On Wednesday, April 4, 2018, the Securities and Exchange Commission (“SEC”) published new Compliance and Disclosure Interpretations (“New C&DIs”) on the use of non-GAAP financial measures. The New C&DIs supplement and clarify the Staff’s existing guidance with respect to non-GAAP financial measures for business combination transactions. Please see Morrison & Foerster’s client alert on the New C&DIs.
We had previously reported on a Securities and Exchange Commission open meeting that had been scheduled for today. The open meeting was cancelled. The Commission approved the issuance of an interpretive release to provide guidance to public companies when preparing disclosures about cybersecurity risks and incidents. The release (available here: https://goo.gl/QVhwSG) discusses the Commission’s views regarding the importance of maintaining robust policies and procedures relating to cybersecurity risks and incidents. The guidance in the release updates and reinforces the guidance provided in 2011 by the Commission’s Division of Corporation Finance.
In a speech given early in the week at Stanford University’s Rock Center for Corporate Governance, titled, “Mutualism: Reimagining the Role of Shareholders in Modern Corporate Governance,” Commissioner Stein addressed a broad range of topics, including cybersecurity issues and shareholder engagement. Commissioner Stein also commented on dual class capital structures. Commissioner Stein, not speaking on behalf of the Commission, noted that in her view, dual class capital structures were not democratic and created a disconnect between the interests of shareholders and control parties.
Later in the week, Commissioner Jackson, speaking at Berkeley and making his first public remarks since joining the Commission, commented on perpetual dual class structures. Commissioner Jackson cited statistics showing that the trend was on the rise, noting that 14% of the 133 companies that listed on U.S. exchanges in 2015 had dual class voting structures, compared to 12% in the prior year. Commissioner Jackson outlined some of the benefits of dual class structures that have been noted in academic literature, as well as some of the disadvantages, and focused his comments on companies that adopt dual class structures and provide for these in perpetuity, as opposed to allowing for some sunset provisions. The Commissioner cited research from a review of 157 dual-class IPOs that were undertaken in the last 15 years and noted significant differences in performance between those companies that had sunset provisions and those that did not. Included in the remarks are additional data points and analyses. While solely voicing his own views, Commissioner Jackson seemed to favor seeing modified listing standards from the national securities exchanges that would address the inclusion of sunset provisions.
Yesterday, the Securities and Exchange Commission announced that it will hold an open meeting on February 21st at 10 a.m. to consider various matters, including whether to approve the issuance of an interpretive release to provide guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents. The details may be found here.
On February 12, 2018, in no-action relief granted to a mortgage REIT, the Staff of the SEC acknowledged that the real estate finance business has evolved substantially since the enactment of the Investment Company Act, with the creation and use of new debt financing techniques and mortgage-related products. In the relief, the Staff indicates that a particular mortgage REIT’s assets, sources of income, historical development, and public representations of its policy, and the activities of its officers, directors, and employees (and other relevant factors), may evidence that the mortgage REIT is primarily engaged in the real estate finance business and, therefore, should be able to rely on the Section 3(c)(5)(C) exemption.
The Section 3(c)(5)(C) exemption generally excludes from the definition of “investment company” any entity primarily engaged in, among other things, purchasing or otherwise acquiring mortgages and other interests in real estate. In order to qualify for this exemption, a mortgage REIT must comply with strict asset tests, including having at least 55% of its assets consist of mortgages and other liens on, or interests in, real estate that are the functional equivalent of mortgage loans (including certain mortgage-backed securities), referred to as “qualifying assets,” and at least 80% of its assets consist of qualifying assets and real estate-related assets. Over time, the Staff has provided guidance to mortgage REITs in the form of no-action letters regarding the types of securities that it deems to be qualifying assets.
However, in this new principles-based grant of relief, the Staff focuses on the business activities of the particular issuer, instead of whether a particular asset is a qualifying asset, in determining the availability of the Section 3(c)(5)(C) exemption. Mortgage REITs should consider obtaining confirmation from the SEC Staff regarding their own particular business activities in order to avoid any potential future uncertainty with respect to any securities held as part of the mortgage REIT’s portfolio.
For a copy of the no-action relief, please see the link below:
In the recently released Congressional Budget Justification, the Securities and Exchange Commission highlights a number of priorities. In discussing the Division of Corporation Finance’s activities, the request notes that the Division remains focused on measures designed to promote capital formation. Among these, the report notes that the Division will consider and propose amendments to modernize disclosure requirements under Regulation S-K as part of the Disclosure Effectiveness Initiative and will implement recommendations resulting from the FAST Act-mandated Regulation S-K study. The budget request also references the Commission’s intent to “propose amendments to further facilitate capital formation through exempt and registered offerings.” The request also refers to proposed amendments to modernize industry-specific disclosures applicable to real estate companies, including REITs. While changes to Industry Guide 7 (mining) and Industry Guide 3 (financial institutions) have been underway, this is the first reference to changes to the REIT industry guide. Reference is also made to the Commission’s efforts to establish the Office of the Advocate for Small Business Capital Formation.
See the request here: https://www.sec.gov/files/secfy19congbudgjust.pdf.
Bill Hinman, Director of the Securities and Exchange Commission’s Division of Corporation Finance delivered the keynote address at the Practising Law Institute’s annual Securities Regulation in Europe program. During his speech, Mr. Hinman touched on various topics, including the types of measures that may be undertaken in order to make the capital markets and the public company alternative more attractive. He discussed the accommodations available to foreign private issuers (FPIs), as well as the Division’s policy changes extending the confidential submission process to companies other than emerging growth companies (EGCs). Mr. Hinman noted that since adoption of the new policy in the summer of 2017, the Commission has received draft submissions for more than 20 IPOs of companies that exceed $1 billion in revenue or otherwise do not qualify to submit as EGCs, and from over 35 companies engaged in follow-on offerings. Mr. Hinman also reiterated the willingness of the Division staff to review and consider requests made under Regulation S-X Rule 3-13 for accommodations relating to financial statement presentation.
Addressing future areas of focus, Mr. Hinman noted that the Staff is discussing ways in which internal processes, such as filing reviews and the consideration of no-action letter requests, as well as possible updates to the Financial Reporting Manual and the Compliance and Disclosure Interpretations in order to make these more user-friendly. Turning to disclosure, Mr. Hinman noted that the Staff is considering whether additional guidance would be helpful regarding cybersecurity disclosure. Mr. Hinman also provided some insight on future rulemaking. He noted that the Staff is:
- preparing recommendations for a proposal to implement the resource extraction issuer disclosure provision of the Dodd-Frank Act;
- considering rulemaking to raise the threshold companies for smaller reporting company eligibility;
- recommending final rules to update and simplify disclosure requirements that are outdated, or are overlapping or duplicative with other Commission rules or U.S. GAAP;
- preparing recommendations for proposals to amend the rules for financial information required for acquired entities (Regulation S-X Rule 3-05), as well as Regulation S-X Rule 3-10 for disclosures by guarantors and issuers of guaranteed securities; and
- developing recommendations for updating Industry Guide 3 to modernize the disclosure requirements for financial institutions.
The full text of Mr. Hinman’s remarks are available here: https://www.sec.gov/news/speech/speech-hinman-020118.
As we have previously discussed on our blog, the securities exchanges impose shareholder vote requirements in connection with certain financing transactions. These rules are often referred to as the “20% Rule,” since, for Nasdaq, for example, a shareholder vote is required to be obtained by a listed company that intends to complete certain private placement transactions that will result in the issuance of 20% or more of the total pre-transaction voting shares outstanding. We discuss these rules in our recently updated FAQs (see: https://goo.gl/aagwaA).
Recently, Nasdaq filed with the SEC an amendment that would update certain of these rules. Nasdaq had solicited comments on these changes (see our prior post from the summer (available here: https://goo.gl/i156t5). The proposal would, among other things:
- amend the measure of “market value” in connection with assessing whether a transaction is being completed at a discount from the closing bid price to the lower of: the closing price as reflected by Nasdaq, or the average closing price of the common stock for the five trading days preceding the definitive agreement date;
- refer to the above price as the “Minimum Price,” and existing references to “book value” and “market value” used in Rule 5635(d) will be eliminated; and
- eliminate the references to “book value” for purposes of the shareholder vote requirement.
See the full text of the amendments here: https://goo.gl/vswnxc.
On February 2, 2018, the SEC approved on an accelerated basis the NYSE’s proposal, as modified by Amendment No. 3, to change its listing qualifications to facilitate listings for certain non-IPO offerings. Section 102.01B of the NYSE Listed Company Manual (“Section 102.01B”) currently recognizes that some companies that have not previously registered their common equity securities under the Exchange Act, but which have sold common equity securities in a private placement, may wish to list those common equity securities on the NYSE at the time of effectiveness of a resale registration statement filed solely for the resale of the securities held by selling stockholders. Footnote (E) of Section 102.01B (“Footnote (E)”) currently provides that the NYSE will exercise its discretion to list these companies by determining that a company has met the $100 million aggregate market value of publicly-held shares requirement based on a combination of both (1) an independent third-party valuation of the company and (2) the most recent trading price for the company’s common stock in a trading system for unregistered securities operated by a national securities exchange or a registered broker-dealer (a “Private Placement Market”).
The proposal, as modified by Amendment No. 3 filed on December 8, 2017: (i) eliminates the requirement in Footnote (E) to have a private placement market trading price if there is a valuation from an independent third-party of $250 million in market value of publicly-held shares; (ii) sets forth several factors indicating when the independent third party providing the valuation would not be deemed “independent” under Footnote (E); (iii) amends NYSE Rule 15 to add a reference price for when a security is listed under Footnote (E); (iv) amends NYSE Rule 104 to specify Designated Market Maker (“DMM”) requirements when facilitating the opening of a security listed under Footnote (E) when there has been no sustained history of trading in a private placement trading market for such security; and (v) amends NYSE Rule 123D to specify that the NYSE may declare a regulatory halt prior to opening on a security that is the subject of an initial pricing upon NYSE listing and that has not, immediately prior to such initial pricing, traded on another national securities exchange or in the over-the-counter market.
However, Amendment No. 3 notably revises the proposal, as amended by Amendment No. 2 filed on August 16, 2017, to eliminate proposed changes to Footnote (E) that would have allowed a company to undertake a direct listing (i.e., listing immediately upon effectiveness of an Exchange Act registration statement only, such as Form 10 or Form 20-F, without any concurrent IPO or Securities Act registration). This means that a direct listing will now require a company to either (1) file a resale registration statement for the resale from time to time of securities held by existing securityholders or (2) undertake a primary offering. Although this may limit the efficiency of a direct listing, the rationale for the change might be to ensure that there is a basis for Securities Act Section 11 liability to attach to the direct listing. In contrast, Nasdaq allows a direct listing without a concurrent IPO or Securities Act registration.
As we have previously posted on, the NYSE originally issued its proposal on March 13, 2017, which was later withdrawn on July 19, 2017 and then amended by Amendment No. 1 on July 31, 2017. The SEC has solicited comments on the proposal, as amended by Amendment No. 3, for submission within 21 days of publication in the Federal Register.
The SEC order is available here.
The proposal, as amended by Amendment No. 3, is available here.
The Securities and Exchange Committee announced the agenda for the March 8, 2018 meeting of its Investor Advisory Committee, which will include, among other things, a discussion of dual class share structures and cybersecurity risk disclosures. See the full agenda here: https://www.sec.gov/spotlight/investor-advisory-committee-2012/iac030818-agenda.htm.