On March 15, 2016, the NASDAQ Stock Market LLC resubmitted its proposed rule requiring NASDAQ-listed companies to publicly disclose third-party compensation arrangements for board members and board nominees, commonly referred to as “golden leash” arrangements.  Golden leash arrangements arise when activist shareholders offer to compensate board nominees in connection with their candidacy or service on the board and usually occur in connection with a proxy contest.  The types of golden leash arrangements vary but often include compensating directors based on achieving certain benchmarks, such as an increase in the company’s share price over a specified time period.

The re-proposed rule  addresses NASDAQ’s concern that golden leash arrangements may lead to conflicts of interest and compromise a director’s ability to satisfy his or her fiduciary duties since such arrangements promote short-term results.  NASDAQ initially submitted the proposed rule in January 2016, but it was rejected by the SEC for technical reasons.  The re-proposed rule, Listing Rule 5250(c), is substantially similar to the initial proposed rule and would require NASDAQ-listed companies to publicly disclose all agreements and arrangements between directors or director nominees and any person or third-party entity that provide compensation or payment in connection with that person’s candidacy or service as a director.  This disclosure would be made either on the company’s website or in their annual proxy statement or annual report and would at a minimum identify the parties and the material terms of such arrangements.  The re-proposed rule is intended to be construed broadly to cover all forms of compensation, including payments for items such as health insurance premiums.  However, the disclosure obligation would not include arrangements that relate only to the reimbursement of expenses in connection with a director’s candidacy or to arrangements that existed before the director’s candidacy and would have otherwise been publicly disclosed, such as an employment agreement.

A company’s obligation to disclose golden leash arrangements under the re-proposed rule would be continuous and terminate at the earlier of the resignation of the applicable director or one year following the termination of the applicable golden leash arrangement.  If the re-proposed rule is approved by the SEC, it will become effective on June 30, 2016.

The re-proposed rule is available at: http://nasdaq.cchwallstreet.com/NASDAQ/pdf/nasdaq-filings/2016/SR-NASDAQ-2016-013_Resubmission.pdf.

The Commission announced that it approved interim final rules implementing two provisions of the FAST Act, adopted in December, that revise financial reporting forms for emerging growth companies and smaller reporting companies.

The Congressionally mandated rules revise Forms S-1 and F-1 to provide that as long as emerging growth companies’ registration statements include all required financial information at the time of the offering, they will be allowed to omit certain historical period financial information prior to the offering. In addition, the rules revise Form S-1 to allow smaller reporting companies to use incorporation by reference for future filings the companies make under the federal securities laws after the registration statement becomes effective. The interim final rules also include a request for comment on whether the rules should be expanded to include other registrants or forms. The rules will become effective when published in the Federal Register and the public comment period will remain open for 30 days following their publication.

Link to press release: https://www.sec.gov/news/pressrelease/2016-6.html

Link to interim rules: https://www.sec.gov/rules/interim/2016/33-10003.pdf

The SEC announced that the next meeting of the Investor Advisory Committee will be held on January 21, 2016.  Among other things, the Committee will discuss the Financial Accounting Standards Board proposed amendments to the Statement of Financial Accounting Concepts and Notes to Financial Statements concerning disclosure materiality; an update on crowdfunding rules; and the NASDAQ listing standards—shareholder approval rules.

On December 11, 2015, the Securities and Exchange Commission (the “SEC”) proposed rules required under Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”). Section 1504 of the Act added Section 13(q) to the Securities Exchange Act of 1934 (the “Exchange Act”), which directs the SEC to issue rules requiring resource extraction issuers to include in an annual report information relating to any payment made by the issuer, a subsidiary of the issuer, or an entity under the control of the issuer, to a foreign government or the federal government for purposes of the commercial development of oil, natural gas, or minerals.

Read our client alert.

Today, the Commission issued an advanced notice of proposed rulemaking (ANPR) for new requirements for transfer agents, together with a concept release requesting public comment on the Commission’s broader review of transfer agent regulation.

Over the course of the last year, various Commissioners, including Commissioner Aguilar, had noted that the Commission’s regulation of transfer agents had not been reviewed or updated in quite some time.  Commissioner Aguilar and former Commissioner Gallagher had urged the Commission to review its regulations relating to transfer agents.  The Commission and FINRA have been focused for some time on the incidence of microcap and small cap fraud.  In some instances, closer regulation of the activities of transfer agents might have served to prevent, or perhaps to detect, certain transfers of restricted securities.  Also, many of the new offering exemptions require that issuers retain the services of a transfer agent.  This is the case, for example, with the final crowdfunding rules.

The Commission’s press release notes that, “The Commission also identifies in the ANPR certain areas in which it intends to propose specific rules or rule amendments, including registration and annual reporting requirements, safeguarding of funds and securities, antifraud requirements in connection with the issuance and transfer of restricted securities, and cybersecurity and information technology, among others.  The concept release seeks comment on a broader range of issues to help inform the Commission’s consideration of additional rulemaking.  These include the processing of book entry securities, bank and broker-dealer recordkeeping for beneficial owners, administration of issuer plans, outsourcing and the role of transfer agents to mutual funds and crowdfunding.”

The release is available here:  http://www.sec.gov/rules/concept/2015/34-76743.pdf.

In a Guidance Update published on June 30, 2014 by the SEC’s Division of Investment Management, the staff closed a loophole that allowed business development companies (BDCs) with wholly owned Small Business Investment Company (SBIC) subsidiaries to avoid meeting asset coverage requirements when the SBIC subsidiaries issue debt that is not guaranteed by the Small Business Administration (SBA).

Sections 18(a) and 61(a) of the Investment Company Act of 1940 (1940 Act) generally require BDCs to meet asset coverage requirements when they issue “senior securities,” including debt instruments.  A BDC may be deemed an indirect issuer of any class of “senior security” issued by its direct or indirect wholly owned SBIC subsidiaries.

The SEC has regularly granted BDCs limited exemptive relief from these asset coverage requirements.  The relief allows the BDCs to treat certain indebtedness issued by their wholly owned SBIC subsidiaries as indebtedness not represented by senior securities for purposes of determining the BDC’s consolidated asset coverage.  The SEC exemptive orders are, in part, based upon the representation that SBIC subsidiaries are subject to the SBA’s regulation of leverage.

The staff said that it learned that some BDCs have sought to rely on this limited relief in connection with SBICs that have not issued indebtedness that is held or guaranteed by the SBA.

Although in most cases the representations and condition in the orders have not explicitly required that an SBIC subsidiary have issued indebtedness held or guaranteed by the SBA, the staff said that this requirement is implicit in the rationale for the relief because the SBA’s independent oversight of SBIC debt makes the protections of the 1940 Act unnecessary.  The staff said that when an SBIC subsidiary issues debt that is not backed by the SBA, the subsidiary is not subject to the full oversight of the SBA, and thus the protections of Section 18(a) are required.

Going forward, the staff will require that BDC applications for relief from the Section 18 asset coverage requirements include a condition providing that:

[A]ny senior securities representing indebtedness of an SBIC Subsidiary will not be considered senior securities and, for purposes of the definition of “asset coverage” in section 18(h), will be treated as indebtedness not represented by senior securities but only if that SBIC Subsidiary has issued indebtedness that is held or guaranteed by the SBA.

We expect that as BDCs grow in popularity and assets, the staff will issue more regulatory guidance for BDCs.


On July 10, the Investment Advisory Committee will be meeting to consider various topics, including the definition of the term “accredited investor.”  The Committee had previously discussed amendments to the natural persons prong of the definition to better account for the financial sophistication of purchasers.  Meetings are webcast.

Read the meeting notice here.

Read the meeting agenda here.

Earlier this month a group of Congressmen wrote to SEC Chair White (see letter here:  http://www.sec.gov/comments/s7-11-13/s71113-114.pdf) regarding state preemption for Regulation A+ offerings.  The letter suggests that, at the time that the JOBS Act was being debated and considered, Congress was concerned about sales of securities in Reg A+ offerings to retail investors.  However, the letter does not contain any discussion whatsoever of the many investor protection measures contained in the SEC’s Regulation A+ proposal, such as the investment limit, the requirements for robust issuer disclosures in the offering circular, the fact that the SEC would review the offering circulars, the post-sale reporting requirements for Tier 2 Regulation A+ issuers, or any of the other measures incorporated in the proposal.  The letter simply notes that Reg A+ offerings will be “smaller, regional offerings,” which is unlikely to be the case for Tier 2 offerings of up to $50 million.  At the same time, a bill has advanced in the House Financial Services Committee that would make clear that Congress intended to preempt state review for Tier 2 Regulation A+ offerings.  In the absence of state preemption, issuers are unlikely to proceed with Tier 2 Regulation A+ offerings and, instead, will rely on Rule 506 offerings.  Securities sold pursuant to Rule 506 are considered “covered securities” and, therefore, these offerings are not subject to state review.  The offerings also are not subject to any particular disclosure requirements.

On May 22, 2014, Sebastian Gomez Abero, Chief of the Office of Small Business Policy of the Division of Corporation Finance of the SEC, spoke about the SEC’s crowdfunding and Regulation A+ proposals. Mr. Gomez commented generally on a number of comments and questions raised by commenters to the proposals. Mr. Gomez also noted that the crowdfunding proposals are not yet final and the SEC will have to adopt final rules and that finalizing the Regulation A+ proposals is a priority for the SEC in 2014.

With respect to the SEC’s crowdfunding proposals, Mr. Gomez discussed the offering size limitation, integration with other offerings and the role of intermediaries. Mr. Gomez noted a tendency, while the SEC is deliberating on final rules, to fit crowdfunding under other exemptions from registration, such as Securities Act Rule 506(c) or current Regulation A. Mr. Gomez mentioned that some commenters thought the $1 million offering size limitation should be raised and asked for clarification on whether crowdfunding offerings would be integrated with offerings under other exemptions (e.g., offerings to accredited investors under Securities Act Rule 506(c)). Mr. Gomez said that the SEC is still considering the integration question, but noted that the question is closely tied to the offering size limitation. Mr. Gomez also mentioned guidance in the adopting release for the Securities Act Rule 506 amendments which indicates that a registered offering does not prohibit a Securities Act Rule 506(b) offering, so long as investors in the Rule 506(b) offering are not generally solicited and have a pre-existing relationship with the issuer, and then posed the question whether a crowdfunding offering should be treated as a registered offering in this context. Mr. Gomez also discussed the provisions covering intermediaries (which must register with the SEC and will be subject to FINRA regulation) and emphasized that intermediaries function as “gatekeepers” given that investors in crowdfunding offerings may not be very sophisticated. Another concern expressed by commenters was with liability attaching to intermediaries, although intermediaries are prohibited from providing investment advice in crowdfunding offerings, since the definition of “issuer” under the rule proposals also covers intermediaries. Mr. Gomez went on to discuss the issue of “curating” and noted the safe harbor list of activities provided in the rule proposals, but mentioned that the SEC does not want funding portals to promote types of offerings although funding portals could specialize in certain types of companies (e.g., companies in a particular state or companies in a particular industry). Mr. Gomez noted that the SEC also received comments regarding the information that crowdfunding issuers need to disclose, particularly the financial statement requirements, and that a large number of commenters requested that the threshold for audited financial statements be raised because audited financial statements impose a significant cost for start-up companies and the usefulness of such financial statements for start-up companies is questionable. Mr. Gomez finally mentioned that the SEC is still considering the proposed offering and ongoing reporting requirements for crowdfunding issuers.

With respect to the SEC’s Regulation A+ proposals, Mr. Gomez discussed the preemption of state blue sky laws, which he noted raised the largest number of comments. Mr. Gomez mentioned the coordinated review program approved by the members of the North American Securities Administrators Association (the “NASAA”), which was established to address concerns raised in a GAO report to Congress regarding multi-state review for Regulation A offerings. Mr. Gomez noted that the SEC staff has met with the NASAA to discuss the coordinated review program, although some commenters have noted that there may still be some redundancies even with a coordinated state review process. Mr. Gomez then mentioned that in contrast Securities Act Section 4(a)(6) clearly preempts state blue sky laws but indicated that some states have their established their own rules to exempt crowdfunding offerings. Mr. Gomez also noted that the SEC’s two new compliance and disclosure interpretations (“C&DIs”) regarding crowdfunding and Securities Act Rule 147 (which provides a safe harbor for intrastate offerings conducted pursuant to Securities Act Section 3(a)(11)) are examples of the SEC’s efforts to clarify that use of the internet is not incompatible with Rule 147 and state blue sky laws (for more information regarding these two new CD&Is, see our blog post, “SEC Issues New and Revised Guidance on Intrastate Crowdfunding,” available here.

The House Financial Services Committee passed several bills designed to promote capital formation, including:

HR 4200, the Small Business Investment Companies (SBICs) Advisers Relief Act, introduced by Rep. Blaine Luetkemeyer (R-MO). The bill was approved 56-0.

H.R. 4200 amends the Investment Advisers Act of 1940 to reduce unnecessary regulatory costs and eliminate duplicative regulation of advisers to SBICs. Eliminating duplicative regulation will allow the private equity fund money that currently goes to pay for regulatory compliance and fees to flow directly to job-creating small businesses.

H.R. 4554, the Restricted Securities Relief Act, introduced by Rep. Mick Mulvaney (R-SC). The bill was approved 29-28.  H.R. 4554 would streamline the process for reselling restricted securities to the public under a Securities and Exchange Commission (SEC) rule in order to increase liquidity in the private securities markets and the availability of capital for small companies and to reduce its cost. By reducing the regulatory burdens surrounding the offering and resale of private securities offerings by small issuers, this bill will help enhance the liquidity in this space, making it easier for issuers to access capital.

H.R. 4568 would simplify the SEC registration form for new securities offerings.  Simplifying this disclosure regime will lower compliance costs associated with filing redundant paperwork, allowing eligible companies to direct more resources to growing their business.

H.R. 4571, the Encouraging Employee Ownership Act of 2014, introduced by Rep. Randy Hultgren (R-IL). The bill was approved 36-23.  H.R. 4571 modernizes SEC Rule 701, which was last updated in 1996. Updating this rule gives private companies more flexibility to reward employees with a company’s securities and thereby retain valuable employees without having to use other methods to compensate them, such as borrowing money or selling securities.

H.R. 4569, the Disclosure Modernization and Simplification Act, introduced by Rep. Scott Garrett (R-NJ). The bill was approved 59-0.  H.R. 4569 would direct the SEC to simplify its disclosure regime for issuers and help investors more easily navigate very lengthy and cumbersome public company disclosures. Permitting issuers to submit a summary page would enable companies to concisely disclose pertinent information to investors without exposing them to liability.  This summary page would also enable investors to more easily access the most relevant information about a company.

H.R. 4570, the Private Placement Improvement Act, introduced by Rep. Garrett. The bill was approved 31-28.

H.R. 4570 would amend the Federal securities laws to ensure that small businesses do not face complicated and unnecessary regulatory burdens when attempting to raise capital through private securities offerings issued under SEC Regulation D.

H.R. 4565, the Startup Capital Modernization Act of 2014, introduced by Rep. Patrick McHenry (R-NC). The bill was approved 31-28.  H.R. 4565 would make it easier for issuers to take advantage of registration exemptions under SEC Regulation A to increase capital formation to grow the economy and create jobs.