On July 1, 2024, the Securities and Exchange Commission adopted rule and form amendments that require issuers of registered index-linked annuities (“RILAs”) to exclusively register their offerings on Form N-4.  The final amendments (“RILA Amendments”) are focused on increasing and simplifying disclosure to RILA investors.  Under the RILA Amendments, Forms S-1 and S-3 under the Securities Act of 1933 (“Securities Act”) and Rule 424 under the Securities Act are no longer available for RILA offerings.

The RILA Amendments mostly adopt, unchanged, the modifications discussed in the original proposal. The RILA Amendments will become effective 60 days after date of their publication in the Federal Register.

Continue reading this Legal Update.

Webinar | July 22, 2024
1:00 p.m. – 2:00 p.m. EDT
Register here.

Disclosures by public companies about their human capital management continue to be a focus of investors, regulators, and other stakeholders. In 2020, the SEC adopted a requirement for registrants to discuss their human capital resources to the extent material to an understanding of the registrant’s business taken as a whole. The principles-based nature of this requirement has led to some variation in disclosures, which has in turn led to calls for more prescriptive requirements. In addition, there is continued interest in disclosures about corporate board diversity, particularly in light of NASDAQ’s adoption of a new diversity listing rule and similar state legislation.

During this session expert faculty will discuss:

  • The SEC’s human capital and diversity disclosure requirements
  • Trends in public companies’ human capital management disclosures since the 2020 amendments
  • Possible amendments to the SEC’s human capital management disclosure requirements
  • NASDAQ board diversity listing rule, similar state legislation and related litigation
  • Key takeaways and practical considerations

The Securities and Exchange Commission’s Small Business Capital Formation Advisory Committee will be meeting on July 30, 2024.  The meeting will focus on changes to the U.S. Small Business Administration’s (SBA) Small Business Investment Company (SBIC) program.  The Committee will discuss capital raising by smaller businesses, including the role played by the SBA and the SBIC program, which provides access to funding for smaller businesses.  SBICs are investment funds licensed by the SBA that can access SBA-guaranteed loans that match private capital.  Often, business development companies (BDCs) have SBIC subsidiaries.  Recent changes to the SBIC program were designed to increase access to funding for small businesses, start-ups and funds. 

See the press release and the agenda.

On June 25, 2024, the Securities and Exchange Commission (the “SEC”) charged an advanced materials company and its former executive officers with market manipulation, fraud and other securities law violations.  The charges related to the alleged artificial inflation of the price of the company’s shares and the issuance and sale of shares through the company’s at-the-market (“ATM”) program.  The company was formed through a reverse merger.  The SEC alleges, among other things, that a predecessor entity issued and sold shares with an inflated value through its ATM program prior to completion of the merger.

In advance of the ATM issuances, the predecessor entity offered new shares of its preferred stock to common stockholders and publicly announced a preferred dividend of the profits from selling oil and gas assets to such preferred stockholders.  As a result of touting the preferred dividend, the common stock price rose from less than $1.00 per share to as high as $10.88 per share over a ten-day period in 2021.  The complaint alleges that the preferred dividend was planned with the intent of causing a short squeeze.  The complaint further alleges that as a result of this scheme to inflate the stock price, the company was able to sell approximately 16 million shares through the ATM offering for tens of millions of dollars more than it could have absent the scheme.

The SEC alleges that the predecessor company included misleading or vague statements regarding the preferred dividend in its proxy statement, including statements to the effect that holders would receive the net proceeds of the sale of the oil and gas assets.  In reality, the company concealed a planned spin-off of the assets into a new entity and made false claims regarding the value of the assets.  The SEC charged the company and its executive officers with violating Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Section 14(a) of the Exchange Act. The chief executive officer was also independently charged with violating Section 13(a) of the Exchange Act, Section 13(b)(2)(A) of the Exchange Act, and Section 13(b)(2)(B) of the Exchange Act.  While the fact pattern here is quite extraordinary, it serves as a good reminder regarding the need for controls relating to the use of ATM programs.  Public companies using ATM programs must ensure that accurate and complete disclosures are made in proxy statements and other filings incorporated by reference into the ATM prospectus.  The continuous nature of an ATM program and its ready accessibility should not result in a more lax approach to vetting disclosures, including those incorporated by reference.  See the complaint linked here and the order linked here.

Confidence in the IPO market is growing.  In the first six months of 2024, the IPO market has had its best start since the market boom of 2021, with approximately $20 billion raised in IPOs, according to a recent Bloomberg report.  Bloomberg reported three IPOs over $1 billion completed in the first half of 2024, compared to one in each of the first half of 2022 and 2023.

According to Wolters Kluwer, during the first half of 2024, there have been 75 IPOs, a third of which were completed by life sciences and healthcare companies.  Tech and industrial companies make up 13% each of the IPOs completed in the first half of 2024.  73 companies filed for an IPO but remain in the queue to go public, while 31 companies withdrew their IPOs in the first six months of 2024. 

Activity in 2024 is set to surpass that of 2023, which saw $19.3 billion in 119 IPOs.  Read more about the 2023 IPO market in our At A Glance infographic.

Webinar | July 22, 2024
12:00 p.m. – 1:00 p.m. EDT
Register here.

The Supreme Court’s term included some of the most consequential administrative law decisions in decades. Chief among them is Loper Bright, which overruled Chevron, the decision that required federal courts to defer to administrative agencies’ interpretations of ambiguous statutes. Also important is the Court’s decision in Corner Post, which significantly expanded opportunities to bring Administrative Procedure Act challenges to federal rules.  

Please join us on July 22 for a discussion of the consequences of Loper Bright and Corner Post for agency rulemakings. We will also discuss litigation strategies to challenge regulations.

A number of trade associations (The Business Roundtable, the American Investment Council, The Center for Capital Markets Competitiveness of the US Chamber of Commerce, the Investment Company Institute, the Managed Funds Association, and the National Venture Capital Association) recently published a report titled, “Investors and the Markets First: Reforms to Restore Confidence in the SEC.” The report notes that the trade associations have observed a shift in the SEC’s regulatory approach “that threatens the resiliency of our capital markets and the financial well-being of American investors.” The trade associations take the view that “the SEC’s approach does not generally reflect a single cohesive framework to improve efficiency, competition, and capital formation in the capital markets.” The report claims that the SEC rulemaking presents the following issues:

  • The SEC has ignored its obligations under the Administrative Procedure Act;
  • The SEC has not considered the interconnectedness of its rules;
  • The SEC has adopted final rules that differ drastically from the proposals;
  • The SEC has exceeded its statutory authority;
  • The SEC has not promoted capital formation; and
  • Many of the SEC’s rules will disrupt the orderly functioning of the markets.

The trade associations call for consideration of the following reforms:

  • Require the SEC to affirmatively conduct an analysis of all interrelated and interconnected rules for each proposed rule and then amend or repeal rules as necessary to account for such interconnectedness;
  • Require the SEC to provide comment periods for proposals with a minimum of 60 days, calculated from the Federal Register publication date, unless there is an emergency;
  • Require a third party to perform and publish for public comment no later than 90 days from the date of enactment a post-adoption cost impact assessment for each major rule the SEC has adopted in the past three years;
  • Integrate and expand on the mission of several offices of the SEC, including, for example, the Office of the Advocate for Small Business Capital Formation; and
  • Require the SEC to publish an annual report on the number of exemptions granted or exemptive rules adopted to promote capital formation and innovation and the actions the SEC has taken to promote financial security and review and adjudicate exemptive applications under the Investment Company Act of 1940 for relief in no more than 180 days.

Access the full report.

The Division of Examinations (the “Division”) of the Securities and Exchange Commission (“SEC”) recently issued a Risk Alert (the “Risk Alert”) to SEC-registered broker-dealers providing insight and additional information regarding the Division’s exam process, along with an appendix describing the types of documents and information that may be requested and reviewed during an exam. As most broker-dealers are aware, the Division takes a risk-based approach both in choosing firms to examine and in determining the scope of risk areas to review. The Risk Alert notes that the Division leverages technology to collect and analyze large data sets to help identify risks when determining which firms to examine. The Risk Alert and appendix can be accessed here.

When selecting broker-dealers for potential exams, staff may consider several factors, including the following: (1) prior examination history; (2) supervisory concerns, such as disciplinary history of associated individuals or affiliates; (3) tips, complaints, or referrals involving the firm; (4) the length of time since the firm’s last examination; (5) the firm’s customer base; (6) products and services the firm offers; (7) financial notifications or alerts that indicate that the broker-dealer is experiencing financial stress; (8) reporting by news and media that may involve or impact the firm; (9) information filed by the firm with the SEC or with a self-regulatory organization; and (10) whether the firm holds customer cash and securities. In addition, the Division may select a specific office or branch of a broker-dealer for examination based on risk factors identified with that location (i.e., customer complaints or outside business activities of personnel working from that location).

The Division publishes exam priorities annually and provides broker-dealers with insight regarding areas that it considers as key risks on which it intends to focus that year, including certain products, services business operations or practices.  The 2024 priorities can be found here, and our related Legal Update can be found here.  As the Risk Alert notes, the Division also directs resources to emerging risks.

The scope of an examination and documents requests vary from exam to exam, depending on a firm’s business model, associated risks and the reason for conducting the exam.  The Division may adjust the scope of an exam based on information received and staff observations.  In connection with the exam process, staff will typically send a letter notifying a broker-dealer of an upcoming exam, which will include an initial request list identifying certain information, including documents staff will review as part of the examination.  This initial request may include: (1) general information, which provides the staff with an understanding of the broker-dealer’s business and securities activities; (2) the written policies and procedures the firm has established, maintained, and enforced to address the firm’s securities activities; and (3) information for the staff to perform its own testing for compliance in various areas.  See the appendix to the Risk Alert for further details.

The Securities and Exchange Commission’s Office of the Investor Advocate recently issued its fiscal year 2025 Report on Objectives. The Report is one of two annual reports required to be filed by the Investor Advocate with the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives. The Office of the Investor Advocate and the Office of the Ombuds were established ten years ago. The Investor Advocate, in her introduction, highlights the increased incidence of fraud over the last ten years and the role that social media and advanced technology play in facilitating fraud, including the use of Artificial Intelligence (AI) and large language models (LLMs). She notes that, like other agencies and regulators, the Office will be attentive to the use of AI, LLMs, and cryptocurrencies in scaling up fraud. The Report sets out the objectives of the Investor Advocate, which include: assisting retail investors; identifying areas in which investors would benefit from regulatory changes; identifying problems with financial service providers and investment products; analyzing the potential impact on investors of proposed rules and regulations; proposing appropriate changes to the SEC and to Congress; and supporting the SEC’s Investor Advisory Committee.

Specifically, for fiscal year 2025, the Office intends to focus on broker and adviser conduct, especially as more discount brokers facilitate transactions through mobile devices and applications. The Office intends to consider how digital platforms fit within the Regulation Best Interest framework concerning investor recommendations, and to the extent that this new digital engagement does not implicate Reg BI, how other regulatory tools would help ensure that retail investors are the principal beneficiaries of these new technologies. Similarly, with respect to advisers, the Office intends to consider how advisers discharge their advice to retail clients through digital engagement. The Office also intends to continue its focus on the private markets given their growth, with engagement on topics such as accredited investor status, the degree of transparency in the private markets, and the interplay between the public and private markets. The Office will also consider investor testing with a view toward more innovative approaches to disclosure that is retail-friendly. See the full Report.

The Staff of the Division of Corporation Finance posted questions and answers regarding the confidential submission process for draft registration statements. 

The guidance provides additional clarity relating to the process applicable to companies that are not emerging growth companies and that submit draft registration statements for confidential review.  For example, the Q&As address confidential treatment under Rule 83 for issuers that are not EGCs; how an issuer may submit a Rule 83 request for confidential treatment with respect to a draft registration statement; reiterates the items that may be omitted from a draft registration statement; and addresses other similar matters, including the addition of a Q&A regarding de-SPAC transactions.

The Q&As note that an issuer that is not an EGC cannot omit from its publicly filed registration statement financial information that it reasonably believes will not be required to be included in the registration statement at the time of the contemplated offering, since that relief is only available to EGCs by virtue of the FAST Act.

The Q&As confirm that a Canadian issuer filing under the Multi-Jurisdictional Disclosure System can take advantage of these accommodations. An asset-backed issuer, however, may not take advantage of these accommodations.

An issuer also cannot use the draft submission for a draft post-effective amendment to an effective registration statement.

As far as communications safe harbors, the Q&As note that if an issuer submits a draft registration statement for nonpublic review, it cannot rely on the Rule 134 safe harbor to make a public communication about its offering.  The safe harbor is not available until the issuer files a registration statement that satisfies the requirements of Rule 134.

But an issuer that submits a draft registration statement for nonpublic review may make a public communication about its offering in reliance on the Securities Act Rule 135.  This, however, may affect whether the Commission can withhold the draft registration statement in response to a request under the Freedom of Information Act.

Finally, the Q&As address the use of the confidential submission process in connection with a de-SPAC transaction and when to include information of a co-registrant.  Since EDGAR does not allow for the entry of a co-registrant on a DRS submission, the primary registrant in connection with a de-SPAC transaction should submit the DRS without the co-registrant’s CIK and related submission information.  The primary registrant should add the information on the co-registrant in EDGAR when it publicly files the registration statement.  The co-registrant will not need to separately submit the DRS or related correspondence in EDGAR since the primary registrant’s reporting history will include all DRS submissions and related correspondence.

See the full Q&As here.