Generally, under Nasdaq Rule 5810(b), a company listed on Nasdaq that receives from Nasdaq a notification of deficiency, a Staff Delisting Determination or a Public Reprimand Letter (collectively, a “Deficiency Notice”) is required to make a public announcement disclosing receipt of such notice and the Nasdaq Rule(s) upon which the Deficiency Notice is based.  Generally, a company can satisfy its obligation to make a public announcement by filing a Form 8-K with the disclosure required by Item 3.01.  However, if the notice or delisting determination relates to the requirement to file a periodic report, the company is required to file a press release, in addition to filing a Form 8-K.   

As described in its proposed rule changes filed with the SEC, Nasdaq is concerned that companies are not disclosing information sufficient to allow the public to understand the deficiency that led to the Deficiency Notice and the underlying basis of the deficiency.  Nasdaq also expressed concern that companies may fail to make the disclosure at all.  In particular, Nasdaq noted that, as the remedy for failing to provide the required public disclosure of the receipt of a Deficiency Notice is to halt trading in the company’s securities, a company that has already been halted may decline altogether to make the required disclosure. 

To address these concerns,  Nasdaq proposes modifying Rules 5250(b)(2) and 5810(b) and IM-5810-1 to require that a company receiving a Deficiency Notice  described in its public disclosure “each specific basis and concern identified by Nasdaq in reaching its determination that the [c]ompany does not meet the listing standard.”  In addition, Nasdaq proposes modifying IM-5810-1 and adding Rule 5840(l) to provide Nasdaq clear authority to make a public announcement, including by press release, describing a Deficiency Notice or other event involving a company’s listing or trading on Nasdaq.  The amendment to IM-5810-1 would permit Nasdaq to make a public announcement of the notice if the company does do so or the company’s announcement does not include all of the required information.  New Rule 5840(l) would permit Nasdaq to make a public announcement even when the company has not failed to do so.   

The proposed changes will not become effective until approved by the SEC.


On September 26, 2012, the Securities and Exchange Commission announced that starting October 1, 2012, certain emerging growth companies and foreign private issuers would be able to submit to the SEC draft registration statements for non-public and confidential review via a modified EDGAR system instead of via the current secure e-mail submission process.  Once the EDGAR Filer Manual for EDGAR Release 12.2 becomes effective, eligible issuers desiring to take advantage of the confidential review process will be required to use the new EDGAR system. 

To assist issuers with the use of the new confidential filing procedures, the SEC posted a set of detailed instructions on how to prepare an electronic submission of a draft registration statement, or an amendment.  In addition, issuers that file via the new EDGAR system will no longer need to file copies of previously submitted draft registration statements as exhibits to their publicly-filed registration statements to comply with the JOBS Act’s mandate that the drafts become publicly available at least 21 days prior to the start of the road show.  The new EDGAR system will allow issuers to direct the EDGAR system to publicly file the drafts as individual documents on EDGAR.

The new EDGAR system is part of the SEC’s efforts to meet the requirements of Section 106(a) of the JOBS Act mandating that certain pre-IPO emerging growth companies be provided an opportunity to submit draft registration statements to the SEC for confidential review.  In addition, the new EDGAR system will support the SEC’s policies and procedures allowing certain foreign private issuers that are not emerging growth companies to submit registration statements to the SEC for non-public review.


On August 29, 2012, the Securities and Exchange Commission issued its proposed rules to eliminate the prohibition against general solicitation and general advertising in certain securities offerings made pursuant to Securities Act Rules 506 and 144A.  The rules were proposed pursuant to Section 201(a)(1) of the JOBS Act.  The SEC will seek public comment for 30 days after the publication of the rules in the Federal Register.

Under the proposed rules, issuers would be permitted to offer securities using general solicitation and advertising if:

  • The issuer takes reasonable steps to verify that the purchasers are accredited investors; and
  • All purchasers are accredited investors because either:
    • They come within one of the categories of persons who are accredited investors under Rule 501, or
    • The issuer reasonably believes they come within one of the categories at the time the securities are sold.

The proposed rules do not require specific methods to verify accredited investor status.  Instead, the proposed rules require issuers to consider the facts and circumstances of the transaction.  In its release proposing the new rules, the SEC enumerated certain factors issuers should consider and noted that “whether the steps taken are “reasonable” would be an objective determination, based on the particular facts and circumstances of each transaction.” 

For those issuers that do not want to engage in general solicitation and verification procedures, the proposed rules would preserve the existing portions of Rule 506 as a separate exemption so that companies conducting offerings without the use of general solicitation or advertising would not have to comply with the new verification provisions. 

In addition, under the proposed rules, securities sold pursuant to Rule 144A could be offered to persons other than “qualified institutional buyers,” including by means of general solicitation, if the securities are sold only to persons whom the seller and any person acting on the seller’s behalf reasonably believes to be qualified institutional buyers.

Lessons From a Recent SEC Enforcement Matter

On July 18, 2012, the SEC announced that it entered into a deferred prosecution agreement with the Amish Helping Fund (AHF).  AHF was formed in 1995 by a group of Amish elders interested in furthering the Amish way of life.  AHF offered and sold securities, the proceeds of which were used to fund mortgage and construction loans to young Amish families in Ohio.  The SEC asserted that AHF’s offering memorandum, drafted in 1995, was not updated for 15 years and contained material misrepresentations about the fund and the securities being offered.  When the SEC informed AHF of the alleged violations, AHF immediately cooperated, updated its offering memorandum and provided existing investors with a corrected copy of the updated  memorandum, offered all existing investors the right of rescission, and retained a certified public accountant to perform ongoing audits, among other things.  In its press release, the SEC emphasized that the SEC acknowledged and rewarded AHF’s cooperation.

What lessons can we learn from this enforcement matter?  First, that the securities laws apply without regard to the underlying reasons you are seeking to raise money.  Even when raising money for a “good cause”, such as helping young Amish families, when selling securities, compliance with applicable securities laws is still critical.  Second, offering materials must be reviewed and updated on a regular basis to reflect changes.  A company may not simply prepare a disclosure document, and then keep reusing the disclosure document from year to year without reviewing and updating it.  Updating is critical to providing accurate and complete information to investors.

SEC Approves Rule Requiring a Single, Consolidated Audit Trail System to Track Trading Activity

On July 11, 2012, the Securities and Exchange Commission announced that it approved Rule 613 pursuant to the Securities Exchange Act of 1934 requiring the national securities exchanges and the Financial Industry Regulatory Authority (collectively, the “SROs”) to develop a detailed, comprehensive plan for creating, implementing, and operating a single, market-wide consolidated audit trail system.  The rule requires that the system, when implemented, collect and accurately identify every order, cancellation, and trade execution for all “National Market System” securities.  

Currently, there is no single, readily accessible database regarding orders and executions.  Instead, such information must be compiled from separate audit trail systems established by the various SROs that cover orders only in their respective markets.  Presently, preparing such a compilation can be a long and tedious process.  For example, according to comments from SEC Chairman Mary L. Shapiro, after the Flash Crash of May 6, 2010, it took dozens of highly-trained economists, financial professionals, and data technologists four months to assemble and process information necessary to fully analyze just a few hours of trading on a single day. 

While the rule was approved, Commissioner Aguilar did not support the rule, stating in part that “today’s rule falls short of establishing the process that investors deserve. . . . I am concerned that the [proposed rule] fails to set appropriately specific requirements to ensure the creation of a comprehensive market surveillance system . . . .”

The rule will become effective 60 days after publication in the Federal Register and requires the SROs to submit their plan for the consolidated audit trail system to the SEC within 270 days after publication of the SEC adopting release in the Federal Register.  The plan will not be implemented unless and until approved by the SEC.


Financial Accounting Standards Board Shelves Efforts to Revise Loss Contingency Disclosure Rules (Finally!)

On July 9, 2012, the Financial Accounting Standards Board (FASB) finally decided to shelve its efforts to revise the disclosure requirements for loss contingencies under FASB Accounting Standards Codification™ Topic 450.  Since 2007, the FASB had been considering expanding and enhancing the disclosures required with respect to loss contingencies to address concerns of investors and other users of financial statements that the existing disclosures do not provide enough information, soon enough, to help them evaluate the possible outcome of a loss contingency, such as a lawsuit or liability for an environmental clean-up.  The proposed changes would have lowered the threshold for reporting loss contingencies to include certain remote contingencies and would have required additional qualitative and quantitative disclosures.   

There was overwhelming opposition to the proposed changes.  Much of the opposition related to concerns that the additional financial statement disclosure would prejudice reporting company’s efforts to defend against lawsuits and other claims.  In addition, some users of financial statements commented that changes were unnecessary because the real issue is not the absence of a disclosure requirement, but rather the lack of compliance with the existing disclosure requirements. 

While FASB may have decided to shelve its current efforts to revise the disclosure requirements for certain loss contingencies, reporting companies should nonetheless remain vigilant about their reporting of loss contingencies, especially since the SEC continues to comment on loss contingency disclosures.

SEC Updates Procedures for Non-Public Submission of Registration Statements by Foreign Private Issuers

On May 30th, the SEC updated its procedures for foreign private issuers wishing to make non-public submission to the SEC of draft registration statements for review by the SEC.  Prior to the enactment of the JOBS Act, domestic issuers filing initial registration statements with the SEC were required to file publicly through the EDGAR system.  Under certain limited circumstances, however, foreign private issuers had the option of submitting to the SEC registration statements and amendments on a non-public basis for SEC review in connection with their first-time registration of securities with the SEC.   

Pursuant to Section 106(a) of the JOBS Act, any emerging growth company (EGC), in connection with its initial public offering, may submit to the SEC a draft registration statement for confidential, non-public review.  Section 106(a) of the JOBS Act also requires that the EGC file publicly the initial confidential submission and all amendments at least 21 days prior to the date the company starts its road show.  In addition, SEC policy requires EGCs to submit on EDGAR all company responses to SEC comment letters on confidential draft registration statements at the time the EGC first files its registration statement publicly on EDGAR.  The SEC will then publicly release its comment letters and company responses no earlier than 20 business days following the effective date of the registration statement, which is the same time frame the SEC uses for non-confidential filings.

Pursuant to the updated procedures, the process for non-public submission of initial registration statements by foreign private issuers that are not EGCs now tracks the process applicable to EGCs.  When a foreign private issuer utilizing the SEC’s non-public submission policy first publicly files its registration statement, it is also required to file publicly all previously submitted draft registration statements and to resubmit all previously submitted responses to SEC comment letters.  Thereafter, the SEC will publicly release its comment letters and company responses in accordance with its policy described above.  A foreign private issuer that both qualifies as an EGC and meets the SEC’s requirements for non-public submission of registration statements by foreign private issuers can elect to submit its initial draft registration statement confidentially to the SEC as an EGC or non-publicly as a foreign private issuer.  The new filing and submission requirements set forth in the SEC’s May 30th update apply to foreign private issuers seeking non-public review (as opposed to confidential review as an EGC) only where the initial draft registration statement was submitted after May 30, 2012.

JOBS Act – What People Are Talking About

The JOBS Act continues to be a hot topic.  Yesterday, the Practicing Law Institute presented its continuing legal education seminar on the JOBS Act.  Some discussion highlights from the seminar include:

  • Under Section 105(c) of the JOBS Act, an issuer that qualifies as an emerging growth company can engage in oral or written communications, prior to or after filing the registration statement with the SEC, with qualified institutional buyers and institutional accredited investors to determine whether they might have an interest in a contemplated securities offering, also known as “testing the waters.”   The panel discussed the SEC’s recent requests, in connection with reviews of issuers’ registration statements, that the issuers provided on a supplemental basis any written materials used by issuers in connection with such testing the waters.  It appears that the SEC is requesting these materials to determine if the materials are consistent with the issuer’s registration statement.  The fact that the SEC is requesting copies of such materials, combined with the general reluctance on the part of issuers and investment bankers to engage in testing the waters process due to liability concerns, probably means that most issuers and investment bankers will not be using written materials to test the waters, at least in the near term. 
  • The SEC is asking emerging growth companies to indicate on the cover of their registration statements that they are an emerging growth company and to include in the registration statement disclosure regarding how and when emerging growth company status may be lost, the various exemptions available to the issuer as an emerging growth company, such as exemptions from Section 404(b) of the Sarbanes-Oxley Act, and the issuer’s election under Section 107(b) of the JOBS Act.  Unless an issuer that is an emerging growth company opts out, under Section 107(b) of the JOBS Act, the issuer will be subject to any new or revised financial accounting standards on the effective dates applicable to private companies, rather than the effective dates applicable to public companies.  Historically, the effective dates for private companies have been later than the effective dates for public companies.  If the emerging growth company elects to opt out of the extended transition period, the SEC requests the issuer to state that such election is irrevocable.  If the emerging growth company chooses to be subject to the later effective dates for new or revised financial accounting standards, the SEC is requesting issuers to include a risk factor (as well as disclosure in the critical accounting policies section of the MD&A) explaining that the issuer’s financial statements may not be comparable to companies that comply with the public company effective dates.  There are at least a few SEC comments letters publicly available requesting this information.
  • Under the JOBS Act, once SEC rules are in place, general solicitation or advertising will be permitted in connection with Rule 506 offerings so long as the issuer sells securities only to accredited investors.  Interestingly, the definition of the term “accredited investor” provides that an accredited investor is not only someone that is actually an accredited investor, but also someone the issuer “reasonably believes” is an accredited investor.  The general consensus was that the SEC will likely not seek to change the definition of “accredited investor,” but will seek to provide for fairly stringent steps issuers will have to take in order to satisfy the JOBS Act requirement that an issuer take “reasonable steps to verify” accredited investor status in connection with Rule 506 offerings that use general solicitation or advertising.   

Don’t Forget About Your FCPA Risk Factor

The Foreign Corrupt Practices Act (FCPA) is back in the news.  The Securities and Exchange Commission has a specialized unit established to enhance the SEC’s enforcement of the FCPA, and the SEC reports that it has brought more than 30 FCPA enforcement actions since the start of 2010.  Moreover, as my colleagues Shawn M. Wright and James R. Billings-Kang recently wrote in The National Law Journal, the United States Department of Justice has over 150 open FCPA investigations and together the SEC and the DOJ netted approximately $1.8 billion in fines, penalties and disgorgement of profits in 2010 alone for FCPA violations. 

Generally, the FCPA covers, among others, any company with securities registered under the Securities Exchange Act of 1934 and any company that is required to file reports under the Exchange Act or has its principal place of business in the United States.  The anti-bribery provisions of the FCPA prohibit corrupt payments to foreign officials for the purpose of procuring or maintaining business.  The FCPA is extremely broad in its scope and determining exactly what is prohibited by the FCPA can be very difficult.  Because the FCPA makes illegal many payments that individuals working in countries other than the United States may consider ordinary or customary, it can be particularly difficult to put a stop to the sorts of payments that may be covered by the FCPA, even where a company has a robust training and compliance program. 

If your company has significant operations outside the United States, especially where those operations are in countries where unofficial payments or gifts are a regular part of the business culture, a risk factor about your company’s FCPA exposure is likely to be warranted.    


SEC Tells Those Waiting to Crowdfund to Settle Down

On April 23, 2012, the SEC posed a release reminding issuers that capital raising via crowdfunding is not yet a reality:

On April 5, 2012, the Jumpstart Our Business Startups (JOBS) Act was signed into law. The Act requires the Commission to adopt rules to implement a new exemption that will allow crowdfunding. Until then, we are reminding issuers that any offers or sales of securities purporting to rely on the crowdfunding exemption would be unlawful under the federal securities laws.

There is a lot of excitement in the securities and business worlds about the potential for crowdfunding to allow smaller companies to raise capital.  But, I think much of that excitement is premature.

First, under Section 301(c) of the JOBS Act, the SEC has 270 days (yes, about 9 months) to issue rules implementing the crowdfunding provisions of the JOBS Act and the SEC may be unable to meet that deadline.  Wave after wave of regulatory reform hitting the SEC has resulted in the SEC falling behind on its rule making activities under the Dodd-Frank Act.  In addition, the JOBS Act requires the SEC to consult with any state securities commission and national securities association that that wants to provide input, which has the potential to consume a lot of time.

Second, the JOBS Act provides the SEC with a great deal of discretion on how to implement the crowdfunding provisions.  While the JOBS Act received broad bipartisan and Presidential support, it is no secret that the SEC is not a fan of the crowdfunding.  As such, it is difficult to predict the ultimate outcome of the SEC’s rulemaking activities with respect to crowdfunding or how those rules will be perceived by companies and the securities industry.