Laura Anthony

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    • Member Type(s): Expert
    • Title:Founding Partner
    • Organization:Legal & Compliance, LLC
    • Area of Expertise:Securities Law
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    SEC Regulations Governing Securities “Road Shows”

    Monday, May 22, 2017, 10:52 AM [General]
    0 (0 Ratings)

    Investors interested in securities offerings must be aware of myriad SEC regulations and guidelines surrounding the “road show,” a series of presentations given by company managers to other potential investors, money managers and broker-dealers that might participate in the offering.

    In a May 16 post on the Securities Law Blog, attorney Laura Anthony, founding partner of Legal and Compliance LLC in West Palm Beach, outlined and defined the various types of road shows, including SEC-stipulated timing, formats, content, exemptions and follow-on offerings.

    “Investors often place a high level of importance on road show meetings and, as such, a well-run road show can make the difference as to the level of success of an offering,” Anthony writes. “A road show is designed to provide these market participants with more information about the issuer and the offering, and to give them a chance to meet and assess management, including their presentation skills and competence in a question-answer setting.”

    Traditionally, road shows have been held in multi-city settings over up to two weeks, and they usually involve multiple meetings and presentations. But in the digital age, road shows now can be done by teleconference (live or recorded) or via the sharing of electronic information. Unless it is a non-deal offering, the road show involves an offer of securities – defined as “offer to sell,” “offer for sale” or the broader “offer” represented by “every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value.”

    Various SEC regulations govern securities offerings and road shows. Registered road shows must be accompanied by oral offers of their securities, and written offers are allowed only if they comply with Section 10 of the Securities Act - including a requirement that they must be accompanied by a prospectus that meets information requirements before or at the time of the offer.

    Among the additional details provided in Anthony’s blog post:

    • Road Show Definition: Under Rule 433 of the Securities Act, information provided in a road show reflects the same information in the prospectus that is filed with the SEC. A separate “free-writing prospectus” (FWP) includes information that goes beyond what is provided in the prospectus, and is subject to special requirements for form, content and filing requirements under Rule 433.
    • Road Show Types: The SEC generally classifies road shows as
      “live” (an “oral offer,” and more freely allowed) or “written” (more strictly regulated.  Live offers generally include in-person presentations to an audience or audiences (either through simulcast, webcast, live video conference or live telephone conference). Road shows that are not written, or that do not provide leave-behind printed materials, slides or video clips, are classified as “oral offers.”  Road shows represented by FWPs are governed by Rule 405 of the Securities Act, and they generally involve all communications – including electronic media – that can be reduced to writing.
    • Road Show Content:  Typically road shows provide detailed information about the offering, including the reasons behind it and managers’ intended use of proceeds. Typically, offering managers spell out business plans, growth plans, industry trends, competitors and market potential for their products and services. Except in live presentations, a question-answer session also is a key component of a road show. Content is usually prepared collaboratively among the company, underwriters and legal counsel, and the process usually begins at the same time as the registration statement is drafted.
    • Timing: Road shows typically are completed in the last few weeks before a registration statement becomes effective or before a Regulation A offering circulate is qualified. Section 5(c) prohibits offers before the registration statement is filed. For practical purposes, a Regulation A road show commences just before an SEC qualification. A private offering road show commences after documents are completed. Emerging Growth Company documents must be filed at least 15 days before the road show starts.

    Regulation FD requires companies that are subject to SEC reporting requirements must make material information fully accessible to the public. The same regulation, and other stipulations, also applies to road shows that are conducted for follow-on offerings.

    For more information, contact attorney Laura Anthony, founding partner of Legal & Compliance, LLC, a national corporate and securities law firm, at 1-800-341-2684 or visit www.LegalandCompliance.com and www.LawCast.com.

    Road Shows

    Tuesday, May 16, 2017, 8:20 AM [General]
    0 (0 Ratings)

    Introduction; Definitions

    We often hear the words “road show” associated with a securities offering. A road show is simply a series of presentations made by company management to key members of buy-side market participants such as broker-dealers that may participate in the syndication of an offering, and institutional investor groups and money managers that may invest into an offering. A road show is designed to provide these market participants with more information about the issuer and the offering and a chance to meet and assess management, including their presentation skills and competence in a Q&A setting. Investors often place a high level of importance on road show meetings and as such, a well-run road show can make the difference as to the level of success of an offering.

    A road show usually involves an intensive period of multiple meetings and presentations in a number of different cities over a one-to-two-week period. Although road shows are generally live, they can be by teleconference, or electronic using prepared written presentation materials. In today’s Internet world, road shows are often recorded from a live presentation and made available publicly for a period of time. The meetings and presentations can vary in length and depth depending on the size and importance of the particular audience. During the road show, the underwriters are building a book of interest which will help determine the pricing for the offering.

    A company can also conduct a “non-deal road show” for the purpose of driving interest in the company and its stock, where no particular offering is planned.

    Unless it is a non-deal road show, the road show involves an offer of securities. “Offers” of securities are very broadly defined.  Section 2(a)(3) of the Securities Act defines “offer to sell,” “offer for sale,” or “offer” to include “every attempt or offer to dispose of, or solicitation of an offer to buy, a security or interest in a security, for value.”

    The timing and manner of all offers of securities are regulated, and especially so in registered offerings. All issuers that have filed a registration statement are permitted to make oral offers of their securities, but only certain types of written offers are allowed. Written offers must comply with Section 10 of the Securities Act, including a requirement that a prospectus meeting the information requirements in Section 10(a) be delivered at the time of or prior to the offer.  In addition, certain eligible issuers may provide supplemental written information and graphic communications not otherwise included in the prospectus filed with the SEC (i.e., a free writing prospectus) as part of an offer of securities.  All of these oral and written communication rules are implicated in the road show process and must be considered when planning and completing the road show.

    A road show is generally timed to be completed in the last few weeks before a registration statement goes effective or a Regulation A offering circular becomes qualified.  In a registered offering, Section 5(c) prohibits offers prior to the filing of the registration statement and as such, the road show would never commence pre-filing.  Regulation A is not a registered offering for purposes of Section 5(c), but for practical purposes, a Regulation A road show also commences right before SEC qualification.  Rule 163 provides an exception to the pre-filing offer rules only available to well-known seasoned issuers (very big companies), which is not discussed in this blog.

    For a private offering, the road show occurs once the offering documents are completed. An Emerging Growth Company (EGC) that has filed its registration statement on a confidential basis must make the initial filing and all confidentially submitted amendments public a minimum of 15 days prior to starting the road show.

    A road show is subject to the test-the-waters and pre-effective communication rules.  For a review of testing the waters in a registered offering, see HERE and for Regulation A offerings, see HERE.

    A road show is specifically regulated under Rule 433 of the Securities Act and the free writing prospectus rules.  Securities Act Rule 433(h)(4) defines a road show as an offer, other than a statutory prospectus, that “contains a presentation regarding an offering by one or more of the members of the issuer’s management ….. and includes discussion of one or more of the issuer, such management, and the securities being offered.”

    The SEC definition of road show includes the language “other than a statutory prospectus.”  The statutory prospectus is one that meets the requirements of Section 10(a) of the Securities Act and is generally the filed final prospectus that contains the disclosures outlined in the particular offering form being used (for example, Form S-1 or 1-A) and including disclosures delineated in Regulations S-K and S-X.

    In general, if the information being presented in a road show is nothing more than what is already included in the prospectus filed with the SEC, there are no particular SEC filing requirements.  On the other hand, if the information is written and goes beyond the statutory prospectus, it may be considered a “free writing prospectus” and be subject to specific eligibility requirements for use, form and content and SEC filing requirements all as set forth in Rule 433 and discussed herein.

    Rule 405 of the Securities Act defines a free writing prospectus (“FWP”) as “any written communication as defined in this section that constitutes an offer to sell or a solicitation of an offer to buy the securities relating to a registered offering that is used after the registration statement in respect of the offering is filed… and is made by means other than (i) a prospectus satisfying the requirements of Section 10(a) of the Act…; (2) a written communication used in reliance on Rule 167 and Rule 426 (note that both rules relate to offerings by asset backed issuers); or (3) a written communication that constitutes an offer to sell or solicitation of an offer to buy such securities that falls within the exception from the definition of prospectus in clause (a) of Section 2(a)(10) of the Act.”  Section 2(a)(10)(a) in turn exempts written communications that are provided after a registration statement goes effective with the SEC as long as the effective registration statement is provided to the recipient prior to or at the same time.

    Types of Road Shows; Oral/Live vs. Written; Free Writing Prospectus (FWP) Requirements

    The rules distinguish between a “live” vs. a “written” road show communication, with one being an “oral offer” and more freely allowed and the other being a “written offer” and more strictly regulated.  In addition, the rules differentiate requirements based on whether a road show is for a registered or private offering and, if a registered offering, whether such offering is an initial public offering (IPO) involving common or convertible equity.

    Where a road show communication is purely oral, it is not an FWP and thus there are no specific SEC filing requirements (though see the discussion on Regulation FD below).  Where an oral communication implicates Regulation FD, a Form 8-K would need to be filed regardless of whether the communication is during a road show or in any other forum.

    Although road shows are generally live and specifically designed to constitute oral offers, they can also be electronic using prepared written presentation materials.  Both live and electronic road shows may be available for replay electronically over the Internet.

    Live road shows include: (i) a live, in-person presentation to a live, in-person audience; (ii) a live, real-time presentation to a live audience or simultaneous multiple audiences transmitted electronically; (iii) a concurrent live presentation and real-time electronic transmittal of such presentation; (iv) a webcast or video conference that originates live and is transmitted in real time; (v) a live telephone conversation, even if it is recorded; and (vi) the slide deck or other presentation materials used during the road show unless investors are allowed to print or take copies of the information.

    The explanatory note to Rule 433(d)(8) states: “A communication that is provided or transmitted simultaneously with a road show and is provided or transmitted in a manner designed to make the communication available only as part of the road show and not separately is deemed to be part of the road show. Therefore, if the road show is not a written communication, such a simultaneous communication (even if it would otherwise be a graphic communication or other written communication) is also deemed not to be written.”

    Accordingly, road show slides and video clips are not considered to be written offers as long as copies are not left behind. Even handouts are not written offers so long as they are collected at the end of the presentation. If they are left behind, however, they become a free writing prospectus (FWP) and are subject to Securities Act Rules 164 and 433, including a requirement that the materials be filed with the SEC.

    A video recording of the road show meeting will not need to be filed as an FWP so long as it is available on the Internet to everyone and covers the same ground as the live road show.  Such video road shows are considered a “bona fide electronic road show.”  Rule 433(h)(5) defines a “bona fide electronic road show” as a road show “that is a written communication transmitted by graphic means that contains a presentation by one or more officers of an issuer or other persons in an issuer’s management….”  It is permissible to have multiple versions of a bona fide electronic road show as long as all versions are available to an unrestricted audience.  For example, different members of management may record different presentations and, although access must be unrestricted, management may record versions that are more retail investor facing or institutional investor facing.

    On the other hand, a FWP would include any written communication that could constitute an offer to sell or a solicitation of an offer to buy securities subject to a registration statement that is used after the filing of a registration statement and before its effectiveness.  A FWP is a supplemental writing that is not part of the filed registration statement.  If the writing is simply a repetition of information contained in the filed registration statement, it may be used without regard to the separate FWP rule.

    Rule 405 of the Securities Act defines a written communication as any communication that is “written, printed, a radio or television broadcast or a graphic communication.”  A graphic communication includes “all forms of electronic media, including but not limited to, audiotapes, videotapes, facsimiles, CD Rom, electronic mail, internet websites, substantially similar messages widely distributed (rather than individually distributed) on telephone answering or voice mail systems, computers, computer networks and other forms of computer data compilation.”  Basically, for purposes of rules related to FWP’s, all communications that can be reduced to writing are considered a written communication.  Accordingly, radio and TV interviews, other than those published by unaffiliated and uncompensated media, would be considered a FWP and subject to the SEC use and filing rules.

    Electronic road shows that do not originate live and in real time are considered written communications and FWP’s.   Once it is determined that a road show includes a FWP, unless an exemption applies, an SEC filing is required.  As mentioned, bona fide electronic road shows, although technically a FWP, are not required to be filed with the SEC.  In addition, Rule 433 only requires the filing of a FWP for an IPO of common or convertible equity.

    non-exempted FWP must be filed with the SEC, using Form 8-K, no later than the date of first use.  An after-hours filing will satisfy this requirement as long as it is on the same calendar day.  Moreover, all FWP’s must be filed with the SEC, whether distributed by the registrant or another offering participant and whether such distribution was intentional or unintentional.

    The use of a FWP has specific eligibility requirements.  A FWP may not be used by any issuer that is “ineligible” for such use.  The following entities are ineligible to use a free writing prospectus: (i) companies that are or were in the past three years a blank-check company; (ii) companies that are or were in the past three years a shell company; (iii) penny-stock issuers; (iv) companies that conducted a penny-stock offering within the past three years; (v) business development companies; (vi) companies that are delinquent in their Exchange Act reporting requirements; (vii) limited partnerships that are engaged in an offering that is not a firm commitment offering; and (viii) companies that have filed or have been forced into bankruptcy in the last three years.

    Small- and micro-cap issuers will rarely be eligible to use a free writing prospectus. Accordingly, small and micro-cap companies generally are limited to live road shows involving oral offers not constituting a FWP.

    Moreover, underwriters generally require specific representations and warranties and indemnification related to FWP’s regardless of whether they are required to be filed with the SEC.

    Content

    The road show presentation usually covers key aspects of the offering itself, including the reasons for the offering and use of proceeds.  In addition, management will also cover important aspects of their business and growth plans, industry trends, competition and the market for their products or services.  An important aspect of the road show is the question-and-answer period or Q&A, though obviously this is only included in live interactive road shows.  It is common for materials to include drilled-down information that is provided on a higher level in the prospectus as well as theory and thoughts behind business plans and management goals.

    The preparation of the road show content is usually a collaborative effort between the company, underwriters and legal counsel.  Although the road show begins much later in the process, since its content is derived from the registration statement, ideally the planning begins at the same time as the registration statement drafting.  Also, slides, PowerPoint presentations and other presentation materials should be carefully prepared to get the most out of their effectiveness.

    The lawyer generally reviews all materials for compliance with the rules related to offering communications as well as potential liability for the representations themselves.  Part of the compliance review is ensuring that no statements conflict with or provide a material change to the information in the filed offering prospectus; that could be deemed materially misleading by content or omission; and compliance with Regulation FD if applicable.

    Also from a technical legal perspective, all road show materials should contain a disclaimer for forward-looking statements, and that disclaimer should be read in live or prerecorded road show presentations.  Where the road show content includes a FWP, it is required to contain a legend indicating that a prospectus has been filed, where it can be read (a hyperlink can satisfy this requirement), and advising prospectus investors to read the prospectus.

    Under Rule 433(b)(2), the FWP for a non-reporting or unseasoned company must be accompanied with or preceded by the prospectus filed with the SEC.  The delivery requirement can be satisfied by providing a hyperlink to the filed prospectus on the EDGAR database.

    Road show materials, even those that are also a FWP, generally are not subject to liability under Section 11 of the Securities Act.  Section 11 provides a private cause of action in favor of purchasers of securities, against those involved in filing a false or misleading public offering registration statement.  Road-show materials, including FWPs, are not a part of the registration statement, but rather are supplemental materials.   Section 12 liability, however, does apply to road-show materials.  Section 12 provides liability against the seller of securities for material misstatements or omissions in connection with that sale, whether oral or in writing.

    Follow-on Offerings and Regulation FD

    Regulation FD requires that companies subject to the SEC reporting requirements take steps to ensure that material information is disclosed to the general public in a fair and fully accessible manner such that the public as a whole has simultaneous access to the information.  Consequently, Regulation FD would be implicated in connection with communications in a road show for a follow-on offering by a company already subject to the Exchange Act reporting requirements.  Regulation FD excludes communications (i) to a person who owes the issuer a duty of trust or confidence, such as legal counsel and financial advisors; (ii) communications to any person who expressly agrees to maintain the information in confidence; and (iii) communications in connection with certain offerings of securities registered under the Securities Act of 1933 (this exemption does not include registered shelf offerings).

    Where a road show is being conducted by a company subject to the Exchange Act reporting requirements, counsel should ensure that that the presentation either does not include material non-public information or that the information is simultaneously disclosed to the public in a Form 8-K.  As a backstop where Regulation FD applies, the company should also consider having all road-show attendees sign a confidentiality agreement.

    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.

    Contact Legal & Compliance LLC. Technical inquiries are always encouraged.

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    New SEC White Paper Provides More Clarity on Regulation Crowdfunding

    Monday, May 15, 2017, 10:15 AM [General]
    0 (0 Ratings)

    A new white paper from the Securities and Exchange Commission (SEC) provides long-awaited insight into Regulation Crowdfunding activities spanning May 16, 2016 until the end of 2016, and it serves as an early benchmark on the practice of raising funds for projects and investments through pooled donations from online crowdfunding platforms.

    By the end of 2016, a total of 21 funding portals have registered with the SEC and Financial Investment Regulatory Authority (FINRA). In its 32-week review, the SEC acknowledges that current activities – marked by 163 offerings seeking a total of $18 million – are not necessarily indicative of what the crowdfunding market will resemble as it matures.

    Over time, companies, investors and intermediaries involved in crowdfunding will gain from experience, learn from mistakes and possibly evolve toward industry-specific or demographic-specific initiatives, according to the white paper.

    For the past five years, crowdfunding’s growth has been marked by legislative and administrative stops and starts. The first online crowdfunding platform emerged in 2000, while the first legislation governing the practice was passed in 2012 with Jumpstart Our Business Startup Acts (JOBS) Act. Initial rules for the JOBS Act were published in October 2013, with final rules following two years later in 2015.

    Those rules, however, have faced criticism on several fronts, including crowdfunding supporters who viewed a $1 million cap as too low for small investors, the inability of companies to “test the waters” through communications with potential investors to gauge interest in early-funding stages, and lack of access to a Special Purchase Vehicle (SPV) for a crowdfunded offering.

    A July 2016 “Fix Crowdfunding Act” addresses those criticisms, but has been passed only by the U.S. House of Representatives.

    For observers interested in the progress of Regulation Crowdfunding activities, the SEC white paper provides key metrics around activities, amounts raised, average investments, types of investments and profiles of involved companies.

     Among key data points from the SEC during the May-December time period:

    • 163 offerings by 156 companies sought to raise $18 million
    • Average offering sought $110,000 but allowed oversubscriptions, generally up to the current $1 million statutory limit
    • Average offering closed in 4-5 months
    • 33 issuers raised about $10 million
    • Average amount raised was $290,000 (a number that could increase, as some offerings remained opened on Dec. 31, 2016)

    The SEC also noted that 24 offerings initiated in 2016 were withdrawn by companies or were associated with an intermediary whose FINRA terminated. Those offerings sought a total of $2.3 million.

    Offerings encompassed three types of securities, led by equity funding (common and preferred), and simple agreements for future equity (SAFE) and debt.

    The most popular state for incorporation was Delaware, while the California, Texas and New York – in that order – were the most popular locations for businesses involved in offerings.

    The SEC also noted that most issuers were pre-revenue start-ups or development-stage companies. The median company had less than $50,000 in assets, less than $5,000 in cash, $10,000 in debt, no revenues and three employees.

    The average issuer had assets of $327,000, cash of $64,00 and five employees. Median company growth from the prior fiscal year was 15%, and median sales growth was 80%.  

    For more information, contact attorney Laura Anthony, founding partner of Legal & Compliance, LLC, a national corporate and securities law firm, at 1-800-341-2684 or visit www.LegalandCompliance.com and www.LawCast.com.

    SEC Issues Whitepaper On Title III Crowdfunding

    Tuesday, May 9, 2017, 8:35 AM [General]
    0 (0 Ratings)

    On February 28, 2017, the SEC released a white paper on Regulation Crowdfunding, which law went into effect on May 16, 2016. Regulation Crowdfunding had been long in the making, with the JOBS Act having been passed on April 5, 2012, and the first set of proposed crowdfunding rules having been published on October 23, 2013. Regulation Crowdfunding provides the rules implementing Section 4(a)(6) of the Securities Act of 1933 (the Securities Act). For a summary of Regulation Crowdfunding, see my blog HERE.

    From the time the SEC published the final Regulation Crowdfunding rules and regulations on October 30, 2015, the regulatory framework has met with wide criticism. The most commonly repeated issues with the current structure include: (i) the $1 million annual minimum is too low to adequately meet small-business funding needs; (ii) companies cannot “test the waters” in advance of or at the initial stages of an offering; and (iii) companies cannot currently use a Special Purchase Vehicle (SPV) in a crowdfunding offering.

    To address the feedback and offer a resolution, on March 23, 2016, North Carolina Representative Patrick McHenry introduced HR 4855, aptly titled the “Fix Crowdfunding Act.” The Fix Crowdfunding Act would increase the annual funding limit from $1 million to $5 million. The Act would also allow for the use of special purpose vehicles (SPV’s) in the fundraising process. It is thought that an SPV structure helps protect the smaller investors by allowing them to pool funds together with larger investors in an entity that offers separate protections than the offering company itself. Finally, the Fix Crowdfunding Act adds “test the waters” provisions allowing companies to communicate with potential investors and gauge interest before spending significant time and expense on the offering process. The Fix Crowdfunding Act passed the House on July 5, 2016, but there has been no further action.

    Background

    Crowdfunding generally is where an entity or individual raises funds by seeking small contributions from a large number of people. The crowdfunder sets a goal amount to be raised from the crowd, with the funds to be used for a specific business purpose. In addition, a crowdfunding campaign allows the crowd to communicate with each other, thus adding the benefit of the “wisdom of the crowd.” Small businesses can particularly benefit from crowdfunding as they are not limited by purchaser qualification requirements and, subject to the rules, can engage in general solicitation and advertising. It is intended that crowdfunding offerings will be relatively low-cost and easy to implement; however, the general consensus is that that particular goal falls short.

    Title III of the JOBS Act amended Section 4 of the Securities Act, adding Section 4(a)(6) to create a new exemption to the registration requirements of Section 5 of the Securities Act. Effective May 16, 2016, Regulation Crowdfunding, implementing Section 4(a)(6), became effective.

    Regulation Crowdfunding allows companies to solicit “crowds” to sell up to $1 million in securities in any 12-month period as long as no individual investment exceeds certain threshold amounts. Regulation Crowdfunding limits investment amounts per investor for all crowdfunding offerings by all issuers in any 12-month period as follows: (a) if either annual income or net worth is less than $100,000, the investment limitation is the greater of $2,000 or 5% of the lesser of annual income or net worth; or (b) if both annual income and net worth are equal to or greater than $100,000, the investment limitation is 10% of the lesser of annual income or net worth. In addition, the final rule provides an overall investment limitation of $100,000 for any investor in any 12-month period. Significantly, the investment limitations apply across all crowdfunding issuers during any 12-month period.

    Regulation Crowdfunding requires that all crowdfunding offerings be conducted through an intermediary that is a broker-dealer or funding portal that is registered with the SEC and a member of FINRA.  All offerings must be conducted through the intermediary’s Internet-based platform.  Securities sold in a crowdfunding offering are generally restricted for one year.

    In offerings over $100,000, financial statements must be reviewed by an independent accountant and in offerings over $500,000 audited financial statements must be provided, provided however that audits are not required for a first-time offering.

    In addition, Regulation Crowdfunding requires that companies and intermediaries provide certain information to investors, potential investors and the SEC prior to making an investment. The offering disclosure document is on Form C. Companies must also provide the SEC and investors with a closing report on Form C-U and an annual report on Form C-AR following the offering.

    The registered intermediary has certain requirements designed to reduce fraud.  Among others, the intermediary is responsible for filing the Form C with the SEC, must provide communication channels to allow discussion of the offerings on its platform, must disclose compensation received by the intermediary, and must provide educational materials to investors.

    The ability to utilize crowdfunding is subject to bad boy restrictions and other disqualifying events.  All crowdfunding issuers must be United States entities.  Crowdfunding issuers cannot be subject to the reporting requirements of the Securities Exchange Act of 1934 or an investment company as defined by the Investment Company Act of 1940.

    The SEC White Paper

    The SEC white paper reviewed crowdfunding offerings from the date of inception of Regulation Crowdfunding on May 16, 2016, through December 31, 2016. During that time there were 163 offerings by 156 companies seeking to raise a total of $18 million.  The average offering sought $110,000 but allowed over-subscriptions, generally up to the total $1 million statutory limit. The average offering closed in 4 to 5 months.

    Since first-time issuers are not required to file audited financial statements, many set maximum offering limits at the total allowed $1 million mark.  As repeat issuers enter the market, the average size of maximum offering amount may decrease to avoid audit expenses.

    Of the offerings, approximately $10 million was raised, by 33 issuers, with the average amount raised being $290,000. However, some of these offerings remained open on December 31, 2016, so this number would likely be higher today.

    For offerings initiated in 2016, 24 were withdrawn by companies or associated with an intermediary whose FINRA membership was terminated and funding portal registration withdrawn, seeking a total of $2.3 million based on the target amount.

    Most offerings solicited in all states. The most popular type of securities was equity, including both common and preferred, followed by simple agreements for future equity (SAFE’s) and debt.

    The most popular state of incorporation was Delaware, and the most popular location of the business was California, followed by Texas and New York.  Most issuers have been pre-revenue start-ups or development-stage companies, with the median company having under $50,000 in assets, under $5,000 in cash, $10,000 in debt, no revenues and 3 employees. The average issuer had 5 employees, assets of $327,000 and cash of $64,000.  However, many companies were growing. The median growth from the prior fiscal year was 15%, and median sales growth was 80%.

    Some of the companies also did prior, concurrent or subsequent Regulation D (15%) or Regulation A (3%) offerings. None of the issuers had previously been listed on an exchange or subject to the Exchange Act reporting requirements.

    As of December 31, 2016, 21 funding portals have registered with the SEC and FINRA.  One funding portal had its FINRA membership terminated and withdrew its SEC registration. In addition, 8 broker-dealers have conducted crowdfunding offerings. The average funding portal fee is 5%, though broker-dealers averaged at 7.7%.

    The SEC acknowledges that the initial results are probably not indicative of what the crowdfunding market will look like as it matures. In particular, companies, investors and the intermediaries will gain experience and learn from mistakes as time goes on. Moreover, it is likely that the number of intermediaries will grow and some may be industry-specific or concentrate on specific demographics.

    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.

    Contact Legal & Compliance LLC. Technical inquiries are always encouraged.

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    Legal & Compliance, LLC makes this general information available for educational purposes only. The information is general in nature and does not constitute legal advice. Furthermore, the use of this information, and the sending or receipt of this information, does not create or constitute an attorney-client relationship between us. Therefore, your communication with us via this information in any form will not be considered as privileged or confidential.

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    © Legal & Compliance, LLC 2017

    Sweeping Changes at SEC Under New Leadership

    Friday, May 5, 2017, 11:01 AM [General]
    0 (0 Ratings)

    Expect sweeping changes in procedural operations, enforcement and overall philosophy at the Securities and Exchange Commission (SEC) under new agency leaders appointed by President Donald Trump.

    Key among the institutional changes already taking place under incoming SEC Chairs Michael Piwowar and Jay Clayton are vast reductions in the agency’s investigative and enforcement powers, and a concomitant shift in support for capital formation and policies that support large financial institutions, according to Laura Anthony, founding partner of Legal and Compliance LLC, in West Palm Beach.

    Based on statements and writings from two new SEC appointees, the agency is likely to shift its position on Dodd-Frank Act, with less emphasis on consumer protection provisions and more pro-business policies on behalf of large financial institutions. New agency leaders also are downgrading the agency’s enforcement of whistleblower retaliation issues and the Foreign Corrupt Practices Act (FCPA), now viewed as competitively unfair to U.S. companies.

    Key Change: Vastly Reduced Subpoena, Investigative Powers  

    In one of his first moves, Piwowar overturned a 2009 decision by previous Chair Mary Jo White, who expanded subpoena and investigative powers to about 20 SEC senior enforcement staff members. In his reversal, Piowowar returned subpoena power solely to the Director of the Division of the Enforcement, describing the previous broader subpoena authority as over-reaching with too little oversight.

    In a 2013 speech to the Los Angeles County Bar, Piwowar made clear his support for investigations that focus on evidence of wrongdoing, such as lying, cheating or stealing. The SEC, he said at the time, should concern itself with “the facts known to them and then reasonable inferences from those facts,” and he urged the agency to avoid individual investigations that are influenced by “animus, prejudice or vindictiveness” because of their inherent power – especially when investigations are unaccompanied by enforcement action – to “defame and destroy.”

    The 2009 loosening of procedures surrounding formal orders of investigation, he noted, made formal orders easier to obtain and doubled their numbers in subsequent years. Instead, he supports a broader approach to the SEC’s investigative process, including public comment periods and broader involvement by the agency’s General Counsel, Corporate Finance, Trading and Market, and Investment Management divisions.

    Other Key Agency Shifts Apparent

    SEC observers also note other apparent changes at the agency around key issues and pieces of legislation, including:

    • Dodd-Frank Act: Clayton has criticized the financial reform act for over-regulating the financial services industry. Expect to see changes in the act and reduced enforcement of its remaining provisions. Under Clayton’s leadership, the SEC also is likely to cut back dramatically on the use of administrative proceedings and civil penalties that have been imposed since 2010 as part of Dodd-Frank’s passage. At that time, the act expanded SEC administrative hearings as an additional forum for securities law violations. This new administrative power has been tested in court, but Clayton – with little fanfare or public announcement – has quietly ended or greatly reduced the proceedings until more formal policy charges are brought.
    • FCPA: Both Clayton and President Trump have spoken against the act, claiming U.S. companies are disproportionately and unfairly impacted by the act, subjecting them to potentially significant costs that their competitors do not face.  It is likely that FCPA violations will be low-priority issues under the new SEC.
    • Whistleblower retaliation: Also likely is less activity and proceedings against companies that have been implicated for retaliating against or chilling whistleblower activity, both in practice and in employment and severance agreements.

    Changes in leadership at the SEC, combined with President Trump’s Feb. 3, 2017, executive order on regulation of the financial system, make clear some of the operational and procedural changes at the agency. Broadly, the President’s order encourages more consumer independence in making financial and investment decisions, supports less regulation and SEC enforcement as a way to boost economic growth and create more robust financial markets, advocates greater competitive advantages for American firms, and supports prevention of taxpayer-funded bailouts.

    For more information, contact attorney Laura Anthony, founding partner of Legal & Compliance, LLC, a national corporate and securities law firm, at 1-800-341-2684 or visit www.LegalandCompliance.com and www.LawCast.com.

     

     

    SEC Completes Inflation Adjustment Under Titles I and III of The Jobs Act; Adopts Technical Amendments

    Friday, May 5, 2017, 10:14 AM [General]
    0 (0 Ratings)

    On March 31, the SEC adopted several technical amendments to rules and forms under both the Securities Act of 1933 (Securities Act) and Securities Exchange Act of 1934 (Exchange Act) to conform with Title I of the JOBS Act. On the same day, the SEC made inflationary adjustments to provisions under Title I and Title III of the JOBS Act by amending the definition of the term “emerging growth company” and the dollar amounts in Regulation Crowdfunding.

    Title I of the JOBS Act, initially enacted on April 5, 2012, created a new category of issuer, called an “emerging growth company” (EGC). The primary benefits to an EGC include scaled-down disclosure requirements both in an IPO and periodic reporting, confidential filings of registration statements, certain test-the-waters rights in IPOs, and an ease on analyst communications and reports during the EGC IPO process.

    The definition of an EGC (as enacted on April 5, 2012) is a company with total annual gross revenues of less than $1 billion during its most recently completed fiscal year that first sells equity in a registered offering after Dec. 8, 2011. An EGC loses its EGC status on the earlier of the last day of the fiscal year in which it exceeds $1 billion in revenues, the last day of the fiscal year following the fifth year after its IPO (for example, if the issuer has a December 31 fiscal year-end and sells equity securities pursuant to an effective registration statement on May 2, 2016, it will cease to be an EGC on Dec. 31, 2021), the date on which it has issued more than $1 billion in non-convertible debt during the prior three-year period, or the date it becomes a large accelerated filer (i.e., its nonaffiliated public float is valued at $700 million or more). EGC status is not available to asset-backed securities issuers (ABS) reporting under Regulation AB or investment companies registered under the Investment Company Act of 1940, as amended. However, business development companies (BDC’s) do qualify.

    The provisions of Title I of the JOBS Act were self-executing and automatically became effective on April 5, 2012. Although the SEC has passed several rules and made numerous form amendments to conform to the JOBS Act provisions, several of the rules and forms under the Securities Act, Exchange Act, periodic and current reports forms, Regulation S-K and Regulation S-X did not reflect the JOBS Act provisions.

    The statutory definition of an EGC, as reflected in Securities Act Section 2(a)(10) and Exchange Act Section 3(a)(80), require the SEC to make an adjustment to index to inflation the annual gross revenue amount used to determine an EGC, every five years. Likewise, Title III of the JOBS Act, which set the statutory groundwork for Regulation Crowdfunding, requires an inflationary adjustment to the dollar figures in Regulation Crowdfunding every five years. On March 31 the SEC did so for the first time.

    Inflation Adjustments

    Definition of ‘Emerging Growth Company’

    The JOBS Act amended Section 2(a)(19) of the Securities Act and Section 3(a)(80) of the Exchange Act to define an “emerging growth company” to mean a company with total annual gross revenues of less than $1 billion, as adjusted for inflation every five years, during its most recently completed fiscal year that first sells equity in a registered offering after Dec. 8, 2011.

    The SEC is now making its first inflationary increase to the definition. The inflation increase is $70,000. Accordingly, an EGC is now defined as a company with total gross revenues of less than $1,070,000,000.

    Crowdfunding Amendments

    Title III of the JOBS Act, enacted in April 2012, amended the Securities Act to add Section 4(a)(6) to provide an exemption for crowdfunding offerings. Regulation Crowdfunding went into effect on May 16, 2016. The Securities Act requires that the amounts set forth in Regulation Crowdfunding be adjusted by the SEC for inflation not less than once every five years. The SEC is now making its first inflationary increase by amending Rules 100 and 201(t) of Regulation Crowdfunding and Securities Act Form C. The inflation increase is $70,000.

    Technical Amendments to Rules and Forms

    Scaled Disclosure in Registration Forms and Periodic Reports

    Section  102(b)(1)  of the JOBS Act amended Section 7(a) of the Securities Act to provide that (1) an EGC is permitted  to present only two years of audited financial statements in its IPO registration statement, and (2) in any Securities Act registration statement other than its IPO registration statement, an EGC need not present selected financial data under Item 301 of Regulation S-K for any period prior to the earliest audited period presented in its IPO registration statement. However, Item 301 and Rule 3-02 of Regulation S-X and Form 20-F had not been amended for these changes and, until now, contained conflicting requirements. In particular, such rules and forms only addressed reduced disclosure requirements for smaller reporting companies and not address the JOBS Act rules related to EGC’s. The SEC is now amending Item 301 and Rule 3-02 of Regulation S-X and Form 20-F to conform with Section 7(a) of the Securities Act.

    Section 102(b)(2) of the JOBS Act amended Section 13(a) of the Exchange Act to provide that an EGC need not present selected financial data in an Exchange Act registration statement or periodic report for any period prior to the earliest audited period presented in the EGC’s first effective registration statement under either the Exchange Act or Securities Act. The SEC is now amending Item 301 of Regulation S-X to conform with Section 13(a) of the Exchange Act.

    Likewise, the SEC is amending Item 303 of Regulation S-K related to management discussion and analyses (MD&A) such that a disclosure needs only to be provided for the periods of the financial statements included in the EGC’s IPO registration statement.

    Auditor Attestation; Section 404(b) of Sarbanes-Oxley

    Section 103 amended Section 404(b) of the Sarbanes-Oxley Act to exempt EGC’s from the need to provide an auditor attestation on management’s assessment of the effectiveness of the EGC’s internal controls over financial reporting. Compliance with Section 404(b) is expensive, with the average cost being in the $2-million range. To conform with SEC rules and forms to amended Section 404(b), the SEC has amended Article 2-02 of Regulation S-X, Item 308 of Regulation S-K, and Forms 20-F and 40-F to specify that the auditor of an EGC does not need to attest to, and report on, management’s report on internal control over financial reporting and that management does not need to include the auditor’s attestation report in an annual report required by Section 13(a) or 15(d) of the Exchange Act.

    Executive Compensation Disclosure and Shareholder Advisory Vote

    Section 102(c) of the JOBS Act provides that an EGC need only provide the same executive compensation disclosure as a smaller reporting company. The smaller reporting company executive compensation disclosures are delineated in Items 402(m)-(r) of Regulation S-K. The SEC is amending Item 402 to specify that these scaled disclosures also apply to EGCs.

    Exchange Act Rule 14a-21 requires companies to conduct shareholder advisory votes on say-on-pay, say-on-frequency and golden parachute compensation arrangements with any “named executive officers.” Item 102(a) of the JOBS Act amended Section 14A(e) of the Exchange Act to exempt EGC’s from these requirements. The SEC is amending Exchange Act Rule 14a-21 and Item 402(t) and Instruction 1 to Item 1011(b) of Regulation S-K to conform with this statutory exemption.

    Foreign Private Issuers

    The definition of an emerging growth company is not dependent on whether the company is domestic or qualifies as a foreign private issuer. A foreign private issuer that qualifies as an EGC may avail itself of the scaled disclosures to the same extent as domestic companies. The SEC is now amending Form 20-F to conform its disclosure requirements with those available to an EGC.

    “Check Box” Notice of EGC Status and Compliance with New or Revised Accounting Standards

    Section 102(b) of the JOBS Act amended Section 7(a)(2)(B) of the Securities Act and Section 13(a) of the Exchange Act such that an EGC is not required to comply with new or revised financial accounting standards until private companies are also required to comply with those standards. An EGC can, however, choose to comply with such new or revised accounting standards but must do so on the next report or registration statement and notify the SEC of its choice. The election is irrevocable. To provide a method to inform the SEC of its choice, the SEC is adding a “check box” to Securities Act Forms S-1, S-3, S-4, S-8, S-11, F-1, F-3 and F-4 and Exchange Act Forms 10, 8-K, 10-Q, 10–K, 20–F and 40-F.

    For more information, contact attorney Laura Anthony, founding partner of Legal & Compliance, LLC, a national corporate and securities law firm, at 1-800-341-2684 or visit www.LegalandCompliance.com  and www.LawCast.com

    The Senate Banking Committee Passes Several Pro-Business Bills

    Tuesday, May 2, 2017, 8:35 AM [General]
    0 (0 Ratings)

    On March 9, the Senate Banking Committee approved the first set of bills to go through the committee under the new administration. The five bills were cleared as one package, and are aimed at making it easier for companies to grow and raise capital.

    The bills are bipartisan and could be some of the first to pass through Congress under the new regime. Only two Democrats opposed the bills: Massachusetts Sen. Elizabeth Warren, who is consistently pushing for greater investor protections regardless of the impact on businesses, and Rhode Island Sen. Jack Reed. In 2016, most of these pro-business bills were passed by the House and never made it through the Senate. Each of the current bills had already been presented in prior years, either as stand-alone bills or packaged with other provisions, but never made it through the Senate.

     The following is a summary of the new bills:

     Fair Access to Investment Research Act of 2017 (S.327)

    The Fair Access to Investment Research Act would require the SEC to expand a safe harbor for certain investment fund research reports. The bill would amend Rule 139 covering the publications or distributions of research reports on investment funds by brokers or dealers distributing securities. In particular, the bill clarifies that a covered investment fund research report that is published or distributed by a broker-dealer would not be deemed an offer for sale or offer to sell a security under Sections 2(a)(10) or 5(c) of the Securities Act of 1933, even if such broker-dealer was participating in a registered offering of that fund’s securities. The bill would require FINRA to make conforming changes as well.

    Section 2(a)(10) of the Securities Act defines the term “prospectus,” and Section 5(c) prohibits the offer or sale of securities unless a registration statement has been filed (or there is a valid exemption from registration). The Fair Access to Investment Research Act would remove investment fund research reports from the definition of an offer for sale or offer to sell and related prospectus delivery requirements.

    The House passed a similar provision as part of the Financial Choice Act: the H.R. 5019 – Fair Access to Investment Research Act (expanding exclusion of research reports from the definition of an offer for or to sell securities under the Securities Act).

    Previously, Title I of the JOBS Act amended Section 2(a)(3) of the Securities Act to eliminate restrictions on publishing analyst research and communications while IPO’s for Emerging Growth Companies (EGC’s) are under way. Section 2(a)(3) defines the terms sale or sell and related offers. Under prior law, research reports by analysts, especially those participating in an underwriting of securities of the subject issuer, could be deemed to be “offers” of those securities under the Securities Act and, as a result, could not be issued prior to completion of an offering. Section 2(a)(3) of the Securities Act as amended by Section 105(a) of the JOBS Act provides that publication or distribution by a broker or dealer of a research report about an EGC that is the subject of a proposed public offering of its securities does not constitute an offer of securities, even if the broker or dealer that publishes the research is participating or will participate as an underwriter in the offering. Moreover, the term “research” is defined broadly as any information, opinion or recommendation about a company and includes oral as well as written and electronic communications. This research need not be accompanied by a full prospectus and need not provide information “reasonably sufficient upon which to base an investment decision.”

    Section 105(b) of the JOBS Act also eliminated restrictions on publishing research following an IPO or around the time the IPO lockup period expires or is released. Prior to that time, under SEC and Financial Industry Regulatory Authority (FINRA) rules, underwriters of an IPO could not publish research for 25 days after the offering (40 days if they served as a manager or co-manager), and managers or co-managers cannot publish research within 15 days prior to or after the release or expiration of the IPO lockup agreements (so-called “booster shot” reports). The JOBS Act eliminated those provisions related to an EGC. On Oct. 11, 2012, FINRA amended its rules to conform to the requirements.

    The new rules would expand the safe-harbor provisions to include research related to covered investment funds.

    Supporting America’s Innovators Act of 2017 (S. 444)

    This bill expands a registration exemption under the Investment Company Act of 1940 for venture capital funds with less than $10,000,000 in capital contributions.

    A very similar bill was passed by the House on December 5, 2016, (the Supporting America’s Innovators Act (H.R. 4854)). The House bill would create a new small “qualifying venture capital fund” under the Investment Company Act of 1940 and increase the current registration exemption under Section 3(c)(1) of the Investment Company Act to allow for up to 250 investors in such qualifying venture capital fund. Currently Section 3(c)(1) of the Investment Company Act exempts pooled funds, such as hedge funds, from registering under the Act as long as they have fewer than 100 equity holders. Currently, there is no limit on the amount of invested capital in a fund to qualify for the 3(c)(1) exemption. H.R. 4854 would create a new class of pooled fund, called a “qualifying venture capital fund,” which would be defined as any venture fund with $10 million or less of invested capital and allow up to 250 investors in such fund.

    The Senate bill only includes the $10,000,000 threshold and does not refer to the number of investors in a qualifying venture capital fund.

    Securities and Exchange Commission Overpayment Credit Act (S. 462)

    This bill requires the SEC to give a credit to any national securities exchange or national securities association for any fees or assessments paid to the SEC within the last 10 years that were more than the amount such exchange or association was required to pay. The bill is strictly retroactive, providing credits for past overpayments, and does not apply to pre-bill payments.

    U.S. Territories Investor Protection Act of 2017 (S. 484)

    This bill amends the Investment Company Act of 1940 to terminate an exemption for companies located in Puerto Rico, the Virgin Islands or any other possession of the United States. The Investment Company Act currently exempts companies organized and having their principal place of business in Puerto Rico, the Virgin Islands or any other possession of the U.S., as long as such companies do not sell securities to any resident outside of such territory. The Act provides a three-year safe harbor for compliance with the ability for the SEC to add an additional three years by passing a rule extending the time for compliance.

    Encouraging Employee Ownership Act (S. 488)

    This bill would raise the threshold for disclosure obligations under Rule 701 under the Securities Act from $5 million to $10 million. In particular, under the current Rule 701, a company must provide enhanced and specifically delineated disclosures to employees where such company sells in excess of $5 million to employees under a written incentive or stock option plan, in any 12-month period. A substantially similar bill passed the House in 2016 (H.R. 1675). The bill would amend the rule to increase that threshold to $10 million.

    For more information, contact attorney Laura Anthony, founding partner of Legal & Compliance, LLC, a national corporate and securities law firm, at 1-800-341-2684 or visit www.LegalandCompliance.com  and www.LawCast.com.

     

     

    SEC Adopts The T+2 Trade Settlement Cycle

    Tuesday, April 18, 2017, 8:08 AM [General]
    0 (0 Ratings)

    Introduction and brief summary of the rule

    On March 22, 2017, the SEC adopted a rule amendment shortening the standard settlement cycle for broker-initiated trade settlements from three business days from the trade date (T+3) to two business days (T+2). The change is designed to help enhance efficiency and reduce risks, including credit, market and liquidity risks, associated with unsettled transactions in the marketplace.

    Acting SEC Chair Michael Piwowar stated, “[A]s technology improves, new products emerge, and trading volumes grow, it is increasingly obvious that the outdated T+3 settlement cycle is no longer serving the best interests of the American people.” The SEC originally proposed the rule amendment on September 28, 2016. My blog on the proposal can be read HERE. In addition, for more information on the clearance and settlement process for U.S. capital markets, see HERE.

    The change amends Rule 15c6-1(a) prohibiting a broker-dealer from effecting or entering into a contract for the purchase or sale of a security that provides for payment of funds and delivery of securities later than T+2, unless otherwise expressly agreed to by the parties at the time of the transaction. This means that when an investor buys a security, the brokerage firm must receive payment from the investor no later than two business days after the trade is executed. Also, when an investor sells a security, the investor must deliver the investor’s security to the brokerage firm no later than two business days after the sale.

    The rule does not apply to private exempt transactions such as private placements. The rule also allows a managing underwriter and issuer to agree to a trade settlement cycle other than T+2 as long as the agreement is express and reached at the time of the transaction. Firm commitment offerings are also exempted. In particular, Rule 15c6-1(c) allows registered firm commitment underwritten transactions that price after 4:30 p.m. ET to use a T+3 or T+4 settlement cycle.

    The reduction of the settlement cycle to T+2 will also assist in aligning global clearing of securities as many markets, including the United Kingdom and many European countries, are already on the T+2 schedule.

    Compliance with the new rules is effective on September 5, 2017.

    Background

    DTC provides the depository and book entry settlement services for substantially all equity trading in the US. Over $600 billion in transactions are completed at DTC each day. Although all similar, the exact clearance and settlement process depends on the type of security being traded (stock, bond, etc.), the form the security takes (paper or electronic), how the security is owned (registered or beneficial), the market or exchange traded on (OTC Markets, NASDAQ…) and the entities and institutions involved.

    All securities trades involve a legally binding contract. In general, the “clearing” of those trades involves implementing the terms of the contract, including ensuring processing to the correct buyer and seller in the correct security and correct amount and at the correct price and date. This process is effectuated electronically.

    “Settlement” refers to the fulfillment of the contract through the exchanging of funds and delivery of the securities. In 1993, Exchange Act Rule 15c6-1 was adopted, requiring that settlement occur three business days after the trade date, commonly referred to as “T+3.” Delivery occurs electronically by making an adjusting book entry as to entitlement. One brokerage account is debited and another is credited at the DTC level and a corresponding entry is made at each brokerage firm involved in the transaction. DTC only tracks the securities entitlement of its participating members, while the individual brokerage firms track the holdings in their customer accounts. Technology, of course, plays an important role in the process and ability to efficiently manage settlements.

    There may be two brokerage firms between DTC and the customer account holder. Brokerage firms that are direct members with DTC are referred to as “clearing brokers.” Many brokerage firms make arrangements with these DTC members (clearing brokers) to clear the securities on their behalf. Those firms are referred to as “introducing brokers.” A clearing broker will directly route an order through the national exchange or OTC Market, whereas an introducing broker will route the order to a clearing broker, who then routes the order through the exchange or OTC Market.

    The Dodd-Frank Act added a definition of, and responsibilities associated with, a “financial market utility” or FMU. Clearing brokers are FMU’s.  FMU’s provide the actual functions associated with clearing trades through the DTC system. As part of that process, a division of DTC, the National Securities Clearing Corporation (“NSCC”), becomes the buyer and seller of each contract, netting out and settling all brokerage transactions each day, making one adjusting entry per day. The net entry debits or credits the brokerage firm’s account as necessary. When one of the counterparties in the process does not fulfill its settlement obligations by delivering the securities, there is a “failure to deliver.” Overall, failures to deliver are less than 1% of all transactions.

    Likewise, a cash account is maintained for each brokerage firm, which is netted and debited and/or credited each day. These accounts can be in the billions. Clearing firms can either settle each day or carry their open account forward until the next business day. Because all transactions are netted out, 99% of all trade obligations do not require the exchange of money, which helps reduce some risk.  NSCC’s role in this process is referred to as a central counterparty or CCP. This process is continuous.

    Looking at the process from the top down, the CCP carries the risk that the clearing firm (or FMU) will not have the financial resources to perform its obligations. In turn, the clearing firms have risks from their customers, including introducing brokers, who in turn ultimately have risks from the individual account holders. The risks are compounded by changing values of the securities being traded, during the settlement process. The faster a trade settles, the lower the cumulative risk at each level of the process.

    This is a very simplified high-level description of the process. Technically, the roles of DTC and its subsidiaries, CEDE and NSCC, as well as clearing agencies and introducing brokers involve a complex set of regulations, with different definitions, obligations and roles for the different hats the entities wear depending on the type of security being traded (stock, bond, etc.), how the security is owned (registered or beneficial), the form the security takes (paper or electronic), the market or exchange traded on (OTC Markets, NASDAQ…) and the entities and institutions involved (retail or institutional).

    Exchange Act Rule 15c6-1

    Exchange Act Rule 15c6-1 prohibits a broker-dealer from effecting or entering into a contract for the purchase or sale of a security, subject to certain exemptions, that provides for the payment of the funds or delivery of the securities later than the third business day after the contract (i.e., trade) date unless expressly agreed upon by both parties at the time of the transaction. The rule amendment shortens this time period to two business days.

    Exempted securities include government and municipal securities, insurance products, commercial paper, limited partnership units that are not listed on an exchange or automated quotations system (OTC Markets), and sales in a firm commitment underwritten offering that are priced after market close. Firm commitment offerings can rely on an extended T+4 settlement cycle. The new rule does not amend the exemptions or the settlement cycle for firm commitment underwritten offerings.

    One of the SEC’s roles is to enhance the resilience and efficiency of the clearance and settlement process such that the system itself does not add to, but rather subtracts from, the risks associated with trading in securities. To further this goal the SEC has amended Rule 15a6-1(a) to shorten the settlement cycle to T+2. The SEC believes this change will reduce various risks in the marketplace, including: (i) the credit risk that one party will be unable to fulfill its delivery obligations (of either cash or the securities) on the settlement date; and (ii) the market risk that the value of the securities will change between the trade and settlement such as to result in a loss to one of the parties.

    To drill down further on the summary of the settlement and clearing process described in the background section of this blog, the following is a high-level description of what happens following the execution of a trade. When a trade is submitted to an exchange or alternative trading system (such as OTC Markets), it is matched with a counterparty. That is, a buy order is electronically matched to a sell order. As long as there is a match, the trade is locked in and sent to NSCC.

    On the trade date (T), NSCC validates the trade data and communicates receipt of the transaction. At that moment the parties are legally committed to complete the trade. Before the new amendment, at midnight on the first day (T+1), NSCC substitutes itself as the legal buyer and legal seller. Technically, the first buy/sell contract is replaced by two new contracts, one between NSCC and the buyer and the other between NSCC and the seller. The NSCC substitution will now occur at the point of trade comparison and validation.

    Historically, on the second day (T+2), NSCC would issue a trade summary report to its members which summarizes all securities and cash to be settled that day, and show the net positions for each. NSCC also sends an electronic instruction to DTC to process the net security and cash settlements. This will now occur on T+1. Finally, on the third day (T+3), DTC process the electronic settlement by transferring cash and securities between the broker-dealer accounts and the broker-dealers, in turn, put the securities and/or cash in their customer accounts.  With implementation of the rule change, this final step will be completed on the second day (T+2).

    Although institutional trading is similar, there are unique aspects and there can be additional participants. For example, an institution may have a custodian of its securities in addition to its broker, may use a matching provider and may avail itself of different netting and settling processes within the brokerage and DTC systems. Although the detailed process may differ, ultimately both retail and institutional trades will now fully settle in the new T+2 timeline.

    As mentioned, the length of the settlement cycle impacts the exposure to credit, market and liquidity risks for the participants. The participants, including NSCC, take measures to reduce these risks, including by requiring funds to be kept on deposit by clearing and brokerage firms effecting such participants’ liquidity. Even then, however, all participants are exposed to market risk during the settlement process, including a decline in value of the traded securities and the risk that such decline could exceed the broker’s capital deposit or result in a failure to deliver.

    A reduction in risks would reduce the necessity to mitigate such risk, including reducing the funds that must be kept on deposit by participants. It is undisputed that reducing the settlement cycle reduces these risks. Firms may pass these benefits on to other market participants, including retail investors in the form of reduced margin charges. Also, obviously if funds are tied up for three days pending a settlement of a transaction, whether you are the retail investor or clearing agency, there is a lack of available liquidity to participate in other transactions during that time.

    The SEC also believes that shortening the standard settlement cycle will promote technological innovation and changes in market infrastrucutres and operations, incentivizing market participants to make work further to make the markets more efficient.

    The rule amendment requires the SEC to conduct a study no later than September 5, 2020, on the impact of the T+2 amendment and the potential impact of further reducing the trade settlement cycle to T+1.

    Conforming Stock Exchange Rule Amendments

    On February 10, 2017, the SEC approved rulemaking proposals submitted separately by the New York Stock Exchange, the NASDAQ Stock Market and the NYSE MKT that will conform stock exchange rules to the amendments to Rule 15c6-1, with the amendments to become operative concurrently with the SEC compliance date.

    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.

    Contact Legal & Compliance LLC. Technical inquiries are always encouraged.

    Follow me on Facebook, LinkedIn, YouTube, Google+, Pinterest and Twitter.

    Legal & Compliance, LLC makes this general information available for educational purposes only. The information is general in nature and does not constitute legal advice. Furthermore, the use of this information, and the sending or receipt of this information, does not create or constitute an attorney-client relationship between us. Therefore, your communication with us via this information in any form will not be considered as privileged or confidential.

    This information is not intended to be advertising, and Legal & Compliance, LLC does not desire to represent anyone desiring representation based upon viewing this information in a jurisdiction where this information fails to comply with all laws and ethical rules of that jurisdiction. This information may only be reproduced in its entirety (without modification) for the individual reader’s personal and/or educational use and must include this notice.

    © Legal & Compliance, LLC 2017

    SEC Issues Final Rules Requiring Links To Exhibits

    Tuesday, April 11, 2017, 8:32 AM [General]
    3.7 (1 Ratings)

    On March 1, 2017, the SEC passed a final rule requiring companies to include 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 rule change was made to make it easier for investors and other market participants to find and access exhibits listed in current reports, but that were originally provided in previous filings.

    The SEC first proposed the rule change on August 31, 2016, as discussed in my blog HERE. The new rule continues the SEC’s Division of Corporation Finance’s ongoing Disclosure Effectiveness Initiative. I anticipate that this initiative will not only continue but gain traction in the coming years under the new administration as, hopefully, more duplicative, antiquated and immaterial requirements come under scrutiny. At the end of this blog, I include an up-to-date summary of the proposals and request for comment related to the ongoing Disclosure Effectiveness Initiative.

    Background

    On April 15, 2016, the SEC issued a 341-page concept release and request for public comment on sweeping changes to certain business and financial disclosure requirements in Regulation S-K (“S-K Concept Release”). The S-K Concept Release contained a discussion and request for comment on exhibit filing requirements. Item 601 of Regulation S-K specifies the exhibits that must be filed with registration statements and SEC reports. Item 601 requires the filing of certain material contracts, corporate documents, and other information as exhibits to registration statements and reports.

    A particular area of discussion recently has been the need to file schedules to contracts. These schedules can be lengthy and lack materiality. Likewise, a recent area of discussion has been the necessity of filing an immaterial amendment to a material exhibit. The S-K Concept Release contains a lengthy discussion on exhibits, including drilling down on specific filing requirements. Many of the exhibit filing requirements are principle-based, including, for example, quantitative thresholds for contracts. Consistent with the rest of the S-K Concept Release, the SEC discusses whether these standards should be changed to a straight materiality approach. The SEC also discusses eliminating some exhibit filing requirements altogether, such as where the information is otherwise fleshed out in financial statements or other disclosures (for example, a list of subsidiaries).

    Currently companies are allowed to reference exhibits filed in prior filings as opposed to refiling the exhibit with the SEC. The better practice has always been to include a specific reference to the filing, including the date of the filing, and where the original exhibit can be located. However, many companies do not do so, leaving the public to search through prior filings to find the listed exhibit.  Moreover, as time goes by and companies switch counsel, some choose not to spend the time and funds to have new counsel update an exhibit list to include a full reference. The new rule will require them to do so. The rule amendment is limited to the presentation of the exhibit list and requires including a hyperlink to the actual filed exhibit.

    Rule Amendments

    In addition to the filing of exhibits and schedules, Item 601 of Regulation S-K requires each company to include an exhibit index list that lists each exhibit included as part of the filing. The list is cumulative. For example, the company’s articles of incorporation are required to be included as an exhibit with every 10-Q and 10-K filing. Once an exhibit has been filed once, the company could historically incorporate by reference by including a footnote as to which filing the original exhibit can be found in. Unfortunately, I find that companies often will indicate that an exhibit has been previously filed, without giving a specific reference as to which filing or when, leaving an investor or reviewer to go fish. The SEC rightfully asserts that requiring companies to include hyperlinks from the exhibit index to the actual exhibits filed would allow much easier access to these filings.

    The new rule change would requires companies to include a hyperlink to each filed exhibit on the exhibit index as required by Item 601 of Regulation S-K, for virtually all filings made with the SEC, including XBRL exhibits. An active hyperlink will now be required in all filings made under the Securities Act or Exchange Act, provided however that if the filing is a registration statement, the active hyperlinks need only be included in the version that becomes effective.

    Currently exhibits may be filed in the EDGAR system in either ASCII or HTML format. HTML format allows for hyperlinks to another place within the same document or to a separate document. ASCII does not support such hyperlinks. Over the years HTML has become the standard used for EDGAR filings, with 99% of filings in 2015 using HTML. The rule amendment will now prohibit the use of ASCII for exhibits and require only HTML with the newly required hyperlinks.

    In addition, the rule changes include conforming changes to Rule 105 of Regulation S-T. Rule 105 sets forth the limitations and liabilities for the use of hyperlinks. Rule 105 allows hyperlinks to other documents within the same filing or previously filed documents on EDGAR but prohibits hyperlinks to sites, locations, or documents outside the EDGAR system.

    The new Rule goes into effect on September 1, 2017, provided however that non-accelerated filers and smaller reporting companies that submit filings in ASCII may delay compliance through September 1, 2018.

    Further Background

    I have been keeping an ongoing summary of the SEC’s ongoing Disclosure Effectiveness Initiative. The following is a recap of such initiative and proposed and actual changes. However, I note that with the recent election, and the GOP sweeping control of both the House and Senate, it is unclear what the future of these initiatives holds.

    On August 31, 2016, the SEC issued proposed amendments to Item 601 of Regulation S-K to require hyperlinks to exhibits in filings made with the SEC. The proposed amendments would 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 proposed amendment would also require that all exhibits be filed in HTML format. See my blog HERE on the Item 601 proposed changes.

    On August 25, 2016, the SEC requested public comment on possible changes to the disclosure requirements in Subpart 400 of Regulation S-K.  Subpart 400 encompasses disclosures related to management, certain security holders and corporate governance. See my blog on the request for comment HERE.

    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.

    That 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.

    As part of the same initiative, on June 27, 2016, the SEC issued proposed amendments to the definition of “Small Reporting Company” (see my blog HERE). The SEC also previously issued a release 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.

    As part of the ongoing Disclosure Effectiveness Initiative, in September 2015 the SEC Advisory Committee on Small and Emerging Companies met and finalized its recommendation to the SEC regarding changes to the disclosure requirements for smaller publicly traded companies. For more information on that topic and for a discussion of the reporting requirements in general, see my blog HERE.

    In March 2015 the American Bar Association submitted its second comment letter to the SEC making recommendations for changes to Regulation S-K. For more information on that topic, see my blog HERE.

    In early December 2015 the FAST Act was passed into law.  The FAST Act requires 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. The current Regulation S-K and S-X Amendments are part of this initiative. In addition, the SEC is required to conduct a study within one year on all Regulation S-K disclosure requirements to determine how best to amend and modernize the rules to reduce costs and burdens while still providing all material information. See my blog HERE.

    The Author

    Laura Anthony, Esq.
    Founding Partner
    Legal & Compliance, LLC
    Corporate, Securities and Going Public Attorneys
    LAnthony@LegalAndCompliance.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.

    Contact Legal & Compliance LLC. Technical inquiries are always encouraged.

    Follow me on Facebook, LinkedIn, YouTube, Google+, Pinterest and Twitter.

    Legal & Compliance, LLC makes this general information available for educational purposes only. The information is general in nature and does not constitute legal advice. Furthermore, the use of this information, and the sending or receipt of this information, does not create or constitute an attorney-client relationship between us. Therefore, your communication with us via this information in any form will not be considered as privileged or confidential.

    This information is not intended to be advertising, and Legal & Compliance, LLC does not desire to represent anyone desiring representation based upon viewing this information in a jurisdiction where this information fails to comply with all laws and ethical rules of that jurisdiction. This information may only be reproduced in its entirety (without modification) for the individual reader’s personal and/or educational use and must include this notice.

    © Legal & Compliance, LLC 2017

    The Acting SEC Chair Has Trimmed Enforcement’s Subpoena Power

    Tuesday, April 4, 2017, 9:29 AM [General]
    0 (0 Ratings)

    In early February 2017, acting SEC Chair Michael Piwowar revoked the subpoena authority from approximately 20 senior SEC enforcement staff. The change leaves the Director of the Division of Enforcement as the sole person with the authority to approve a formal order of investigation and issue subpoenas. Historically, the staff did not have subpoena power; however, in 2009 then Chair Mary Shapiro granted the staff the power, in the wake of the Bernie Madoff scandal. Chair Shapiro deemed the policy to relate solely to internal SEC procedures and, as such, passed the delegation of power without formal notice or opportunity for public comment.

    This is the beginning of what I expect will be many, many changes within the SEC as the new administration changes the focus of the agency from Mary Jo White’s broken windows policies to supporting capital formation. The mission of the SEC is to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation. Although each mission should be a priority, the reality is that the focus of the SEC changes based on its Chair and Commissioners and political pressure. Mary Jo White viewed the SEC enforcement division and the task of investor protection as her top priority. Mike Piwowar and presumably Jay Clayton are shifting the top priority to capital formation.

    Acting Chair Piwowar has 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.

    Mr. Piwowar made a speech in 2013 to the LA County Bar, being very clear about his views on the SEC and its operations. At the time, he talked about enforcement and that investigations should be focused on evidence of wrongdoing, to wit: lying, cheating and stealing. He stated that the SEC must only concern itself with “the facts known to them and the reasonable inferences from those facts” and cautioning that a Commissioner “should never suggest, vote for, or participate in an investigation aimed at a particular individual for reasons of animus, prejudice, or vindictiveness.” In that regard, he recognizes that “the mere existence of an investigation – even without taking any subsequent enforcement action – carries with it the power to defame and destroy.”

    Piwowar then went on to specifically address the process for the issuance of a formal order of investigation, which brings with it the power to subpoena witnesses, documents and testimony. He stated, “Historically, formal orders have been approved by the Commission. This process usually required the staff to prepare a memorandum for the Commission containing a summary of the case and any possible violations, and recommending issuance of the order. Although it was rare, if ever, for the Commission to deny a request for a formal order, the process brought forth a certain level of focus and review from not only the Division of Enforcement, but also staff in the Office of the General Counsel as well as the other divisions, such as Corporation Finance, Trading and Markets, and Investment Management.” Piwowar continued, “[B]ut in a significant departure from past practice, in August 2009, the Commission delegated the authority to issue formal orders to the Director of Enforcement, on the grounds that such delegation would expedite the investigative process by reducing the time and paperwork previously associated with obtaining Commission authorization prior to issuing subpoenas.”

    Moreover, clearly this change made formal orders much easier to obtain, as evidenced by the fact that the issuance of these orders doubled in the years following. Mr. Piwowar stated, “[t]he delegation of authority for approval of formal orders was deemed by the Commission to relate solely to agency organization, procedure, and practice, and therefore not subject to the notice and comment process under the Administrative Procedure Act. The mere fact that we can institute certain rules without obtaining comment from the public does not necessarily mean that we should. Given the significant ramifications for persons who are on the receiving end of a subpoena issued pursuant to a formal order, we should make sure that public comment is allowed on any review of the formal order process.”

    It is no surprise, then, that Piwowar remanded this provision as soon as he was in a position to do so.

    Potential Additional Changes with Enforcement and SEC Policy

    Incoming SEC Chair Jay Clayton is largely thought to be pro-business and likely sympathetic to large financial institutions.  Moreover, the SEC still must appoint additional Commissioners and a new Director of Enforcement. The individuals that fill these roles will undoubtedly greatly influence policy.

    Mr. Clayton has made public comments criticizing the Dodd-Frank Act for over-regulating the financial services industry. As such, I would expect to see changes in Dodd-Frank and a lack of interest in enforcing some provisions while they remain.

    Clayton has also publicly criticized the Foreign Corrupt Practices Act (FCPA) as putting U.S. businesses at a huge disadvantage against competitors not subject to this law, such as those domiciled in other countries. Clayton specifically stated that U.S. companies were disproportionately affected by a “virtually stand-alone approach to deterring foreign corruption” that “places significant costs on companies subject to the FCPA as compared to their competitors that are not.” Trump also spoke against the FCPA. Accordingly, it is very likely that enforcement of FCPA violations will take a low priority going forward.

    Another area in which Clayton will not likely focus is enforcement of whistleblower retaliation cases. Over the past few years the SEC has vigorously pursued enforcement proceedings against companies thought to retaliate against or even chill whistleblower activity. The SEC has even taken action against contract provisions in employment or severance agreements that could be deemed to prevent or impede whistleblower activity. For more on this topic, see my blog HERE. Likewise, the Financial Choice Act 2.0 contains provisions reducing the availability of whistleblower awards.

    On February 3, 2017, President Trump signed an executive order entitled “Core Principles for Regulating the United States Financial System.” The order set forth seven principles for regulating the financial system, including:

    (a) empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;

    (b) prevent taxpayer-funded bailouts;

    (c) foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry;

    (d) enable American companies to be competitive with foreign firms in domestic and foreign markets;

    (e) advance American interests in international financial regulatory negotiations and meetings;

    (f) make regulation efficient, effective and appropriately tailored; and

    (g) restore public accountability within federal financial regulatory agencies and rationalize the federal financial regulatory framework.

    The executive order, although general, certainly is very telling in regard to the philosophy of this administration, including that which is related to over-regulation and enforcement by the SEC.

    Administrative Proceedings

    The SEC Penalties Act, as written in its beginning form, treats administrative court and federal court proceedings equally.  However, the administrative court process is not an equal forum and, based on a barrage of negative attacks, including lawsuits, appeals and media coverage, requires review and attention. An analysis by The Wall Street Journal in 2015 indicated that in the last five years, the SEC has won 90% of cases brought in its own administrative courts but only 69% of cases brought in federal court. Part of the disparity could be that the SEC chooses to settle or drop “losing” claims, but that still leaves a large discrepancy.

    Moreover, the Dodd-Frank Act, enacted in 2010, for the first time granted the SEC the authority to impose civil penalties in administrative proceedings against any person the SEC claims violated the securities laws, regardless of whether that person or firm is in the securities business. In other words, Dodd-Frank opened the doors for the SEC’s own administrative proceedings to be just another forum for the pursuit of any securities law violations. Common sense tells us that this change, seven years ago, directly relates to the uproar in the defensive bar.

    Over the past years a slew of cases have been filed challenging the SEC’s power in administrative actions and the administrative process. With little fanfare or public announcement, the SEC under Jay Clayton may cut back dramatically on the use of administrative proceedings, quietly ending or at least greatly reducing this battle until more formal policy changes are brought.

    The Author

    Laura Anthony, Esq.
    Founding Partner
    Legal & Compliance, LLC
    Corporate, Securities and Going Public Attorneys
    LAnthony@LegalAndCompliance.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.

    Contact Legal & Compliance LLC. Technical inquiries are always encouraged.

    Follow me on Facebook, LinkedIn, YouTube, Google+, Pinterest and Twitter.

    Legal & Compliance, LLC makes this general information available for educational purposes only. The information is general in nature and does not constitute legal advice. Furthermore, the use of this information, and the sending or receipt of this information, does not create or constitute an attorney-client relationship between us. Therefore, your communication with us via this information in any form will not be considered as privileged or confidential.

    This information is not intended to be advertising, and Legal & Compliance, LLC does not desire to represent anyone desiring representation based upon viewing this information in a jurisdiction where this information fails to comply with all laws and ethical rules of that jurisdiction. This information may only be reproduced in its entirety (without modification) for the individual reader’s personal and/or educational use and must include this notice.

    © Legal & Compliance, LLC 2017


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