Securities Regulation
SEC Adopts Hedging Disclosure Rules
By Kimberley Anderson, Dorsey & Whitney LLP
The SEC adopted new rules that will require disclosure of a company’s hedging policies in proxy statements or information statements relating to the election of directors.
The new rules are set forth in new Item 407(i) of Regulation S-K and require a company to describe any practices or policies it has adopted regarding the ability of its employees, officers or directors to engage in hedging transactions. The disclosure requirements can be satisfied by providing a “fair and accurate summary” of the hedging practices or policies, or by disclosing the practices or policies in full. If a summary is provided, it must include (i) the categories of persons covered by the policy or practice and (ii) the categories of hedging transactions that are specifically permitted or specifically disallowed. However, if a company has not established a hedging policy or practice it must disclosure that fact or state that hedging transactions are permitted.
The rules do not require that companies prohibit or limit hedging transactions, or that companies adopt a policy relating to hedging. However, we expect that most companies will amend their current policies to address hedging if it is not already covered in existing policies.
Implementation Dates: Except for “smaller reporting companies” and “emerging growth companies”, the new disclosure rules apply for proxy statements or information statements filed during fiscal years beginning on or after July 1, 2019. For “smaller reporting companies” and “emerging growth companies”, the rules apply for proxy statements or information statements filed during fiscal years beginning on or after July 1, 2020. Foreign private issuers will not be subject to the new disclosure requirements.
SEC Chair Testimony Before the Senate
By Anna T. Pinedo, Mayer Brown
SEC Chair Clayton testified on December 11, 2018 before the U.S. Senate Committee on Banking, Housing and Urban Affairs. In his testimony, Chair Clayton reviewed the Commission’s Strategic Plan and outlined the agency’s priorities. Consistent with his remarks delivered at Columbia University, Chair Clayton reviewed some of the principal accomplishments in 2018, including proposed Regulation Best Interest, the amendments to the smaller reporting company definition, the disclosure simplification amendments, and the proposed changes to financial disclosures for guarantors. He noted that there were other proposals “on the horizon,” including:
- A proposal to amend the definition of “accelerated filer” (triggering SOX 404(b) attestation);
- Extension of the test-the-waters accommodation to non-EGCs;
- Rulemaking to expand Regulation A eligibility to public reporting companies;
- A release soliciting input on reducing compliance burdens on reporting companies with respect to quarterly reports;
- A concept release on the exempt offering framework;
- Changes to Rule 701 to address the comments received on the Commission’s concept release on the exemption;
- Improvements to the proxy process;
- Regulation of proxy advisory firms;
- Revisions of the offering rules for BDCs as required by the Small Business Credit Availability Act; and
- Revisions of the offering rules for closed-end funds as required by the Economic Growth, Regulatory Relief, and Consumer Protection Act.
SEC Expands Regulation A Exemption to Exchange Act Reporting Companies
By Jennifer Carlson, Michael Hermsen, Raffi Garnighian and Anna T. Pinedo, Mayer Brown
On December 19, 2018, the US Securities and Exchange Commission (the Commission) amended Rule 251 and Rule 257 of the Securities Act of 1933, as amended (the Securities Act), which are part of Regulation A, in order to allow companies subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act) to make offerings in reliance on the Regulation A exemption. The rule changes were mandated by the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2017 (the Economic Growth Act).
Regulation A is an exemption from registration under the Securities Act for smaller public offerings. It includes two overlapping tiers: Tier 1, for offerings of up to $20 million in a 12-month period and Tier 2, for offerings of up to $50 million in 12-month period Prior to the Commission’s amendments, reporting companies were not eligible to rely on Regulation A.
Reporting companies that are newly eligible to rely on Regulation A may realize several benefits from this offering alternative. For example, access to Regulation A may make it easier and less costly for reporting companies to raise capital in smaller offerings of up to $50 million in any 12-month period. Issuers may solicit indications of interest (i.e., “test-the-waters communications”) from any investor before qualification of an offering statement, which may allow them to gauge investor interest prior to deciding whether to incur the full cost of the offering. This is particularly relevant for reporting companies that do not qualify as emerging growth companies (EGCs). Additionally, reporting companies not listed on an exchange whose offerings fall within Tier 2 can now benefit from blue sky preemption, which can expedite certain offerings and enable offers of securities across states to a wide variety of investors. Regulation A also contains a safe harbor from integration of Regulation A offerings with any other prior or subsequent offers or sales of securities registered under the Securities Act. However, Regulation A does not permit at-the-market offerings, which limits its attractiveness for some reporting companies.
Court of Chancery Invalidates Federal Court Forum-Selection Provision for Securities Cases
By Albert Carroll, Edward McNally, Morris James LLP
Delaware law permits a Delaware corporation to include a forum-selection provision in its certificate of incorporation governing all “internal affairs” claims by its stockholders. There is much national debate on the topic of forum-selection provisions in charters governing securities claims, such as whether a corporation can require arbitration. A recent decision wades into that debate by addressing a charter provision mandating a federal forum for securities claims. In it, the Court of Chancery holds that the Delaware General Corporation Law (the DGCL) does not authorize a Delaware corporation to include a forum-selection provision in its charter governing claims under the 1933 Act. The Court reasons that claims under the Act are external to the corporation—they do not “turn on the rights, powers, or preferences of the shares, language in the corporation’s charter or bylaws, a provision in the DGCL, or the equitable relationships that flow from the internal structure of the corporation.” Because the claim exists outside of the contract between the corporation and its stockholders and does not relate to the corporation’s internal affairs, it is beyond the power of state corporate law to regulate.
SEC Request for Comment on Earnings Releases and Quarterly Reports
By Rani Doyle, EY
The SEC issued a request for comment on the nature and timing of the disclosures that reporting companies are required to provide in their quarterly reports filed on Form 10-Q, including when Form 10-Q filers also issue earnings releases furnished on Form 8-K. The SEC also asks for comment on whether reporting companies, or certain classes of reporting companies should have flexibility as to the frequency of their periodic reporting. As to concerns of “short-termism” the SEC seeks comment on how the existing periodic reporting system, earnings releases, and earnings guidance, standing alone or in combination with other factors, may affect corporate decision making and strategic thinking — positively or negatively — including whether these factors foster an inefficient outlook among registrants and market participants by focusing on short-term results. The SEC’s release provides a background for and asks numerous questions around these three main areas of comment solicitation.
Private Equity and Venture Capital
FIRRMA Expands CFIUS Oversight of Foreign Investment
By Melissa Sanders, Fox Rothschild LLP
Private equity and venture capital funds with foreign limited partners may be impacted by the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), which expands the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS). FIRRMA expanded the definition of “covered transactions” where the business in question involves critical technology, critical infrastructure, or sensitive personal data. Private or seed investments by non-U.S. persons in companies engaged in covered transactions may be required to file a short notification of the proposed investments. After receiving a declaration, CFIUS will have 30 days either to approve the transaction or to require a full CFIUS review. There is no size limitation on transactions subject to CFIUS review. As a result, funds focused on minority and seed or other early stage investments should consider potential CFIUS implications when structuring their funds and investments. Final regulations are still in the works, but interim regulations which implement a pilot program related to critical technologies were published on October 11, 2018.