Time and technology often conspire to make our existing views and approaches seem dated. It’s inevitable, and such is the case with the regulations that address permissible communications by issuers. The securities laws regulating communications by issuers have not undergone many revisions since Securities Offering Reform in 2005 despite the fact that the ways in which issuers communicate with investors and in which investors access information have undergone significant change. The Securities and Exchange Commission (SEC, or the Commission) now is required to propose rules relating to the application of the communications safe harbors under Securities Act Rules 138 and 139 in relation to certain funds. The dialogue relating to measures that may promote capital formation, without sacrificing investor protections, has prompted the Commission to consider extending the ability to “test the waters,” made available by the Jumpstart Our Business Startups (JOBS) Act to emerging growth companies (EGCs), to all companies. While the Commission certainly could limit its rulemaking to acting on these specific matters, it would seem an opportune time for the Commission to undertake a more comprehensive review of all of the communications safe harbors contained in the Securities Act.

Partner Anna Pinedo discusses some of the communications safe harbors that may benefit from amendment in a recently published PLI Current article.

Thursday, August 2, 2018
1:00 p.m. – 2:00 p.m. EDT

With companies remaining private longer, their stockholder base often becomes more widely dispersed. More and more privately held companies are facing interesting challenges in communicating effectively with various stakeholders, without violating securities laws. During this session, Partner Anna Pinedo will address the following:

  • Private company information rights;
  • Rule 701 disclosures for employees;
  • Information requirements in connection with stockholder liquidity programs;
  • Sharing company information in connection with financing rounds;
  • Communicating with investment professionals;
  • Communications and social media policies for private companies; and
  • Blackout/insider trading policies for private companies.

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

The Senate Banking Committee recently considered various securities-related bills, including the following:

  • S. 536 Cybersecurity Disclosure Act, which would require that a public company disclose whether a cybersecurity expert is on its board of directors;
  • The 8-K Trading Gap Act of 2018, which would ban trading by insiders during the period of time between when directors and officers become aware of material nonpublic information and the date on which such information is disclosed in a Current Report on Form 8-K;
  • S. 588 Helping Angels Lead Our Startups Act, or the HALOS Act, which clarifies whether certain communications, including presentations made at demo days and similar events, would constitute general solicitation;
  • S. 2126 Fostering Innovation Act of 2017, which would extend the Sarbanes-Oxley Section 404(b) exemption for an additional five years for former emerging growth companies (EGCs) that maintain a public float below $700 million and average annual revenues below $50 million; and
  • S. 2347 Encouraging Public Offerings Act of 2018, which would extend the ability to test the waters to non-EGCs.

While it is not clear whether these and some of the proposed bills introduced in the House of Representatives will be adopted or even consolidated into “JOBS Act 2.0”- type legislation, many of these are consistent with the recommendations contained in the U.S. Treasury’s report on capital markets, as well as with measures introduced in prior sessions of Congress that garnered bipartisan support.

 

There are a number of legislative proposals making their way through the House, including: H.R. 5054, the Small Company Disclosure Simplification Act of 2018, which provides EGCs and smaller reporting companies an exemption from xBRL requirements (referred to in our prior blog post), H.R. 6035, the Streamlining Communications for Investors Act, which is a measure that would direct the Securities and Exchange Commission to amend Rule 163 under the Securities Act in order to allow underwriters and dealers acting by or on behalf of a WKSI to engage in certain communications, and a measure that would direct the Commission to increase and align the smaller reporting company definition and the non-accelerated filer financial thresholds, and a measure requiring the Commission to conduct a study with respect to research coverage of small issuers before their initial public offerings.

All of these bills emanated from the recommendations contained in the report prepared by SIFMA and other trade associations titled “Expanding the On-Ramp: Recommendations to Help More Companies Go and Stay Public,” which we blogged about previously.

The Financial Services Committee has passed H.R. 6035 with some bipartisan consensus.  This measure is similar in scope to the amendments to Rule 163 of the Securities Act that the Commission had proposed a few years ago and never adopted.  Given the fact that most follow-on offerings are conducted on a wall-crossed basis these days, it would make sense to allow underwriters acting on a WKSI’s behalf to approach investors even prior to the WKSI filing an automatic shelf registration statement.

In a recent paper, authors Onur Bayar, Thomas J. Chemmaur and Paolo Fulghieri consider whether allowing insiders with nonpublic information to disclose such information prior to selling their securities.  The paper discusses the communications prohibitions applicable prior to, and in close proximity to, securities offerings, as well as some communications safe harbors.  The authors set out a model for disclosures at different points in time prior to a securities offering.  The paper concludes that even in the absence of an agency, like the Securities and Exchange Commission, that regulates disclosures, there are incentives for companies to self-regulate resulting in conservative disclosures.  The authors further conclude that whether allowing disclosures prior to an equity offering is desirable depends on the proportion of Institutional investors who are able to verify the information (compared to retail investors that would not be able to test or verify disclosures).  Finally, the authors also consider the nexus to the rules for bringing private securities lawsuits.  Setting aside the authors’ thesis, it would seem prudent in light of the significant advances in technology since 2005 when securities offering reform last revamped the communications rules to revisit the safe harbors available to issuers.