Securities – Taking Care of Business

SEC’s Proposed Overhaul to the Definition of an Accredited Investor

Dec 20, 2019

In June 2019, the Securities and Exchange Commission (the SEC) published a concept release (the Concept Release) that sought public comment on how to improve the framework for private securities offerings under the Securities Act of 1933 (the 1933 Act), with the goal of encouraging capital formation as well as opening up investment opportunities to a broader group of investors. After receipt and consideration of comments on the Concept Release, on December 18, 2019, the SEC issued a release in which it proposed expansion of the definition of an “accredited investor” in Rule 501(a) of Regulation D of the 1933 Act in an effort to further the goals discussed in the Concept Release. The SEC’s proposed rule changes are designed to modernize and broaden the criteria by which both individual and institutional investors can participate in private securities offerings. (more…)

Third Circuit Decision Highlights Important Distinction Between Directors and Board Observers

Jul 26, 2019

By: Lori Smith, Ryan Udell and Adam Chelminiak

A recent decision by the U.S. Court of Appeals for the Third Circuit offers an important reminder of the distinction between the roles (and exposure to liability) of corporate directors and board observers. In a precedential opinion on a matter that previously lacked judicial guidance, the appeals court held that as a matter of law the functions of the defendant nonvoting board observers were not “similar” to the functions of board directors for purposes of imposing liability under Section 11 of the Securities Act of 1933.

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The Dangers of Transactional Precedent – The Times They Are-A-Changing

Mar 13, 2019

By: Lori Smith

The other day I had a client ask me to review some form documents that another party wanted to use in connection with the client’s website. The basis of the request was that he thought I had prepared, or at least reviewed, these documents when they were originally created – over 10 years ago (coincidentally I had reviewed them, but had been somewhat critical, in part, at that time as off-market). This got me thinking about how many companies (and lawyers) rely on templates or precedential deal documents collected over many years, without thinking about the specific facts and circumstances of the deal they are doing or the passage of time and how that might implicate the need for updates and revisions.

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SEC Adopts New Hedging Disclosure Rules

Jan 21, 2019

By: Jamie Wang

On December 18, 2018, the Securities and Exchange Commission (SEC) announced that it had approved and adopted final rules requiring public companies to disclose, in proxy or information statements for election of directors, any of their policies and practices regarding the ability of the company’s employees, officers and directors to engage in certain hedging transactions with respect to the company’s equity securities. The final rules implement provisions of Section 14(j) of the Securities Exchange Act of 1934, which was added pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. The effective date of the new rules is 30 days after publication in the federal register. As noted in the release of the final rules, the new requirements are intended to provide shareholders with information, at the time that they are asked to elect directors, about whether employees, officers or directors may engage in transactions that could reduce the extent to which their equity holdings and equity compensation are aligned with shareholders’ interests.

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Delaware Chancery Court Invalidates Charter Provisions Requiring Federal Forum Selection for Claims Under The Securities Act Of 1933

Dec 21, 2018

By: Marc Casarino

On December 19, 2018, The Delaware Court of Chancery held in Sciabacucchi v. Salzberg ^[1] that Delaware corporations cannot use charter or bylaw provisions to mandate that claims under the Securities Act of 1933 (‘33 Act) must be pursued in federal court. Such federal forum selection provisions have become a frequent component of corporate constitutive documents. This largely has been in response to increasing pursuit of state court actions asserting ‘33 Act claims and particularly after the Supreme Court’s decision in Cyan, Inc. v. Beaver County Employees Retirement Fund ^[2] – which clarified that ‘33 Act claims may be pursued in either state or federal court.

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Becoming a Smaller Reporting Company: SEC Issues Compliance Guide on Expanded Smaller Reporting Company Definition

Aug 30, 2018

By: Alexandria Kane and Jamie Wang

On August 10, 2018, the U.S. Securities and Exchange Commission (SEC) issued a Small Entity Compliance Guide for Issuers (the Guide) on the recently amended smaller reporting company (SRC) definition. On June 28, 2018, the SEC adopted amendments to the definition of SRC which expand the number of companies that qualify as SRCs and can thereby take advantage of the scaled disclosure requirements applicable to such companies. The expanded definition of SRC will be effective on September 10, 2018. (more…)

SEC Issues Final Rule Increasing the Rule 701 Disclosure Threshold and Requests Comments on Modernizing Compensatory Arrangements

Aug 17, 2018

By: Alexandria Kane and Tarik Abdel-Meguid

The U.S. Securities and Exchange Commission (SEC) recently issued a final rule amending Rule 701, promulgated under the Securities Act of 1933 (the Securities Act). Rule 701 provides an exemption from the registration requirements of Section 5 of the Securities Act for offers and sales of securities under certain compensatory arrangements and covers securities offered or sold by a non-reporting company (including a foreign private issuer) to its employees, officers, directors, partners, trustees, consultants and advisors. The amendment increases the threshold for delivery of additional disclosures from $5 million in aggregate sales price or amount of securities sold during any consecutive 12-month period to $10 million. We previously discussed the Economic Growth Regulatory Relief and Consumer Protection Act and the proposed changes to Rule 701 in more detail in the article, “The Economic Growth, Regulatory Relief and Consumer Protection Act Amends a Key Provision of Rule 701”. (more…)

Favorable Market Conditions Lead to Renewed Interest in SPACs

Aug 1, 2018

By: Howard Jiang and Lori Smith

Special purpose acquisition companies (SPACs) have experienced a renewed popularity over the past couple of years due to favorable capital markets conditions. A SPAC is a publicly traded acquisition and investment vehicle which is sponsored by an experienced team of investors or parties with significant operating experience who invest the seed capital for the SPAC. The SPAC has no current business operations and has gone public through an initial public offering to raise a desired amount of investment capital for the purpose of doing an acquisition or merger. A SPAC is in some ways similar to the use of a reverse merger to take a private company public in that its ultimate goal is the same – at the end of the day, the acquisition target becomes a publicly traded company through acquisition by, or merger with, the SPAC. (more…)

The Economic Growth, Regulatory Relief and Consumer Protection Act Amends a Key Provision of Rule 701

Jun 12, 2018

By: Alexandria Kane

The Economic Growth Regulatory Relief and Consumer Protection Act, which was signed into law by President Trump on May 24, 2018, directs the US Securities and Exchange Commission (SEC) to amend a significant provision of Rule 701. Rule 701 is the federal exemption from registration that most US private companies rely on when granting or selling equity based compensation to their employees, consultants and advisors. Rule 701(e) requires certain heightened disclosure requirements, including financial statements of the issuer prepared in accordance with generally accepted accounting principles (GAAP), risk factors and a summary of material terms of the plan, when the aggregate sale price or amount of securities sold or granted during any consecutive 12 month period exceed $5 million. These items must be provided in a reasonable time before the date of any sale or grant. This $5 million threshold had not been revised since 1999 and, since such date, companies have been staying private longer and growing to significantly higher valuations. (more…)

SEC Enforcement Action Shines Light on Equity-Based Compensation Disclosure Compliance of Private Companies

Mar 23, 2018

By: Lori Smith, Michael Psathas and Jamie Wang

On March 12, 2018, the US Securities and Exchange Commission (SEC) brought an action against Credit Karma, Inc., a Silicon Valley-based fintech company, for issuing stock options to its employees in violation of US securities laws. The action resulted in a cease and desist order and settlement imposing a $160,000 penalty on the company. Like so many other private companies, Credit Karma sought to rely on Rule 701 promulgated under the Securities Act to provide equity-based compensation to its employees. However, in this case, the company failed to comply with certain disclosure requirements (out of confidentiality concerns) including providing financial statements and risk disclosures after the aggregate sales price of the stock options issued exceeded $5 million in a 12-month period. (more…)

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