Late last week, the Securities and Exchange Commission (SEC) proposed rule amendments that are intended to modernize the offering related provisions of the Securities Act of 1933 (the Securities Act) and the communications safe harbors available to business development companies (BDCs) and closed-end funds (CEFs) in order to harmonize these with the provisions applicable to operating companies. The SEC also proposed accompanying amendments to Form N-2. The SEC was required to undertake rulemaking with respect to BDCs by the Small Business Credit Availability Act, and to undertake rulemaking with respect to CEFs by the Economic Growth, Regulatory Relief and Consumer Protection Act, often referred to as the Crapo Act. Pursuant to the provisions of the Small Business Credit Availability Act, certain amendments became self-effectuating on the Act’s one-year anniversary, which has now passed; however, BDCs may want to consider whether to rely on those provisions, or await SEC Staff guidance regarding the transition period since the amendments address the same matters.

Among the most important proposed changes for BDCs and CEFs would be: (1) the ability to qualify as well-known seasoned issuers; (2) to benefit as WKSIs from the ability to engage in certain communications and rely on expedited shelf registration provisions; (3) the ability for other BDCs and CEFs to use more streamlined shelf registration statement procedures; and (4) the ability to rely on a number of important communications safe harbors.

For more information, read our Legal Update.

On March 20, 2019, the US Securities and Exchange Commission (SEC) adopted amendments intended to modernize and simplify certain disclosure requirements of Regulation S-K and related rules and forms. The amendments represent the next step in a series the SEC has taken to update and modernize the disclosure requirements in Regulation S-K. This Legal Update provides an overview of the amendments, their effective dates and related practical considerations for companies.

Consistent with the rule adopted by the New York Stock Exchange in 2018 in order to facilitate direct listings, the Securities and Exchange Commission recently approved a similar Nasdaq rule for the Nasdaq Global Select Market, Rule IM-5315-1.  Although prior to the effectiveness of the rule, the Nasdaq had permitted companies to undertake direct listings, the requirements were discretionary.  The new rule clarifies the circumstances under which an issuer that has not previously registered a class of its securities under the Securities Exchange Act may list its securities without undertaking a public offering of its securities under the Securities Act.  The Nasdaq will consider the market value of the securities of a company that have been trading on a private secondary market prior to the Nasdaq listing.  Also, the Nasdaq rule allows Nasdaq to determine whether a company has met the market value of publicly held shares listing requirement for the exchange based on an independent third-party valuation that shows at least $250 million.  The valuation must be provided by an experienced valuation firm and be as of a recent date.  The valuation agent must be independent.  A valuation agent will not be considered independent if:  the agent or any affiliate owns in the aggregate as of the valuation date more than 5% of the class of securities to be listed; the agent or an affiliate has provided investment banking services within the 12 months preceding the valuation date; and the agent or an affiliate has been engaged to provide investment banking services to the company in connection with the proposed listing or related financings or other related transactions.  For an issuer that has securities that have traded on a foreign regulated exchange and is seeking to list the securities on the Nasdaq, Nasdaq will determine whether the company has met the price-based listing requirements based on the most recent trading price of its securities on the foreign trading market.  As with the NYSE rule, the Nasdaq rule is applicable to companies that apply to list their securities upon the effectiveness of a registration statement that registers the resale of securities held by existing securityholders, which acquired such securities in private placements.

The Securities and Exchange Commission proposed rule amendments that are intended to modernize the offering related provisions of the Securities Act and the communications safe harbors available to business development companies (BDCs) and closed-end funds (CEFs) in order to bring these to parity with the provisions applicable to operating companies.  The Commission was required to undertake rulemaking with respect to BDCs by the Small Business Credit Availability Act.  (See our chart that summarizes the affected provisions: https://www.freewritings.law/wp-content/uploads/sites/24/2018/04/BDC-provisions-of-2018-Spending-Bill_.pdf.)  The Commission was required to undertake rulemaking along the same lines in respect of CEFs by the Crapo Act.

Among the most important proposed changes for BDCs and CEFs would be the ability to qualify as well-known seasoned issuers (WKSIs) to the extent that the entities meet the reporting history and float requirements; benefit as WKSIs from the ability to engage in certain communications and rely on expedited shelf registration provisions, the ability for other BDCs and CEFs to use more streamlined shelf registration statement procedures, and the ability to rely on a number of important communications safe harbors.

A detailed client alert will follow.

The Securities and Exchange Commission adopted additional amendments that are intended to simplify disclosure requirements for public companies, investment advisers and investment companies.  The proposed amendments are based on the Commission Staff’s FAST Act Report.  Among other things, the amendments will:

  • Allow registrants to omit confidential information from most exhibits without filing confidential treatment requests;
  • Provide registrants greater flexibility with respect to the presentation of historical periods within the MD&A section of filings:
  • Revise the current Regulation S-K description of property requirement in order to emphasize the materiality threshold; and
  • Modify certain data tagging requirements.

A detailed client alert will follow.

In her first speech as the SEC’s Advocate for Small Business Capital Formation, Martha Miller provided an overview of the Office’s mission, as well as the Office’s priorities.  Miller noted the importance of the small businesses in the United States, and commented on access to funding.  She observed that in recent years, the amounts raised in exempt securities offerings has outpaced the amounts raised in registered securities offerings.  While there is significant private capital available, including venture capital, to fund emerging companies, Miller observed that the availability of venture funding though is limited—for example, while VC-backed companies in the United States raised over $99 billion in over 5,000 transactions in 2018, companies in three states received three-quarters of the funding.

The mission of the Office is to give an independent voice to small businesses, and to advocate for small businesses and their investors.  The Office intends to work with small businesses to understand their capital formation issues, help small businesses resolve issues with the SEC and self-regulatory organizations, including by recommending policy changes; and analyze the potential impact of proposed rules and regulations likely to significantly affect small businesses.  For purposes of the Office’s focus, “small business” is understood to include private and public companies with less than $250 million in market capitalization.  The Office will annually submit a report to Congress analyzing issues important to small business capital formation.

At the ICI Conference, Dalia Blass, Director of the Securities and Exchange Commission’s Division of Investment Management, provided some insights on upcoming rulemaking initiatives.  Director Blass noted that we should anticipate a proposal soon for business development company and closed-end fund offering reform, as well as recommendations for a proposal on modernizing the advertising and solicitation rules for investment advisers and a proposal for use of derivatives by investment companies.  She also noted that the Chief Counsel’s Office has been working on improvements to the Division’s exemptive application review process.

Director Blass noted a number of areas in which investment advisers may perform company-specific analysis on matters put to a shareholder vote and to that end the Division will explore ways to update its guidance in order to clarify how investment advisers should fulfill their fiduciary duty in this regard.  To that end, Director Blass noted that the Staff will consider, among other things, the following questions:

  • how to promote voting practices that are in the best interests of advisory clients, including voting on an issuer-specific basis when appropriate;
  • whether advisers are expected to vote every proxy;
  • how advisers should evaluate recommendations of proxy advisers, particularly where the issuer disagrees with the factual assumptions of the recommendation; and
  • how advisers should address conflicts of interest that a proxy adviser may have.

At the same conference, Commissioner Roisman addressed proxy voting.  The Commissioner noted practices in the asset management sector with respect to proxy voting that have raised questions, such as why some advisers aim to vote every proxy for every company in every fund’s portfolio; centralize proxy voting functions within a complex and vote uniformly across funds in the complex; rely on third-party proxy advisory firms to assist with devising and implementing voting policies.  The Commissioner noted that a fund adviser is acting in a fiduciary capacity when it is voting proxies.  Commissioner Roisman posed a number of questions regarding whether certain approaches employed by asset managers with respect to proxy voting are consistent with the exercise of their fiduciary duty.  The Commissioner also raised concerns regarding the reliance by asset managers on proxy advisory firm recommendations, the processes used by proxy advisory firms in formulating their voting recommendations, and the conflicts of interest that may affect proxy advisory firms.  Commissioner Roisman noted that it would be a good time for the Commission to consider whether guidance to asset managers would be helpful in their interactions with proxy advisory firms.

On March 28, 2019, the Securities and Exchange Commission’s Investor Advisory Committee will hold its next meeting, which will be open to the public and webcast.  The agenda items for the upcoming meeting include the following:  a discussion on investor protection; a discussion of trends relating to investment research.  The Committee also is scheduled to discuss disclosures on human capital.

At a recent Practising Law Institute conference, William Hinman, Director of the Securities and Exchange Commission’s Division of Corporation Finance, commented on the application of the Commission’s principles-based disclosure requirements to areas posing complex risks, such as Brexit.  Hinman noted that, “[p]rinciples-based disclosure requirements articulate an objective and look to management to exercise judgment in satisfying that objective by providing appropriate disclosure when necessary.”  The particular areas in which preparers of filings might consider addressing the impact of Brexit include the MD&A section and Risk Factors section of SEC filings.  To that end, Director Hinman noted that, “[a] well written MD&A allows investors to understand how management is positioning the company in the face of uncertainties, like those associated with rapidly evolving topics such as Brexit.”  Hinman reported on the Division’s review of disclosures contained in filings made by registrants across a range of industries regarding the impact of Brexit.  He noted that most companies provided only generic disclosures that are not helpful to investors.  Many of the more tailored disclosures reviewed by the Staff were prepared by foreign private issuers.  In light of this, Hinman noted that there is room for continued improvement relating to Brexit disclosures.  He urged companies to consider a number of questions, including the following:

  • How does management assess and analyze Brexit-related risks and the potential impacts on the company and its operations?
  • What is management doing to mitigate and manage these risks?
  • What is the nature of the board’s role in overseeing the management of these risks?
  • In examining the disclosures, finally, would the disclosures satisfy the curiosity of a thoughtful, deliberative board member considering the potential impact of Brexit on the company’s business, operations and strategic plans?

Hinman provided a number of examples of disclosure topics related to the impact of Brexit that companies across a range of industries might consider as they prepare more tailored disclosures.  Hinman also commented on sustainability disclosures and noted that he believes there are still evolving views regarding the utility and materiality of sustainability disclosures.  In light of this, Hinman seemed to favor reliance on principles-based disclosure requirements, rather than new prescriptive sustainability disclosure requirements.  He reminded the audience that in 2010 the Commission had published an interpretive release that considered how disclosure requirements may pertain to climate-related issues for some companies.  The full text of the Director’s remarks are available here:  https://www.sec.gov/news/speech/hinman-applying-principles-based-approach-disclosure-031519.

On February 28, 2019, the staff of the Securities and Exchange Commission’s Division of Investment Management issued a no-action letter to the Independent Directors Council permitting board members of a business development company to vote by telephone, video conference or other remote means in certain circumstances.  This modernized position softens, but does not eliminate, the unnecessary burden for BDCs and their boards to adhere to certain in-person voting requirements.  For example, the Investment Company Act of 1940 and rules thereunder provide that the approval or renewal of an advisory contract requires the vote of directors at an in-person board meeting.  The no-action relief may be relied upon if a director is unable to meet at an in-person board meeting as a result of unforeseen or emergency circumstances.  Such circumstances could include illness or death, including of family members, weather events or natural disasters, acts of terrorism and disruptions in travel that prevent some or all directors from attending an in-person board meeting.  Additionally, either no material changes may be proposed at the board meeting to the existing contract, plan or arrangement or the material aspects of the proposed new contract, plan or arrangement must have been previously discussed at a prior in-person board meeting (without a vote).  If relying upon the no-action relief, the directors are required to ratify the prior approval at the next in-person board meeting.  A copy of the no-action letter may be found using the following link: http://business.cch.com/srd/independent-directors-council-022819.pdf