Last month, the Securities and Exchange Commission (SEC) held its annual SEC Speaks Conference in Washington, D.C. We have summarized several significant insights conveyed by SEC Staff that are instructive for counsel handling investigations by the SEC’s Enforcement Division.
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Note: We updated this post (originally posted last week) to add a new frequently asked question about expanded hyperlinking.
The questions and answers below address certain interpretive issues on the SEC’s new hyperlink requirements effective May 2, 2019. For more on the SEC’s amendments, see our previous post that details the rule changes.
Question: The new rules will require registrants to include an active hyperlink to information incorporated by reference into a registration statement or report if such information is publicly available on EDGAR “at the time the registration statement or form is filed.”
How does this new requirement apply to information incorporated by reference from one item to another within the same filing?
There have certainly been many developments in securities claims jurisdiction in the past several years, particularly in the area of “exclusive forum” provisions contained in charters or bylaws. Exclusive forum provisions typically provide that a certain court (e.g., the Delaware Court of Chancery) is the sole and exclusive forum for certain types of litigation involving the company. These provisions are often tested in the courts, especially when they seem to be in conflict with controlling precedent. For example, in 2018 in Cyan 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 claims under the 1933 Act, and it also prohibited the removal of such class actions from state to federal court.
Following Cyan, several Delaware companies attempted to avoid litigating 1933 Act class actions in state court by adopting charter-based federal forum provisions, which required stockholders to file any claim under the 1933 Act in federal court. Those efforts to circumvent the consequence of Cyan, however, failed when in a December 2018 case (Sciabacucchi v. Salzberg), the Delaware Court of Chancery rejected use of these federal forum provisions. The court reasoned that Delaware corporations could only adopt forum-selection provisions for “internal-affairs claims.” According to the Delaware Court of Chancery, “a 1933 Act claim is external to the corporation.” Therefore, because 1933 Act claims are external to Delaware corporations, charter provisions requiring a federal forum for 1933 Act class actions brought by corporation shareholders were invalid under Delaware law.
Notwithstanding the above related to the 1933 Act class actions, federal courts continue to have “exclusive jurisdiction” to hear claims brought under the 1934 Act as a result of Section 27(a) of that law.
On March 20, 2019, nearly a year and a half after proposing them, the SEC adopted amendments to disclosure requirements for reporting companies, as mandated by the 2015 Fixing America’s Surface Transportation Act (the “FAST Act”). The amendments are a part of an ongoing effort by the SEC to simplify and modernize disclosure obligations. According to the SEC’s press release, the amendments are expected “to benefit investors by eliminating outdated and unnecessary disclosure and making it easier for them to access and analyze material information.”
Among many other items, the amendments address the following topics:
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:
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.
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.
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.”
