Our partner Pamela B. Greene was recently quoted in a Boston Globe article focusing on a local company’s use of Regulation A+ (or “Reg A+”) as a new way to raise capital, and the benefits and risks that may be associated with this kind of offering. The rules allowing Regulation A+ were adopted by the SEC in March 2015, as mandated by the Jumpstart Our Business Startups (JOBS) Act, and are designed to facilitate smaller companies’ access to capital. The rules enable smaller companies to offer and sell up to $50 million of securities in a 12-month period, subject to eligibility, disclosure and reporting requirements. A Cambridge, MA medical robotics company called Myomo is planning to complete an offering using this method. The article in which Pam is quoted can be found here.
Snap Inc., which debuted on the New York Stock Exchange (NYSE) on March 2nd, was the largest tech IPO since Alibaba went public in 2014. Initially priced at $17 per share, the share price jumped to more than $24 by the end of the first trading day, raising $3.4 billion and beating market expectations.
Beyond the magnitude of the offering and its implications for the broader deal pipeline, Snap’s IPO has raised interesting governance issues around its non-voting shares, which the SEC’s Investor Advisory Committee (IAC) tackled on March 9th at its quarterly meeting. The IAC’s discussion centered on Snap’s three-tiered capital structure: Class C shares with 10 votes per share for founders Evan Spiegel and Bobby Murphy, Class B shares with one vote per share for pre-IPO VC investors and other insiders, and Class A shares with no voting rights for public investors. Companies like Facebook and Google have employed similar structures in the past; in fact, a recent study by Institutional Shareholder Services (ISS) noted that dual- and multi-class capital configurations are common, especially in the technology sector. However, the notion of affording no voting rights whatsoever to public investors is unprecedented.
SNAP RAISES CONCERNS FROM INVESTOR GROUPS AROUND GOVERNANCE CONTROLS
Some have expressed concern that the issuance of no-vote shares weakens corporate governance controls. The same ISS study referenced above found that “controlled companies” – those with multi-class or unequal voting rights like Snap – tend to underperform relative to their non-controlled peers in several key areas of assessment including shareholder returns, revenue growth, and return on equity. The most critical investors’ rights advocates argue that Snap’s no-vote share class will be disastrous for the company’s shareholders who will be left without a say while Snap is given the go-ahead to operate as a public company without being subject to traditional public company voting and disclosure requirements.
Others who were not on the IAC’s meeting agenda are less fatalistic in their assessment of Snap’s potential impact on shareholder rights. Looking at industry trends, some of the most successful public technology companies have concentrated voting power among the company’s founders, and shareholders appear to have benefitted (or at least not to have been disadvantaged) as a result. Facebook and Alphabet are prime examples. Others maintain that Snap is an anomaly – as a tech “unicorn” (one of a select group of private ventures valued at more than $1 billion), Snap is able by virtue of its rarefied status to issue no-vote shares whereas smaller-cap or less prestigious companies likely could not. As long as Snap continues to prosper, so will its Class A holders, even without a direct say in the company’s decision making.
SNAP’S DISCLOSURE OBLIGATIONS TO CLASS A HOLDERS
Beyond the general governance concerns, Snap’s IPO has also generated discussion around the company’s disclosure obligations. Are Snap’s no-vote shares entitled to the same degree of disclosure as voting shares? Technically no, though Snap has indicated in its SEC filings that it intends to afford Class A holders the same degree of transparency as those with voting rights. According to Snap’s prospectus, the company plans to invite the Class A holders to attend the annual meeting and to submit questions to the management team. Snap simultaneously acknowledges that its Class A shares are its only class of stock registered under Section 12 of the Exchange Act, and therefore Snap is not required to file a proxy statement unless a vote of Class A holders is required by applicable law. The company promises, “[W]e will provide holders of our Class A common stock … any information that we provide generally to the holders of our Class B common stock and Class C common stock, including proxy statements, information statements, annual reports, and other information and reports.”
Snap caveats that promise in several important ways. First, if the company doesn’t deliver proxy statements or information statements to Class B holders, then it will not do so to Class A holders – that goes without saying. Second, Snap will be still obligated to comply with the ongoing periodic and current disclosure requirements of the Exchange Act, including Form 8-K, which may be filed up to four business days after a material event and which, by its nature, is less detailed and more open ended in terms of content requirements than a proxy statement. This means that Snap’s disclosures on executive compensation and related matters may include less information than would otherwise be required by a proxy statement. Lastly, because Snap is not bound by the proxy filing requirements, any filing the company does make may not contain all the information that would otherwise be required of a public company with voting shares. Class A holders will essentially be reliant on the company’s annual, quarterly and current reports, without the ability to refer to proxy statements for information on, for example, its compliance with proxy access rules. As a side note, Snap will not be required to comply with the Dodd-Frank Act’s “say-on-pay” and “say-on-frequency” rules, by virtue of its status – for now – as an emerging growth company under the JOBS Act.
OBLIGATIONS OF NYSE AND OTHER NATIONAL EXCHANGES
Testifying before the IAC, Ken Bertsch of the Council of Institutional Investors (CII) questioned what Snap’s IPO means for institutional asset owners, which hold the majority of publicly traded securities in the U.S. He criticized the NYSE for being “asleep at the wheel” by allowing Snap to list a non-voting class of securities on the exchange, which he argued were more akin to preferred stock or derivatives. Aside from Snap’s ability to trade on the NYSE, Bertsch asserted that the company should not be permitted to participate in public company stock indices. Under his theory, an investment in an index fund pegged to the S&P or any other index carries with it certain expectations regarding the underlying disclosures of listed companies, and Snap’s no-vote shares run afoul of those expectations by adding a layer of complexity that will not be adequately reflected in the price.
Given the SEC’s regulatory power over national securities exchanges like the NYSE, a number of related questions emerge: How does allowing Snap to list on NYSE impact exchanges outside the U.S. where listing requirements are generally less onerous? Should the SEC be concerned about a potential race-to-the-bottom amongst non-U.S. exchanges? How should the SEC balance investor protection directives against the desire to entice private companies to go public?
None of these questions were answered on March 9th. At most, the testimony amounted to a call by investor groups to revisit the rules surroundings multi-class common structures listed on U.S.-domestic exchanges in light of Snap and the potential for other companies to replicate its offering structure. Those who are skeptical of CII’s argument with respect to index funds will note that Snap is still subject to ‘34 Act reporting requirements, which generally puts it on par with other companies listed in the index (proxy rules excepted). Certainly, fewer or limited disclosures are of concern to any investor who wants to ensure the share price accurately reflects the totality of information available. Those concerns may be better directed at deregulatory efforts generally, rather than at Snap, which continues – at least as of this writing – to trade above its initial IPO price.
It’s unclear whether the Commission will address the topic of no-vote shares again in the near term, especially given its change in leadership and priorities. All parties would benefit to wait and see how Snap performs over time and whether the company endeavors in good faith to provide its Class A holders with a degree of transparency that resembles that of more traditional shareholders.
 The IAC is a mandate under Dodd-Frank, set up to advise the SEC on various regulations affecting investors. Here’s a link to the agenda, as posted on the IAC’s website: https://www.sec.gov/spotlight/investor-advisory-committee-2012/iac030917-agenda.htm.
 See Rob Kalb and Rob Yates, Snap Inc. Reportedly to IPO with Unprecedented Non-Voting Shares for Public, Harvard L. Sch. Forum on Corp. Governance and Financial Regulation (Feb. 7, 2017), https://corpgov.law.harvard.edu/2017/02/07/snap-inc-reportedly-to-ipo-with-unprecedented-non-voting-shares-for-public/ (looking at post-IPO companies holding their first annual meetings, finding several instances of 10-to-1 voting structures between insiders and outsiders).
 See generally Testimony of Ken Bertsch before the IAC (Mar. 9, 2017), available at https://www.sec.gov/spotlight/investor-advisory-committee-2012/bertsch-remarks-iac-030917.pdf.
 See, e.g., Kurt Wagner, One way Shapchat’s IPO will be unique: The shares won’t come with voting rights, Recode (Feb. 21, 2017), http://www.recode.net/2017/2/21/14670314/snap-ipo-stock-voting-structure.
 See, e.g., Preliminary Prospectus, filed with the SEC: https://www.sec.gov/Archives/edgar/data/1564408/000119312517056992/d270216ds1a.htm.
 Id. at 5.
 See Eleanor Bloxham, Snap Shouldn’t Have Been Allowed to Go Public Without Voting Rights, Fortune (Mar. 3, 2017), http://fortune.com/2017/03/03/snap-ipo-non-voting-stock/.
 See supra note 3.
 See generally SEC Should Bar No-Vote Share Structures, Committee Told, Law360 (Mar. 10, 2017), https://www.law360.com/capitalmarkets/articles/900042?utm_source=rss&utm_medium=rss&utm_campaign=section.
Public companies will soon be required to include an active hyperlink to each exhibit to all registration statements filed under the Securities Act of 1933, as amended, and all periodic and current reports filed under the Securities Exchange Act of 1934, as amended, filed on or after September 1, 2017.
Under Regulation S-K Item 601, public companies are required to file their material agreements, certificates of incorporation, bylaws and other specified documents as exhibits to their SEC filings. Exhibits that are identified in the exhibit index to the filing may be attached to the filing or, in the case of previously-filed exhibits, may be incorporated by reference from the previous filing to the extent permitted by the SEC’s rules and forms. Currently, an investor seeking access to an exhibit that is incorporated by reference into a filing must first determine where the exhibit is located by reviewing the exhibit index and then search for and locate the filing which contains the exhibit, which can be time-consuming and cumbersome. The exhibit hyperlink rule, therefore, is intended to facilitate easier access to these exhibits for investors and other users of the information.
Key points to note about the exhibit hyperlink rule:
- An active hyperlink will be required for each exhibit identified in the exhibit index of the filing, including exhibits that are incorporated by reference from a prior filing and exhibits that are attached to the new filing. The hyperlink rule, however, does not require the hyperlinking of any XBRL exhibits or exhibits filed with Form ABS-EE. The SEC also decided not to require companies to refile electronically any exhibits previously filed only in paper.
- The requirement to include exhibit hyperlinks applies to Securities Act registration statements, including all pre-effective amendments; Exchange Act periodic and current reports; registration statements on Form F-10 and annual reports on Form 20-F; and does not apply to other forms under the multi-jurisdictional disclosure system used by certain Canadian issuers or to Form 6-K.
- The exhibit hyperlink rule is effective for filings submitted on or after September 1, 2017. Smaller reporting companies or non-accelerated filers that submit filings in ASCII format will be required to file their registration statements and periodic reports that are subject to exhibit filing requirements in HTML format and to comply with the exhibit hyperlink rule for filings submitted on or after September 1, 2018. The hyperlink rule does not apply to exhibits filed in paper pursuant to a temporary or continuing hardship exemption under Rules 201 or 202 of Regulation S-T or pursuant to Rule 311 of Regulation S-T.
- If a filing contains an inaccurate exhibit hyperlink, the inaccurate hyperlink alone would not render the filing materially deficient nor affect the company’s eligibility to use Form S-3. However, the company must correct a nonfunctioning or inaccurate hyperlink, in the case of a registration statement that is not yet effective, by filing a pre-effective amendment to the registration statement or, in the case of a registration statement that is effective or an Exchange Act report, by correcting the hyperlink in the next Exchange Act periodic report that requires or includes an exhibit pursuant to Item 601 of Regulation S-K (or, in the case of a foreign private issuer, pursuant to Form 20-F or Form F-10).
Originally created by Congress in 1990, the EB-5 program was intended to stimulate the U.S. economy through job creation and capital investment by foreign investors. Under a pilot immigration program first enacted in 1992 and regularly reauthorized since, certain EB-5 visas also are set aside for investors in Regional Centers designated by the United States Citizenship and Immigration Services, based on proposals for promoting economic growth. Unscrupulous parties have on occasion taken advantage of interested parties and perpetrated schemes in this area on people who are understandably keen to take part in this otherwise very beneficial program.
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.
Investors that own more than 5% of a public company’s securities and file under the exempt category (which includes most venture capital firms and other similar investors) are required to file their beneficial ownership reports within 45 days after the close of the calendar year (i.e., on February 14). Investors have a few extra days to file this year, as Valentine’s Day falls on a Saturday, followed by a Monday holiday. Therefore Schedule 13Gs will be due on Tuesday, February 17, 2015.
Don’t Forget Those Filings for Newly Public Companies
Investors in companies that went public in 2014 who either acquired all of their securities prior to the IPO or, if they acquired shares after the IPO, all post-IPO acquisitions plus all other acquisitions of stock during the preceding 12 months did not exceed 2% of the company’s outstanding common stock, are deemed to be exempt investors and are required to file an initial Schedule 13G by February 17, 2015 to report their holdings as of December 31, 2014.
Need a primer on this reporting obligation? To learn more about the rules and the timing of filing Schedule 13Ds and Schedule 13Gs in other circumstances, click here for a detailed memorandum.
An increasingly popular hedge fund strategy, commonly referred to as “appraisal arbitrage,” recently received a significant boost from the Delaware Court of Chancery. Appraisal arbitrage refers to the practice of buying shares in a target corporation following announcement of a buyout transaction, and seeking value above the buyout price through the appraisal process. In In Re Appraisal of Ancestry.com, Inc. (January 5, 2015), the Court found that a beneficial owner had standing to seek appraisal in respect of an acquisition even though it had purchased its shares in the open market after the record date for the stockholder vote and was unable to show that its shares were not voted in favor of the transaction. In denying Ancestry’s motion for summary judgment, the Court reasoned that the record holder of the shares (here Cede & Co.) only needed to show that enough shares were not voted in favor of the acquisition to cover the number of shares for which it demanded appraisal. Once this hurdle is met, a beneficial owner of such shares (here Merion) does not need to show that its specific shares were among those not voted in favor of the acquisition in order to file the appraisal petition. Thus Merion had standing to pursue appraisal. As money continues to flow toward this strategy, it may result in more appraisal petitions and increased closing risk, as well as erosion of shareholder value in public M&A.
We are pleased to announce that we are joining forces with our colleagues in Mintz Levin’s Securities & Capital Markets Practice to provide more comprehensive coverage of all aspects of the federal and state securities laws and regulation, Delaware corporate law, and related topics. While continuing to blog about developments in securities and shareholder litigation and SEC enforcement, we will be adding more posts discussing public company reporting, disclosure, and compliance; capital market trends and best practices; and corporate governance matters, among other topics. To lead this expansion, veteran securities lawyers Megan Gates and Brian Keane are joining us as co-editors.
Reflecting these changes, we will also be changing the name of this blog from “Securities Litigation and Compliance Matters” to “Securities Matters.” Visitors to the old site, www.securitieslitigationmatters.com, will be automatically redirected to the new site, www.securitiesmatters.com. If you are a subscriber to www.securitieslitigationmatters.com, your subscription will automatically transfer over to www.securitiesmatters.com, so you do not need to make any changes.
Though our new name is shorter, our coverage will be broader. Our goal is to become a convenient, one-stop source of timely analysis and advice concerning new developments in securities and corporate law for public and private companies, directors and officers, and financial service providers.
By rule, the SEC is required to issue a report on the Commission’s administrative proceedings caseload every six months. On October 29, 2014, the SEC issued its most recent report covering the six month period from April 1, 2014 through September 30, 2014. This report also included the statistics from the two prior six-month periods for comparison purposes.
Here are three of the more notable statistics from the report:
1) Newly filed proceedings initiated before the SEC’s Administrative Law Judges increased by 44% over the prior six month period. Although, the total number of new matters was roughly on par with those filed in the same six-month period from 2013 (139 for 2014 and 121 for 2013).
2) The median age of the proceedings at the time when the Adminstrative Law Judge issues an initial decision decreased from 52 days in the prior six month period to 40 days in the most recent six month period. This represents a marked improvement on the 186.5 day median for the same six-month period in 2013.
3) While the Administrative Law Judges have improved on the time it take to issue an initial decision, the time it takes the Commission to review ALJ decisions has remained relatively constant, and relatively long. The median age of the proceedings at the time when the Commission completes its review was 524 days in the last six-month period. This compares to 600 days for the prior six-month period, and 539 days for the same six-month period from 2013.