From the Sox Up - Gardere Securities Law Blog - Law. Trends. Cases of Interest.

On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act (the "JOBS Act"). Section 201(a)(1) of the JOBS Act provides that the Securities and Exchange Commission amend Rule 506 of Regulation D of the Securities Act of 1933, as amended, to make the prohibition against general solicitation or general advertising contained in Rule 502(c) inapplicable to offers and sales under Rule 506, provided that all purchasers are accredited investors. More on the JOBS Act may be viewed here (PDF). Less than five months later, on Aug. 29, 2012, the SEC issued a proposed rule (subject to comments) that included proposed amendments to Rule 506 to implement Section 201(a)(1) of the JOBS Act. As directed by the JOBS Act, the proposed amendment to Rule 506 provides that the prohibition against general solicitation and general advertising contained in Rule 502(c) of Regulation D not apply to offers and sales of securities made pursuant to Rule 506, provided that all purchasers of the securities are accredited investors. The proposed amendment to Rule 506 also required that, in Rule 506 offerings that use general solicitaiton or general advertising, the issuer take reasonable steps to verify that purchasers of the securities are accredited investors. The full text of the proposed amendments may be accessed here (PDF).

OUR TAKE: The SEC's prohibition against general solicitation or general advertising in Rule 506 Private Placements to accredited investors appears to be fading away.

As we highlighted at the end of last year, the SEC issued a Wells notice to Netflix Inc. regarding a post by Netflix CEO Reed Hasting on his personal Facebook page.  On April 2, 2013, the SEC issued a report of investigation (PDF) stating that the SEC would not pursue enforcement action against Netflix and addressing the application of Regulation FD to a public company’s use of social media websites (the “Report”).  

In approving a public company’s use of social media channels, the Report confirms that the SEC’s August 2008 Guidance on the Use of Company Websites (PDF) applies to social media channels and further highlights that “the investing public should be alerted to the channels of distribution a company will use to disseminate material information.”  The SEC further noted in the Report that “in light of the direct and immediate communication from issuers to investors that is now possible through social medial channels, such as Facebook and Twitter, we expect issuers to examine rigorously the factors indicating whether a particular channel is a ‘recognized channel of distribution’ for communicating with investors.”

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A two-step merger is a common acquisition structure for public company sale transactions.  Under this structure, the buyer commences a tender or exchange offer to obtain over 50% of the target’s voting shares, followed by a second-step merger to acquire the remaining voting shares.  Generally speaking, unless the buyer obtains 90% or more of the target’s voting shares in the first-step tender or exchange offer (or through exercising a "top-up option," if any), the target’s stockholders must vote to approve the second-step merger.  This stockholder vote requires a proxy statement or an information statement to be delivered to the target’s stockholders, which can be onerous.

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Section 13(r) of the Securities Exchange Act of 1934 requires any issuer obligated to file periodic reports with the Securities and Exchange Commission after February 6, 2013 to disclose certain business transactions and other activities related to Iran. New Section 13(r) is the result of the Iran Threat Reduction and Syria Human Rights Act of 2012 (the “ITR Act”) (.PDF), legislation that increased economic and other sanctions against Iran to persuade Iran to cease its pursuit of nuclear weapons and support for terrorism.  Section 13(r) did not require any rulemaking by the SEC, but in a set of Compliance and Disclosure Interpretations issued on December 4, 2012, the SEC addressed certain questions regarding the obligations imposed on reporting issuers.

A reporting issuer must include in each of its periodic reports (such as a Form 10-K or Form 10-Q) disclosure regarding certain transactions and other activities related to Iran of the issuer or any of its affiliates (such as a subsidiary or a director or an executive officer) at any time during the period covered by the report.  The disclosure applies only to a transaction or activity that is or was “knowingly” engaged in; and “knowingly” is defined in the ITR Act as a person’s actual knowledge or that he “should have known ... of the conduct, the circumstance, or the result.”  But the disclosure is required even if a transaction or activity is or was not material, even if it was engaged in before the ITR Act became law, and even if the transaction or activity is concluded or discontinued by the date of the filing of the periodic report.

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About two years ago, the Securities and Exchange Commission adopted rules implementing provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (.PDF) that require public companies subject to the SEC's proxy rules to conduct two non-binding shareholder-advisory votes at annual meetings:

• A vote to approve the compensation of the named executive officers as described in the proxy statement for the meeting (a “say-on-pay vote”); and
• A vote on whether the company's say-on-pay vote should be held annually, every second year, or every third year (a “say-on-frequency vote”).

Those votes were first required for most public companies beginning with an annual meeting held on or after January 21, 2011, but the requirement was delayed for smaller reporting companies. Effective for annual meetings held on or after January 21, 2013, however, smaller reporting companies will be required to conduct a say-on-pay vote and a say-on-frequency vote.

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