In December 2018, Bill 3718 (the “Bill”) was introduced in the Senate and referred to Committee. The Bill, or the “Ban Conflicted Trading Act,” prohibits members of Congress and senior congressional staff from trading individual stocks and other investments while in office. Specifically, the Bill prohibits such covered persons from (1) purchasing or selling any security, commodity, future, or derivative and (2) entering into a transaction that creates a net short position in any security. Additionally, the Bill prohibits any covered person from serving as an officer or member of any board of any for-profit association, corporation, or other entity. Certain exceptions are set forth for investments that were held before taking office. Investments in diversified mutual funds or exchange-traded funds would still be allowed. On a case-by-case basis, the Select Committee on Ethics may authorize a covered person to place their securities holdings in a qualified blind trust approved by the Committee. Under the Bill, all members would have six months after enactment to divest their shares. New members would get six months from their entry into Congress to divest. Those who fail to comply with the Act would be subject to a civil penalty. Similar measures have been introduced in prior sessions of Congress; however, in light of recent enforcement activity, it’s fair to predict that this measure may be adopted. The Bill can be found in full here.
On December 19, 2018, the US Securities and Exchange Commission (the Commission) amended Rule 251 and Rule 257 of the Securities Act of 1933, as amended (the Securities Act), which are part of Regulation A, in order to allow companies subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act) to make offerings in reliance on the Regulation A exemption. The rule changes were mandated by the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (the Economic Growth Act).
To read more, see our Legal Update.
On November 16, 2018, the American Bar Association’s Committee on Federal Regulation of Securities hosted a dialogue with William Hinman, Securities and Exchange Commission (“SEC”) Director of the Division of Corporation Finance. During the discussion, Hinman highlighted his priorities for the Division. Hinman wants to find other ways for mainstream investors who are not accredited investors to gain access to private investments. Hinman noted an uptick in initial public offering filings. He said companies are spending more time with comment letters, are writing meaningful responses and disclosures and are taking advantage of the draft submission process. Hinman explained the Staff is trying to do as much as possible through rulemaking and policies to make the public reporting system more attractive to companies looking to raise capital. With regards to disclosures, Hinman encouraged companies to take a narrow, tailored approach. As an alternative to generic disclosures, Hinman encouraged issuers to examine and disclose specifically how certain risks, such as Brexit and LIBOR, may impact their companies. On the Division’s long-term agenda, Hinman noted plans to issue a comprehensive concept release on private capital raising. The concept release will examine current statutes, rules and policies. Hinman wants to see if there are any holes in the current regulatory framework that need to be revised to better harmonize private capital raising. On the Division’s short-term agenda, Hinman noted plans to approach the remaining Dodd-Frank Act rulemaking provisions in sequential order, beginning with hedging disclosures.
On October 23, 2018, the Heritage Foundation hosted a discussion entitled, “Problems with the JOBS Act and How They Can Be Fixed” that featured University of Kentucky College of Law Professor Rutherford B. Campbell. The discussion centered on the impact of the 2012 Jumpstart Our Business Startups Act (the “JOBS Act”), its benefits, its shortcomings, and recommendations on how to address those shortcomings related to Titles II, III and IV.
The JOBS Act was enacted to reduce the regulatory burden on small businesses seeking to raise capital to launch or grow their business. Campbell praised Title II’s elimination of the prohibition against general solicitation and general advertising under Rule 506(c). However, he lamented that Rule 506(c) was still limited to sales to accredited investors. Campbell discussed Title III and argued that small businesses are simply not utilizing Regulation Crowdfunding. Campbell noted the mere $49 million in funds that was raised through Regulation Crowdfunding in 2017. He asserted that the limitations and concerns regarding integration “make no sense at all.” As an alternative, Campbell recommends a two-way regulatory integration safe harbor that allows for crowdfunding and permits traditional advertising while conducting a campaign. Additionally, Campbell recommends rethinking the periodic reporting requirement under Regulation Crowdfunding. By doing so, Campbell believes more small businesses will utilize Regulation Crowdfunding. Campbell then examined Regulation A+ under Title IV, noting there are still compliance, accounting and legal hindrances. As a solution, Campbell proposes federal preemption for Tier 1 offerings. Overall, Campbell advocates for the implementation of these recommendations to enhance the current regulatory framework for small business capital formation.
On September 25, 2018, the Securities and Exchange Commission’s (“SEC”) Division of Trading and Markets released Compliance and Disclosure Interpretations (“C&DIs”) to frequently-asked questions regarding Regulation Crowdfunding. Specifically, the SEC provided C&DIs related to the Rule 300 series of Regulation Crowdfunding which applies to requirements for intermediaries, including broker-dealers and funding portals. Additionally, the SEC Staff provided C&DIs related to the Rule 400 series of Regulation Crowdfunding, which contains rules specifically applicable to funding portals.
These address, among other things, the financial interests of an intermediary in the issuer, due diligence requirements for intermediaries, requirements for the delivery of educational materials by intermediaries, intermediary requirements with respect to transactions, changes and cancellation of an offering, and intermediary payments to third parties for directing investors to their platform. The SEC Staff notes that an intermediary is permitted to have a financial interest in the issuer.
Additionally, the C&DIs provide instructions on how to register as a funding portal and notes amendments to Form Funding Portal must be made within 30 days after information previously submitted becomes inaccurate. Moreover, interpretation was given regarding the Rule 402 conditional safe harbor for funding portals and recordkeeping requirements for funding portals.
The C&DIs can be found in full on the SEC’s website.
Since January 2018, the present U.S. administration has imposed a series of tariff policies (U.S. Tariff Policies) that potentially have a wide range of consequences. In this Lexis Practice Advisor® Practice Note, partner Anna Pinedo and associates Martin Estrada and Gonzalo Go discuss disclosure trends related to U.S. Tariff Policies.
On August 17, 2018, the SEC amended certain disclosure requirements that it considered to have become redundant, duplicative, overlapping, outdated or superseded, in light of other SEC disclosure requirements or changes in the information environment. The SEC has now published the final rules in the Federal Register. The amendments will go into effect on November 5, 2018.
The SEC final rules can be found here.
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.
Recent years have seen significant growth in Securities Act of 1933 (“1933 Act”) class actions filed in California state courts, based on conflicting readings of the jurisdictional provisions of the Securities Litigation Uniform Standards Act (“SLUSA”). SLUSA was designed, among other things, to prevent certain state private securities class action lawsuits alleging fraud from being used to frustrate the objectives of the Private Securities Litigation Reform Act of 1995 (“PSLRA”). However, the jurisdictional provisions of SLUSA proved to be vague and unclear, resulting in a circuit split. Some courts had found that SLUSA covered class actions filed in state court alleging only 1933 Act claims must be heard in federal courts. In Cyan, Inc. v. Beaver County Employees Retirement Fund, the Supreme Court unanimously held that state courts have jurisdiction over class actions that allege federal violations under the 1933 Act and defendants are not permitted to remove such actions from state court to federal court for lack of subject matter jurisdiction. In Cyan, the Court was charged with interpreting the jurisdictional provisions of the SLUSA to determine the jurisdictions of such claims. Justice Kagan concluded: “SLUSA’s text, read most straightforwardly, leaves in place state courts’ jurisdiction over 1933 Act claims, including when brought in class actions.” Thus, the Court determined SLUSA did not strip state courts of jurisdiction over class actions alleging violations under the 1933 Act. Furthermore, the court concluded that SLUSA did not empower defendants to remove such actions from state to federal court. State courts will continue to exercise concurrent jurisdiction over class actions that allege federal violations under the 1933 Act. The Supreme Court cured a circuit split and the decision may lead to more securities class actions alleging 1933 Act violations to be brought in state courts.