SEC Acting Chairman Michael S. Piwowar issued a public statement on February 6, 2017 requesting input on any unexpected challenges that companies have experienced as they prepare for compliance with the CEO pay ratio rule, which will become required disclosure in public company 2018 proxy statements. Piwowar also directed SEC staff to “reconsider the implementation of the rule” based on comments submitted.

This public statement and request for comments is a first step in considering changes to the rule, as part of the Republican Party’s effort to modify or roll back certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd Frank). Any SEC modifications to the CEO pay ratio rule would take time to implement and may be challenged. The easiest route to prevent its implementation would be for Congress to repeal this provision of Dodd Frank.

On July 13, 2016, the SEC announced its adoption of several amendments that update the SEC’s rules of practice governing its administrative proceedings.  The final amended rules are available here.

As SEC Chair Mary Jo White stated in the SEC’s announcement, “[t]he amendments to [the SEC’s] rules of practice provide parties with additional opportunities to conduct depositions and add flexibility to the timelines of [the SEC’s] administrative proceedings, while continuing to promote the fair and timely resolution of the proceedings.”  For example, under amended Rule 360, orders instituting proceedings would designate the time period for preparation of the initial decision as 30, 75, or 120 days from completion of post-hearing or dispositive motions.  Further, amended Rule 360 extends the length of the pre-hearing period from four months to a maximum of 10 months for cases designated as 120-day proceedings, a maximum of six months for 75-day cases, and a maximum of four months for 30-day cases.

Continue Reading SEC Adopts Amendments Updating its Rules of Practice for Administrative Proceedings

Our Venture Capital & Emerging Companies practice group analyzed the SEC’s recently released equity crowdfunding rules (referred to by the SEC as “Regulation Crowdfunding”) in a concise and easy-to-digest article authored by Sam Effron and Kristin Gerber.

The article does a great job of highlighting some of the regulation’s shortcomings, such as the limits it places on amounts that can be raised (at both the company and investor level); the requirement that companies complete and file a new Form C; and certain ongoing reporting obligations for companies.  In all, the added costs, burdens, and risks associated with complying with this regulation means that in most cases there are better alternatives (such as raises under Rule 506) for start-up companies looking to access the capital markets.

On October 13 from 1 – 2:30 pm ET, join Pam Greene and a panel of other experts for a timely webinar covering Regulation A+: Practical Tips and Guidance for Launching a Mini-IPO. Regulation A+ went into effect in June 2015 to allow private US and Canadian based companies to raise equity – up to $20 million under Tier I and up to $50 million under Tier II – from both accredited and nonaccredited investors, subject to certain limitations.

During this webinar, our distinguished panel, including Pam Greene, member in the Corporate and Securities Practice at Mintz Levin;   TJ Berdzik, CFA, of StockCross Financial Services, Inc.; Maggie Chou, of OTC Markets; Yoel Goldfeder, of Vstock Transfer; and Rudy Singh, of S2 Filings, will discuss the legal and business considerations in launching a Tier II Regulation A+ offering, how investors can achieve liquidity through the OTC Market, and why many are calling Tier II offerings a “Mini-IPO”.

We hope you can take part in what is sure to be an informative discussion. Click here to register.

Pursuant to Section 1502 of the Dodd-Frank Act, which added new Section 13(p)(1) to the Securities Exchange Act of 1934, as amended, the SEC promulgated Rule 13p-1 (the “Conflict Minerals Rule”), which required that issuers that manufacture (or contract to manufacture) products in which conflict minerals are “necessary to the functionality or production of the product” are required to disclose whether or not their products contain tin, gold, tantalum, or tungsten mined from the Democratic Republic of Congo (the “DRC”) and nine of its neighboring countries.  This provision was included in the Dodd-Frank Act at the request of legislators who believed that the process of mining for and producing these particular minerals in certain countries is contributing to a grave, ongoing humanitarian crisis in that region of Africa. Continue Reading DC Circuit Court Reaffirms Earlier Decision Partially Invalidating Conflict Minerals Rule on First Amendment Grounds

On August 5, by a vote of 3-to-2 with the SEC Commissioners voting along party lines, the SEC approved the final rule to implement the requirements of Section 953(b) of the Dodd-Frank Act, which instructed the SEC to amend existing rules under Item 402 of Regulation S-K to require public companies to disclose the ratio of their CEO’s annual total compensation to that of the median annual total compensation of all company employees. All public companies will be subject to this new disclosure requirement, with the exception of emerging growth companies, smaller reporting companies and foreign private issuers.

The rule requires companies to disclose:

(a) The median of the annual total compensation of all company employees, excluding the CEO;

(b) The annual total compensation of the company’s CEO; and

(c) The ratio of (a) to (b).

Companies will be required to provide disclosure of this ratio commencing with their first fiscal year beginning on or after January 1, 2017, which information will be disclosed in the Executive Compensation section of a company’s Form 10-K (or proxy statement). Thus, disclosure will begin in the 2018 proxy season. In addition to the ratio itself, disclosure describing the methodology used to identify the median employee, determine total compensation and any material assumptions, adjustments (including allowable cost-of-living adjustments) or estimates used to identify the median employee or to determine annual total compensation will also be required. As described in the proposed rule, when identifying the median employee, the final rule requires companies to include all employees, including full-time, part-time, temporary, seasonal, and foreign employees employed by the company or any of its subsidiaries and to annualize the compensation of permanent employees who were not employed for the entire year, such as new hires. Companies may not, however, annualize the compensation of part-time, temporary, or seasonal employees. Consultants and other advisors who are not employees and individuals who are employed by unaffiliated third parties are not to be included in the calculation.

Continue Reading SEC Finalizes the CEO Pay Ratio Rule – Additional Executive Compensation Disclosure for Public Companies Beginning in 2017

Mintz Levin Partner Pam Greene was interviewed on Friday by Law360 regarding the advent of Regulation A+ and its anticipated impact on capital-raising by smaller companies. Pam noted that Tier 2 offerings can be likened to a “mini IPO” because they let companies raise capital under less onerous requirements than a full-fledged public company faces. “This will be an easier path for smaller companies to go public that is less expensive than an IPO,” Greene said.

Read more here.

The SEC has also posted links to the new forms to be used in connection with Regulation A+ offerings and post-offering reporting:

Form 1-A: Regulation A Offering Statement

Form 1-K: Annual Reports and Special Financial Reports

Form 1-SA: Semiannual Report or Special Financial Report Pursuant to Regulation A

Form 1-U: Current Report Pursuant to Regulation A

Form 1-Z: Exit Report Under Regulation A

Form 8-A: Registration of Certain Classes of Securities Pursuant to Section 12(b) or (g)

 

Despite the attempt by the State of Montana’s securities division to stay the rule, Regulation A+ is effective as of today, June 19, 2015.

Regulation A+ allows companies organized in the U.S. and Canada to raise money from investors, even those that are not accredited investors, under a less burdensome regime than traditional going public transactions and through the use of general solicitation, even to unaccredited investors, which is not allowed under current private placement rules.  Regulation A+ replaces and expands the seldom used Regulation A by increasing the offering limit under the rule from $5 million to up to $20 million for “Tier 1 Offerings” and up to $50 million for “Tier 2 Offerings.” The regulation also preempts state law review for Tier 2 Offerings, for which the disclosure documents will instead be reviewed by the SEC.

While Regulation A+ has critics on both sides of the table – that it doesn’t go far enough in providing flexibility, or that it goes too far and does not adequately protect unsophisticated investors – it should be a welcome avenue for smaller companies who believe their companies have significant value to test the appetite of investors, raise capital publicly at a lower cost, and become accustomed to the public disclosure regime by preparing less burdensome ongoing disclosure. It remains to be seen how companies take advantage of these new rules and whether investors are at the ready.

Securities Matters readers are invited to join Kristin Gerber and me at the Cambridge Innovation Center this Thursday, April 16, starting at 4:30, for an update on the status of equity crowdfunding rules at both the federal and state levels. Given that it has been 18 months (and counting) since the SEC first proposed rules to implement the JOBS Act’s directive to make crowdfunding a reality, we will take a look not just at the SEC’s rulemaking but also the increasing activity at the state level (including crowdfunding rules passed in January 2015 right here in Massachusetts). We’ll also discuss other means of capital-raising for the small, scrappy start-up that may have greater practical, near-term application. The program is free to attend, so we hope to see you there.

 

The Securities and Exchange Commission adopted yesterday a new set of regulations entitled Regulation “A+,” designed to provide a more streamlined approach for small and mid-sized companies to offer securities to the public. These rules will become final 60 days after publication by the SEC in the Federal Register. We will be preparing a detailed client advisory analyzing these new rules for our friends and clients.

Regulation A+ was initially proposed by the SEC in December 2013 as an amendment to little-used current Regulation A.  The purpose of this new rule is to implement Section 401 of the Jumpstart Our Business Startups Act (the JOBS Act) which directed the SEC to adopt rules exempting offerings of up to $50 million of securities annually from the registration requirements of the Securities Act of 1933, as amended. Regulation A+ as adopted yesterday provides for 2 tiers of offerings with differing requirements.  Tier 1 is for offerings of securities of up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer; and Tier 2 is for offerings of securities of up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer. Both tiers are subject to certain basic requirements, while Tier 2 offerings are also subject to additional disclosure and ongoing reporting requirements, such as filing an offering circular with the SEC which will be reviewed by the SEC before qualifying the offering, audited financial statements, and annual reports. Additionally, the amount of securities a non-accredited investor may purchase in an offering will be capped when buying securities not listed on a national exchange.

These rules also provide for the preemption of state securities law registration and qualification requirements for securities offered or sold to “qualified purchasers” in Tier 2 offerings. Tier 1 offerings will be subject to federal and state registration and qualification requirements; however, companies may take advantage of the coordinated review program recently developed by the North American Securities Administrators Association (NASAA), the association of state regulators, that is expected to reduce the compliance costs for small businesses seeking to receive state approval for these offerings.

However, as with many of the rules recently proposed or adopted by the SEC, this one is not free from criticism, as NASAA yesterday released the following statement:

“We appreciate that all five Commissioners recognize the efforts of state securities regulators and NASAA to successfully implement a modernized and streamlined Coordinated Review program for Regulation A offerings to help small and emerging businesses raise investment capital. The program has been lauded for effectively streamlining the state review process that promotes efficiency by providing centralized filing, unified comments, and a definitive timeline for review.

However, it appears that the SEC has adopted a rule that fails to fully recognize the significant benefits of this program to issuers and investors alike. We continue to have concerns that the rule does not maintain the important investor protection role of state securities regulators and must look more closely at the final rule as we evaluate our options.”

The SEC hopes that Regulation A+ will fare better than the current Regulation A and become a more practical way for smaller issuers to access the public markets. Only time will tell if these new offering requirements will lead to easier access to capital.