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The 2017 SEC Government-Business Forum On Small Business Capital Formation

Posted by Securities Attorney Laura Anthony | March 13, 2018 Tags: 2017, SEC, The 2017 SEC Government-Business Forum On Small Business Capital Formation

On November 30, 2017, the SEC held its annual Government-Business Forum on Small Business Capital Formation (the “Forum”). It will be several months until the final report with recommendations from the forum is published, but the opening remarks from SEC Chair Jay Clayton and Commissioners Kara Stein and Michael Piwowar provide ongoing and consistent guidance as to the current focus of the SEC. For a review of the recommendations by last year’s forum, see HERE.

As expected, the topics of cryptocurrency and ICO’s were front and center at the Forum. In his opening remarks at the Forum, Division of Corporation Finance Director William Hinman confirmed that the SEC believes that ICO’s generally involve securities offerings and that the securities laws must be complied with. Hinman continued that the SEC is providing guidance through enforcement and public statements on the topic.

As with other statements and speeches, the SEC hedges by pointing out the validity of an ICO as a capital raising tool, and of course, the innovation potential of blockchain. The SEC is not trying to discourage ICO’s or blockchain innovation; they are trying to discourage ICO’s that fail to comply with securities laws, and the unfortunate, multiple frauds being perpetuated as a result of the frenzy surrounding this new technology.

Remarks by Chairman Jay Clayton

Chair Clayton is consistent with the theme he has been putting forth since taking office: The SEC is committed to helping Main Street investors. The Forum provides a key opportunity for the small-cap marketplace to have their voices heard regarding issues and desired changes to federal securities regulations and the regulatory system.

Chair Clayton reiterates the SEC’s three-part mission to (i) protect investors; (ii) maintain fair, orderly and efficient markets; and (iii) facilitate capital formation. Furthermore, although capital formation is important for all businesses, small and medium-sized businesses contribute the most to U.S. job creation, generating 62% of new jobs. Along the same lines, the SEC wants to open more investment opportunities into small businesses for Main Street investors. In that regard, Jay Clayton points out the Regulation A public offering process. As an aside, I was happy to see him recognize Regulation A as an IPO, whereas when he first took office, he seemed to view Regulation A as outside the IPO realm.

Remarks by Commissioner Michael Piwowar

Michael Piwowar’s statement was short and pointed. As anyone that follows my blog knows, I am a fan of Piwowar, agreeing with most of his views, and more so his willingness to express those views, even when contrary to other SEC chiefs or the legislature. Mr. Piwowar has been vocal about his disagreement with the pay ratio disclosure requirements mandated by the Dodd-Frank Act and uses his statement as an opportunity to reiterate that view, while pointing out that the recent interpretative guidance on the subject will help with the compliance burden. I have not written about that guidance as of yet, but my prior blog on the pay ratio rules can be read HERE.

Commissioner Piwowar also points out other SEC actions to assist with small businesses and capital formation, including the newest proposed rules to modernize and simplify disclosures (see HERE) and the SEC’s action to allow all companies to file confidential registration statements (see HERE).

Commissioner Piwowar ends his statement by promising that he will personally give careful consideration to this year’s recommendations of the Forum. I hope so, as the recommendations are always on point to assist the small-cap marketplace.

Remarks by Commissioner Kara Stein

Commissioner Stein began with the usual niceties regarding the forum and its importance for communication between regulators and the small-cap market. Adding her own perspective, Commissioner Stein points out that a lot of the SEC’s effort and rules are “designed to facilitate trust between… market participants – the small businesses seeking to raise capital, the investors who wish to support their growth, and their service providers.” Continuing to add her own unique voice, Ms. Stein talked about the need for diversity of companies and investors and bringing capital raising (and a voice in the process) to different parts of the country.

The Author

Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys
330 Clematis Street, Suite 217
West Palm Beach, FL 33401
Phone: 800-341-2684 – 561-514-0936
Fax: 561-514-0832
LAnthony@LegalAndCompliance.com
www.LegalAndCompliance.com
www.LawCast.com

Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the OTC Market’s top source for industry news, and the producer and host of LawCast.com, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

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The SEC’s 2017 Enforcement Priorities And Results

Posted by Securities Attorney Laura Anthony | January 9, 2018 Tags: 2017, SEC, The SEC's 2017 Enforcement Priorities And Results

No more broken windows! In a series of speeches by various top brass at the SEC followed by the publication of the SEC Enforcement Division 2017 Report on results and priorities, the SEC has confirmed both directly and through its actions that the era of “broken windows” enforcement is over. The broken windows policy was first shepherded by Mary Jo White in 2013 and was one in which the SEC committed to pursue infractions big and small and to investigate, review and monitor all activities. The idea was that small infractions lead to bigger infractions, and the securities markets have had the reputation that minor violations are overlooked, creating a culture where laws were treated as meaningless guidelines.

Michael Piwowar has been a critic of broken windows since its inception. In a speech to the Securities Enforcement Forum in 2014, Mr. Piwowar stated, “[I]f every rule is a priority, then no rule is a priority.” He continued, “[I]f you create an environment in which regulatory compliance is the most important objective for market participants, then we will have lost sight of the underlying purpose for having regulation in the first place. Rather than enabling vital and important economic activity, we will have unnecessarily shackled it – and our country will be far worse off from the absence of such activity.”

Given the power to make a change, Commissioner Michael Piwowar and Chair Jay Clayton have signaled an adjustment in enforcement priorities throughout the year. In February 2017, then acting Chair Michael Piwowar revoked the subpoena authority from SEC staff, leaving the Division of Enforcement with the sole authority to approve a formal order of investigation and issue subpoenas. Mr. Piwowar had been a vocal critic of both the staff subpoena power and the manner in which the power was created since its inception. He has also been a vocal critic of the SEC’s investigative power, believing it has too much power and too little oversight. For more on the SEC subpoena power, Mr. Piwowar’s views, and the early stage setting for the current enforcement priorities, see HERE.

In his October 4, 2017 testimony on the SEC’s Agenda, Operations and Budget before the Committee on Financial Services, Chair Jay Clayton reiterated his commitment to rooting out bad actors and fraud, including pump-and-dump schemes, insider trading, and serious reporting and disclosure violations. Certainly, a review of published enforcement proceedings has illustrated that commitment. Mr. Clayton also laid the groundwork for more focused enforcement, stating, “I have asked the Division of Enforcement to evaluate regularly whether we are focusing appropriately on retail investor fraud and investment professional misconduct, insider trading, market manipulation, accounting fraud and cyber matters. I believe our Main Street investors would want us to focus on these areas.”

In July 2017, Chair Clayton announced a top priority and philosophy of protecting “Main Street investors,” which buzzwords are now repeated often in SEC communications, including press releases and speeches.

On October 26, 2017, Steven Peikin, co-director of the SEC Division of Enforcement, confirmed the death knell for the broken windows policy. In a speech, Mr. Peiken told conference attendees that the SEC would “have to be selective and bring a few cases to send a broader message rather than seep the entire field.” Mr. Peiken also suggested stronger communication between the Division of Enforcement and investigative targets, and an environment that fosters cooperation. In that regard, the SEC should communicate the benefits of cooperation and specifically how a company can merit cooperation credit. In that regard, the SEC will again encourage self-reporting and remediation, a prior policy that lost its wind in the 2001 Enron crisis.

Clearly, the change is driven by more than philosophy. The SEC budget has effectively been frozen, and more money needs to be spent on cybersecurity matters than ever before. See HERE. The SEC Division of Enforcement could have at least 100 fewer investigators and supervisors over the next year, as those lost to attrition will not be replaced.

Mary Jo White’s policy of forcing admissions of guilt in enforcement settlements may also have reached its pinnacle. In June 2013, the SEC announced that it would require that a settling party admit wrongdoing as part of a settlement to act as a further deterrent and bolster public accountability. In addition to reputational damage, this policy had legal evidentiary significance that could be used in civil matters, including shareholder lawsuits. For more on this, see HERE.

In his October 2017 speech, Mr. Piekin talked about the admissions policy, stating, “I think when people resolve cases with the commission [and] neither admit nor deny but agree to all the points of relief, I don’t think most people in the world say, ‘Boy, they really got away with that.’” That doesn’t mean the policy will disappear, but it may revert to its prior reiteration, where only those with related criminal cases will be asked for a guilt admission.

Division of Enforcement Annual Report on Results and Priorities

On November 15, 2017, the Division of Enforcement issued its annual report (Annual Report) on results and priorities, reiterating the mission and focus on the protection of Main Street investors. The Annual Report cites five core principles, including: (i) focus on Main Street (retail) investors, including accounting fraud, sales of unsuitable products, pursuit of unsuitable trading strategies, pump-and-dump schemes and Ponzi schemes; (ii) focus on individual accountability to maximize deterrence and prevent recidivists from continuing improper activities; (iii) keeping pace with technological changes, including all cybersecurity matters; (iv) imposing sanctions that support enforcement goals; and (v) constantly assessing the allocation of resources.

The Annual Report reiterates initiatives announced earlier this year, including the new Cyber Unit and Retail Strategy Task Force (see HERE), while confirming its commitment to long-standing enforcement goals. The top current goals include risks posed by cyber-related misconduct; issues raised by the activities of investment advisers, broker-dealers, and other registrants; financial reporting and disclosure issues involving public companies; and insider trading and market abuse.

During fiscal year ended (FYE) September 2017, the SEC brought 754 enforcement proceedings, returned $1.07 billion to harmed investors and obtained judgment and orders for more than $3.789 billion in disgorgement and penalties. During FYE ended September 2016, the SEC brought 868 actions and obtained judgements and orders for more than $4 billion in disgorgement and penalties. For more on the 2016 report, see HERE.

Broken down by type of case, the most cases were brought related to issuer reporting violations including audit and accounting problems, followed by securities offerings, then investment advisor or investment company violations, then broker-dealer violations, followed by insider trading, then market manipulation. A number of cases were also brought for public finance abuse, FCPA violations and transfer agent issues.

Interestingly, the SEC suspended trading in 309 companies in FYE 2017, a 55% increase from 2016. Trading suspensions are generally related to market manipulation and microcap fraud, and are a very successful tool to stop these problems in their tracks. Asset freezes were pretty even in both years, with 35 court-ordered asset freezes in 2017 and 33 in 2017. Likewise, the imposition of bars and suspensions has remained a constant, with 625 in 2017 and 650 in 2016.

The Author

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