Securities Regulation
SEC Files Charges in Plexcoin ICO
By Stephen Fox, Goodwin Procter LLP
On December 4, 2017, the Securities and Exchange Commission (SEC) announced that it had filed charges against two individuals for their roles in the initial coin offering (ICO) of PlexCoin tokens. The SEC charged Dominic Lacroix and Sabrina Paradis-Royer with engaging in an ongoing securities fraud and the unlawful sale, and offer to sell, unregistered securities in violation of the Securities Act of 1933. The SEC claims that Lacroix violated a 2011 order not to engage in the sale of securities by Canada’s financial markets authority (QAMF), stemming from a prior securities violation. In addition, the SEC alleges that Lacroix and Paradis-Royer violated a June 2017 order by QAMF, which found that PlexCoin was a “security” and ordered the two to cease engaging in its offering. Robert Cohen, chief of the SEC’s Cyber Unit, noted in the announcement of this enforcement action that “[t]his first Cyber Unit case hits all of the characteristics of a full-fledged cyber scam and is exactly the kind of misconduct the unit will be pursuing. We acted quickly to protect retail investors from this initial coin offering’s false promises.”
SEC Issues $4.1 Million Award to Overseas Whistleblower
By Lloyd B. Chinn and Harris Mufson, Proskauer Rose LLP
On December 5, 2017, the SEC announced a whistleblower award of more than $4.1 million to an overseas former company insider. The SEC declined to disclose the identity of the whistleblower or the company at issue. The order noted that the tipster voluntarily reported original information that prompted an SEC investigation which uncovered an extensive securities law violation spanning multiple years. In determining the award amount, the SEC also took into account that the individual provided continued assistance and information to the Commission throughout its investigation. Although the SEC reduced the whistleblower’s bounty award due to “unreasonable delay in reporting the misconduct,” the reduction was tempered by the presence of two mitigating factors. First, the SEC’s whistleblower award program had not yet been established when the delay occurred. And second, the SEC acknowledged that the whistleblower likely could not assert a retaliation claim because the whistleblower is a foreign national working beyond United States borders. In the SEC’s press release, Jane Norberg, chief of the SEC’s Office of the Whistleblower, stated that the case demonstrated “[t]he breadth of the SEC’s whistleblower program.” The award was the third among over $20 million issued to whistleblowers within the last week. On November 30, the SEC awarded two whistleblowers over $16 million.
PCAOB Issues Staff Guidance on New Auditing Standard
By Jeffrey W. Rubin, Ellenoff Grossman & Schole LLP
On December 4, the Public Company Accounting Oversight Board (PCAOB) issued its staff guidance regarding changes to the auditor’s report, which will be effective for fiscal years ending on or after December 15, 2017. The guidance was issued in connection with the PCAOB’s new auditing standard, AS 3101, which is intended to add clarity to the auditor’s report and to address such matters as auditor independence, auditor tenure, and auditor reporting regarding internal control over financial reporting. The PCAOB’s provisions relating to critical audit matters, which are also within the scope of AS 3101, will not become effective until fiscal years ending on or after June 30, 2019, or later, depending upon the nature of the issuer.
Securities Regulation; Private Equity and Venture Capital
Dell Decision Reaffirms Primacy of Deal Price in Appraisal Proceedings Involving Fully-Shopped Deals
By Lisa R. Stark, K&L Gates LLP
On December 14, 2017, the Delaware Supreme Court found that the court of chancery committed reversible error by not assigning any weight to market data when determining the “fair value” of Dell’s stock in a statutory appraisal proceeding. The appraisal proceeding was initiated by stockholders dissenting from a 2013 buyout of Dell led by Dell’s founder and CEO, Michael Dell, and affiliates of a private equity firm, Silver Lake Partners. The deal price of $13.75 per share represented a 37 percent premium to Dell’s then-trading price on the New York Stock Exchange. The court of chancery determined that the deal price was an unreliable indicator of the fair value of Dell’s shares and relied exclusively on its own discounted cash-flow analysis to reach a fair-value calculation of $17.62 per share. According to the Delaware Supreme Court, the transaction process, including a robust post-signing go-shop period, favored the court of chancery giving substantial, if not exclusive, weight to the deal price in the fair-value analysis. In remanding the case to the court of chancery, the Delaware Supreme Court did not require the court to find that the deal price of $13.75 per share was “fair value” for purposes of the appraisal proceeding. Rather, the supreme court gave the chancery court the discretion on remand to enter judgment at the deal price with no further proceedings or to determine the fair value of Dell’s shares in a manner that gave appropriate weight to the deal price consistent with the record and with relevant, accepted financial principles.
SEC Rulemaking Agenda Will Facilitate Capital Formation
By Anna T. Pinedo, Morrison & Foerster LLP
The SEC’s recently released rulemaking agenda includes a number of matters that will affect capital formation. For example, the agenda references as priorities the modernization of disclosures for mining registrants, amendments to the smaller reporting company definition, finalizing certain proposed changes to Regulation S-K and S-X to remove outdated requirements, Industry Guide 3 changes for bank holding company disclosures, Regulation S-X related changes, and amendments to implement the recommendations made in the Staff’s FAST Act study. A few items of interest were moved to the list of long-term action items. These include amendments to the Regulation D “accredited investor” definition, extending the ability to “test the waters” to companies that are not “emerging growth companies” as defined by Congress in the JOBS Act of 2012, and the broader disclosure effectiveness-related amendments to Regulation S-K.
Private Equity and Venture Capital
Chancery Court Declines to Appoint a Receiver for Start-up over Dispute between Founder and Hedge Fund
By Lisa R. Stark, K&L Gates LLP
In a recent action, the Delaware Court of Chancery denied petitioner Empery Asset Master, Ltd.’s request for the appointment of a receiver for a biotechnology start-up, Geneius Biotechnology, Inc., under Section 291 of the Delaware General Corporation Law, which grants the court of chancery the discretion to appoint a receiver for an insolvent Delaware corporation upon the application of a creditor or stockholder of the corporation. Empery, a minority equity investor in Geneius, initiated this action under Section 291 because of disagreements with Geneius’s founder and majority stockholder over Geneius’s capital-raising efforts. However, Empery did not provide the court with any evidence that Geneius was insolvent on either a balance sheet or cash-flow basis; instead, Empery attempted to discredit the evidence presented by Geneius as to the company’s solvency. Accordingly, the court dismissed the petition. This case serves as a cautionary reminder that the remedy afforded by Section 291 is extraordinary and requires proof of insolvency, not just proof of disagreement over the management of a business.