Anna Pinedo is a partner in Mayer Brown’s New York office and a member of the Corporate & Securities practice. She concentrates her practice on securities and derivatives. Anna represents issuers, investment banks/financial intermediaries and investors in financing transactions, including public offerings and private placements of equity and debt securities, as well as structured notes and other hybrid and structured products.

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Author Yuliya Guseva in her paper titled “The SEC and Foreign Private Issuers: A Path to Optimal Enforcement,” reviews SEC enforcement actions against foreign private issuers between 2005 and 2016 and considers developments following the Supreme Court’s Morrison decision.  Guseva notes that following Morrison, federal courts have narrowed the application of Exchange Act Section 10 to instances involving securities listed on US exchanges and domestic transaction wherein either title to the securities passes in the United States or the parties become irrevocably bound to purchase the securities in the United States.   It is unclear how courts will react to the Tenth Circuit decision in Traffic Monsoon.  In the immediate aftermath of Morrison, the author notes a decline in the number of class actions filed against foreign issuers.  Guseva also looks at SEC proceedings in the five years before and roughly five years since the Morrison decision.  During this period, there were 151 actions brought against foreign issuers.  Approximately 8% of these involved Exchange Act Section 10(b) and Securities Act Section 17 violations, and delinquent filing violations accounted for 77% of the actions brought.  During this time period, the SEC may have referred to foreign regulators’ enforcement matters, which would not be reflected in the statistics cited in the paper and above.

A recent research report published by Goldman Sachs reviews private market value creation compared to public market creation.  Echoing the trends noted in other publications, the report notes the increasingly important role of venture capital as an asset class.  The growth in venture funding has contributed to companies remaining private longer.  The report notes that among the top twenty unicorn companies 11 funding rounds on average were undertaken.  In recent years, the number of mega-rounds (over $100 million raised) has grown steadily. Historically, from 1995 to 2017, value creation in the public markets has been greater than in the private markets. In 2017 to 2018, the public markets underperformed the private markets.  IPO value (change in aggregate market capitalization) declined 8% on average versus the S&P 500.  Private Market gains for companies going public over the last five years was 33% higher than for companies going public on average for the last 25 years. Based on the amount of private capital available for investment, this trend shows no signs of abating.

In 2010, the US Supreme Court in Morrison v. National Australia Bank established a new standard, a transactional test, for determining the extraterritorial application of Section 10(b), which replaced the prior conduct-and-effects test.  Following the Morrison decision, Dodd-Frank Act Section 929P(b) provided US courts with jurisdiction in cases brought by the SEC or the US government that involved conduct within the United States that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors or conduct occurring outside the United States that has a foreseeable substantial effect within the United States.  It was not clear whether the Dodd-Frank Act had, in effect, overcome the limits set by Morrison.

The Tenth Circuit Court of Appeals court date considered this question in a recent case, SEC v. Scoville and Traffic Monsoon. The Tenth Circuit considered whether the SEC had authority to bring a civil enforcement action under the federal securities antifraud provisions in a securities transaction outside of the United States.  The Court applied the conduct-and-effects test which took the view that was reinstated by the Dodd-Frank Act in order to allow an action brought by the SEC to proceed.  However, private actions under the antifraud provisions would continue to be governed by the Morrison transactional test.

In a recent paper titled “The battle of social media platforms: The use of Twitter, YouTube and Instagram in corporate communication,” author Pawel Bilinski analyzes whether using social media channels helps investors interpret earnings information.

The study focuses on companies that are included in the FTSE 100 index and, within that, on earnings announcements only.  In the period from January 2015 to April 2018, 64% of the FTSE 100 companies used Twitter to communicate earnings news.  Use of social media is more common among consumer and retail companies.  Most companies used Twitter, with usage of Instagram and YouTube being considerably lower.  The author considered whether use of social media strengthened the impact of earnings news.  Companies using Twitter had higher earnings responses.  Retail ownership increases in companies that communicate through social media.  A higher number of Twitter and YouTube Posts leads to more positive price reaction.  Social media communication is seen by investors as signaling a commitment to greater transparency.  The authors also considered whether higher press coverage for companies reduces the usefulness of social media posts, but found that Twitter postings lead to incrementally higher price reactions.  Finally, the study suggests that posts help align investor expectations about a company’s prospects.  Research analysts also have a more positive reaction to such posts.  By contrast, YouTube and Instagram usage appears to have little to no effect on investors’ ability to interpret earnings news.  All of this suggests that greater attention may need to be devoted to social media as part of a public company’s communications policy.

In a recent report, the Nasdaq Private Market (NPM) provided data regarding transaction activity for private company securities.  On NPM, the total sponsored liquidity program value increased from $3.2 billion in 51 programs in 2017 to $12.0 billion in 79 programs in 2018. There were 46 third-party tender offers in 2018 compared to 23 in 2017.  There were 33 company repurchase programs in 2018 compared to 28 in 2017.  The NPM platform also continues to host more repeat programs, suggesting that private companies now are incorporating liquidity programs into their plans.  Interestingly only 38% of the programs were for unicorns.  This suggests that companies are using sponsored liquidity programs earlier in their growth.  The report also highlights another trend, which we too have observed, which is that more companies are conducting programs immediately following “mega-rounds” (rounds in which $100 million or more was raised).  This suggests new investors may be eager to see companies take steps to clean up their capitalization tables.  NPM also provides some insight on the discounts for common stock sales versus recently completed preferred round valuations.  The discounts associated with common stock sales seemed to have narrowed which, taken together with the significant increase in third-party tenders, suggests that institutional investors are becoming more comfortable with purchases through private secondary market platforms.

Consistent with our prior posts on this topic (see our posts “Mandatory Arbitration”, “Coalition of State Treasurers Oppose Mandatory Arbitration” and “Mandatory Arbitration Provisions”) the Securities and Exchange Commission appears to be deferring taking any view on the inclusion of mandatory arbitration provisions in public company bylaws.  Chair Clayton’s recent comments on mandatory arbitration provisions came in the context of an inquiry from a company that sought guidance from the Staff of the Division of Corporation Finance regarding excluding a shareholder proposal from its proxy statement.  Under Rule 14a-8(i)(2), the company sought to omit from its proxy statement the shareholder proposal and the company argued that the proposal, were it to be adopted, would result in a violation of both federal and state law.  In this particular instance, the Division stated it would not recommend enforcement action if the company were to exclude the proposal based on its arguments that it would violate applicable (New Jersey) state law.  However, the Staff of the Division expressly noted that it was not opining on whether the proposal, if implemented, would violate federal law.  Chair Clayton reaffirmed his belief that “any SEC policy decision on this subject should be made by the Commission in a measured and deliberative manner.”  See his remarks here.

Since the Jumpstart Our Business Startups (JOBS) Act was enacted in 2012, emerging growth companies (EGCs) have benefited from the opportunity to test the waters with investors and gauge interest in a potential offering. Title I of the JOBS Act amended Section 5 of the Securities Act of 1933 (the Securities Act) in order to provide that certain communications made by EGCs or persons acting on their behalf with institutional accredited investors and qualified institutional buyers (QIBs), either prior to or following the filing of a registration statement, would not constitute “gun jumping.”

Now, the US Securities and Exchange Commission (Commission) has proposed a new rule under the Securities Act that would extend the ability to test the waters to all issuers. This has been highly anticipated.

For more, read our Legal Update.

There are a number of legislative proposals making their way through the House and the Senate that would affect public reporting companies and are gathering some momentum, so they bear watching.  Here are a few highlights:

  • Diversity Disclosure Requirements:  H.R. 970, which has been reintroduced in the House of Representatives, titled the “Improving Corporate Governance Through Diversity Act,” would amend Section 13 of the Exchange Act in order to require each issuer that is required to file an annual report to disclose data on the racial, ethnic and gender composition of the board of directors and the C-level executives of the issuer.  C-level executives would include the most senior executive officer, information officer, technology officer, financial officer, compliance officer, or security officer of the issuer.
  • Rule 10b5-1 Plans:  We have previously blogged about this one, which has been in the news recently.  House Financial Services Committee Chair Waters and Congressman McHenry reintroduced legislation, “The Promoting Transparent Standards for Corporate Insiders,” H.R. 624, which would require the SEC to review Rule 10b5-1 and to study gaps in coverage, consider whether to limit trading to issuer-adopted trading windows, curb the use of multiple trading plans, mandate a delay between adoption of a plan and the first trade pursuant to the plan, restrict an insider’s ability to modify or cancel a plan, require companies and insiders to make certain filings with the SEC, and mandate that boards adopt policies to monitor compliance with trading plans. The SEC would be required to issue a report on its study one year following enactment of the measure and promptly undertake necessary rulemaking.  The Council of Institutional Investors has written to Waters and McHenry supporting H.R. 624.
  • Stock Buyback Bill(s)?  Senator Sanders has indicated he plans to introduce legislation that would limit stock buybacks unless companies provide more extensive benefits to workers, such as an increased minimum wage and paid sick leave as well as satisfy certain pay ratios.  The text of the legislation would appear to track bills introduced in prior sessions of Congress (see, for example, S. 3640 introduced in November 2018 in the Senate and a companion bill, H.R. 7145, introduced in the House also in November 2018) although it has not been made available.  There was a recent op-ed piece in The New York Times, co-authored by Senators Schumer and Sanders (see: relating to their views.  In the meantime, Senator Rubio has outlined plans on share buybacks as part of a more comprehensive paper published by the US Senate Committee on Small Business and Entrepreneurship.
  • Corporate Political Disclosures:  Representative Carbajal has introduced legislation, titled the Corporate Political Disclosure Act 2019 (H.R. 1053), which would mandate disclosure of a company’s political activities during the prior year in its annual report and on its Internet website, which must be accessible to shareholders and to the public.

The Securities and Exchange Commission took the long-awaited step of proposing rules for comment that would extend the ability to test the waters beyond emerging growth companies, or EGCs.  This topic, of extending the test the waters communications, had been the subject of proposed legislation in the last session of Congress and had made its way into the package of legislative reforms that were referred to as “JOBS Act 3.0.”

As proposed, test the waters would be available to all prospective issuers, not just EGCs. Proposed Securities Act Rule 163B would permit any issuer, or any person authorized to act on its behalf, to engage in oral or written communications with potential investors that are, or are reasonably believed to be, QIBs or IAIs, either prior to or following the filing of a registration statement, to determine whether such investors might have an interest in a contemplated registered securities offering. The proposed rule would be non-exclusive and an issuer could rely on other Securities Act communications rules or exemptions when determining how, when, and what to communicate related to a contemplated securities offering.  Under the proposed rule there would be no filing or legending requirements; test-the-waters communications may not conflict with material information in the related registration statement; and issuers subject to Regulation FD would need to consider whether any information in a test the waters communication would trigger disclosure obligations under Regulation FD or whether an exemption under Regulation FD would apply.

The proposal will have a 60-day public comment period following its publication in the Federal Register.  A Mayer Brown Legal Update will follow shortly.

The Staff of the Securities and Exchange Commission (“SEC”) released a question and answer guide relating to the recently adopted rule amendments requiring disclosure of company policies on hedging transactions by officers and directors in the company’s securities.  The guidance is available here.