Please find below the Autumn 2013 issue of the U.S. Securities Law Digest. This update is intended to provide a compilation of recent legal news relevant to a capital markets practice in the London and international markets. The news pieces have been collected and summarized from various sources, and links to the original sources are provided.
We continue to welcome any feedback that you may have about the Digest.
SEC Division of Corporation Finance guidance begins to address early questions under new general solicitation rules
On November 13, 2013, the Division of Corporation Finance at the Securities and Exchange Commission (the “SEC”) updated its "Securities Act Rules Compliance and Disclosure Interpretations" (the “C&DIs”) to provide 11 new interpretations relating to new Rule 506(c) and revised Rule 144A. The staff is providing guidance on the new general solicitation rules and how they relate to private placements. There are two new C&DIs in Section 138 and nine new C&DIs in Section 260 of the Securities Act Rules C&DIs.
To view the SEC’s new C&DIs regarding Rule 144A and Rule 506(c) on the SEC website, please click here. The eleven new C&DIs are under the link “Securities Act Rules (Updated 11/13/13)” and indicated by “[Nov. 13, 2013]” at the end of each answer.
See the Forum for U.S. Securities Lawyers in London’s article here.
Preventing Exchange Act reporting obligations after the JOBS Act
Growing companies need to be aware of the requirements of Section 12(g) of the Securities Exchange Act of 1934 (the “Exchange Act”). If the thresholds of Section 12(g) are crossed, which look principally to the number of shareholders, the company must generally begin filing the same reports under the Exchange Act as with any company listed on the NYSE or Nasdaq. Therefore the issue needs to be considered when raising capital and granting employees equity, and is especially important to venture funded and other entities that use employee equity as a significant component of compensation.
The integration doctrine must be considered when an issuer conducts multiple offerings in a short period of time. If applicable, multiple offerings are collapsed to determine if a safe harbor or exemption still applies. Under the JOBS Act, integration becomes important in the following situations:
An issuer uses general solicitation under Rule 506(c) and a short time later attempts to do an offering under Rule 506(b) or Section 4(a)(2);
An issuer uses general solicitation under Rule 506(c) and also commences a public offering within a short period of time; and
Completed Rule 506(b) or Section 4(a)(2) private offerings are followed by offerings using general solicitation under Rule 506(c) or are attempted concurrently.
Little is known about the position the SEC will ultimately take about integration of offerings under the JOBS Act but some clues can be gleaned from studying existing pronouncements set forth in the article below.
On October 23, 2013, the SEC proposed “Regulation Crowdfunding” pursuant to Title III of the JOBS Act. Crowdfunding is a method of raising money using the internet, typically through small contributions from a large number of people. The JOBS Act, enacted on April 5, 2012, established a regulatory foundation for start-ups and small businesses to conduct securities offerings over the internet using crowdfunding. Without the proposed regulation, crowdfunding offerings would be considered public offerings required to be registered with the SEC under Section 5 of the Securities Act. The proposed rules would create an exemption in Section 4(a)(6) of Title III of the JOBS Act (the “Crowdfunding Exemption”) that would allow crowdfunding offerings transacted through an intermediary to proceed without SEC registration when certain conditions are met.
See Morrison & Foerster’s article here and its tech blog here.
SEC Chair Mary Jo White outlines potential changes to “accredited investor” definition
On November 14, 2013, SEC Chair Mary Jo White delivered a letter to Representative Scott Garrett, Chairman of the House of Representatives Subcommittee on Capital Markets and Government-Sponsored Enterprises for the House Financial Services Committee, in which she answered a number of Representative Garrett’s questions regarding the status of the SEC’s review of the definition of “accredited investor” under Rule 501(a) promulgated under the Securities Act. The SEC’s review of the accredited investor definition with respect to individuals was mandated by the Dodd–Frank Wall Street Reform and Consumer Protection Act and is currently underway. Any changes to the definition of accredited investor will be closely watched, because such changes will impact which individuals may participate in private offerings of securities conducted under Rule 506 promulgated under the Securities Act, including under new subsection (c), which allows for general solicitation and general advertising.
The rise of portability in European high yield bonds: Have bond, will travel
High yield bonds have become increasingly attractive to sponsors in financings and, most importantly, refinancings. Sustained liquidity and growing investor demand, coupled with the reduced availability of new M&A credits, has driven the inclusion of flexible "portability" features into European high yield bond terms. In the U.S. this has also resulted in increasingly flexible tenors, shorter call periods and larger equity claws.
Senior U.S. officials discuss FCPA enforcement trends and activity
From November 18–21, U.S. regulators attended the American Conference Institute’s 30th International Conference on the Foreign Corrupt Practices Act (the “FCPA”), where they discussed the near-record amount of FCPA penalties in 2013 and disclosed that there are more than 150 ongoing FCPA investigations. Regulators from the Department of Justice and the SEC also explained new developments in cross-border cooperation as well as their efforts to prosecute individual FCPA defendants.
Lack of cooperation increases FCPA penalties for Weatherford
Swiss based Weatherford International Ltd, whose shares were traded on the NYSE, became the newest member of the FCPA’s top ten, paying about $152 million to resolve corruption charges with the Department of Justice and the SEC. Overall the company paid $252 million to resolve charges which included export control violations. The FCPA portion of the settlement put the firm at number nine on the top ten list maintained by the FCPA blog.
Swiss national and former energy executive criminally charged under FCPA
In an illustration of the extraterritorial reach of the FCPA, Alain Riedo, a Swiss citizen and the general manager of Maxwell Technologies S.A., a Swiss subsidiary of a US public company, was criminally charged with violating anti-bribery, book and records, and internal control provisions of the FCPA. According to the indictment filed in the Southern District of California, Riedo, along with unidentified co-conspirators and agents, allegedly conspired to, and made, corrupt payments to Chinese government officials and falsely recorded those payments on Maxwell books and records in an effort to retain business, prestige and increased compensation.
The SEC’s whistleblower report shows program picking up steam
Fresh off its $14 million bounty award, the SEC’s Office of the Whistleblower has released its Annual Report indicating that the Whistleblower Program continues to gain steam. Created by the Dodd-Frank Act, the SEC’s Whistleblower Program provides monetary awards to individuals who contribute original information that leads to an SEC enforcement action netting at least $1 million in disgorgement or penalties.
To view the SEC’s 2013 Annual Report to Congress on the Dodd-Frank Whistleblower Program, please click here.
Court decision poses threat to whistle-blower policies
A recent decision by the Fifth Circuit Court of Appeals ruled that whistle-blowing employees are protected from retaliation under the Dodd-Frank Act if they report potential violations to the SEC, but not if they report those potential violations only to their employer. In Asadi v. G.E. Energy, Asadi, a former employee of G.E. Energy in Amman, Jordan, was terminated after informing his supervisor and a company ombudsperson of a suspected violation of the FCPA. The Fifth Circuit concluded that Asadi was not a whistle-blower as defined by the Dodd-Frank Act and was thus not protected by the provisions thereunder.
While the SEC’s definition of a “whistle-blower” is fairly broad and expansive, the Fifth Circuit noted that because Congress directly addressed the definition of a “whistle-blower” in the Dodd Frank Act, it was required to reject the SEC’s expansive definition for purposes of determining whistle-blower protection. The Fifth Circuit’s decision further clarified that under Dodd-Frank, “there is only one category of whistle-blowers: individuals who provide information relating to a securities law violation to the SEC.” The Fifth Circuit’s decision further clarified that employees who only report potential violations internally may be covered by the Sarbanes-Oxley Act of 2002; however, the court noted that the Dodd-Frank Act whistle-blower protection provides for greater monetary damages.
This ruling may undermine programs that many companies have developed to encourage would-be whistle-blowers to report such violations on an internal basis, instead of going to the SEC.
The text of the Asadi v. G.E. Energy decision can be found here.
New York lawyer group opines that attorneys cannot seek whistleblower awards
The New York County Lawyers’ Association (the “NYCLA”) opined that, under the New York Rules of Professional Conduct, lawyers cannot ethically collect Dodd-Frank Act whistleblower awards for providing confidential client information to the SEC. The NYCLA stated that the prospect of receiving a whistleblower award “might tend to cloud a lawyer’s professional judgment.” Under Dodd-Frank, individuals who provide original information to the SEC leading to an enforcement action may receive between 10-30 percent of any sanctions collected (over $1 million). SEC rules allow attorneys, as a last resort, to disclose confidential client information in rare instances to prevent or remedy securities fraud. Instead of disclosing confidential information, lawyers are encouraged to report potential securities law violations up the corporate ladder. The NYCLA concluded that lawyers cannot ethically disclose confidential information in order to collect a monetary whistleblower award because this represents a conflict of interest. The NYCLA opined that the same rationale applied to a lawyer reporting former clients as well.
Searching for an efficient market with cross-listed securities: denial of class certification in Deutsche Bank illustrates increased scrutiny of the fraud on the market doctrine
On October 29, 2013, the Southern District of New York denied class certification in a securities fraud action brought against Deutsche Bank AG in IBEW Local 90 Pension Fund v. Deutsche Bank AG. Significantly, the Court found that the shareholder plaintiffs failed to meet their burden of establishing market efficiency for the securities in question, and thus were not entitled to the presumption of reliance permitted under the so-called “fraud on the market” doctrine. In the wake of the U.S. Supreme Court’s March 2013 decision in Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, the Deutsche Bank order provides an insightful roadmap for defendants looking to challenge class certification in putative securities fraud class actions, particularly where the securities in question are cross-listed on multiple exchanges.