Goodbye 500 Holder Rule?

Posted by Austin Ke on April 02, 2012

Currently under Section 12(g)(1) of the Exchange Act, a company with more than $10 million in assets must register each class of security that is held of record by 500 or more persons and comply with the reporting requirements under Sections 13 and 15(d) of the Exchange Act.  Last week, the Senate approved, by a 73-26 margin, the Jumpstart Our Business Startups Act (the “JOBS Act”).  As reported by the New York Times, the House of Representatives approved the final version of the JOBS Act on Tuesday and President Obama has reportedly stated that he will sign it.  If enacted, the JOBS Act will, among other things, raise the equity holder threshold from 500 to 2,000 (PDF) and relax the general solicitation and general advertising prohibition for offerings made pursuant to Rule 506 of Regulation D of the Securities Act.  The purported goal of the JOBS Act is to ease access to capital and investments for entrepreneurs.  Many experts, however, including SEC Chairman Mary L. Shapiro, have criticized the JOBS Act for also potentially removing important investor protections in very large companies. 

OUR TAKE:  Whether the JOBS Act will succeed in achieving its purposes remains to be seen.  What is clear, however, is that the JOBS Act will dramatically change established securities laws, which were implemented to place restraint on how equity can be raised and to ensure that investors were provided adequate disclosures regarding the risk of an investment. 

A Net Too Wide - SEC Seasoning Rules and Their Applicability to Newly Public Companies

Posted by Chris Converse on March 27, 2012

According to published reports, 25% of all securities fraud class action lawsuits filed during the first half of 2011 involved Chinese companies that have gone public through reverse mergers.  A 2011 report by Cornerstone Research stated that 12 securities class action complaints were filed in 2010 against Chinese companies listed on U.S. stock exchanges, representing 42.9% of all class action filings against foreign issuers listed in the U.S.  Commentators assert that one factor fueling this trend is the fact that many Chinese issuers have gone public through reverse mergers with listed U.S. shell companies – a process which, in some cases, results in a significant lack of disclosure associated with the newly public business.

Due in part to increasing allegations of fraud by foreign reverse merger companies, in late 2011, the SEC approved new rules imposing additional requirements on companies intending to list their shares on one of the three major U.S. stock exchanges.  These rules, including applicable exceptions, are described in our prior posts found here and here.  However, it remains to be seen whether these rules will actually help to remedy many of the disclosure issues associated with foreign issuers going public through reverse mergers.

OUR TAKE:  The problem with these seemingly heavy-handed new rules is that they fail to directly address the lack of financial disclosure sometimes associated with foreign issuer reverse mergers.  For example, by requiring reverse merger companies to undergo one year of trading in a systemically under-regulated environment like the OTC Bulletin Board, the SEC may be simply imposing a bureaucratic holding pattern rather than creating targeted, meaningful regulation.

Say on Pay: A Practice Pointer

Posted by Rick Jordan on February 15, 2012

This week, the SEC released a new Compliance and Disclosure Interpretation (“C&DI”) for Exchange Act Rule 14a-21.  This rule sets forth one of the say-on-pay requirements mandated by the Dodd-Frank Act.  It requires issuers to periodically afford shareholders the right to a nonbinding (i.e., advisory) vote on the compensation of the issuer’s named executive officers.

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Over a Million Reasons Not to Violate the Securities Laws

Posted by Jess C. Frey on February 09, 2012

We had occasion to review the civil and criminal penalties for violating SEC regulations and the Sarbanes-Oxley Act of 2002 and thought a quick post may serve to remind our readers of the severity of securities law violations. 

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SEC's Responses to FAQs Regarding "Family Office" Exclusion from "Investment Adviser"

Posted by Richard A. Tulli on January 30, 2012

As previously described, the Securities and Exchange Commission has, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, adopted a rule to exclude “family offices” from the definition of “investment adviser” under the Investment Advisers Act of 1940, as amended (the “Rule”). 

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New Calls to Eliminate the Prohibition of General Solicitation or General Advertising in Private Securities Offerings

Posted by Richard A. Tulli on January 19, 2012

Within the last two weeks, there have been two new calls for the Securities and Exchange Commission to amend its Rule 502(c) of Regulation D to eliminate the prohibition of “general solicitation or general advertising” (the “Prohibition”) with respect to certain exempt, private securities offerings. 

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Liquidating Trusts: A Discussion of SEC Reporting and Registration Requirements

Posted by Austin Ke on January 13, 2012

There has been a high volume of bankruptcy filings over the last three years of the economic downturn and they do not show any signs of letting up.  Whether it is Hostess Brands—with the future of Twinkies at risk, the prospect of iconic Kodak in the Bankruptcy Court or AMR Corp.’s flight into Chapter 11 reorganization.  Notwithstanding the broad scope of the United States Bankruptcy Code and the power of the Bankruptcy Courts, there are still securities issues to be considered.

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MIND THE GAAP: Ringing in the New Year

Posted by Suzanne Dixon on January 12, 2012

New Year’s resolutions come in all shapes and sizes.  This year, investors may seek refuge in the adage “older but wiser” with respect to the flurry of questionable financial reporting during 2011 at Chinese companies listed in the United States.

Auditors have been caught directly in the crossfire.  As we highlighted last quarter, the SEC is seeking to compel a Chinese affiliate of Deloitte to produce documents in connection with allegations of accounting fraud at Longtop Financial Technologies, Ltd.  In early January 2012, a federal judge ordered the affiliate to appear in court on February 1, 2012 in order to defend against such production.

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SEC Adopts Amendments to Its Accredited-Investor Net-Worth Standard

Posted by Richard A. Tulli on December 22, 2011

The Securities and Exchange Commission announced on Dec. 21, 2011 that it has adopted amendments to its rules regarding the net-worth standard (PDF) for determining an individual “accredited investor” for purposes of certain exemptions from the registration requirements of the Securities Act of 1933, as amended.  As described in our post when the amendments were proposed by the SEC in January 2011, the amendments are required to conform the net-worth standard to one of the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

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Insider Gifts of Securities to Charities

Posted by Richard A. Tulli on December 20, 2011

A question posed occasionally at this time of year is whether a director or an officer may make a gift of his or her company’s securities to a charitable organization without exposing the director or officer to insider-trading liability under SEC Rule 10b-5.  Although the question is relevant whenever the insider has material non-public information, it is particularly relevant for most insiders at this time of year, when charitable gifts are frequent and when the insiders have material non-public information regarding fiscal-year-end and fourth-quarter company performance and are subject to a black-out period under the company’s insider-trading policy. 

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