a variety of services including research and analysis on matters to be voted upon; general voting guidelines that clients can adopt; giving specific voting recommendations on specific matters subject to a shareholder vote; and handling the administrative process of returning proxies and casting votes. The administrative tasks are usually electronic and, at times, can involve an automated completion of a ballot based on programed voting instructions.
The final vote was divided with the SEC Commissioners voting 3-1 in favor of the new rules. On the same day the SEC Commissioners, also in a 3-1 divided vote, endorsed guidance to investment advisors related to the new rules. The guidance updates the prior guidance issued in August 2019 – see HERE.
In essence, the amendments condition the availability of two exemptions from the information and filing requirements of the federal proxy rules, which are often used by proxy voting advice businesses, on compliance with tailored and comprehensive conflicts of interest disclosure requirements. In addition, the exemptions are conditioned on the requirements that (i) companies that are the subject of proxy voting advice have that advice made available to them in a timely manner; and (ii) clients of proxy advice businesses are made aware of a company’s response to the advice in a timely manner.
The amendments codify the SEC’s longstanding view that proxy advice constitutes a solicitation under the proxy rules and is thus subject to the anti-fraud provisions. In particular, the amendment changes the definition of “solicitation” in Exchange Act Rule 14a-1(l) to specifically include proxy advice subject to certain exceptions, provides additional examples for compliance with the anti-fraud provisions in Rule 14a-9 and amends rule 14a-2(b) to specifically exempt proxy voting advice businesses from the filing and information requirements of the federal proxy rules.
Rule 14a-1(l) – Definition of “Solicit” and “Solicitation”
The federal proxy rules can be found in Section 14 of the Securities Exchange Act of 1934 (“Exchange Act”) and the rules promulgated thereunder. The rules apply to any company which has securities registered under Section 12 of the Act. Exchange Act Rule 14(a) makes it unlawful for any person to “solicit” a proxy unless they follow the specific rules and procedures. Prior to the amendment, Rule 14a-1(l), defined a solicitation to include, among other things, a “communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy,” and includes communications by a person seeking to influence the voting of proxies by shareholders, regardless of whether the person himself/herself is seeking authorization to act as a proxy. The SEC’s August 2019 guidance confirmed that proxy voting advice by a proxy advisory firm would fit within this definition of a solicitation and the new amendment codified such view.
The amendments change Rule 14a-1(l) to specify the circumstances when a person who furnishes proxy voting advice will be deemed to be engaged in a solicitation subject to the proxy rules. In particular, the definition of “solicit” or “solicitation” now includes “any proxy voting advice that makes a recommendation to a shareholder as to its vote, consent, or authorization on a specific matter for which shareholder approval is solicited, and that is furnished by a person who markets its expertise as a provider of such advice, separately from other forms of investment advice, and sells such advice for a fee.“
The SEC provides for certain exemptions to the definition of a “solicitation” including: (i) the furnishing of a form of proxy to a security holder upon the unsolicited request of such security holder as long as such request is not to a proxy advisory firm; (ii) the mailing out of proxies for shareholder proposals, providing shareholder lists or other company requirements under Rule 14a-7 related to shareholder proposals; (iii) the performance by any person of ministerial acts on behalf of a person soliciting a proxy; or (iv) a communication by a security holder, who does not otherwise engage in a proxy solicitation, stating how the security holder intends to vote and the reasons therefor. This last exemption is only available, however, if the communication: (A) is made by means of speeches in public forums, press releases, published or broadcast opinions, statements, or advertisements appearing in a broadcast media, or newspaper, magazine or other bona fide publication disseminated on a regular basis, (B) is directed to persons to whom the security holder owes a fiduciary duty in connection with the voting of securities of a registrant held by the security holder (such as financial advisor), or (C) is made in response to unsolicited requests for additional information with respect to a prior communication under this section.
By maintaining a broad definition of a solicitation, the SEC can exempt certain communications, as it has in the definition, in Rule 14a-2(b) discussed below, and through no-action relief, while preserving the application of the anti-fraud provisions. In that regard, the amended SEC rules specifically state that a proxy advisory firm does not fall within the carve-out in Rule 14a1(I) for “unsolicited” voting advice where the proxy advisory firm is hired by an investment advisor to provide advice. Proxy advisory firms do much more than just answer client inquiries, but rather market themselves as having an expertise in researching and analyzing proxies for the purpose of making a voting determination.
On the other hand, in response to commenters, the new rule adds a paragraph to specifically state that the terms “solicit” and “solicitation” do not include any proxy voting advice provided by a person who furnishes such advice only in response to an unprompted request. For example, when a shareholder reaches out to their financial advisor or broker with questions related to proxies, the financial advisor or broker would be covered by the carve-out for unsolicited inquiries.
In response to commenters from the proposing release, the SEC also clarified that a voting agent, that does not provide voting advice, but rather exercises delegated voting authority to vote shares on behalf of its clients, would not be providing “voting advice” and therefore would not be encompassed within the new definition of “solicitation.”
Rule 14a-2(b) – Exemptions from the Filing and Information Requirements
Subject to certain exemptions, a solicitation of a proxy generally requires the filing of a proxy statement with the SEC and the mailing of that statement to all shareholders. Proxy advisory firms can rely on the filing and mailing exemption found in Rule 14a-2(b) if they comply with all aspects of that rule. Rule 14a-2(b)(1) provides an exemption from the information and filing requirements for “[A]ny solicitation by or on behalf of any person who does not, at any time during such solicitation, seek directly or indirectly, either on its own or another’s behalf, the power to act as proxy for a security holder and does not furnish or otherwise request, or act on behalf of a person who furnishes or requests, a form of revocation, abstention, consent or authorization.” The exemption in Rule 14a-2(b)(1) does not apply to affiliates, 5% or greater shareholders, officers or directors, or director nominees, nor does it apply where a person is soliciting in opposition to a merger, recapitalization, reorganization, asset sale or other extraordinary transaction or is an interested party to the transaction.
Rule 14a-2(b)(3) generally exempts voting advice furnished by an advisor to any other person the advisor has a business relationship with, such as broker-dealers, investment advisors and financial analysts. The amendment adds conditions for a proxy advisory firm to rely on the exemptions in Rules 14a-2(b)(1) or (b)(3).
The amendments add new Rule 14a-2(b)(9) providing that in order to rely on an exemption, a proxy voting advice business would need to: (i) include disclosure of material conflicts of interest in their proxy voting advice; and (ii) have adopted and publicly disclosed written policies and procedures design to (a) provide companies and certain other soliciting persons with the opportunity to review and provide feedback on the proxy voting advice before it is issued, with the length of the review period depending on the number of days between the filing of the definitive proxy statement and the shareholder meeting; and (b) provide proxy advice business clients with a mechanism to become aware of a company’s written response to the proxy voting advice provided by the proxy firm, in a timely manner.
The new rules contain exclusions from the requirements to comply with new Rule 14a-2(b)(9). A proxy advisory business would not have to comply with new Rule 14a-2(b)(9) for proxy voting advice to the extent such advice is based on an investor’s custom policies – that is, where a proxy advisor provides voting advice based on that investor’s customized policies and instructions. In addition, a proxy advisory business would not need to comply with the rule if they provide proxy voting advice as to non-exempt solicitations regarding (i) mergers and acquisition transactions specified in Rule 145(a) of the Securities Act; or (ii) by any person or group of persons for the purpose of opposing a solicitation subject to Regulation 14A by any other person or group of persons (contested matters). The SEC recognizes that contested matters or some M&A transactions involve frequent changes and short time windows. This exception from the requirements of Rule 14a-2(b)(9) applies only to the portions of the proxy voting advice relating to the applicable M&A transaction or contested matters and not to proxy voting advice regarding other matters presented at the meeting.
New Rule 14a-2(b)(9) is not required to be complied with until December 1, 2021. Solicitations that are exempt from the federal proxy rules’ filing requirements remain subject to Exchange Act Rule 14a-9, which prohibits any solicitation from containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact.
Conflicts of Interest
The rule release provides some good examples of conflicts of interest that would require disclosure, including: (i) providing proxy advice to voters while collecting fees from the company for advice on governance or compensation policies; (ii) providing advice on a matter in which one of its affiliates or other clients has a material interest, such as a transaction; (iii) providing voting advice on corporate governance standards while at the same time working with the company on matters related to those same standards; (iv) providing voting advice related to a company where affiliates of the proxy advisory business hold major shareholder, board or officer positions; and (v) providing voting advice to shareholders on a matter in which the proxy advisory firm or its affiliates had provided advice to the company regarding how to structure or present the matter or the business terms to be offered.
The prior rules did generally require disclosure of material interests, but the amended rules require a more specific and robust disclosure. The amended rules require detailed disclosure of: (i) any information regarding an interest, transaction or relationship of the proxy voting advice business or its affiliates that is material to assessing the objectivity of the proxy voting advice in light of the circumstances of the particular interest, transaction or relationship; and (ii) any policies and procedures used to identify, as well as the steps taken to address, any such material conflicts of interest arising from such interest, transaction or relationship. The final rule as written reflects a principles-based approach and adds more flexibility to the proxy advisory business than the more prescriptive-based rule proposal.
Although the rule requires prominent disclosure of material conflicts of interest to ensure the information is readily available, it provides flexibility in other respects. The rule does not dictate the particular location or presentation of the disclosure in the advice or the manner of its conveyance as some commenters recommended. Accordingly, the rule would give a proxy voting advice business the option to include the required disclosure either in its proxy voting advice or in an electronic medium used to deliver the proxy voting advice, such as a client voting platform, which allows the business to segregate the information, as necessary, to limit access exclusively to the parties for which it is intended. Likewise, the disclosure of policies and procedures related to conflicts of interest is flexible. This may include, for example, a proxy voting advice business providing an active hyperlink or “click-through” feature on its platform allowing clients to quickly refer from the voting advice to a more comprehensive description of the business’s general policies and procedures governing conflicts of interest.
Review and Feedback on Proxy Advisory Materials
Although some of the largest proxy advisory firms such as ISS and Glass Lewis voluntarily provide S&P 500 companies with an opportunity to review and provide some feedback on advice, there is still a great deal of concern as to the accuracy and integrity of advice, and the need to formally allow all companies and soliciting parties an opportunity to review and provide input on such advice prior to it being provided to solicitation clients. Likewise, it is equally important that clients learn of written feedback and responses to a proxy advisor’s advice. The amended rules are designed to address the concerns but as adopted are more principles-based and less prescriptive than the proposal.
The proposed amendments would have required a standardized opportunity for timely review and feedback by companies and third parties and require specific disclosure to clients of written responses. The time for review was set as a number of days based on the date of filing of the definitive proxy statement. However, commenters pushed back and the SEC listened.
The final rules allow proxy advisory businesses to take matters into their own hands. In particular, a proxy voting advice business must adopt and publicly disclose written policies and procedures reasonably designed to ensure that (i) companies that are the subject of proxy voting advice have such advice made available to them at or prior to the time when such advice is disseminated to the proxy voting advice business’s clients; and (ii) the proxy voting advice business provides its clients with a mechanism by which they can reasonably be expected to become aware of any written statements regarding its proxy voting advice by companies that are the subject of such advice, in a timely manner before the shareholder meeting (or, if no meeting, before the votes, consents, or authorizations may be used to effect the proposed action).
As adopted the new rule does not dictate the manner or specific timing in which proxy voting advice businesses interact with companies, and instead leaves it within the discretion of the proxy voting advice business to choose how best to implement the principles embodied in the rule and incorporate them into the business’s policies and procedures. Although advice does not need to be provided to companies prior to be disseminated to proxy voting business’s clients, it is encouraged where feasible. Under the final rules, companies are not entitled to be provided copies of advice that is later revised or updated in light of subsequent events.
New Rule 14a-2(b)(9) provides a non-exclusive safe harbor in which a proxy advisory firm could rely upon to ensure that its written policies and procedures satisfy the rule. In particular:
(i) If its written policies and procedures are reasonably designed to provide companies with a copy of its proxy voting advice, at no charge, no later than the time it is disseminated to the business’s clients. The safe harbor also specifies that such policies and procedures may include conditions requiring companies to (a) file their definitive proxy statement at least 40 calendar days before the security holder meeting and (b) expressly acknowledge that they will only use the proxy voting advice for their internal purposes and/or in connection with the solicitation and will not publish or otherwise share the proxy voting advice except with the companies’ employees or advisers.
(ii) If its written policies and procedures are reasonably designed to provide notice on its electronic client platform or through email or other electronic means that the company has filed, or has informed the proxy voting advice business that it intends to file, additional soliciting materials setting forth the companies’ statement regarding the advice (and include an active hyperlink to those materials on EDGAR when available).
The safe harbor allows a proxy advisory firm to obtain some assurances as to the confidentiality of information provided to a company. Policies and procedures can require that a company limit use of the advice in order to receive a copy of the proxy voting advice. Written policies and procedures may, but are not required to, specify that companies must first acknowledge that their use of the proxy voting advice is restricted to their own internal purposes and/or in connection with the solicitation and will not be published or otherwise shared except with the companies’ employees or advisers.
It is not a condition of this safe harbor, nor the principles-based requirement, that the proxy voting advice business negotiate or otherwise engage in a dialogue with the company, or revise its voting advice in response to any feedback. The proxy voting advice business is free to interact with the company to whatever extent and in whatever manner it deems appropriate, provided it has a written policy that satisfies its obligations.
Rule 14a-9 – the Anti-Fraud Provisions
All solicitations, whether or not they are exempt from the federal proxy rules’ filing requirements, remain subject to Exchange Act Rule 14a-9, which prohibits any solicitation from containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact. The amendments modify Rule 14a-9 to include examples of when the failure to disclose certain information in the proxy voting advice could, depending upon the particular facts and circumstances, be considered misleading within the meaning of the rule.
The types of information a proxy voting advice business may need to disclose include the methodology used to formulate the proxy voting advice, sources of information on which the advice is based, or material conflicts of interest that arise in connection with providing the advice, without which the proxy voting advice may be misleading. Currently the Rule contains four examples of information that may be misleading, including: (i) predictions as to specific future market values; (ii) information that impugns character, integrity or personal reputation or makes charges concerning improper, illegal or immoral conduct; (iii) failure to be clear as to who proxy materials are being solicited by; and (iv) claims made prior to a meeting as to the results of a solicitation.
The new rule adds to these examples the information required to be disclosed under 14a2-(b), including the failure to disclose the proxy voting advice business’s methodology, sources of information and conflicts of interest. The proxy advisor must provide an explanation of the methodology used to formulate its voting advice on a particular matter, although the requirement to include any material deviations from the provider’s publicly announced guidelines, policies, or standard methodologies for analyzing such matters, was dropped from the proposed rule. The SEC uses as an example a case where a proxy advisor recommends a vote against a director for the audit committee based on its finding that the director is not independent while failing to disclose that the proxy advisor’s independence standards differ from SEC and/or national exchange requirements and that the nominee does in fact meet those legal requirements.
Likewise, a proxy advisor must make disclosure to the extent that the proxy voting advice is based on information other than the company’s public disclosures, such as third-party information sources, disclosure about these information sources and the extent to which the information from these sources differs from the public disclosures provided by the company.
Supplemental Guidance for Investment Advisors
On the same day as enacting the amended rules the SEC Commissioners, also in a 3-1 divided vote, endorsed supplemental guidance for investment advisors in light of the new rules. The guidance updates the prior guidance issued in August 2019 – see HERE. The supplemental guidance assists investment advisers in assessing how to consider company responses to recommendations by proxy advisory firms that may become more readily available to investment advisers as a result of the amendments to the solicitation rules under the Exchange Act.
The supplemental guidance states that an investment adviser should have policies and procedures to address circumstances where the investment adviser becomes aware that a company intends to file or has filed additional soliciting materials with the SEC, after the investment adviser has received the proxy advisory firm’s voting recommendation but before the submission deadline. The supplemental guidance also addresses disclosure obligations and client consent when investment advisers use automated services for voting such as when they receive pre-populated ballots from a proxy advisory services firm.
« Finders – Part 2 Audit Committees – NYSE American »
Finders – Part 2
Following the SEC’s proposed conditional exemption for finders (see HERE), the topic of finders has been front and center. New York has recently adopted a new finder’s exemption, joining California and Texas, who were early in creating exemptions for intra-state offerings. Also, a question that has arisen several times recently is whether an unregistered person can assist a U.S. company in capital raising transactions outside the U.S. under Regulation S. This blog, the second in a three-part series, will discuss finders in the Regulation S context.
Regulation S
It is very clear that a person residing in the U.S. must be licensed to act as a finder and receive transaction-based compensation, regardless of where the investor is located. The SEC sent a poignant reminder of that when, in December 2015, it filed a series of enforcement proceedings against U.S. immigration lawyers for violating the broker-dealer registration rules by accepting commissions in connection with introducing investors to projects relying on the EB-5 Immigrant Investor Program. From a securities law perspective, EB-5 investments are generally completed by relying on the registration exemption found in Regulation S. For more on Regulation S, see HERE.
In a typical EB-5 investment, a company goes through a process of having their project approved by the United States Citizenship and Immigration Services (USCIS) after which they prepare private placement offering documents and solicit investors in qualifying foreign countries, including China. Due to language and cultural barriers, the U.S. company generally employs the services of marketing agents or finders in the foreign country to help locate and communicate with potential investors. Those finders are generally paid a success-based transaction fee. In addition, U.S. companies often establish a relationship with a U.S.-based immigration attorney that speaks the same language as the potential investors. The enforcement actions were part of a larger SEC investigation into securities law violations, including unregistered broker-dealer activity and sometimes fraud, in connection with the EB-5 program. It is interesting to note that no off-shore or non-U.S. finders were, or have since been, charged with unlicensed broker activity unless the action involved fraud.
Section 3(a)(4) of the Exchange Act defines a “broker” as “any person engaged in the business of effecting transactions in securities for the account of others.” Section 15(a)(1) of the Exchange Act, in turn, makes it unlawful for any broker to use the mails or any other means of interstate commerce to “effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security” unless that broker is registered with the SEC.
However, the Exchange Act generally does not apply to transactions outside the U.S. In particular, Section 30(b) of the Exchange Act specifically states that “The provisions of this chapter or of any rule or regulation thereunder shall not apply to any person insofar as he transacts a business in securities without the jurisdiction of the United States, unless he transacts such business in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate to prevent the evasion of this chapter.” Although this provision seems very broad, case law has narrowed the exemption such that the U.S. would still have jurisdiction, and the broker-dealer registration requirements in the Exchange Act would still apply, where (i) transactions occur in a U.S. securities market (such as Nasdaq or the NYSE); (ii) offers and sales were made abroad to U.S. persons (such as U.S. armed forces stationed abroad); or (iii) if the U.S. was used as a base for securities fraud perpetrated on foreigners.
Regulation S itself is a jurisdictional exemption. Rule 901 of Regulation S provides: “[F]or the purposes only of section 5 of the Act (15 U.S.C. §77e), the terms offer, offer to sell, sell, sale, and offer to buy shall be deemed to include offers and sales that occur within the United States and shall be deemed not to include offers and sales that occur outside the United States.” Regulation S then continues to create a framework defining when an offer or sale is within the U.S. and preserves jurisdiction to protect foreign investors from offering fraud by U.S. persons.
Although not directly on point, SEC Rule 15a-6 provides a conditional exemption from the broker-dealer registration requirements for foreign broker-dealers that engage in certain specified activities involving U.S. investors. Rule 15a-6(b)(3) defines foreign broker-dealer to include “any non‑U.S. resident person (including any U.S. person engaged in business as a broker or dealer entirely outside the United States, except as otherwise permitted by this rule) that is not an office or branch of, or a natural person associated with, a registered broker or dealer, whose securities activities, if conducted in the United States, would be described by the definition of ‘broker’ or ‘dealer’ in sections 3(a)(4) or 3(a)(5) of the [Exchange] Act.” Notably, Rule 15a-6 does not include a requirement that a broker be licensed or registered in its foreign jurisdiction. Rather, the Rule only requires that the foreign broker be operating legally in its country of jurisdiction.
Rule 15a-6 allows certain transactions by foreign brokers with U.S. investors without registration. Regulation S, on the other hand, would only involve transactions with non-U.S. investors. Further in the Rule 15a-6 release, the SEC indicated that the exception in Rule 15a-6(a)(1) for unsolicited trades was designed to reflect the view that “U.S. persons seeking out unregistered foreign broker-dealers outside the U.S. cannot expect the protection of U.S. broker-dealer standards.” Again, in a Regulation S transaction, both the foreign finder and the investor would be outside the U.S.
Both Regulation S and Rule 15a-6 are based on the investors or brokers being outside the U.S. In determining whether such person is outside the U.S., the SEC will consider factors like whether the person physically visits the U.S., where a business has offices, where it has employees, where business is conducted and where bank accounts are located. Regulation S is very strict in its requirements that investors, and therefore finders, not have a connection to the U.S. at the time of an offer or sale of securities.
The bottom line is that I am comfortable that a foreign finder, operating exclusively outside the U.S. and exclusively soliciting non-U.S. investors, would be able to collect a transaction-based success fee without running afoul of the U.S. broker-dealer registration requirements.
« SEC Modernizes Auditor Independence Rules SEC Amendments To Rules Governing Proxy Advisory Firms »
SEC Modernizes Auditor Independence Rules
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 (see HERE).
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. Under Rule 2-01(b), an auditor is not independent if that auditor, in light of all facts and circumstances, could not reasonably be capable of exercising objective and impartial judgment on all issues encompassed within the audit duties. Rule 2-01(c) provides a non-exclusive list of circumstances which the SEC would consider inconsistent with independence.
The underlying theory to Rule 2-01, the auditor independence rule, is that if an auditor is not independent, investors will have less confidence in their report and the financial statements of a company. The more confidence an investor and the capital markets participants have in audited financial statements, the more a company will enjoy better access to liquidity and capital finance in the public markets. Rule 2-01 requires that an auditor be independent of their audit clients in “fact and appearance.” However, under the old rules, technical violations that would not result in a lack of integrity were swept into the regulatory structure, causing unnecessary burdens and expenses associated with the client-auditor relationship.
The final amendments reflect updates based on recurring fact patterns that the SEC staff observed over years of consultations in which certain relationships and services triggered technical independence rule violations without necessarily impairing an auditor’s objectivity and impartiality. Accordingly, the new rules are meant to ease restrictions such that relationships and services that would not pose threats to an auditor’s objectivity and impartiality do not trigger non-substantive rule breaches or potentially time-consuming audit committee review of non-substantive matters.
The SEC adopting release provides examples of the types of concerns the new rules are designed to address, including one related to student loans and one related to a portfolio company. The student loan example is very straightforward, involving the technical independence violation where an auditor in an audit firm is still paying student loans to a large student loan lender and the audit firm audits the lender. Under the new rules, this would no longer create an independence violation.
The second example is more complicated but, in essence, involves a fund with multiple (could be hundreds) of portfolio companies and an audit firm with multiple global network affiliates. Under the prior rules, it was very complicated to sort out to make sure that the audit firm was not providing audit services to more than one portfolio company even though the only relationship between the companies was a common investor. Furthermore, a scenario could result where no qualified large audit firm could be independent due to the widespread investing activing of the fund.
Although the SEC doesn’t name names, this scenario could be fairly common. The three largest asset management firms, BlackRock, Vanguard and State Street, manage over $15 trillion in combined global assets, which is equivalent to more than three-quarters of the U.S. gross domestic product. Under the current rules, if one of their portfolio companies wanted to complete an IPO, it is very likely that the best audit firms would fail an independence test. The result would be that the company would be required to either: (i) replace their audit firm with another audit firm if one could be found; (ii) to wait to register with the SEC for up to three years after termination of the services provided to another portfolio company; or (iii) to make a determination, likely in consultation with SEC staff and/or the audit committee, that the rule violation did not impair the auditor’s objectivity and impartiality. The amended rules would eliminate the need for a company’s audit committee and their auditors to seek SEC staff guidance in these scenarios.
The amendments will be effective 180 days after publication in the Federal Register, but voluntary compliance is permitted for new relationships once published in the Federal Register. However, auditors cannot retroactively apply the final amendments to relationships in existence prior to the effective date.
Amendments
Definitions of Affiliate of the Audit Client and Investment Company Complex
The SEC has amended the definitions of an “affiliate of the audit client” and “investment company complex” with a focus on decreasing the number of sister or affiliated entities that could come within the current definition but that may be immaterial or far removed from the entity actually being audited. Currently an audit client includes not only the entity being audited but also affiliates of the audit client. Affiliates is broadly defined and includes entities under common control of the audit client, such as sister entities. Moreover, the current definition of investment company complex (“ICC”) includes not just the investment companies that share an investment adviser or sponsor with an investment company audit client, but also any investment company advised by a sister investment adviser or which has a sister sponsor.
The SEC recognizes challenges in identifying and applying the common control element of independence, especially where the sister entity is immaterial and/or part of a complex group of investment funds and their portfolio companies. In the private equity and investment company context, where there potentially is a significant volume of acquisitions and dispositions of unrelated portfolio companies, the definition of affiliate of the audit client may result in an expansive and constantly changing list of entities that are considered to be affiliates of the audit client.
Monitoring the relationships results in increased compliance costs, even where there is not a likely threat to the auditor’s objectivity and impartiality. In addition, the pool of available auditors for sister or private equity portfolio companies can be negatively impacted where audit firms provide services to sister or related entities that currently technically would violate the independence rules.
The SEC has amended the definition of affiliate and ICC as relates to an audit client to include materiality qualifiers in the common control provisions and to provide distinctions for when an auditor is auditing a portfolio company, an investment company, or an investment advisor or sponsor. In reviewing materiality, the audit firm will need to consider both whether the sister entity and/or the audit client is material to the controlling entity. The amendment to the definition does not alter the general requirement that an auditor review all facts and circumstances to confirm independence. The changes are expected to make it easier to identify conflicts and to increase choices and competition for audit services.
Audit and Professional Engagement Period
Currently the definition of audit engagement period is different for foreign private issuers (FPIs) and domestic companies. For a domestic company, the audit engagement period begins when the auditor is first engaged to audit or review financial statements that will be filed with the SEC. For an FPI, the audit engagement period begins on the first day of the last fiscal year before the FPI first filed, or was required to file, a registration statement or report with the SEC. That is, if a domestic company conducts an IPO requiring two years of financial statements, the auditor must be independent for both of those years; however, if an FPI conducts an IPO, the auditor only has to be independent during the most recently completed fiscal year.
The SEC believes this disparity puts domestic issuers at a disadvantage in entering the US capital markets when compared to an FPI. The SEC, and commenters, believe shortening the look-back period may encourage capital formation for domestic companies contemplating an IPO. Accordingly, the SEC has amended the rules such that an audit engagement period for domestic issuers will match that for FPIs aligning both with a one-year look-back for first-time filers.
Loans and Debtor-Creditor Relationships
Currently an auditor is not independent if the firm, any covered person in the firm, or any of their immediate family members has any loans (including a margin loan) to or from an audit client or certain entities related to the audit client. The Rule contains specific exceptions where the following loans are given from a financial institution under normal procedures: (i) automobile loans and leases; (ii) insurance policy loans; (iii) loans fully collateralized by cash deposits at the same financial institution; (iv) primary residence mortgage loans that were not obtained while the covered person was a covered person; (v) credit card balances that are reduced to $10,000 or less on a current basis.
The SEC has amended the rule to add student loans that are not obtained while the covered person was a covered person, to the list of exceptions. In addition, the SEC has added language to the mortgage loan exception so that it is clear that all loans on a primary residence, including second mortgages and equity lines of credit, are included in the exception.
The SEC has also revised the credit card rule to refer to “consumer loans” to encompass any consumer loan balance owed to a lender that is an audit client that is not reduced to $10,000 or less on a current basis taking into consideration the payment due date and available grace period.
Business Relationship Rule
The current rules prohibit the audit firm, or any covered person, from having any direct or material indirect business relationship with the audit client or affiliate, including the audit client’s officers, directors or substantial stockholders. The SEC has replaced the term “substantial stockholders” in the business relationships rule with the phrase “beneficial owners (known through reasonable inquiry) of the audit client’s equity securities where such beneficial owner has significant influence over the audit client.”
As additional guidance, the SEC clarifies that the business relationships analysis should be on persons with decision-making authority over the audit client and not affiliates of the audit client.
Inadvertent Violations for Mergers and Acquisitions
An independence violation can arise as a result of a corporate event, such as a merger or acquisition, where the services or relationships that are the basis for the violation were not prohibited by applicable independence standards before the consummation of transaction. The SEC has added a transition framework for mergers and acquisitions to address inadvertent violations related to such transactions so the auditor and its audit client can transition out of prohibited services and relationships in an orderly manner. Under the new rule, an auditor will need to correct the independence violations as promptly as possible considering all relevant facts and circumstances. Audit firms will also need to effectuate quality control standards that anticipate and provide for procedures in the event of a merger or acquisition.
« SEC Proposes Amendments To Rule 144 Finders – Part 2 »
SEC Proposes Amendments To Rule 144
I’ve been at this for a long time and although some things do not change, the securities industry has been a roller coaster of change from rule amendments to guidance, to interpretation, and nuances big and small that can have tidal wave effects for market participants. On December 22, 2020, the SEC proposed amendments to Rule 144 which would eliminate tacking of a holding period upon the conversion or exchange of a market adjustable security that is not traded on a national securities exchange. The proposed rule also updates the Form 144 filing requirements to mandate electronic filings, eliminate the requirement to file a Form 144 with respect to sales of securities issued by companies that are not subject to Exchange Act reporting, and amend the Form 144 filing deadline to coincide with the Form 4 filing deadline.
The last amendments to Rule 144 were in 2008 reducing the holding periods to six months for reporting issuers and one year for non-reporting issuers respectively, adding current information requirements and eliminating the use of the rule for shell companies and former shell companies unless certain preconditions were satisfied. For a summary of the current Rule 144, see HERE.
Currently, Rule 144 deems securities acquired solely in exchange for other securities of the same issuer to have been acquired at the same time as the securities surrendered for conversion or exchange. Under the amendments, the holding period for the underlying securities acquired upon conversion or exchange of “market-adjustable securities” would not begin until the conversion or exchange. Market adjustable securities usually take the form of convertible notes which had become a very popular and common form of financing for micro- and small-cap public companies over the past decade or so – that is, until the SEC went on the attack starting a few years ago recently intensifying those efforts.
In a standard convertible note structure, an investor lends money in the form of a convertible promissory note. Generally the note can either be repaid in cash, or if not repaid, can be converted into securities of the issuer. As Rule 144 allows for tacking of the holding period, as long as the convertible note is outstanding for the requisite holding period, the investor would be able to sell the underlying securities into the public market immediately upon conversion. The notes generally convert at a discount to market price so if the converted securities are sold quickly, a profit is built in. The selling pressure from the converted shares has a tendency to push down the stock price of the issuer.
The notes also generally have an equity blocker (usually 4.99%) such that the holder is prohibited from owning more than a certain percentage of the company at any given time to ensure they will never be deemed an affiliate and will not have to file ownership reports under either Sections 13 or 16 of the Exchange Act (for more on Sections 13 and 16 see HERE). As a result, there is the potential for a note holder to require multiple conversions each at 4.99% of the outstanding company stock. Each conversion would be at a discount to the market price with the market price being lower each time as a result of the selling pressure. This can result in a very large increase in the number of outstanding shares and a drastic decrease in the share price. Over the years this type of financing has often been referred to as “toxic” or “death spiral.”
Extreme dilution is really only possible in companies that do not trade on a national securities exchange. Both the NYSE and Nasdaq have provisions that prohibit the private issuance of more than 20% of total outstanding, of discounted securities without prior shareholder approval. For more on the 20% Rule, see HERE. In addition to protecting the shareholders from dilution, the 20% Rule is a built-in blocker against distributions and as such, the SEC proposed rule change only includes securities of an issuer that does not have a class of securities listed, or approved to be listed, on a national securities exchange. The SEC also notes, correctly, that the exchanges do not look favorably on transactions involving market adjustable securities and as such, it is more difficult for an issuer to satisfy the listing criteria if they are or have been engaged in such transactions.
Although on first look it sounds like these transactions are risk-free for the investor, they are not. First, Rule 144 itself creates some hurdles. In particular, in order to rely on the shorter six-month holding period for reporting companies, the company must be current in its reporting obligations. Also, if the company was formerly a shell company, it must always be current in its reporting obligations to rely on Rule 144. If a company becomes delinquent, the investor can no longer convert its debt and oftentimes such a company does not have the cash to pay back the obligation. Further, over the years it has become increasingly difficult to deposit the securities of penny stock issuers. Regardless of whether Rule 144 requires current information, most brokerage firms will not accept the deposit of securities of a company without current information, and many law firms, including mine, will not render an opinion for the securities of those dark companies.
The SEC recognizes these risks noting that a holder of market adjustable securities is subject to risk in the period from the issuance of the securities until the holding period is satisfied (such as a company going dark) but are not exposed to market risk associated with the underlying securities after conversion. In these circumstances, holders that convert and promptly resell the underlying security in order to secure a profit on the sale based on the built-in discount have not assumed the economic risks of investment of the underlying security. The SEC sees this as inconsistent with the purpose of Rule 144 to provide a safe harbor for transactions that are not distributions of securities.
The potential for profit attracted some unscrupulous market participants (especially in the early years), which together with the fact that the financing is expensive for companies, made the entire industry one that certain players in the small-cap world love to hate. From my viewpoint, the two sides of the coin became as polarized as partisan politics. An almost evangelical faction arose determined to stop these “predatory lenders,” likening them to the leg-breaking loan sharks of the 1960’s. On the other side, there are also higher-quality lenders that seek out a better-quality company to invest in and work to become long-term financial partners making multiple investments over the years mounting to millions of dollars helping companies grow. For many micro-cap companies, these lenders have become an indispensable source of capital where few or no other options exist.
I applaud every regulatory step in the direction of cleaning up the micro-cap space and giving OTC Markets respect as the venture marketplace it is, but in some cases the proverbial baby gets thrown out with the bath water. This isn’t the first time that the SEC has taken action to limit market adjusted financing. Back in 2006 the SEC altered its interpretation of Rule 415 limiting the amount of securities that could be registered as resale to 30% of a company’s public float (see HERE. Prior to that, big players like Cornell Capital and Dutchess Capital wrote ELOC’s for every micro-cap company in town.
Market adjusted investments dissipated for a little while but then the Rule 144 changes in 2008 (coupled with the allowance of tacking from 1997) brought it back to life. The 1997 Rule 144 proposing rule release proposed codifying the Division of Corporation Finance’s position that, if the securities to be sold were acquired from the issuer solely in exchange for other securities of the same issuer, the newly acquired securities shall be deemed to have been acquired at the same time as the securities surrendered for conversion or exchange, even if the securities surrendered were not convertible or exchangeable by their terms. However, investors still thought a two-year hold was too long. Then the 2008 rule changes shortened the holding period for restricted securities to six months for reporting companies and one year for non-reporting companies and overnight, the convertible note lending business blossomed.
The SEC certainly had visibility on the business as most of the issuers were publicly reporting and had to not only file an 8-K upon entering into a transaction but are required to report derivative liabilities on their balance sheets for the convertible overhang and to detail the transactions in the notes to financial statements. Back on September 26, 2016, and again on the 27th, the SEC brought enforcement actions against issuers for the failure to file 8-K’s associated with corporate finance transactions and in particular PIPE transactions involving the issuance of convertible debt, preferred equity, warrants and similar instruments. Prior to the release of these actions, I had been hearing rumors in the industry that the SEC has issued “hundreds” of subpoenas (likely an exaggeration) to issuers related to PIPE transactions and in particular to determine 8-K filing deficiencies. See HERE for my blog at the time.
At the time the SEC did not take aim at the investors and the only enforcement actions against investors’ involved fraud or market manipulation. Then in November 2017, the SEC shocked the industry when it filed an action against Microcap Equity Group, LLC and its principal alleging that its investing activity required licensing as a dealer under Section 15(a) of the Exchange Act. Since that time the SEC has filed approximately four more cases with the sole allegation being that the investor acted as an unregistered dealer.
The SEC litigation put a chill on convertible note investing and has left the entire world of hedge funds, family offices, day traders, and serial PIPE investors wondering if they can rely on previously issued SEC guidance and practice on the dealer question. So far the SEC has only filed actions for unlicensed dealer activity against investors that invest specifically using convertible notes. Although there is a long-standing legal premise that a dealer in a thing must buy and sell the same thing (a car parts dealer is not an auto dealer, an icemaker is not a water dealer, etc.), there is nothing in the broker-dealer regulatory regime or guidance that limits broker-dealer registration requirements based on the form of the security being bought, sold or traded.
Specifically, there is no precedent for the theory that if you trade in convertible notes instead of open market securities, private placements instead of registered deals, bonds instead of stock, or warrants instead of preferred stock, etc., you either must be licensed as a dealer or are exempt. Again, the entire community that serially invests or trades in public companies is in a state of regulatory uncertainty and the capital flow to small- and micro-cap companies has diminished accordingly. Although the SEC has had some wins in the litigations, the issue is far from settled.
In that regard, the new Rule 144 proposal provides comfort in some respects. First, it is a step in regulating through rules and guidance as opposed to enforcement. Second, it seems to indicate that the SEC enforcement proceedings alleging unregistered dealer activities have specifically targeted market adjusted investment instruments that are not exchange traded as opposed to all private traders and investors.
After this long introduction, I’ll turn to the proposed rule.
Elimination of Tacking for Market Adjustable Securities
All offers and sales of securities in the US must either be registered or there must be an available exemption from registration. The Securities Act of 1933 (“Securities Act”) Rule 144 sets forth certain requirements for the use of the Section 4(a)(1) exemption for the resale of securities. Rule 144 is a non-exclusive safe harbor for reliance on Section 4(a)(1). Section 4(a)(1) of the Securities Act provides an exemption for a transaction “by a person other than an issuer, underwriter, or dealer.” Section 2(a)(11) in turn defines an underwriter as any person who has purchased from an issuer with a view to, or offers or sells for an issuer in connection with, the distribution of any security or participates or has a direct or indirect participation in any such undertaking.
Rule 144 sets forth objective criteria, including holding periods, public information, manner of sale, etc. on which selling security holders may rely to avoid being deemed to be engaged in a distribution and, therefore, to avoid acting as an underwriter under Section 2(a)(11) of the Securities Act. The holding period requirement is meant to ensure that the holder has assumed the economic risks of the investment and is not just acting as a conduit for the sale of unregistered securities to the public. When all of the conditions of Rule 144 are complied with, the purchaser of securities receives freely tradeable, unrestricted securities. Rule 144 only addresses the resale of restricted or control securities. Unrestricted securities (such as securities that have been registered under the Securities Act) may be sold without reference or regard to the Rule.
As discussed above, Rule 144 deems securities acquired solely in exchange for other securities of the same issuer to have been acquired at the same time as the securities surrendered for conversion or exchange. As a result, holders of market adjustable securities, such as a convertible note, may convert the note into common stock and immediately resell that common stock into the public marketplace, as long as the note has been held for the requisite Rule 144 holding period. Since the note is converted at a price below the market price, there is a built-in profit. Multiple conversions and sales can dramatically increase the amount of outstanding stock. This can be seen as a loophole in the rule’s structure resulting in distributions of securities, despite the compliance with Rule 144. The proposed rule change is intended to close this hole.
Currently Rule 144(d) sets out the holding period requirements to satisfy Rule 144. Rule 144(d)(3)(ii) provides “Conversions and exchanges. If the securities sold were acquired from the issuer solely in exchange for other securities of the same issuer, the newly acquired securities shall be deemed to have been acquired at the same time as the securities surrendered for conversion or exchange, even if the securities surrendered were not convertible or exchangeable by their terms.” The proposed rule change would amend Rule 144(d)(3)(ii) to eliminate “tacking” for securities acquired upon the conversion or exchange of the market-adjustable securities of an issuer that does not have a class of securities listed, or approved to be listed, on a national securities exchange. As noted above, the rule change would not capture exchange traded securities as the exchanges already have rules to prevent distributions without prior shareholder approval (see the 20% rule – HERE.
The new proposed Rule 144(d)(3)(ii) language is as follows:
(ii) Conversions and exchanges. If the securities sold were acquired from the issuer solely in exchange for other securities of the same issuer, the newly acquired securities shall be deemed to have been acquired at the same time as the securities surrendered for conversion or exchange, even if the securities surrendered were not convertible or exchangeable by their terms, unless:
(A) the newly acquired securities were acquired from an issuer that, at the time of conversion or exchange, does not have a class of securities listed, or approved for listing, on a national securities exchange registered pursuant to Section 6 of the Exchange Act (15 U.S.C. 78f); and
(B) the convertible or exchangeable security contains terms, such as conversion rate or price adjustments, that offset, in whole or in part, declines in the market value of the underlying securities occurring prior to conversion or exchange, other than terms that adjust for stock splits, dividends or other issuer-initiated changes in its capitalization.
As a result, the holding period for the underlying securities, either six months for securities issued by a reporting company or one year for securities issued by a non-reporting company, would not begin until the conversion or exchange of the market-adjustable securities. The proposed rule change would not include convertible securities that have provisions for adjustments for splits, dividends, or other issuer initiated changes in capitalization but were not otherwise market adjustable.
Forms 4, 5, and 144 Filing Requirements
The rule proposal would: (i) mandate the electronic filing of Form 144; (ii) eliminate the Form 144 filing requirement related to the sale of securities of issuers that are not subject to the reporting requirements of the Exchange Act; (iii) amend the Form 144 filing deadline so that Form 144 may be filed concurrently with Form 4 by persons subject to both filing requirements; and (iv) amend Forms 4 and 5 to add an optional check box to indicate that a reported transaction was intended to satisfy Rule 10b5-1(c), which provides an affirmative defense for trading on the basis of material non-public information in insider trading cases.
The SEC plans to make an online fillable Form 144 available to simplify electronic filing and to streamline the electronic filing of Forms 4 and 144 reporting the same sale of securities.
« Intellectual Property And Technology Risks – International Business Operations SEC Modernizes Auditor Independence Rules »
Intellectual Property And Technology Risks – 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.
The guidance, which is grounded in materiality and a principles-based approach, is meant to supplement prior guidance on technology and cybersecurity matters including the February 2018 SEC statement on public company cybersecurity disclosures (see my blog HERE); Director Hinman’s speech at the 18th Annual Institute on Securities Regulation in Europe in March, 2019; the SEC statement on LIBOR Transition in July 2019; and Chair Clayton’s remarks on LIBOR transition and cybersecurity risks from December 2018. The new guidance concentrates on risks resulting from conducting business outside the U.S. and particularly in jurisdictions that do not have comparable protections for corporate proprietary information.
Although there is no specific line-item requirement under the federal securities laws to disclose information related to the compromise or potential compromise of technology, data or intellectual property, the SEC has made clear that its disclosure requirements apply to a broad range of evolving business risks regardless of the absence of specific requirements. Also, the actual material theft or compromise of technology or intellectual property assets would generally require disclosure, including potentially in management’s discussion and analysis, the business section, legal proceedings, internal controls and procedures and/or financial statements.
The newest guidance is broken down by sources of risk associated with potential theft of technology and intellectual property and assessing and disclosing risks related to potential theft or compromise of technology and intellectual property.
Sources of Risk Associated with Potential Theft of Technology and Intellectual Property
There are many cybersecurity risks associated with technology and intellectual property. Cyber-incidents can take many forms, both intentional and unintentional, and commonly include the unauthorized access of information, including personal information related to customers’ accounts or credit information, data corruption, misappropriating assets or sensitive information or causing operational disruption. Attacks use increasingly complex methods, including malware, ransomware, phishing, structured query language injections and distributed denial-of-service attacks. A cyber-attack can be in the form of unauthorized access or a blocking of authorized access.
In the global context, the risk of theft includes through a direct intrusion by private parties or foreign actors, including those affiliated with or controlled by sovereign entities such as foreign states. The SEC guidance also warns of corporate espionage including the infiltration of moles and insiders.
In addition to direct intrusions, a theft or compromise can be accomplished using indirect attacks such as reverse engineering of technology and intellectual property. Patents together with reverse engineering can be used to assist in obtaining trade secrets and know-how.
Some foreign nations take a very direct route to obtain technology and intellectual property information by requiring companies to yield rights in order to conduct business in or access markets in their jurisdiction, either through formal written agreements or legal or administrative requirements. Companies need to be cognizant of the risks associated with these types of agreements or laws, including unintended consequences. Examples which require cautious risk assessment include: (i) patent license agreements which allow the foreign licensee to retain rights on improvements, including the ability to sever the improvements and receive a separate patent; (ii) patent license agreements which allow the foreign licensee to continue to use the technology or intellectual property after the patent or license term expires; (iii) foreign ownership and investment restrictions which can result in a loss of control over the foreign assets or entity holding the foreign assets; (iv) the use of unusual or idiosyncratic terms favoring foreign persons; (v) regulatory requirements which restrict the ability to conduct business in a foreign jurisdiction unless technology or data is stored locally; (vi) regulatory requirements which require the use of local service providers or technology in connection with international operations; and (vii) local licensing or administrative approvals that involve the sharing of intellectual property.
Assessing and Disclosing Risks Related to Potential Theft or Compromise of Technology and Intellectual Property
In addition to assessing the risks of a potential theft or compromise of technology, data or intellectual property in connection with international operations, companies must conduct an analysis as to how the realization of these risks may impact their business, including financial condition and results of operations, and any effects on their reputation, stock price and long-term value. As always, where the risks are material, they must be disclosed.
Where a company’s technology, data or intellectual property is being or previously was materially compromised, stolen or otherwise illicitly accessed, hypothetical disclosure of potential risks is not sufficient to satisfy a company’s reporting obligations.
The SEC guidance provides a list of questions for management to consider when assessing risks and related disclosure requirements involving international technology, data and intellectual property, including:
(i) Is there a heightened risk by virtue of conducting business, maintaining assets or earning revenue abroad;
(ii) Does the company have operations in a jurisdiction that is particularly susceptible to heightened risk;
(iii) Does the company have operations in a jurisdiction that requires entering into contracts related to technology as a condition to conducting business;
(iv) Has the company’s products been, or may they be, subject to counterfeit and sale through e-commerce;
(v) Has the company directly or indirectly transferred or licensed technology or intellectual property to a foreign entity or government, such as through the creation of a joint venture with a foreign entity;
(vi) Does the company store technology abroad;
(vii) Is the company required to use equipment or service providers in a foreign jurisdiction;
(viii) Has the company entered into a patent or technology license agreement with a foreign entity or government that provides such entity with rights to improvements on the underlying technology and/or rights to continued use of the technology following the licensing term, including in connection with a joint venture;
(ix) Is the company subject to foreign jurisdiction requirements which limit foreign ownership or investment and, in that vein, does the company have foreign subsidiaries where the majority ownership is held by governments or entities in that foreign jurisdiction;
(x) Has the company provided access to your technology or intellectual property to a state actor or regulator in connection with foreign regulatory or licensing procedures, including but not limited to local licensing and administrative procedures;
(xi) Has the company been required to yield rights to technology or intellectual property as a condition to conducting business in or accessing markets located in a foreign jurisdiction;
(xii) Does the company operate in a jurisdiction where the ability to enforce rights over intellectual property is limited as a statutory or practical matter;
(xiii) Does the company conduct business with local laws that limit or prohibit the export of data or financial documentation;
(xiv) Is the company readily able to produce data or other information that is housed internationally in response to regulatory requirements or inquiries;
(xv) Have conditions in a foreign jurisdiction caused the company to relocate or consider relocating operations to a different host nation and, if so, what are the related costs including material costs, training new employees, establishing new facilities and supply chains and the impact on import and export;
(xvi) Does the company have adequate controls and procedures in place to protect technology, data and intellectual property, and do these procedures include the ability to adequately respond to an actual or potential threat;
(xvii) Does the company have adequate controls and procedures in place to detect: (a) malfeasance by employees and others; (b) industrial or corporate espionage; (c) unauthorized intrusions into computer networks; and (d) other forms of cyber-theft and breaches; and
(xviii) What level of risk oversight and management does the board of directors and executive officers have with regard to the company’s data, technology and intellectual property and how these assets may be impacted by operations in foreign jurisdictions where they may be subject to additional risks.
« OTCQB And OTCQX Rule Changes SEC Proposes Amendments To Rule 144 »
OTCQB And OTCQX Rule Changes
Effective October 1, 2020, the OTCQB and OTCQX tiers of OTC Markets have instituted amendments to their rules, including an increase in fees.
The OTC Markets divide issuers into three (3) levels of quotation marketplaces: OTCQX, OTCQB and OTC Pink Open Market. The OTC Pink Open Market, which involves the highest-risk, highly speculative securities, is further divided into three tiers: Current Information, Limited Information and No Information. Companies trading on the OTCQX, OTCQB and OTC Pink Current Information tiers of OTC Markets have the option of reporting directly to OTC Markets under its Alternative Reporting Standards. The Alternative Reporting Standards are more robust for the OTCQB and OTCQX in that they require audited financial statements prepared in accordance with U.S. GAAP and audited by a PCAOB qualified auditor in the same format as would be included in SEC registration statements and reports.
As an aside, companies that report to the SEC under Regulation A and foreign companies that qualify for the SEC reporting exemption under Exchange Act Rule 12g3-2(b) may also qualify for the OTCQX, OTCQB and OTC Pink Current Information tiers of OTC Markets if they otherwise meet the listing qualifications. For more information on OTCQB and OTCQX listing requirements, see HERE, HERE, and HERE.
OTCQB Amendments
Effective October 1, 2020, the OTCQB Standards, Version 3.4, went into effect. To review the last amendments adopted in February 2020, see HERE. The new Version 3.4 modified the prior rules as follows:
Fees. Effective January 1, 2021, the OTCQB annual fee will increase from $12,000 to $14,000 and the application fee will increase from $2,500 to $5,000.
Corporate Governance Requirements. Companies that alternatively report to OTC Markets must meet certain corporate governance requirements to be eligible to trade on the OTCQB. In particular, such companies must have a board of directors that includes at least two independent directors and must have an audit committee the majority of which are independent directors. The new rules provide that trusts, funds, and other similar companies may be exempted from these corporate governance standards. A company wishing to be exempted must apply to OTC Markets in writing and such exemption will be granted in the sole and absolute discretion of OTC Markets.
Application Review/Reasons for Denial. Although OTC Markets has always had broad discretion to deny an application to trade on the OTCQB, the new rules specifically provide that OTC Markets may “[R]efuse the application for any reason, including but not limited to stock promotion, dilution risk, and use of “toxic” financiers if it determines, in its sole and absolute discretion, that the admission of the Company’s securities for trading on OTCQB, would be likely to impair the reputation or integrity of OTC Markets Group or be detrimental to the interests of investors.”
OTCQX Amendments
Effective October 1, 2020, the OTCQX Standards, Version 8.6, went into effect. To review the last amendments adopted in December 2019, see HERE. The new Version 8.6 modified the prior rules as follows:
Fees. Effective January 1, 2021, the OTCQX annual fee will increase from $20,000 to $23,000. The application fee remains unchanged at $5,000.
International Company Upgrade to OTCQX. A Company with a class of securities currently quoted on the OTCQB market that chooses to upgrade to OTCQX may now be exempt from the requirement to select an OTCQX Sponsor or submit a Letter of Introduction.
Sponsor for International Companies. An OTCQX Sponsor who is an attorney or law firm is no longer required to be headquartered in the U.S. or Canada. Instead, each attorney who provides services as an OTCQX Sponsor must be licensed to practice law and in good standing in the U.S. As a reminder, I am a qualified OTCQX Sponsor.
« SEC Adopts Amendments To Management Discussion And Analysis Intellectual Property And Technology Risks – International Business Operations »
SEC Adopts Amendments To Management Discussion And Analysis
It has been a very busy year for SEC rule making, guidance, executive actions and all matters capital markets. Continuing its ongoing disclosure effectiveness initiative on November 19, 2020, the SEC adopted amendments to the disclosures in Item 303 of Regulation S-K – Management’s Discussion & Analysis of Financial Conditions and Operations (MD&A). The proposed rule had been released on January 30, 2020 (see HERE). Like all recent disclosure effectiveness rule amendments and proposals, the rule changes are meant to modernize and take a more principles-based approach to disclosure requirements. In addition, the rule changes are intended to reduce repetition and disclosure of information that is not material.
The new rules eliminate Item 301 – Selected Financial Data – and amend Items 302(a) – Supplementary Financial Information and Item 303 – MD&A. In particular, the final rules revise Item 302(a) to replace the current tabular disclosure with a principles-based approach and revise MD&A to: (i) to state the principal objectives of the disclosure; (ii) update liquidity and capital resource disclosures to require disclosure of material cash requirements including commitments for capital expenditures as of the latest fiscal period, the anticipated source of funds needed to satisfy cash requirements and the general purpose of such requirements; (iii) update the results of operations disclosure to require disclosure of known events that are reasonably likely to cause a material change in the relationship between costs and revenues; (iv) update the results of operations disclosure to require a discussion of the reasons underlying material changes in net sales or revenues; (v) replace the specific requirement to disclose off-balance-sheet arrangements with a directive to disclose the arrangements in the broader context of the MD&A discussion; (vi) eliminate the need for a tabular disclosure of contractual obligations as the information is already in the financial statements; and (vii) add a requirement to discuss critical accounting estimates and (viii) add the flexibility to choose whether to compare the same quarter from the prior year, or the immediately preceding quarter.
The new rules also apply to foreign private issuers (FPIs). Finally, the amendments will make numerous cross-reference clean-up amendments including to various registration statement forms under the Securities Act and periodic reports and proxy statements under the Exchange Act.
Below the discussion of the rule changes is a chart of each of the amendments and its principal objective. The amendments take effect thirty days after publication in the federal register.
Detail on Final Rules
Elimination of Item 301 – Selected Financial Data
Item 301 generally requires a company to provide selected financial data in a comparative tabular form for the last five years. Smaller reporting companies (SRCs) are not required to provide this information, and emerging growth companies (EGCs) that are not also SRCs are not required to provide information for any period prior to the earliest audited financial statements in the company’s initial registration statement.
When Item 301 was developed, prior financial information was not available on EDGAR and financial statements were not tagged with XBRL. Also, the purpose behind Item 301 is to illustrate trends but Item 303 requires a discussion of material trends. Accordingly, Item 301 is not useful and the SEC has eliminated it.
Amendment to Item 302 – Supplementary Financial Information
Item 302 requires selected disclosures of quarterly results and variances in operating results including the effects of any discontinued operations and unusual or infrequently occurring items. SRCs and FPIs are not required to provide the information (note that FPIs are not required to report quarterly results or file quarterly reports at all). Also, Item 302 only applies to companies that are registered under the Exchange Act and accordingly does not apply to voluntary or Section 15(d) reporting companies (for more on voluntary and Section 15(d) reporting, see HERE).
The SEC had originally proposed eliminating this item altogether like Item 301. However, the SEC recognized that while most quarterly financial information could be found in prior filings, certain fourth quarter information was only captured in Item 302. Accordingly, the final rule release did not eliminate Item 302 but amended it such that it now only requires disclosure when there are one or more material changes for any of the quarters in the last two fiscal years for which financial statements are provided. Duplicative disclosures are not required.
Elimination of Item 303(a)(5) – Contractual Obligations Table
Under Item 303(a)(5) companies, other than SRCs, must disclose known contractual obligations in tabular format. There is no materiality threshold for the disclosure. The SEC has eliminated the table consistent with its objective of promoting a principals based MD&A disclosure and to streamline disclosures and reduce redundancy. Likewise, current Items 303(c) and (d) have been eliminated as these items have been picked up in amended 303(b).
Item 303 – Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
Currently MD&A is broken down into 5 parts. Item 303(a) requires full-year disclosures on liquidity, capital resources, results of operations, off-balance-sheet arrangements, and contractual obligations. Item 303(b) covers interim periods and requires a disclosure of any material changes to the Item 303(a) information. Item 303(c) acknowledges the application of a statutory safe harbor for forward-looking information provided in off-balance-sheet arrangements and contractual obligations disclosures. Item 303(d) provides scaled-back disclosure accommodations for SRCs. The amended rule substantially changes this structure.
The new Item 303 (i) adds a new Item 303(a) to state the principal objectives of MD&A including as to full fiscal years and interim periods and to provide instructions to guide the rest of the rule; (ii) eliminates unnecessary cross-references, clarifies and removes outdated and duplicative language; (iii) updates capital resource disclosures to require disclosure of material cash requirements including commitments for capital expenditures as of the latest fiscal period, the anticipated source of funds needed to satisfy cash requirements and the general purpose of such requirements; (iv) updates the results of operations disclosure to require disclosure of known events that are reasonably likely to cause a material change in the relationship between costs and revenues; (v) updates the results of operations disclosure to require a discussion of the reasons underlying material changes in net sales or revenues; (vi) eliminates the requirement to discuss the impact of inflation; (vii) replaces the specific requirement to disclose off-balance-sheet arrangements with a directive to disclose the arrangements in the broader context of the MD&A discussion, (viii) adds a requirement to discuss critical accounting estimates, and (ix) adds the flexibility to choose whether to compare the same quarter from the prior year, or the immediately preceding quarter.
The new Item 303(a) instruction paragraph has been revised to set forth the principal objectives of MD&A. The instructions codify guidance that requires a narrative explanation of financial statements to allow a reader to see a company “through the eyes of management.” The SEC stresses that MD&A should provide an analysis that encompasses short-term results as well as future prospects. The SEC does not want companies to merely recite the amounts of changes from year to year that are readily calculated from the financial statements, but rather to provide greater analysis as to the reasons for changes.
Also, the instructions emphasize providing disclosure on:
(i) Material information relevant to an assessment of the financial condition and results of operations of the company, including an evaluation of the amounts and certainty of cash flows from operations and outside sources;
(ii) The material financial and statistical data that the company believes will enhance a reader’s understanding of its financial condition, changes in financial condition and results of operations; and
(iii) Material events and uncertainties known to management that would cause reported financial information not to be necessarily indicative of future operating results or of future financial condition, including descriptions and amounts of matters that (a) would have a material impact on future operations and have not had an impact in the past and (b) have had a material impact on reported operations and are not expected to have an impact on future operations.
Chart on Rule Changes
The following chart, copied from the SEC’s rule release, summarized the new rules.
| Current Item or Issue | Summary Description of Amended Rules | Principal Objective(s) | |
| Item 301, Selected financial data | Registrants will no longer be required to provide 5 years of selected financial data. | Modernize disclosure requirement in light of technological developments and simplify disclosure requirements. | |
| Item 302(a), Supplementary financial information | Registrants will no longer be required to provide 2 years of tabular selected quarterly financial data. The item will be replaced with a principles-basedrequirement for material retrospective changes. | Reduce repetition and focus disclosure on material information. Modernize disclosure requirement in light of technological developments. | |
| Item 303(a), MD&A | Clarify the objective of MD&A and streamline the fourteen instructions. | Simplify and enhance the purpose of MD&A. | |
|
Item 303(a)(2), Capital resources |
Registrants will need to provide material cash requirements, including commitments for capital expenditures, as of the latest fiscal period, the anticipated source of funds needed to satisfy such cashrequirements, and the general purpose of such requirements. | Modernize and enhance disclosure requirements to account for capital expenditures that are not necessarily capital investments. | |
| Item 303(a)(3)(iii),Results of operations | Clarify that a discussion of material changes in net sales or revenue is required (rather than only material increases). | Clarify MD&A disclosure requirements by codifying existing Commission guidance. | |
| Item 303(a)(3)(iv),
Results of operations
Instructions 8 and 9 (Inflation and price changes) |
The item and instructions will be eliminated. Registrants will still be required to discuss these matters if they are part of a known trend or uncertainty that has had, or the registrant reasonably expects to have, a material favorable or unfavorable impact on net sales, or revenue, or income from continuing operations. |
Encourage registrants to focus on material information that is tailored to a registrant’s businesses, facts, and circumstances. |
|
|
Item 303(a)(4), Off- balance sheet arrangements |
The item will be replaced by a new instruction to Item 303. Under the new instruction, registrants will be required to discuss commitments or obligations, including contingent obligations, arising from arrangements with unconsolidated entities or persons that have, or are reasonably likely to have, a material current or future effect on such registrant’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, cash requirements, or capital resources even when the arrangement results in no obligation being reported in the registrant’s consolidatedbalance sheets. |
Prompt registrants to consider and integrate disclosure of off-balance sheet arrangements within the context of their MD&A. |
|
| Item 303(a)(5),Contractual obligations | Registrants will no longer be required to provide a contractual obligations table. A discussion of material contractual obligations will remain required through an enhanced principles-based liquidity and capital resources requirement focused on material short- and long-term cashrequirements from known contractual and other obligations. | Promote the principles-based nature of MD&A and simplify disclosures. | |
|
Instruction 4 to Item 303(a) (Material changes in line items) |
Incorporate a portion of the instruction into amended Item 303(b). Clarify in amended Item 303(b) that where there are material changes in a line item, including where material changes within a line item offset one another, disclosure of the underlying reasons for these material changes in quantitative and qualitative terms isrequired. | Enhance analysis in MD&A. Clarify MD&A disclosure requirements by codifying existing Commission guidance on the importance of analysis in MD&A. | |
|
Item 303(b), Interim periods |
Registrants will be permitted to compare their most recently completed quarter to either the corresponding quarter of the prior year or to the immediately preceding quarter. Registrants subject to Rule 3-03(b) of Regulation S-X will be afforded the same flexibility.
|
Allow for flexibility in comparison of interim periods to help registrants provide a more tailored and meaningful analysis relevant to their business cycles. | |
| Critical Accounting Estimates | Registrants will be explicitly required to disclose critical accounting estimates. | Facilitate compliance and improve resulting disclosure. Eliminate disclosure that duplicates the financial statement discussion of significantpolicies. Promote meaningful analysis of measurement uncertainties. | |
Further Background on SEC Disclosure Effectiveness Initiative
I have been keeping an ongoing summary of the SEC ongoing Disclosure Effectiveness Initiative. The following is a recap of such initiative and proposed and actual changes. I have scaled down this recap from prior versions to focus on the most material items.
On November 19, 2020, as discussed in this blog, the SEC adopted amendments to Management’s Discussion & Analysis of Financial Conditions and Operations (MD&A) required by Item 303 of Regulation S-K. In addition, to eliminate duplicative disclosures, the SEC also eliminated Item 301 – Selected Financial Data and revised Item 302 – Supplementary Financial Information. For my blog on the rules January 30, 2020 proposal, see HERE.
On August 26, 2020, the SEC adopted final amendments to Item 101 – description of business, Item 103 – legal proceedings, and Item 105 – Risk Factors of Regulation S-K. See HERE.
In May 2020, the SEC adopted amendments to the financial statements and other disclosure requirements related to the acquisitions and dispositions of businesses. See my blog HERE on the proposed amendments. My blog on the final amendments will be published after this blog.
In March 2020, the SEC adopted amendments to the definitions of an “accelerated filer” and “large accelerated filer” to enlarge the number of smaller reporting companies that can be exempt from those definitions and therefore not required to comply with SOX Rule 404(b) requiring auditor attestation of management’s assessment on internal controls. See HERE.
On March 20, 2019, the SEC adopted amendments to modernize and simplify disclosure requirements for public companies, investment advisers, and investment companies. The amendments: (i) revise forms to update, streamline and improve disclosures including eliminating risk-factor examples in form instructions and revising the description of property requirement to emphasize a materiality threshold; (ii) eliminate certain requirements for undertakings in registration statements; (iii) amend exhibit filing requirements and related confidential treatment requests; (iv) amend Management Discussion and Analysis requirements to allow for more flexibility in discussing historical periods; and (v) incorporate more technology in filings through data tagging of items and hyperlinks. See HERE. Some of the amendments had initially been discussed in an August 2016 request for comment – see HERE, and the proposed rule changes were published in October 2017 – see HERE illustrating how lengthy rule change processes can be.
In December 2018, the SEC approved final rules to require companies to disclose practices or policies regarding the ability of employees or directors to engage in certain hedging transactions, in proxy and information statements for the election of directors. To review my blog on the final rules, see HERE and on the proposed rules, see HERE.
In the fourth quarter of 2018, the SEC finalized amendments to the disclosure requirements for mining companies under the Securities Act and the Securities Exchange. The proposed rule amendments were originally published in June 2016. In addition to providing better information to investors about a company’s mining properties, the amendments are intended to more closely align the SEC rules with current industry and global regulatory practices and standards as set out in by the Committee for Reserves International Reporting Standards (CRIRSCO). In addition, 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. See HERE.
On June 28, 2018, the SEC adopted amendments to the definition of a “smaller reporting company” as contained in Securities Act Rule 405, Exchange Act Rule 12b-2 and Item 10(f) of Regulation S-K. See HERE and later issued updated C&DI on the new rules – see HERE. The initial proposed amendments were published on June 27, 2016 (see HERE).
On March 1, 2017, the SEC passed final rule amendments to Item 601 of Regulation S-K to require hyperlinks to exhibits in filings made with the SEC. The amendments require any company filing registration statements or reports with the SEC to include a hyperlink to all exhibits listed on the exhibit list. In addition, because ASCII cannot support hyperlinks, the amendment also requires that all exhibits be filed in HTML format. The new rule went into effect on September 1, 2017 for most companies and on September 1, 2018 for smaller reporting companies and non-accelerated filers. See my blog HERE on the Item 601 rule changes and HERE related to SEC guidance on same.
On July 13, 2016, the SEC issued a proposed rule change on Regulation S-K and Regulation S-X to amend disclosures that are redundant, duplicative, overlapping, outdated or superseded (S-K and S-X Amendments). See my blog on the proposed rule change HERE. Final amendments were approved on August 17, 2018 – see HERE
The July 2016 proposed rule change and request for comments followed the concept release and request for public comment on sweeping changes to certain business and financial disclosure requirements issued on April 15, 2016. See my two-part blog on the S-K Concept Release HERE and HERE.
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. See my blog HERE. In March 2020, the SEC adopted final rules to simplify the disclosure requirements applicable to registered debt offerings for guarantors and issuers of guaranteed securities, and for affiliates whose securities collateralize a company’s securities. See my blog HERE.
In early December 2015, the FAST Act was passed into law. The FAST Act required the SEC to adopt or amend rules to: (i) allow issuers to include a summary page to Form 10-K; and (ii) scale or eliminate duplicative, antiquated or unnecessary requirements for emerging growth companies, accelerated filers, smaller reporting companies and other smaller issuers in Regulation S-K. See my blog HERE.
« Updated Guidance On Confidential Treatment In SEC filings OTCQB And OTCQX Rule Changes »
Updated Guidance On Confidential Treatment In SEC filings
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.
After the rule change, the SEC streamlined its procedures for granting CTR’s and for applying for extended confidential treatment on previously granted orders. The amendments to the CTR process became effective April 2, 2019. See HERE for a summary of confidential treatment requests. In December 2019, the SEC issued new guidance on confidential treatment applications submitted pursuant to Rules 406 and 24b-2.
Confidential Treatment Requests Under Rule 406 or 24b-2
Rule 406 of the Securities Act of 1933 (“Securities Act”) and Rule 24b-2 of the Securities Exchange Act of 1934 (“Exchange Act”) set forth the exclusive procedures for seeking confidential treatment for any information that may be required to be publicly filed under either Act and for which the streamlined procedures for confidential treatment of material contracts and their exhibits is not available. Furthermore, a company may voluntarily seek approval under Rules 406 and 24b-2 even if the self-executing procedure for omitting information is available. Later in this blog, I include a refresher on the streamlined, self-executing rules for omitting confidential information from material contract exhibits to SEC filings.
Like all CTR’s, requests under these rules must be made in paper format and not electronic. Also, like all CTR’s, if a redacted exhibit is included with a registration statement, any questions regarding the confidential treatment will need to be fully resolved before the SEC will declare the registration statement effective.
To make a CTR under Rule 406 or 24b-2, a person must omit the confidential information from the relevant EDGAR filing, noting that information has been omitted based on a CTR, and concurrently file the CTR with the SEC using the specific fax number and designated person for receiving such information. All documents and information must be marked “Confidential Treatment.”
The CTR must include one unredacted copy of the entire document for which confidential treatment is sought and a cover letter or memo containing (i) identification of the information sought to be kept confidential; (ii) a statement of the grounds for keeping the information confidential, including reference to particular provisions under FOIA and other SEC rules and regulations; (iii) the specific time period for which confidentiality is sought (year, month and date) and a justification for such period; (iv) a detailed explanation of why, based on the facts and circumstances of the particular case, disclosure of the information is unnecessary for the protection of investors; (v) a written consent to the furnishing of the confidential information to other government agencies, offices, or bodies and to the Congress; and (vi) the name, address and telephone number of the person to whom all notices and orders should be directed.
For an Exchange Act Rule 24b-2 CTR, the name of each exchange upon which the materials would be filed (or omitted) must also be included. Furthermore, the submission must include a statement that: (i) none of the confidential information has been disclosed to the public; (ii) disclosure of the information will cause substantial competitive harm to the company; and (iii) disclosure of the confidential information is not necessary for protection of investors.
As discussed below, the SEC will not grant confidential treatment to information that is material. Moreover, if information is omitted beyond what is customarily treated as private or confidential, the SEC will ask that an amendment be filed with fewer omissions and a new CTR filed.
If confidential treatment is granted, an order will be entered and filed on EDGAR. If confidential treatment is denied, the company will have an opportunity to withdraw the filing with the confidential information if withdrawal is otherwise allowable (such as a voluntary S-1 filing or Exchange Act report by a voluntary filer). A denial may also be appealed.
Application for Extension of Confidential Treatment
Companies that have previously obtained a confidential treatment order for a material contract must continue to file extension applications under Rules 406 or 24b-2 if they want to protect the confidential information from public release pursuant to a Freedom of Information Act request after the original order expires. The SEC has created a simple one-page form to apply for an extension of time for which a confidential treatment order had previously been granted. Rather than submitting a whole new application, with the confidential information included, a company seeking to extend a confidential treatment order previously granted can simply affirm that the facts and circumstances that supported the prior application continue to be true, complete and accurate.
The short-form application allows for an extension of confidential treatment for a period of three, five or ten years and requires a brief explanation to support the request. The request for extension must be filed prior to the original order’s expiration. If the applicant reduces the redactions from the previous version, the revised redacted version of the contract must be publicly filed when the short-form extension application is submitted. The short-form application cannot be used to add new exhibits to the application or make additional redactions. In that case, a full application under Rules 406 or 24b-2 would still be required.
The SEC has provided an email address (CTExtensions@sec.gov) for submittal of the new short-form application. The email address is exclusive to these short-form applications and, as such, should not be used in connection with any other type of confidential treatment or extension request. Upon approval, the SEC will post the order granting CTR on the applicant’s EDGAR page.
Confidential Treatment Requests for Material Contracts
Effective March 2019, Item 601(b)(10) of Regulation S-K allows a company to file redacted material contracts without applying for confidential treatment of the redacted information provided the redacted information (i) is not material and (ii) would be competitively harmful if publicly disclosed. If it does so, the company should mark the exhibit index to indicate that portions of the exhibit or exhibits have been omitted and include a prominent statement on the first page of the redacted exhibit that certain identified information has been excluded from the exhibit because it is both not material and would likely cause competitive harm to the registrant if publicly disclosed. The company also must indicate by brackets where the information is omitted from the filed version of the exhibit.
If requested by the SEC, the company must promptly provide an un-redacted copy of the exhibit on a supplemental basis. The SEC also may request the company to provide its materiality and competitive harm analyses on a supplemental basis. Any requested supplemental information must be provided in paper format and only to the designated email address provided by the SEC to protect and preserve its confidential nature. If the SEC does not agree with the analysis, it could request that the company amend its filing to include any previously redacted information. If a redacted exhibit is included with a registration statement, any questions regarding the confidential treatment will need to be fully resolved before the SEC will declare the registration statement effective.
The company may request confidential treatment of the supplemental material submitted to the SEC pursuant to Rule 83 while it is in the possession of the SEC. After completing its review of the supplemental information, the SEC will return or destroy the information at the request of the company if the company complies with the procedures outlined in Rules 418 or 12b-4. Rules 418 or 12b-4 require that a company request that the SEC either return or destroy the supplemental information, at the same time as it is first furnished to the SEC and that returning or destroying the information (i) is consistent with the protection of investors and (ii) is consistent with the Freedom of Information Act. Also, if information is electronically provided to the SEC, the SEC has no obligation to return or destroy same.
Although the letter requesting additional information, and the closing of the review letter, will both be made public on the EDGAR system, the SEC will not make public its comments regarding redacted exhibits, nor the company’s responses thereto.
The amendments are not meant to alter what information is deemed confidential or can be omitted, but rather to streamline the process by allowing a company to redact without the confidentiality treatment process. The w may still randomly review company filings and “scrutinize the appropriateness of a registrant’s omissions of information from its exhibits.”
What Information Qualifies for Confidential Treatment
Generally speaking, a company can seek confidential treatment for information which could adversely affect the company’s business and financial condition, usually because of competitive harm, if disclosed, as long as the information is not material to investors.
A CTR must include specific citations to an exemption from disclosure under FOIA. The FOIA specifies nine categories of information that may be exempted from the FOIA’s broad requirement to make information available to the general public. The most commonly used exemption for public companies allows for confidential treatment for “trade secrets and commercial or financial information obtained from a person and privileged or confidential.” The U.S. Supreme Court’s case Food Marketing Institute v. Argus Leader Media (October 2018) held that where commercial or financial information is both customarily and actually treated as private by its owner and provided to the government under an assurance of privacy, the information is “confidential” within the meaning of FOIA and that it is not necessary to show substantial competitive harm. The SEC’s new guidance refers CTA applicants to the Supreme Court case for assistance in crafting arguments for the CTA application.
Although FOIA may generally exempt trade secrets, not all trade secrets may be kept confidential by public companies. In essence, when a company determines to go public and files a registration statement under either the Securities Act or Exchange Act, and thus agrees to file reports with the SEC, the company is agreeing to make public the information required by Regulation S-K and S-X. A company cannot avoid these specific requirements by claiming confidentiality. Examples of information that a private company may deem confidential, but for which a public company will need to disclose, include: (i) the identity of 10% or greater customers; (ii) the identity of 5% or greater shareholders; (iii) the dollar amount of firm backlog orders; (iv) the duration and effect of all patents, trademarks, licenses and concessions held; (v) related party transactions; and (vi) executive compensation.
Assuming that information is not specifically required to be disclosed under the Securities Act or Exchange Act, a “trade secret” is “a secret, commercially valuable plan, formula, process or device that is used for the making, preparing, compounding or processing of trade commodities and that can be said to be the end product of either innovation or substantial effort.” Examples of information that a public company could successfully complete a CTR for include (i) pricing terms; (ii) technical specifications; (iii) payment terms; (iv) sensitive information regarding business strategy, or timing of research, development and commercialization efforts; (v) details of intellectual property (that isn’t already public, such as in a filed patent); (vi) details of cybersecurity procedures; and (vii) customer databases.
A company can never obtain confidential treatment for information that is already in the public domain or has been publicly disclosed, even if inadvertently. Accordingly, it is important that a company be very careful to ensure that any information for which it seeks confidential treatment is kept strictly confidential, including by third parties. For example, care should be given that a counterparty to a contract does not issue a press release or otherwise make provisions public.
Confidential Treatment Requests Under Rule 83
Rule 83 provides a procedure for requesting that information be kept confidential from Freedom of Information Act (“FOIA”) requests where no other procedure, such as Rules 406 or 24b-2, are available. Generally, Rule 83 is used in the context of requests for supplemental information, examinations, inspections and investigations. Under Rule 83, the submitter of information must mark each page with “Confidential Treatment Requested by [name]” and an identifying number and code, such as a Bates-stamped number. Also, the words “FOIA Confidential Treatment Request” must appear on the top of the first page of the request. Like all other CTR’s, the request must be via paper and not electronically. The SEC has provided a specific fax line and office (the FOIA Office) to receive Rule 83 CTR’s to maintain their confidentiality, even among SEC staff. A confidential treatment request will expire 10 years from the date the FOIA Office receives it unless that office receives a renewal request before it expires.
The requester may claim personal or business confidentiality, but need not substantiate his or her request until the FOIA Office notifies him or her of a FOIA request for the records. If a FOIA request is received for the records, the person that requested confidential treatment will be notified and given an opportunity to provide a legal and factual analysis supporting confidential treatment. A substantiation submittal must include: (i) the reasons that the information can be withheld under FOIA and referring to the specific provisions of FOIA supporting same; (ii) any other statutes or regulatory provisions that may govern the information; (iii) the existence and applicability of any prior determinations by the SEC, other federal agency or court relating to the confidential treatment of the information; (iv) the adverse consequences to a business enterprise, financial or otherwise, that would result from disclosure of confidential commercial or financial information, including any adverse effect on the business’ competitive position; (v) the measures taken to protect the confidentiality prior to and after submission to the SEC; (vi) the ease or difficulty of a competitor’s obtaining or compiling the commercial or financial information; (vii) whether the information was voluntarily submitted to the SEC; (viii) if the substantiation argument document itself should be kept confidential; and (ix) such additional facts and legal analysis as appropriate to support the request.
Where a Rule 83 CTR is being made in the course of live testimony or oral discussions, the request for confidential treatment must be made contemporaneously with providing the information and followed with a written request no later than 30 days later.
Rule 83 provides for an appeal process where an initial determination that confidential treatment is not warranted. Rule 83 appeals are reviewed and decided by the SEC’s Office of General Counsel. If the General Counsel decides the information does not need to be kept confidential, it will give the person 10 days’ notice during which time a person could file an action in federal court to continue to fight to maintain the confidentiality of the information. Likewise, if the SEC determines that information should be kept confidential, the person seeking the information can appeal by filing suit in federal court.
Rule 83 cannot be relied upon to request confidential treatment for information that would otherwise be required to be disclosed in SEC registration statements or reports. In that case, the person making the CTR would have to rely on the new procedures for redacting information in material contracts or make a CTR under Rules 406 or 24b-2.
« SEC Issues Transitional FAQ On Regulation S-K Amendments SEC Adopts Amendments To Management Discussion And Analysis »
SEC Issues Transitional FAQ On Regulation S-K Amendments
The recent amendments to Items 101, 103 and 105 of Regulation S-K (see HERE) went into effect on November 9, 2020, raising many questions as to the transition to the new requirements. In response to what I am sure were many inquiries to the Division of Corporation Finance, the SEC has issued three transitional FAQs.
The amendments made changes to Item 101 – description of business, Item 103 – legal proceedings, and Item 105 – Risk Factors of Regulation S-K.
FAQ – Form S-3 Prospectus Supplement
The first question relates to the impact on Form S-3 and in particular the current use of prospectus supplements for an S-3 that went into effect prior to November 9, 2020. In general, a Form S-3 is used as a shelf registration statement and a company files a prospectus supplement each time it takes shares down off that shelf (see HERE).
The prospectus supplement must meet the requirements of Securities Act Rule 424 and includes specific information that was omitted from the base S-3 shelf registration. That information generally includes facts about a particular offering or shelf take-down such as the public offering price, description of securities or similar matters, and facts and events that constitute a substantive change from or addition to the information included in the base S-3.
The specific FAQ is “[A] registrant has a Registration Statement on Form S-3 that became effective before November 9, 2020. If the registrant files a prospectus supplement to the Form S-3 on or after November 9, 2020, must the prospectus supplement comply with the new rules?”
The SEC confirms that a prospectus supplement does not need to comply with new Items 101 and 103 because Form S-3 does not expressly require Item 101 or Item 103 disclosure but rather requires the incorporation by reference from Exchange Act reports containing that information. Further, the SEC confirms that a company does not need to amend its Form 10-K that is incorporated by reference into the Form S-3 to update for the new rules. For more on incorporation by reference including with respect to a Form S-3, see HERE.
On the other hand, Item 105 – risk factor disclosures – are required to be included in a prospectus supplement. In particular, Securities Act Rule 401(a) requires that the form and contents of a prospectus supplement conform to the applicable rules and forms as in effect on the initial filing date of the prospectus supplement. The SEC, however, has stated it will allow a company to continue to comply with the old Item 105 rules for prospectus supplements filed until the next update to the Registration Statement on Form S-3 for Section 10(a)(3) purposes.
A Form S-3 is updated for Section 10(a)(3) purposes each year when it files its Form 10-K, which is automatically incorporated by reference into the S-3. A company may also file a post-effective amendment to the Form S-3 as a result of fundamental changes, which post-effective amendment would act as a Section 10(a)(3) update.
FAQ – Form 10-K
Quickly following the passage of the new rules, practitioners noticed a disconnect between the new Item 101 requirements and the instructions on Form 10-K. In particular, Item 1 of Form 10-K requires the company to “[F]urnish the information required by Item 101 of Regulation S-K (§ 229.101 of this chapter) except that the discussion of the development of the registrant’s business need only include developments since the beginning of the fiscal year for which this report is filed.”
Amended Item 101(a) replaces the former prescriptive requirement to provide information related to the development of the company for the last 5 years (or 3 years for a smaller reporting company) with a principles-based materiality approach. Now, a company must provide information that is material to an understanding of the development of its business, irrespective of a specific time frame. The adopting rule release did not discuss the applicability to Form 10-K.
To clarify any confusion, the SEC issued an FAQ confirming that the new rules do not change Item 1 of Form 10-K, which only requires disclosures regarding the development of the registrant’s business for the fiscal year covered by the 10-K.
FAQ – Item 101 in Reports and Registration Statements
The third FAQ asks whether a company must always provide a full discussion of general development of its business pursuant to new Item 101(a) (or new Item 101(h) for a smaller reporting company) in an annual report or registration statement that requires Item 101 disclosure. The SEC’s response is “not necessarily.”
In particular, except in an initial registration statement, new Item 101 will permit a company to omit the full discussion of the general development of its business if the company: (1) provides an update to the general development of its business, disclosing all material developments that have occurred since the most recent registration statement or report that includes the full discussion; (2) includes one active hyperlink to the registration statement or report that includes the full discussion; and (3) incorporates the full discussion by reference to the registration statement or report. However, a company is not required to use this updating method. The SEC anticipates that the updating method will apply mainly to registration statements.
« SEC Proposed Conditional Exemption For Finders Updated Guidance On Confidential Treatment In SEC filings »
SEC Proposed Conditional Exemption For Finders
Over the years I have written many times about exemptions to the broker-dealer registration requirements for entities and individuals that assist companies in fundraising and related services (see, for example: HERE). Finally, after years of advocating for SEC guidance on the topic, the SEC has proposed a conditional exemption for finders assisting small businesses in capital raising. The proposed exemption will allow for the use of finders to assist small businesses in raising capital from accredited investors.
In its press release announcing the proposal, SEC Chair Clayton acknowledged the need for guidance, stating, “[T]here has been significant uncertainty for years, however, about finders’ regulatory status, leading to many calls for Commission action, including from small business advocates, SEC advisory committees and the Department of the Treasury. If adopted, the proposed relief will bring clarity to finders’ regulatory status in a tailored manner that addresses the capital formation needs of certain smaller issuers while preserving investor protections.”
Separately, New York has recently proposed a new finder’s exemption, joining California and Texas, who were early in creating exemptions for intra-state offerings. Also, I have received several inquiries lately on the topic of non-U.S. finders in the Regulation S context. This seems a good time to address it all. In Part I of this blog, I will review the new SEC proposal and in Part II the state law exemptions and Regulation S framework.
Introduction
Most if not all small and emerging companies are in need of capital but are often too small or premature in their business development to attract the assistance of a banker or broker-dealer. In addition to regulatory and liability concerns, the amount of a capital raise by small and emerging companies is often small (less than $5 million) and accordingly, the potential commission for a broker-dealer is limited as compared to the time and risk associated with the transaction. Most small and middle market bankers have base-level criteria for acting as a placement agent in a deal, which includes the minimum amount of commission they would need to collect to become engaged. In addition, placement agents have liability for the representations of the issuing company and fiduciary obligations to investors.
As a result of the need for capital and need for assistance in raising the capital, together with the inability to attract licensed broker-dealer assistance, a sort of black market industry has developed, and it is a large industry. Despite numerous enforcement actions against finders in recent years, neither the SEC, FINRA nor state regulators have the resources to adequately police this prevalent industry of finders.
In its proposal the SEC recognizes this cottage industry, stating finders “often play an important and discrete role in bridging the gap between small businesses that need capital and investors who are interested in supporting emerging enterprises.” The SEC goes further recognizing that the lack of regulation makes it very difficult, noting that “companies that want to play by the rules struggle to know in what circumstances they can engage a ‘finder’ or a platform that is not registered as a broker-dealer.” The SEC gives a nod to the numerous calls for action over the years, including the ABA’s 2005 report, the SEC Advisory Committee on Small and Emerging Companies and the U.S. Treasury report (see links to discussions under Additional Reading on Finders).
I have advocated in the past for a regulatory framework that includes (i) limits on the total amount finders can introduce in a 12-month period; (ii) antifraud and basic disclosure requirements that match issuer responsibilities under registration exemptions; and (iii) bad-actor prohibitions and disclosures which also match issuer requirements under registration exemptions. Although the exemptive order does have bad actor prohibitions it does not have a cap on the amount of the raise, and other than as related to the finder and his/her compensation, does not require specific disclosures.
Although I think the proposal is a much needed step towards regulating finders, there are two aspects of the exemption that I have trouble with. The first is limiting the exemption to natural persons. Many natural persons operate through personal business entities such as an LLC or S corporation for valid business reasons including tax and estate planning.
The second is making the exemption unavailable for companies that are subject to the Exchange Act reporting requirements. The SEC reasons that once a company is able to file reports under the Exchange Act it is more likely able to attract a licensed broker dealer and would not need an unlicensed finder. The SEC indicates that non-reporting companies are more likely to experience difficulty obtaining the assistance of a broker-dealer, and are therefore most likely to need the assistance of a finder. I completely disagree with this reasoning as a basis for limiting the exemption.
Certainly the SEC reasoning may be true in some cases, but many broker-dealers will not work with small public companies, and many are simply prohibited from doing so. For instance Bank of America, and their brokerage, Merrill Lynch, will not transact business in the securities of companies with less than a $300 million market cap and less than a $5.00-per-share stock price (see HERE). Even many of the smaller tier brokerage firms that I deal with on a daily basis will not assist with a capital raise for an OTC Markets traded security unless the raise is a public offering in conjunction with an up-listing to a national exchange. Many of these brokerage firms clear through a clearing firm who in turn will not allow them to transact business with an OTC Markets issuer. Even those that will work with these smaller public companies, generally will not do so for a private capital raise, but rather will only work on public registered offerings.
If the SEC’s argument is based on need, then there is a large group of small public companies that have a palpable need for assistance with exempt offering capital raising efforts that will be left unfulfilled. Exempt offerings are smaller than registered offerings. Even if a small company can attract a broker-dealer for a private capital raise, the commissions, expense reimbursement and fees are generally extremely high and the agreements generally include strong rights of first refusal (ROFR rights) and other provisions that can make the cost of capital unfeasible. Further, knowing that by becoming subject to the SEC reporting requirements, the ability to use finder’s will be foreclosed, many of these companies may delay a going public transaction, which in and of itself is contrary to the SEC’s stated policies of encouraging public offerings and access to U.S. capital markets (see for example HERE).
Furthermore, one of the SEC’s core missions is the protection of investors. Companies that are subject to the Exchange Act reporting requirements are audited by independent auditors and required to comply with Sarbanes Oxley Act Rule 404(a) requiring the company to establish and maintain internal controls over financial reporting and disclosure control and procedures and have their management assess the effectiveness of each. These companies are subject to robust disclosure requirements delineated by Regulation S-K and financial disclosure requirements under Regulation S-X. Clearly, investors have much greater protections with the use of finders on behalf of a reporting company than a small private company.
Proposed Federal Finder’s Exemption
Background
Registered broker-dealers are subject to comprehensive regulation under the Exchange Act and under the rules of each self-regulatory organization (“SRO”) of which the broker-dealer is a member, such as FINRA, the NYSE and Nasdaq. Section 3(a)(4) of the Exchange Act defines a “broker” as “any person engaged in the business of effecting transactions in securities for the account of others.” Section 15(a)(1) of the Exchange Act, in turn, makes it unlawful for any broker to use the mails or any other means of interstate commerce to “effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security” unless that broker is registered with the SEC. Accordingly, absent an available exception or exemption, a person engaged in the business of effecting transactions in securities is a broker required to register with the SEC.
Periodically the SEC updates its Guide to Broker-Dealer Registration explaining in detail the rules and regulations regarding the requirement that individuals and entities that engage in raising money for companies must be licensed by the SEC as broker-dealers. The Guide clearly includes “finders” and in particular:
Each of the following individuals and businesses is required to be registered as a broker if they are receiving transaction-based compensation (i.e., a commission):
- “finders,” “business brokers,” and other individuals or entities that engage in the following activities:
- Finding investors or customers for, making referrals to, or splitting commissions with registered broker-dealers, investment companies (or mutual funds, including hedge funds) or other securities intermediaries;
- Finding investment banking clients for registered broker-dealers;
- Finding investors for “issuers” (entities issuing securities), even in a “consultant” capacity;
- Engaging in, or finding investors for, venture capital or “angel” financings, including private placements;
- Finding buyers and sellers of businesses (i.e., activities relating to mergers and acquisitions where securities are involved);
From a legal perspective, determining whether a person must be registered requires an analysis of what it means to “effect any transactions in” and to “induce or attempt to induce the purchase or sale of any security.” It is precisely these two phrases that courts and commentators have attempted to flesh out, with inconsistent and uncertain results. Despite the inconsistent results, key considerations have included: (i) actively soliciting or recruiting investors; (ii) participating in negotiations between the issuer and the investor; (iii) advising investors as to the merits of an investment or opining on its merits; (iv) handling customer funds and securities; (v) having a history of selling securities of other issuers; and (vi) receiving commissions, transaction-based compensation or payment other than a salary for selling the investments.
The SEC has now proposed to issue an exemptive order, not a rule change, which would provide exemptive relief to allow a natural person to engage in certain defined activities without registration as a broker dealer. The exemption is in the form of a non-exclusive safe harbor and accordingly even if the parameters of the safe-harbor are not met, the traditional facts and circumstances analysis could still support that a person did not need to register as a broker dealer for specific activities.
Proposed Exemption
The SEC proposal creates two classes of finders, both of which would allow a natural person (not an entity) to accept transaction-based fees for assisting with capital raising. A Tier I finder would be limited to providing contact information for potential investors and, as such, would not be able to have any direct contact with the investor. A Tier I finder could only assist a single company in a 12-month period.
A Tier II finder may (i) identify, screen and contact potential investors; (ii) distribute offering materials to investors; (iii) discuss company information including about the offering but may not provide advice on valuation or the advisability of making an investment; and (iv) arrange or participate in meetings with the company and investor. A Tier II finder is subject to certain disclosure requirements, including as to their role and compensation, and must obtain a written dated disclosure acknowledgement from the investor prior to any investment solicitation.
Regardless of the Tier, a finder could not (i) be involved in structuring the transaction or negotiating the terms of the offering; (ii) handle customer funds or securities or bind the issuer or investor; (iii) participate in the preparation of any sales materials; (iv) perform any independent analysis of the sale; (v) engage in any “due diligence” activities; (vi) assist or provide financing for such purchases; or (vii) provide advice as to the valuation or financial advisability of the investment.
Further, both Tiers of the proposed finder’s exemption are subject to the following conditions:
(i) the issuer cannot be required to file reports under the Exchange Act;
(ii) the issuer must be relying on a valid Securities Act registration exemption (such as Regulation D or Regulation A);
(iii) the finder cannot engage in general solicitation (the exemptive order does not specify if the issuer itself can engage in general solicitation but the finder cannot and in practice it may be difficult to maintain a clear line evidencing that the investors introduced by the finder did not learn of the offering through general solicitation if the issuer is doing so);
(iv) the investor must be accredited;
(v) the finder must have a written agreement with the issuer, including scope of services and compensation;
(vi) the finder cannot be associated with a broker-dealer;
(vii) the finder could not engage in other broker-dealer activities such as facilitating a registered offering or the resale of securities; and
(vii) the finder cannot be a “disqualified person” as defined in Section 3(a)(39) of the Exchange Act.
A “disqualified person” is similar to a bad actor under the exempt offering rules (see HERE) but regulates when a person is disqualified from being a member of FINRA (i.e., a broker-dealer) or associated with a member.
A person is disqualified from being a member or associated with a member of FINRA, and if the proposal is passed, from acting as a finder, if such person:
(a) has been expelled or suspended from membership, association with or participation in FINRA or foreign equivalent (the language is very broad in covering foreign contracts, markets, regulatory organizations and the like);
(b) is subject to an order of the SEC, other appropriate regulatory authority or foreign financial regulator denying, suspending for 12 months or less, revoking or otherwise limiting registration as a broker, dealer, municipal securities dealer, government securities broker, government securities dealer, security-based swap dealer, major security-based swap participant, or foreign equivalent of any of these or being an associated person of same;
(c) is subject to an order of the CFTC denying, suspending or revoking registration;
(d) is subject to an order of a foreign financial regulatory authority denying, suspending, or revoking the ability to engage in commodities, swaps or similar businesses;
(e) by his conduct while associated with a broker, dealer, municipal securities dealer, government securities broker or dealer, security-based swap dealer, or major security-based swap participant, or while associated with an entity or person required to be registered under the Commodity Exchange Act, has been found to be a cause of any effective suspension, expulsion, or order set forth in the above paragraphs, and in entering such a suspension, expulsion, or order, the SEC, an appropriate regulatory agency, or any self-regulatory organization (FINRA) shall have jurisdiction to find whether or not any person was a cause thereof;
(f) has associated (i.e., licensed with) any person that would be disqualified; or
(g) has committed or omitted any act, or is subject to an order or finding, of willful violation of any provision of the Securities Act, the Investment Advisors Act, the Investment Company Act, the Commodity Exchange Act or the rules of the Municipal Securities Rulemaking Board or has willfully aided, abetted, counseled, commanded, induced or procured such violation; is subject to a final order of a state securities or banking commission or similar agency or federal banking agency baring participation in the securities industry or finding a violation of any law or regulation which prohibits fraud, manipulative or deceptive conduct; has been convicted of any offense specified above or any other felony within ten years of the date of the filing of an application for membership or participation in, or to become associated with a member of, a self-regulatory organization; is enjoined from any action, conduct, or practice above; has willfully made or caused to be made in any application for membership or participation in, or to become associated with a member of, a self-regulatory organization, report required to be filed with a self-regulatory organization, proceeding before a self-regulatory organization, or any foreign equivalent any statement which was at the time, and in the light of the circumstances under which it was made, false or misleading with respect to any material fact, or has omitted to state in any such application, report, or proceeding any material fact which is required to be stated therein (this paragraph is very similar to the Regulation D bad actor rules).
Additional Reading on Finders
For a general review on the law surrounding finder’s fees, including my recommendations for changes, see HERE.
For a review of the U.S. Department of the Treasury report recommending a regulatory structure for finder’s fees, see HERE.
For a review of the no-action-letter-based exemption for M&A brokers, see HERE.
For a review of the statutory exemption from the broker-dealer registration requirements found in Securities Exchange Act Rule 3a4-1, including for officers, directors and key employees of an issuer, see HERE.
To read about the American Bar Association’s recommendations for the codification of an exemption from the broker-dealer registration requirements for private placement finders, see HERE.
To learn about the exemption for websites restricted to accredited investors and for crowdfunding portals as part of the JOBS Act, see HERE.
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