At this morning’s open meeting, the Securities and Exchange Commission adopted an amendment to Rule 701.  The Commission was mandated to adopt an amendment to Rule 701 by the Economic Growth, Regulatory Relief and Consumer Protection Act, often referred to as the Crapo Act.  The amendment increases the threshold that triggers an issuer’s requirement to provide certain disclosures to investors from $5 million to $10 million.  In addition, the Commission approved the release of a concept release soliciting comments regarding  Rule 701 and Form S-8 requirements.  The release solicits responses on more than 50 questions.  The Commission did not consider or take action on the changes to certain financial statement related requirements, which originally had been on the agenda for the meeting.

Below we provide links to the Commission’s fact sheet, the amendment and the concept release.  A client alert will follow in short order.

Fact sheet

Rule 701 amendment

Concept release

Tuesday, July 24, 2018
1:00 p.m. – 2:00 p.m. EDT

Share buybacks have been making headlines recently. During this session, Partner Anna Pinedo will discuss the regulatory framework relating to company share buybacks, including the Rule 10b-18 safe harbor. The different ways in which companies may choose to structure share repurchases will be addressed.

Topics will include:

  • Basics of Rule 10b-18;
  • Required authorizations, disclosures, and documentation;
  • Accelerated share repurchases and other modified repurchase plans; and
  • Legislative proposals relating to 10b-18 and other recent developments.

For more information, or to register for this session, please visit the event website.

Late on Tuesday night, the House passed the recently unveiled JOBS & Investor Confidence Act on a vote of 406-4. The almost unanimous decision advances the bill, commonly referred to as JOBS Act 3.0, which is comprised of 32 individual capital formation-related pieces of legislation.

Among other reforms, the bill proposes changes to existing rules that would affect regulations on angel investors; the definition of an “accredited investor”; the expansion of IPO on-ramp expeditions for EGCs; and the easing certain securities regulations for IPOs.

House Majority Leader Kevin McCarthy, co-author of the original JOBS Act, noted that the Act is “…evidence of this House’s commitment to expanding opportunity for American workers and investors.”

We will be following this post with a more comprehensive legal update discussing the bill.

H. Scott Asay and Jeffrey Hales have authored a paper, “Disclaiming the Future:  Investigating the Impact of Cautionary Disclaimers on Investor Judgments Before and After Experiencing Economic Loss,” which reviews how disclaimers about forward-looking statements affect investor judgments.  The Private Securities Litigation Reform Act of 1995, or PSLRA, provided protections to issuers against claims that forward-looking statements were misleading if such statements were identified and accompanied by meaningful cautionary statements.  The authors consider whether such disclaimers protect nonprofessional, or retail, investors by reducing their reliance on forward-looking statements.  Through a series of experiments, the authors conclude that indeed such disclaimers do reduce the participants’ explicit reliance on the forward-looking statements, however, the presence of such statements does not serve to reduce the valuation assessments made by the investors.  The authors also consider whether these statements lead nonprofessional investors to believe they were adequately warned in the event of a loss.  Based on their experiment, the authors conclude that the presence of disclaimers may reduce the extent to which investors feel wronged, especially if the issuer acted in good faith when making the forward-looking statements.  However, if the issuer acted with scienter, then investors believe that they are entitled to compensation—perhaps even more so than if such disclaimers had not been furnished to them.  As a result, the authors suggest that cautionary disclaimers may be more efficient if the statements contain less boilerplate language, are written in plain English, and are integrated with the forward-looking statements that they are intended to qualify rather than appearing alone.

Although Securities and Exchange Commission Chair Clayton has made clear that the Commission does not intend to focus on addressing mandatory arbitration provisions in the near term, the controversy regarding action in this regard remains active.  A coalition of bipartisan state treasurers (California, Illinois, Iowa, Oregon, Pennsylvania and Rhode Island) delivered a letter to the Commission expressing their “serious concern” that the Commission may consider allowing IPO issuers to adopt mandatory arbitration provisions.  The letter repeats many of the arguments made by investor and consumer protection groups in their letters to the Commission, noting that the cost for individual pension plan members, including teachers, municipal workers, and other individual investors associated with bringing an individual action on securities law claims would be too costly.  This would mean, according to the state treasurers, that securities regulators would be left responsible for all oversight, without private shareholder litigation to police the capital markets.

Today, a bipartisan, capital formation-focused, package of legislation was unveiled by House Financial Services Committee Chairman Jeb Hensarling and Ranking Member Maxine Waters.  The “JOBS and Investor Confidence Act of 2018” is comprised of 32 individual bills, including those we have previously blogged about, that have already passed in the Committee or in the House this term.

Chairman Hensarling noted that the efforts of the Committee and the package “…will play an important role in sustaining long-term economic growth and global competitiveness.”

A chart of the bills that comprise the legislative package can be found here.

The House Financial Services Committee met last week and approved eight capital formation-related bills. The bills require the Securities and Exchange Commission to take action to change certain of its definitions in its rules and provide guidance on a number of securities-related issues.  These include amending the definition of a qualifying investment; requiring a study on IPO underwriting fees with the Financial Industry Regulatory Authority; and requiring a study on expanding investments in small-cap companies. Committee Chairman Jeb Hensarling noted that these bills “…will help our small businesses gain capital, help entrepreneurial ventures, and help companies in America go public and stay public.”

Below we provide a summary of the principal bills:

H.R. 6177, the “Developing and Empowering our Aspiring Leaders Act,” requires the SEC to revise the definition of a qualifying investment to include equity securities acquired in a secondary transaction.

H.R. 6319, the “Expanding Investment in Small Businesses Act,” requires the SEC to study whether the current diversified fund limit threshold for mutual funds of 10% constrains their ability to take meaningful positions in small-cap companies.

H.R. 6322, the “Enhancing Multi-Class Share Disclosures Act,” requires issuers with a multi-class stock structure to make certain disclosures in any proxy or consent solicitation materials.

H.R. 6324, the “Middle Market IPO Underwriting Cost Act,” requires the SEC, in consultation with FINRA, to study the direct and indirect costs associated with small and medium-sized companies to undertake initial public offerings.

H.R. 6320, the “Promoting Transparent Standards for Corporate Insiders Act,” requires the SEC to consider certain amendments to Rule 10b5-1 and directs the SEC to consider how any amendments to Rule 10b5-1 would clarify and enhance existing prohibitions against insider trading while also considering the impact of any such amendments on attracting candidates for insider positions, capital formation, and a company’s willingness to operate as a public company.

H.R. 6323, the “National Senior Investor Initiative Act of 2018,” creates an interdivisional task force at the SEC, to examine and identify challenges facing senior investors and requires the Government Accountability Office to study the economic costs of the exploitation of senior citizens.

In a forthcoming paper titled, “Insider Trading and the Post-Earnings Announcement Drift,” authors Christina Dargenidou, Ian Tonks and Fanis Tsoligkas study the types of information conveyed to the market as a result of trading by corporate insiders following an earnings announcement.  The authors study trading, following thousands of annual earnings announcements made by companies in the United Kingdom over an almost 20-year period.  As a general matter, when companies announce earnings results that are lower than expected, their stock prices decline.  When companies announce earnings results that are higher than expected, their stock prices increase.  The authors found that when corporate insiders sell after bad news or purchase after good news, their transactions are viewed as confirmatory by the market.  By contrast, when corporate insiders buy after bad news, or sell after good news which trades express contrarian views, their transactions mitigate the generally expected stock price movements.  This demonstrates that the market attributes to corporate insiders information regarding whether earnings surprises are or are not representative of permanent changes in a company’s prospects.

On February 2018, the Securities and Exchange Commission (“SEC”) approved the New York Stock Exchange’s (the “NYSE”) proposal to permit qualifying private companies to use “direct listings” to list their shares on the NYSE so long as the direct listing is accompanied by a concurrent resale registration statement under the Securities Act of 1933. To accommodate these direct listings, the NYSE modified its Rules 15, 104, and 123(d). In March 2018, the NYSE issued an information memo highlighting the changes.

NYSE Rule 15 sets forth the requirements for a pre-opening indication, which is the price range within which the opening of trading for a security is anticipated to occur. When the opening transaction on the NYSE is anticipated to be at a price that deviates by more than the “Applicable Price Range” from a specified “Reference Price,” then the Designated Market Maker (“DMM”) must publish a pre-opening indication before a security opens. Under amended Rule 15, the reference price for directly listed securities is defined as: (i) the most recent transaction price if the security had recent sustained trading in a private placement market or, if none, (ii) a price determined by the NYSE in consultation with a financial adviser to the issuer of such security.

Rule 104 sets forth the responsibilities and duties of a DMM. Changes to Rule 104 require that the DMM first consult with the financial adviser to the issuer before a direct public offering (DPO) for securities that do not have a recent sustained history of trading in a private placement market. This consultation aims to promote a fair and orderly opening of such security. Last, the SEC approved an amendment to NYSE Rule 123(d) and granted the NYSE discretion to declare a regulatory halt in a security that is the subject of an initial pricing on the NYSE if that security has not been listed on a national securities exchange or traded in the over-the-counter market pursuant to FINRA Form 211 immediately prior to the initial pricing. This regulatory halt would be terminated when the DMM opens the security. The NYSE Information Memo on Direct Listings can be found in full here.

Despite the NYSE accommodations for DPOs, the Financial Industry Regulatory Authority, Inc. (“FINRA”) advises its member firms to exercise caution when recommending and entering unpriced customer orders at and around the opening on the first day of trading of a direct listing of a security. FINRA notes that there is potential for substantial variance in the opening price of a direct listing and in the subsequent prices at which trading on the secondary market occurs on the first day of trading. As a consequence, FINRA is concerned that without the use of a limit price, customers may receive execution at prices that are not in line with their expectations. Instead, FINRA encourages its member firms to consider using and recommending priced, customer limit orders. FINRA Regulatory Notice 18-11 can be found in full here.

In a recent paper titled “Stock Market Short-Termism’s Impact,” author Mark J. Roe counters arguments that US companies are so driven by short-term objectives that they are foregoing investment in research and development and other long-term investments. Roe’s paper comes just as legislation has been introduced that would require a study as to whether the obligation to file quarterly reports on Form 10-Q contribute to short-termism. The focus on short-termism has been linked to increased shareholder activism and increased trading, which commenters suggest cause companies to diminish their investment in R&D and to focus on stock buybacks. However, the author notes that economy-wide R&D spending is steady or rising. Similarly, while stock buyback activity has increased, stock buybacks are not leaving companies cash poor.