This week the SEC proposed to expand the “test-the-waters” accommodation—currently available to emerging growth companies (EGCs)—to all issuers, including investment company issuers. The proposed rule and related amendments under the Securities Act of 1933 would enable all issuers (and its authorized representatives, including underwriters) to engage in test-the-waters communications with certain institutional investors regarding a contemplated registered securities offering prior to, or following, the filing of a registration statement related to such offering. These communications would be exempt from restrictions imposed by Section 5 of the Securities Act on written and oral offers prior to or after filing a registration statement and would be limited to qualified institutional buyers (QIBs) and institutional accredited investors (IAIs).

In the SEC’s press release announcing the action, SEC Chairman Jay Clayton said, “Extending the test-the-waters reform to a broader range of issuers is designed to enhance their ability to conduct successful public securities offerings and lower their cost of capital, and ultimately to provide investors with more opportunities to invest in public companies.”  Chairman Clayton added, “I have seen first-hand how the modernization reforms of the JOBS Act have helped companies and investors. The proposed rules would allow companies to more effectively consult with investors and better identify information that is important to them in advance of a public offering.”

Under proposed Securities Act Rule 163B:


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In response to the mandate of the Economic Growth, Regulatory Relief, and Consumer Protection Act, the Securities and Exchange Commission recently issued final rule amendments permitting companies reporting under Section 13 or 15(d) of the Securities Exchange Act to offer securities pursuant to the registration exemption Regulation A. Previously, offerings pursuant to Regulation A were expressly limited to non-reporting companies. The rule amendments also provide that, so long as the reporting company is current in its Exchange Act periodic reports, the reporting company has no additional periodic reporting obligations under Regulation A. These amendments became effective on January 31, 2019, upon publication in the Federal Register.

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An SEC comment letter exchange recently made public serves as a helpful reminder to consider Section 5 of the Securities Act when structuring a PIPE (private investments in public equity) transaction.  In a PIPE, a public company issues securities to one or more accredited investors in a private placement exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, or the safe harbor thereunder provided by Regulation D.  Since the securities in a PIPE offering are initially “restricted securities” within the meaning of the Securities Act, investors cannot freely resell their securities until a holding period under Rule 144 has lapsed or a registration statement has been filed.

PIPE transactions often include registration rights whereby the issuer agrees to file a resale registration statement with the SEC within an agreed-upon period.  The crux of the Section 5 issue in PIPEs often hinges on the timing of the investment decision in the private offering, including whether commitments are in place from all investors, subject only to conditions outside their control so that there is no further investment decision after the filing of the registration statement, and the investors have market risk at the time that the resale registration statement is filed.   In other words, the “sale” in the private offering is completed prior to filing the registration statement.  As discussed in the comment letter exchange below, other related factors include whether the private offering closes prior to, or after, the filing of the registration statement and when the shares to be resold were actually issued to the purchaser.


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With the government partially shut down, the SEC is following its operations plan during a shutdown, which entails an extremely limited number of staff members available to respond to emergency situations involving market integrity and investor protection, including law enforcement.  While EDGAR will accept registration statements, offering statements and other filings during the shutdown, the SEC is neither screening nor reviewing filings during the shutdown.  This means the Staff is not be able to declare registration statements effective nor qualify Form 1-A offering statements.

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On December 19, 2018, the Delaware Chancery Court held that a business incorporated in Delaware could not use its corporate charter or bylaws to require that its shareholders bring any securities claims under the Securities Act of 1933 (the “1933 Act”) in federal court.  The 1933 Act requires that any person selling or offering securities make certain disclosures through a registration statement approved by the Securities and Exchange Commission and provides a private right of action to securities purchasers to enforce its provisions.

Earlier this year, in Cyan, Inc. v. Beaver Cty. Empls. Ret. Fund, the United States Supreme Court concluded that federal law did not bar state courts from adjudicating class actions alleging only 1933 Act claims.  Importantly, it also prohibited the removal of such class actions from state to federal court.  As a result of the Supreme Court’s decision in Cyan, if a securities purchaser brings a 1933 Act class action in state court, a defendant corporation will find it difficult to have those federal claims heard in federal court.


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On December 18, 2018, the SEC issued a request for public comment soliciting input on the nature, content and timing of earnings releases and quarterly reports of companies that are obligated to file reports with the SEC as well as the relationship between the periodic reports that reporting companies must provide and the earnings releases that they choose to distribute. With this request for comment, the SEC is seeking to continue the ongoing dialogue about whether the current reporting regime and practices of reporting companies is overly burdensome or contributing to “short-termism”.

Commenting on the matter, SEC Chairman, Jay Clayton, said “[t]here is ongoing public debate regarding the effects of mandated quarterly reports and the prevalence of optional quarterly guidance.”  “Our markets thirst for high-quality, timely information regarding company performance and material corporate events.  We recognize the importance of this information to well-functioning and fair capital markets.  We also recognize the need for companies and investors to plan for the long term.  Our rules should reflect these realities.  I look forward to receiving thoughtful comments as we think about ways to encourage long-term investment in our country.”


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Generally speaking, the federal securities laws were drafted with the purpose of limiting the kind and amount of pre-offering publicity permitted in registered public offerings. Pursuant to Section 5(c) of the Securities Act of 1933, it is unlawful to offer to sell or offer to buy any security unless a registration statement has been filed. The term “offer” is defined and interpreted very broadly, with the effect that any pre-filing publicity constitutes gun jumping if it cannot be justified on the grounds that it was made for a permissible purpose, such as regularly released factual business information. As demonstrated by a recent SEC Staff comment letter repeated below, the Staff continues to consider gun jumping rules in connection with its filing reviews.

Evolution of Gun Jumping Laws

The rules related to gun jumping have evolved over time, and in 2005 the SEC substantially modernized many of the offering communication rules in its Securities Offering Reform release. Other recent updates to the offering communication rules include the following examples from the JOBS Act of 2012 and related SEC rules:

  • No Quiet Period in Regulation A+ Offerings: An issuer may “test the waters” with all potential investors before and after the filing of the offering statement to determine whether there is any interest in the contemplated securities offering, subject to certain conditions.
  • Limited Quiet Period for Emerging Growth Companies (EGCs): EGCs may “test the waters” with certain institutional investors before and after filing a registration statement to determine whether such investors might have an interest in the contemplated securities offering.
  • Rule 506(c) Private Placements Permit General Solicitation: Issuers may broadly solicit and generally advertise an offering, provided that all purchasers in the offering are accredited investors, the issuer takes reasonable steps to verify purchasers’ accredited investor status, and certain other conditions in Regulation D are satisfied.


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In monitoring SEC comment letters, we came across this SEC comment letter recently made public.  While we acknowledge the term “pro forma” is often used by registrants when adjusting their GAAP results to provide additional meaningful information to investors, this comment by the Staff serves as a reminder to registrants that the Staff generally dislikes non-GAAP measures titled as “pro forma” when the information is not presented in compliance with the pro forma rules in Article 11 of Regulation S-X.  In this situation, the registrant agreed to delete the words “pro forma” and instead use the words “as adjusted.”

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On October 16, 2018, the SEC issued a 21(a) report announcing that it had investigated whether certain public companies that were victims of oftentimes unsophisticated, cyber-related frauds had violated federal securities laws by failing to have a sufficient system of internal accounting controls in place to detect these events.

Focus of SEC Report

The report focused on two common cyber frauds involving spoofed or otherwise compromised electronic communications. The first involved emails that purported to be from senior executives within the company (typically, the CEO) but in fact were from spoofed email domains. The second involved emails from fake vendors.  This form of scam was more technologically sophisticated than the fake executive emails as in certain instances it involved intrusions into the email accounts of the companies’ foreign vendors. Each of the nine companies referenced in the report lost at least $1 million as a result of these scams and two lost more than $30 million.  In total, the companies lost nearly $100 million to the thieves, almost all of which was never recovered.


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