SEC Proposes “Regulation A+” Amendments

The SEC has proposed regulations to amend Regulation A as required by the Jumpstart Our Business Startups Act (JOBS Act).   Title IV of the JOBS Act directed the SEC to write regulations providing for an exemption from Securities Act registration for public offerings of up to an aggregate of $50 million of equity, debt or convertible debt securities in a 12 month period.  This provision has been termed “Regulation A+” by some observers because it is designed to be an improvement upon the SEC’s Regulation A, which permits exempt public offerings of up to $5 million by non-SEC reporting companies.  Regulation A has been little used because, for one thing, the $5 million limit is too low. 

The SEC’s proposed rules would update and expand the Regulation A exemption by creating two tiers of Regulation A offerings:

  • Tier 1, which would consist of those offerings already covered by Regulation A – that is securities offerings of up to $5 million in a 12-month period, including up to $1.5 million for the account of selling security-holders.
  • Tier 2, which would consist of securities offerings of up to $50 million in a 12-month period, including up to $15 million for the account of selling security-holders.

For offerings up to $5 million, the company could elect whether to proceed under Tier 1 or 2.

Basic Requirements

Under Tier 1 and Tier 2, companies would be subject to basic requirements, including ones addressing issuer eligibility and disclosure that are drawn from the existing provisions of Regulation A.  The proposed rules also would update Regulation A to, among other things:

  • Require issuers to electronically file offering statements with the SEC.
  • Provide that an offering statement and any amendment can be qualified only by order of the SEC.
  • Permit companies to submit draft offering statements for nonpublic SEC review prior to filing.
  • Permit the use of “testing the waters” solicitation materials both before and after filing of the offering statement.
  • Modernize the qualification, communications, and offering process in Regulation A to reflect analogous provisions of the Securities Act registration process, including permitting issuers to satisfy their delivery requirements as to the final offering circular under an “access equals delivery” model when the final offering circular is filed and available on EDGAR.

 Additional Tier 2 Requirements

In addition to the basic requirements, companies conducting Tier 2 offerings would be subject to the following additional requirements:

  • Investors would be limited to purchasing no more than 10 percent of the greater of the investor’s annual income or net worth.
  • The financial statements included in the offering circular would be required to be audited.
  • The company would be required to file annual and semiannual ongoing reports and current event updates that are similar to the requirements for public company reporting.


Regulation A would be available to companies organized in and with their principal place of business in the United States or Canada, as is currently the case under Regulation A.

The exemption would not be available to companies that:

  • Are already SEC reporting companies and certain investment companies.
  • Have no specific business plan or purpose or have indicated their business plan is to engage in a merger or acquisition with an unidentified company.
  • Are seeking to offer and sell asset-backed securities or fractional undivided interests in oil, gas, or other mineral rights.
  • Have not filed the ongoing reports required by the proposed rules during the preceding two years.
  • Are or have been subject to a SEC order revoking the company’s registration under the Exchange Act during the preceding five years.
  • Are disqualified under the proposed “bad actor” disqualification rules.

Preemption of Blue Sky Law

In view of the range of investor protections provided under the proposal, state securities law requirements would be preempted for Tier 2 offerings. 

The SEC will seek public comment on the proposed rules for 60 days.  Let’s see whether the commenters give the proposed rules an “A+”?

2013 SEC Government-Business Forum on Small Business Capital Formation

The SEC will hold its 2013 SEC Government-Business Forum on Small Business Capital Formation on November 21, 2013. A major purpose of the Forum is to provide a platform to highlight perceived unnecessary impediments to small business capital formation and address whether they can be eliminated or reduced. Each Forum seeks to develop recommendations for government and private action to improve the environment for small business capital formation, consistent with other public policy goals, including investor protection. Participants in the Forum typically have included small business executives, venture capitalists, government officials, trade association representatives, lawyers, accountants, academics and small business advocates. In recent years, the format of the Forum typically has emphasized small interactive breakout groups developing recommendations for governmental action

This year’s topics include:

• Panel discussion: Evolving practices in the new world of Regulation D offerings;
• Panel discussion Crystal ball: Now that you raised the money, what’s next for the company and the markets;
• Breakout session: Development of recommendations for securities-based crowdfunding offerings;
• Breakout session: Exempt securities offerings; and
• Breakout session: Securities regulation of smaller public companies.

The panel sessions will be webcast live on the SEC’s home page at beginning at 9:00 a.m. The afternoon breakout groups will not be webcast.  We will post on the results of the Forum when available.

Insider Trading Updates: Cuban Jury to SEC – No Cigar; Heinz Tippees Revealed (But Who Were the Tippers?)

The SEC loses some and wins some insider trading cases:

The SEC’s five year old insider trading case against Dallas Mavericks owner, Mark Cuban, came to a sad conclusion for the SEC on Wednesday when a federal jury acquitted Mr. Cuban of insider trading charges.

The SEC had accused Mr. Cuban of insider trading in the securities of, a publicly traded Internet search engine company. According to the complaint, in June 2004, Mr. Cuban sold his entire 600,000 share position in after learning from the CEO that the company was planning to conduct a PIPE offering. The complaint alleged that Cuban avoided losses in excess of $750,000 by selling his stock prior to the public announcement of the PIPE offering.

The SEC alleged that Mr. Cuban verbally agreed to keep confidential and not trade on the information that the CEO gave him about the private offering. Mr. Cuban denied any such agreement and the jury agreed. Possibly hurting the SEC’s position was the fact that their main witness, the CEO, did not testify in person.

And now for a win.

The SEC announced that they had come to a settlement with the previously unknown inside traders who pocketed 1.8 million in profits by trading call options in advance of the public announcement of the sale of the H.J. Heinz Company.

The SEC filed an emergency enforcement action earlier this year to freeze assets in a Swiss-based trading account used to reap the illegal trading profits in advance of the Heinz announcement.

In an amended complaint filed earlier this month, the SEC alleged that the order to purchase the Heinz options was placed by Rodrigo Terpins while he was vacationing at Walt Disney World in Orlando, and that the trading was based on material non-public information that he received from his brother Michel Terpins. The trades were made through an account belonging to a Cayman Islands-based entity. Rodrigo Terpins purchased nearly $90,000 in option positions in Heinz the day before the announcement, and those positions increased by more than 20 times the next day.

The Terpins brothers agreed to disgorge the entire $1.8 million in illegal profits made from trading Heinz options. The Terpins brothers also will pay $3 million in penalties.

Interestingly, the amended complaint does not reveal the identity of the “tipper” that provided the information to Michel Terpins, other than to say that the SEC believed that the “information source” had disclosed the information about the pending deal “in breach of a duty.”

Is Less More? SEC Chair White Speaks on the Future of Disclosure Reform

SEC Chair Mary Jo White spoke about the future of securities disclosure reform in a speech yesterday before the National Association of Corporate Directors.

Ms. White noted that a common problem today is “information overload” –  when investors are provided “too much” information –  “a phenomenon in which ever-increasing amounts of disclosure make it difficult for an investor to wade through the volume of information she receives to ferret out the information that is most relevant.” The reasons for the increase are several: new rules issued by the Staff, legislative changes such as the Private Securities Litigation Reform Act, which led to a proliferation of risk factors, and the “say-on-pay” vote mandated by the Dodd-Frank Act, which led to 40+ pages of executive compensation disclosures, and a company’s decision (typically prompted by their counsel) to provide more information in an effort to reduce the risk of litigation.  

As required by the JOBS Act, the SEC Staff is reviewing current disclosure requirements to determine how to modernize and simplify the requirements, and to reduce the costs and other burdens of the disclosure requirements for emerging growth companies. Chair White said that the SEC expects to issue this report “very soon.”

The areas of disclosure reform for future consideration noted by Chair White include:

  • Use of a “core document” or “company profile” containing base information that would be updated as required with information about offering, financial statements and significant events.
  • Elimination of repetitive disclosures in filings, such as “legal proceedings” for which the identical information can appear in a Form 10-K four or more times.
  • Revision of the Industry Guides, which, except for oil and gas, have not been updated in decades.  
  • Consideration of whether the applicable disclosure timeframes should be shortened in light of the increased use and speed of technology, including social media and smart phones.
  • Whether there are required disclosures that are not necessary for investors or that investors do not want, such as share prices, dilution disclosures and earnings to fixed charges ratios.

Hopefully, the SEC can quickly complete the remaining rules it is required to write under the Dodd-Frank Act and turns its attention to writing rules designed to streamline the disclosure process.

Burn, Baby, Burn – Reg D Inferno*

A recent report issued by SEC’s Division of Economic and Risk Analysis shows that Regulation D remained “hot” as a means to raise capital – even before the recent amendments to that rule take effect. The report updates a 2012 SEC report that analyzed Form D filings from the beginning of 2009 through the first quarter of 2011. The updated report contains information through the end of 2012 and provides additional analysis.

Among the highlights of the report:

• Capital raised through Regulation D offerings continues to be sizeable – $863 billion reported in 2011 and $903 billion in 2012. By contrast, public equity offerings raised less than $250 billion in each of those years.

• Since 2009, hedge funds reported raising $1.3 trillion through Regulation D offerings. Private equity funds reported $489 billion; non‐financial issuers reported $354 billion. Foreign issuers account for 19% of the total amount sold.

• Since 1993, the number of Regulation D offerings fluctuates directly with the S&P 500, suggesting that the health of the private market is closely tied to the health of the public market (and thereby contradicting the view that the private capital markets step in during times of public market stress).

• Rule 506 accounts for 99% of amounts sold through Regulation D. More than two‐thirds of non‐fund issuers could have claimed a Rule 504 or 505 exemption based on offering size, indicating that issuers value the Blue Sky law preemption allowed under Rule 506.

• More capital was raised in Regulation D offerings in 2012 than in public equity offerings or Rule 144A offerings; public debt offerings raised slightly more capital than Regulation D, but, as the authors noted, public debt offerings include many refinancings of existing debt, while approximately two-thirds of Regulation D offerings represent new equity capital.

• There have been more than 40,000 Regulation D offerings by non‐financial issuers since 2009 with a median offer size of less than $2 million.

• Form D filings report that more than 234,000 investors participated in Regulation D offerings in 2012, of which 91,000 participated in offerings by non‐financial issuers, more than double the number of investors participating in hedge fund offerings.

• Nonaccredited investors were present in only 10% of Regulation D offerings (suggesting that the recent amendments permitting general solicitations, provided that there are no sales to nonaccredited investors, should have little adverse effect).

• Only 13% of Regulation D offerings since 2009 reported using a broker‐dealer or finder, which usage may decline after general solicitation becomes permissible.

• Nearly 10% of all SEC reporting companies raised capital through Regulation D offerings during the period 2009-1011, and about 6% in 2012.

The authors noted that the actual amount of capital raised through Regulation D offerings may be higher than reported because there is no requirement to file a final From D showing the total raised and, further, some issuers do not file a Form D at all.

The bottom line is that the recent Regulation D amendments permitting general solicitation will likely add additional fuel to this already hot market.

* With humble apologies to The Trammps and their 1976 hit, “Disco Inferno.”

SEC Adopts “Me Too” Amendments for Rule 144A

As part of amendments to Regulation D, and as required by the JOBS Act, the SEC adopted an amendment to Rule 144A to provide that securities sold under that Rule may be offered to persons other than qualified institutional buyers, often referred to as QIBs, including by means of general solicitation or general advertising, provided that securities are sold only to persons that the seller and any person acting on behalf of the seller reasonably believe are QIBs.

Rule 144A is a “safe-harbor” from the Securities Act registration requirements that is often used by public and private companies to quickly raise capital through sale of debt and preferred securities.  Securities are purchased from the issuer by an initial purchaser, typically an investment bank, pursuant to the Securities Act Section 4(a)(2) private placement exemption, and then resold pursuant to the Rule 144A exemption.  Prior to the amendment, it had been unclear whether general solicitations were permitted under Rule144A.  This amendment clarifies that general solicitations are permitted provided that sales are made only to QIBs or persons reasonably believed to be QIBs.

This amendment will become effective 60 days after publication in the Federal Register.  The Adopting Release provides that for ongoing Rule 144A offerings that commenced before the effective date, offering participants will be entitled to conduct the portion of the offering following the effective date of the amended rule using general solicitation, without affecting the availability of Rule 144A for the portion of the offering that occurred prior to the effective date.  Footnote 172 to the Adopting Release also makes it clear that the use of a general solicitation permitted in Rule 144A resales from the initial purchaser to QIBs will not affect the availability of the Section 4(a)(2) private placement exemption or the Regulation S offshore offering exemption for the sale of the securities from the issuer to the initial purchaser.

Lastly, in response to some comments, the SEC reaffirmed its view, previously expressed in the Proposing Release, that concurrent offshore offerings that are conducted in compliance with Regulation S will not be integrated with domestic unregistered offerings that are conducted in compliance with Rule 506 or Rule 144A, as amended.

You Can’t Shoot Zombie Directors!

Recently, investor advocacy groups have focused on so-called “zombie directors” – directors of public companies who are elected despite failing to garner a majority of stockholders’ votes in uncontested elections.  CalPERS recently identified 52 directors who failed to win shareholder votes but either stayed in place or subsequently were reinstated. 

Corporate laws across most states, including Delaware, generally adhere to “plurality voting,” which provides that a director receiving the most “for” votes will be elected as a director.  As a result, in an uncontested election, a director receiving just one vote would be elected even though the balance of the votes was withheld.

In recent years, various corporate governance and stockholder advocacy groups have pushed for “majority voting” for directors to make boards accountable to investors.  Majority voting generally provides that, in uncontested elections, a director nominee must receive more “for” votes than “withhold” votes (or if permitted, “against” votes) to be elected. 

The Council of Institutional Investors’ corporate governance policies state that in uncontested elections, directors should be elected by majority vote; directors who fail to receive majority support should step down from the board and not be reappointed.  According to the Council, while more than 70 percent of companies in the Standard & Poor’s 500 Index use the majority vote standard for uncontested board elections, thousands of U.S. companies still use plurality voting.  Further, the Council has noted that some companies that have embraced majority voting for directors give their boards discretion to overrule stockholders and reappoint incumbent directors who fall short of majority support in uncontested elections.

If your company has a majority voting requirement, one way to ensure that you do not have zombie directors is to institute a board policy to the effect that board nominees must submit an irrevocable resignation in advance that will become effective upon the failure of that nominee to receive a majority of votes in an uncontested election.  Such a resignation is now expressly permitted under Delaware corporate law.

But be careful of what you wish for – one unintended consequence of a majority voting requirement coupled with an advance resignation provision is that you may be left with an understaffed board.  For example, a company with a majority voting requirement runs a risk that, in an uncontested election, it may not have a sufficient number of independent directors if either a proxy advisory firm, such as ISS, or a group of dissident stockholders, wages a successful “withhold” vote campaign against some or all of the incumbent board (perhaps due to dissatisfaction with the company’s executive compensation policies).  As a result, a company may be left without a sufficient number of independent directors to satisfy stock exchange listing requirements. 

At the end of the day, in some cases, a zombie director may be better than no director!

Land of Honest Abe – Not So Honest?

In March, the SEC announced that it had charged the State of Illinois with securities fraud for misleading municipal bond investors about the state’s approach to funding its pension obligations. This marks the second time that the SEC has charged a state with violating federal securities laws in their public pension disclosures. The SEC charged New Jersey in 2010 with misleading municipal bond investors about its underfunding of the state’s two largest pension plans. Given the general problems facing state government pensions systems, hopefully the SEC’s action will serve as a wake-up call to the other 48 states and their counsel in drafting municipal bond offering documents.

Interestingly, the SEC’s order did make any direct findings that any investors had actually lost money, other than statements that, as more information became available, the state’s bond ratings were lowered and that the risk premium associated with Illinois bonds rose, which presumably would cause the price of outstanding bonds to fall.

An SEC investigation revealed that Illinois failed to inform investors about the impact of problems with its pension funding schedule as the state offered and sold more than $2.2 billion worth of municipal bonds from 2005 to early 2009. Illinois failed to disclose that its statutory plan significantly underfunded the state’s pension obligations and increased the risk to its overall financial condition. The state also misled investors about the effect of changes to its statutory plan. Illinois, which implemented a number of remedial actions and issued corrective disclosures beginning in 2009, agreed to settle the SEC’s charges.

According to the SEC’s order, the state established a 50-year pension contribution schedule in the Illinois Pension Funding Act that was enacted in 1994. The schedule proved insufficient to cover both the cost of benefits accrued in a current year and a payment to amortize the plans’ unfunded actuarial liability. The statutory plan structurally underfunded the state’s pension obligations and backloaded the majority of pension contributions far into the future. This structure imposed significant stress on the pension systems and the state’s ability to meet its competing obligations – a condition that the SEC determined worsened over time.

The SEC’s order found that Illinois misled investors about the effect of changes to its funding plan, particularly pension holidays enacted in 2005. Although the state disclosed the pension holidays and other legislative amendments to the plan, Illinois did not disclose the effect of those changes on the contribution schedule and its ability to meet its pension obligations. The state’s misleading disclosures resulted from various institutional failures. As a result, Illinois lacked proper mechanisms to identify and evaluate relevant information about its pension systems into its disclosures. The SEC cited, for example, that Illinois had not adopted or implemented sufficient controls, policies, or procedures to ensure that material information about the state’s pension plan was assembled and communicated to individuals responsible for bond disclosures. The state also did not adequately train personnel involved in the disclosure process or retain disclosure counsel.

According to the SEC’s order, Illinois took multiple steps beginning in 2009 to correct process deficiencies and enhance its pension disclosures. The state issued significantly improved disclosures in the pension section of its bond offering documents, retained disclosure counsel, and instituted written policies and procedures as well as implemented disclosure controls and training programs. The state designated a disclosure committee to assemble and evaluate pension disclosures. In reaching a settlement, the Commission considered these and other remedial acts by Illinois and its cooperation with SEC staff during the investigation. Without admitting or denying the findings, Illinois consented to the SEC’s order to cease and desist from committing or causing any violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933.

Beware Inside Traders: SEC has “57 Varieties” of Ways to Get You!

The SEC announced last Friday that it had obtained an emergency court order to freeze assets in a Zurich, Switzerland-based trading account that allegedly was used to reap more than $1.7 million in insider trading profits in advance of the February 14th announcement of the acquisition of the H.J. Heinz Company by Berkshire Hathaway and 3G Capital Partners. The case is noteworthy because of the speed of the SEC’s action and the fact that there is only the suspicion of insider trading.

According to the SEC complaint, “certain unknown traders engaged in highly suspicious and highly profitable trading in Heinz calls through an omnibus account located in Zurich, Switzerland.” The traders purchased 2,533 out-of-the-money June $65 call options, each of which would enable the holder to purchase 100 shares of Heinz stock for $65 per share before the calls expired on June 22, 2013. The SEC complaint termed this trade “highly suspicious” for several reasons, including:
• at the time preceding the June $65 call option purchase, Heinz stock had typically traded around $60 per share;
• the general historical lack of trading in the June $65 calls;
• the fact that the trading account had no prior trading history in Heinz stock or options; and
• the timing of the investment of nearly $90,000 in risky call options the day prior to the Heinz acquisition announcement.

The SEC alleged that the trades were effected while the traders were in possession of material, nonpublic information about the contemplated Heinz acquisition and, therefore, were in violation of Section 10(b) of the Securities Exchange Act and Rule 10b-5.

According to Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office, “Despite the obvious logistical challenges of investigating trades involving offshore accounts, we moved swiftly to locate and freeze the assets of these suspicious traders, who now have to make an appearance in court to explain their trading if they want their assets unfrozen.”

Guess that leaves the “suspicious traders” in a pickle!

SEC Announces Small and Emerging Companies Advisory Committee Agenda

The SEC has announced the agenda for a meeting of its Advisory Committee on Small and Emerging Companies being held this Friday, February 1st.
The Committee will consider recommendations about:
• trading spreads for smaller exchange-listed companies,
• creation of a separate U.S. equity market limited to sophisticated investors for small and emerging companies, and
• disclosure rules for smaller reporting companies.
The meeting will begin at 9:30 a.m. in the multi-purpose room at the SEC’s Washington D.C. headquarters. Public seating will be on a first-come, first-served basis. The event will be webcast live on the SEC website and will be archived for later viewing.
For information about providing written comments, see the SEC’s press release available at