Counsel Brian Hirshberg examines some of the issues raised in comment letters issued by the SEC staff to real estate investment trusts regarding their use of financial measures not presented in accordance with generally accepted accounting principles in a recently published On point.
A paper titled, “The Impact of Exchange Listing on Corporate Governance Evidence from Direct Listing,” written by Dan French, Andrew Kern, Thibaut Morillon, and Adam Yore, considers the impact on corporate governance policies attributable to the listing of a class of securities on a national securities exchange. The authors focus on direct listings and challenge the notion that companies that undertake direct listings may not adopt investor protections and governance practices due to the absence of underwriters that typically act as gatekeepers. The authors examine public non-listed REITs that undertake a listing, or “transitioning REITs.” By doing so, the authors attempt to demonstrate the value of a listing without an offering, or a direct listing. The authors consider various data points, including board size, board independence, nominating and compensation committee independence, etc., in order to draw comparisons between public non-listed REITs and transitioning REITs. Transitioning REITs even before listing on a securities exchange already meet many of the governance standards of the securities exchanges. This suggests that the REITs that undertake direct listings already have characteristics associated with public companies. In addition, once listed on exchanges they ave significant institutional stockholders, and this serves to reinforce the heightened governance standards. The authors conclude that even without the benefits of the traditional IPO process, companies that undertake direct listings have comparable governance standards. The authors note that “changes in corporate governance occur gradually through time as opposed to abruptly just after the listing event.”
On January 1, 2018, a European Union law regulating packaged retail insurance-based investment products (“PRIIPs”) went into effect targeting securities offered to retail investors by investment funds. If a security is considered a PRIIP, the issuer is required to publish a strictly regulated key information document (“KID”) that must be continuously updated during the distribution of the security. The liability for the content of the KID is assumed by the issuer by operation of law. The broadly drafted regulation has the potential to impact the ability of investors to purchase securities issued by U.S. exchange-listed real estate investment trusts (“REITs”). To determine whether the securities of a particular REIT should be considered PRIIPs and thereby subject to the regulation, all relevant operational facts and characteristics of the REIT must be reviewed in an analysis similar to the undertaking by REITs at the time the Alternative Investment Fund Managers Directive (“AIFMD”) was implemented throughout the European Union. Securities are considered PRIIPs if the amount repayable to the retail investor is subject to: (i) fluctuation because of exposure to reference values or (ii) the performance of one or more assets that are not directly purchased by the retail investor. Securities issued by REITs that are structured as alternative investment funds under AIFMD are considered PRIIPs.