I know that many companies are working through their conflict minerals analysis and have begun preparing their initial Form SD which is due June 2nd. I wanted to make companies aware that the SEC issued new FAQs today clarifying various issues related to conflict minerals due diligence and the conflict minerals report. Please see the link below:
The SEC announced today that its Office of Compliance Inspections and Examinations is launching the Never-Before Examined Initiative, an initiative directed at investment advisers that have never been examined. Such initiative will focus on those advisers that have been registered with the SEC for three or more years. These examinations will concentrate on the advisers’ compliance programs, filings and disclosure, marketing, portfolio management, and safekeeping of client assets.
As I sit at home working remotely (AGAIN!) due to the latest snowstorm, I am struck by the thought of how paralyzing this winter has been. Similar to Hurricane Sandy in 2012, this snowy and icy winter is likely to have a material affect on many public companies.
Companies should consider whether additional disclosure should be added to their earnings releases or periodic filings regarding the potential effects of this winter season. In particular, companies should consider whether to include disclosure related to this winter season in the following areas:
- Forward-looking statements – references to the winter season as one of the risks and uncertainties which could cause actual results to differ materially from those projected;
- Risk Factors– risk factor related to the potential impact of this winter season on their results of operations and financial position;
- MD&A – disclosure about the effects of this winter season if the report is filed after the winter season affected the company and/or as a known trend, event or uncertainty;
- Guidance – companies should consider whether guidance given in the past or currently being issued may be affected by the winter season. Companies should consider whether it is necessary to point out that such guidance did or does not take into account the effects of this winer season or estimates the effects of this winter season.
Hopefully this winter madness will end soon and we can all get back to our routines as usual. Stay safe and warm.
Today, the SEC issued new Compliance and Disclosure Interpretations (C&DIs) related to Rule 506 offerings commenced prior to September 23, 2013, the effective date of the new Rule 506(c) exemption.
Effective September 23, 2013, a company conducting a private placement under Rule 506 of Regulation D has had a choice of either using Rule 506(b) for a private placement subject to the prohibition against general solicitation or using new Rule 506(c) for a private placement in which securities can be offered through general solicitation provided that all purchasers are accredited investors and the company takes reasonable steps to verify that all purchasers are accredited investors (see our prior blog post for additional information about Rule 506(c)).
The new rule Rule 506(c) exemption was set forth in Securities Act Release No. 9415. In such release, the SEC explained that for an ongoing offering under Rule 506 that commenced before the effective date of Rule 506(c), an issuer may choose to continue such offering after the effective date in accordance with the requirements of either Rule 506(b) or Rule 506(c). If an issuer chooses to continue the offering in accordance with the requirements of Rule 506(c), any general solicitation that occurs after the effective date will not affect the exempt status of offers and sales of securities that occurred prior to the effective date in reliance on Rule 506(b).
The new C&DIs issued today further clarify this transitional guidance. Please see below a summary of such C&DIs.
- If an issuer
- commenced a Rule 506 offering before September 23, 2013, and
- decides, at some point after September 23, 2013, to continue that offering as a Rule 506(c) offering under the transition guidance in Securities Act Release No. 9415,
the issuer is not required to take “reasonable steps to verify” the accredited investor status of investors who purchased securities in the offering before the issuer conducted the offering in reliance on Rule 506(c). The issuer must take reasonable steps to verify the accredited investor status of only those investors who purchase securities in the offering after the issuer begins to make offers and sales in reliance on Rule 506(c).
- An issuer that commenced a Rule 506 offering before September 23, 2013 and made sales either before or after that date in reliance on the exemption that, as a result of Securities Act Release No. 9415, became Rule 506(b) may rely on the transition guidance in Securities Act Release No. 9415 that permits switching from Rule 506(b) to Rule 506(c) if it already sold securities to non-accredited investors before relying on the Rule 506(c) exemption as long as all sales of securities in the offering after the issuer begins to offer and sell in reliance on Rule 506(c) are limited to accredited investors and the issuer takes reasonable steps to verify the accredited investor status of those purchasers.
Last week we blogged that NASDAQ proposed to amend its independence standards for compensation committee members, which amendments would align NASDAQ’s approach to compensation committee independence with that employed by the NYSE. On December 11th, the SEC published a notice of filing and immediate effectiveness of the proposed rule change. Companies are required to comply with the compensation committee independence rules by the earlier of the date of their first annual meeting after January 15, 2014, or October 31, 2014.
Yesterday, the SEC issued new C&DIs related to Rule 506(c) offerings. The new C&DIs provide guidance on various aspects of Rule 506(c) offerings including the following:
- If an issuer commenced an offering in reliance on Rule 506 before September 23, 2013 and decides to continue that offering after September 23, 2013 in accordance with Rule 506(c), the issuer must file an amendment to the previously-filed Form D to indicate that the issuer is now relying on the Rule 506(c) exemption. If the issuer decides to continue the offering in reliance on Rule 506(b), no amendment to the previously-filed Form D is required solely to reflect this decision.
- An issuer will not lose the ability to rely on Rule 506(c) for an offering if a person who does not meet the criteria for any category of accredited investor purchases securities in the offering, so long as the issuer took reasonable steps to verify that the purchaser was an accredited investor and had a reasonable belief that such purchaser was an accredited investor at the time of the sale of securities.
- An issuer will not be able to rely on the Rule 506(c) exemption for an offering if the issuer does not take reasonable steps to verify the accredited investor status of purchasers (even if the purchasers actually meet the financial and other criteria to be accredited investors). The verification requirement in Rule 506(c) is separate from and independent of the requirement that sales be limited to accredited investors. The verification requirement must be satisfied even if all purchasers happen to be accredited investors. Under the principles-based method of verification, however, the determination of what constitutes reasonable steps to verify is an objective determination based on the particular facts and circumstances of each purchaser and transaction.
- An issuer may satisfy the verification requirement of Rule 506(c) by either using the principles-based method of verification or relying upon one of the specific, non-exclusive verification methods listed in the rule. Although the use of the non-exclusive verification methods is not required, an issuer that chooses to use one of such methods must satisfy the specific requirements of that method. In order to comply with the net worth verification method provided in the rule’s non-exclusive list, the relevant documentation must be dated within the prior three months of the sale of securities. If the documentation is older than three months, the issuer may not rely on the net worth verification method, but may instead determine whether it has taken reasonable steps to verify the purchaser’s accredited investor status under the principles-based method of verification.
- The third-party verification method in the non-exclusive list of verification methods in Rule 506(c) includes written confirmations from an attorney or certified public accountant who is licensed or duly registered, as the case may be, in good standing in a foreign jurisdiction. This method of verification is not limited to written confirmations from attorneys and certified public accountants who are licensed or registered in a jurisdiction within the United States.
- The verification method for existing investors in the non-exclusive list of verification methods does not apply to new issuers that have the same sponsor as the issuer in which the investor purchased securities in a prior Rule 506(b) offering. This non-exclusive method of verification is, by its terms, limited to verification of existing investors who purchased securities in the same issuer’s Rule 506(b) offering as accredited investors prior to September 23, 2013 and continue to hold such securities.
- If an issuer commences an offering intending to rely on Rule 506(c) but does not engage in any form of general solicitation in connection with the offering, the issuer may subsequently determine to rely on Rule 506(b) for the offering, as long as the conditions of Rule 506(b) have been satisfied with respect to all sales of securities that have occurred in the offering. To the extent the issuer already filed a Form D indicating its reliance on Rule 506(c), it must amend the Form D to indicate its reliance on Rule 506(b) instead, as that decision represents a change in the information provided in the previously-filed Form D.
- If an issuer commenced an offering in reliance on Rule 506(b), the issuer may determine, prior to any sales of securities in the offering, to rely on Rule 506(c) for the offering, as long as the conditions of Rule 506(c) are satisfied with respect to all sales of securities in the offering. To the extent the issuer already filed a Form D indicating its reliance on Rule 506(b), it must amend the Form D to indicate its reliance on Rule 506(c) instead, as that decision represents a change in the information provided in the previously-filed Form D.
- If the conditions of Rule 506(c) are not met in a purported Rule 506(c) offering, the issuer will not be able to rely on Securities Act Section 4(a)(2) private offering exemption if the issuer engaged in general solicitation. The use of general solicitation continues to be incompatible with a claim of exemption under Section 4(a)(2).
Effective September 30th, FINRA instituted enhancements to its public offering review process. Such enhancements include an immediate clearance process for certain shelf offerings, an expansion of its expedited review program for non-shelf offerings and the introduction of a new limited review process for certain non-shelf offerings of exchange-listed securities.
FINRA’s review improvements provide member firms with immediate clearance, 24 hours per day, 7 days a week, for shelf filings. Immediate clearance is available for WKSI filings, new shelf registration statements, and shelf takedowns. In order to obtain immediate clearance, member firms must:
- provide background information related to the offering and make the representations required by the existing same-day clearance procedures;
- undertake to provide all information necessary to complete the filing within three business days; and
- provide the Fedwire number for the payment of the filing fee.
FINRA now has three review programs available for non-shelf filings: full review, expedited review and limited review. All non-shelf filings will initially be considered to be full review unless a different request is subsequently made.
Expedited Review. Effective September 30th, FINRA expanded the expedited review program for non-shelf offerings. FINRA will determine whether to grant an expedited review request based on the complexity of the proposed arrangements. PIPEs, resale offerings distributed on a best efforts basis, non-traded investment programs and offerings in which a participating FINRA member firm has acquired unregistered securities during the review period will generally not be eligible for an expedited review.
Limited Review. On September 30th, FINRA implemented a new limited review process for certain non-shelf offerings. The member firm must submit a request for FINRA to consider whether to grant a limited review. For a member firm to request a limited review, the offering must satisfy all of the following criteria:
- securities must be listed on a national securities exchange;
- firm commitment or straight best efforts distribution methods must be used;
- total underwriting compensation must be within allowable guidelines and may not include securities;
- underwriting arrangements may not include prohibited terms as defined in FINRA Rule 5110(f)(2), such as indeterminate items of value;
- FINRA members must be identified in the offering documents and filing system;
- offering must be filed with the SEC; and
- offering must not include a new or novel product or be one that poses complex regulatory issues.
A member firm must also make six representations as part of its request for limited review, although four of such representations may be deferred past the initial request.
On Wednesday, September 18, 2013 at 10:00 a.m. the SEC will hold an open meeting to consider whether to propose rules to require companies to disclose the median annual total compensation of all employees and the ratio of that median to the annual total compensation of the company’s chief executive officer as mandated by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
In July, the United States District Court for the District of Columbia rejected a summary judgment motion challenging the SEC’s conflict minerals rules. Accordingly, the conflict minerals rules remain in effect as adopted.
However, the legal challenge continues as the National Association of Manufacturers and other business interests recently filed a notice of intent to appeal this district court ruling. Initial documents related to the appeal are due on September 12th.
On August 1, 2013, the SEC’s Division of Investment Management issued IM Guidance Update No. 2013-04 (Guidance). The Guidance provides relief to private fund advisers with respect to the requirement to maintain certain certificated, privately-offered securities with a qualified custodian. Specifically, the Guidance provides the following:
“The Division would not object if an adviser does not maintain private stock certificates with a qualified custodian, provided that (1) the client is a pooled investment vehicle that is subject to a financial statement audit in accordance with paragraph (b)(4) of the custody rule; (2) the private stock certificate can only be used to effect a transfer or to otherwise facilitate a change in beneficial ownership of the security with the prior consent of the issuer or holders of the outstanding securities of the issuer; (3) ownership of the security is recorded on the books of the issuer or its transfer agent in the name of the client; (4) the private stock certificate contains a legend restricting transfer; and (5) the private stock certificate is appropriately safeguarded by the adviser and can be replaced upon loss or destruction.”
Advisers wanting to rely on this relief should revise their compliance manuals and adopt additional policies and procedures related to the safeguarding of private stock certificates that are not maintained with a qualified custodian.