Tag: Securities Act

SEC Adopts Final Rules for Crowdfunding

Andrew J. Foley is a partner in the Corporate Department of Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss memorandum.

On October 30, 2015, the Securities and Exchange Commission (the “SEC”) adopted final rules under Title III of the Jumpstart Our Business Startups (“JOBS”) Act. These rules relate to a new exemption under the Securities Act of 1933 (the “Securities Act”) that will permit securities-based crowdfunding by private companies without registering the offering with the SEC. The crowdfunding proposal (“Regulation Crowdfunding”) follows the 2013 crowdfunding rule proposal in most significant respects and represents a major shift in how small U.S. companies can raise money in the private securities market.


Omnicare in Action: City of Westland Decision

Aric H. Wu is a partner at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn client alert by Mr. Wu and Michael J. Kahn.

When the Supreme Court issued its decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S. Ct. 1318 (2015), plaintiff and defense counsel had warring views on what its practical impact would be, particularly at the motion to dismiss stage of securities class actions brought under Section 10(b) of the Securities Exchange Act of 1934. A recent decision from the Southern District of New York, City of Westland Police and Fire Retirement System v. MetLife, Inc., 2015 WL 5311196 (S.D.N.Y Sept. 11, 2015) (Kaplan, J.), shows that Omnicare will serve as a meaningful bar to plaintiffs who seek to base federal securities law claims on statements of opinion, but cannot plead sufficient underlying facts.


Materiality as Pleading Obstacle

Brad S. Karp is chairman and partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss client memorandum.

Claims brought under the Securities Act of 1933 (the “Act”) are typically challenging for defendants to dismiss. Some defendants may have affirmative defenses, but most of the Act’s provisions impose strict liability for alleged misstatements—meaning that a plaintiff need not plead scienter—and claims brought under the Act are subject to the relatively low pleading standard imposed by Federal Rule of Civil Procedure 8. Further, although plaintiffs suing under the Act must allege facts sufficient to show that the purported misstatements were material, courts are generally reluctant to dismiss for failure to plead this element because materiality is an inherently fact-bound inquiry.

Notwithstanding these principles, on September 29, 2015, the United States District Court for the Southern District of New York (Oetken, J.) dismissed a putative class action brought under the Act on the ground that the complaint’s materiality allegations failed as a matter of law. The opinion provides valuable insights on how to defeat other Act claims on similar grounds. [1]


The SEC’s Focus on Cybersecurity

Jessica Forbes is a corporate partner resident the New York office of Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication authored by Ms. Forbes, Joanna D. Rosenberg, and Stacey Song.

On September 22, 2015, the Securities and Exchange Commission (the “SEC”) issued a cease-and-desist order (the “Order”) and settled charges against St. Louis-based investment adviser R.T. Jones Capital Equities Management (“R.T. Jones”) for failing to establish required policies and procedures to safeguard customer information in violation of Rule 30(a) of Regulation S-P (“Rule 30(a)”) under the Securities Act of 1933. [1]

Rule 30(a) requires every broker, dealer, investment company and registered investment adviser to adopt written policies and procedures reasonably designed to ensure the security and confidentiality of customer information and to protect customer information from anticipated threats or unauthorized access. According to the Order, from at least September 2009 through July 2013, R.T. Jones stored personal information of its clients and other persons on its third party-hosted web server without adopting any such written policies and procedures. In July 2013, a hacker gained access to the data on R.T. Jones’ web server, rendering the personal information of more than 100,000 individuals vulnerable to theft. In response to the cyber attack, R.T. Jones notified each individual whose information was compromised.


Remarks on Small and Emerging Companies

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s remarks at a recent open meeting of the SEC, available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

As you know, the term of this Committee expires September 24, 2015. The advice and expertise the Committee has provided to the Commission on a variety of issues over the last four years has been incredibly helpful to us. And, as today’s [September 23, 2015] agenda reflects, you are continuing those contributions. Your contributions have shown the importance of this Committee, and I am pleased to announce that the Commission is renewing its charter for another two-year term. The Commission will be selecting members and it is my hope that many of you will continue your service. I look forward to our continuing dialogue and being the beneficiary of your insight and suggestions.


The Board’s Prerogative and Mergers

Clare O’Brien and Rory O’Halloran are partners at Shearman & Sterling LLP. This post is based on a Shearman & Sterling client publication by Ms. O’Brien, Mr. O’Halloran, and Gregory Gewirtz. This article first appeared in the July/August 2015 issue of Thomson Reuters’ The M&A Lawyer. Related research from the Program on Corporate Governance includes The Case Against Board Veto in Corporate Takeovers by Lucian Bebchuk. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Under Delaware law, the board of directors of each company executing a merger agreement is required to adopt a resolution approving the merger agreement and declaring its advisability, [1] although Delaware law also provides that a company may “agree to submit a matter to a vote of its stockholders whether or not the board of directors determines at any time subsequent to approving such matter that such matter is no longer advisable and recommends that the stockholders reject or vote against the matter.” [2] Further, under the Securities Exchange Act of 1934, for transactions involving a tender offer or exchange offer, the target is required to file a Tender Offer Solicitation/Recommendation Statement on Schedule 14D-9, disclosing the target board’s position as to whether its stockholders should accept or reject the tender offer or defer making a determination regarding such offer. [3]


Prices and Informed Trading

Vyacheslav Fos is Assistant Professor of Finance at Boston College. This post is based on an article by Professor Fos and Pierre Collin-Dufresne, Professor of Finance at the Swiss Finance Institute. Related research from the Program on Corporate Governance includes Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang; and The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here).

In our paper, Do Prices Reveal the Presence of Informed Trading?, forthcoming in the Journal of Finance, we study how empirical measures of stock illiquidity and of adverse selection respond to informed trading by activist shareholders.

An extensive body of theory suggests that stock illiquidity, as measured by the bid-ask spread and by the price impact of trades, should be increasing in the information asymmetry between market participants. An extensive empirical literature employing these illiquidity measures thus assumes that they capture information asymmetry. But, do these empirical measures of adverse selection actually increase with information asymmetry? To test this question one would ideally separate informed from uninformed trades ex-ante and measure their relative impact on price changes. However, since we generally do not know the traders’ information sets, this is hard to do in practice.


SEC and CFTC Turn to Swaps and Security-Based Swaps Enforcement

Annette Nazareth is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP, and a former commissioner at the U.S. Securities and Exchange Commission. This post is based on a Davis Polk client memorandum.

The week of June 15, 2015 saw two of the first publicly announced enforcement actions brought by the Securities and Exchange Commission (“SEC”) and the Commodity Futures Trading Commission (“CFTC”) to enforce security-based swap and swap regulatory requirements under Title VII of the Dodd-Frank Act. The SEC accepted an offer of settlement from a web-based “exchange” for, among other things, offering security-based swaps to retail investors in violation of the Securities Act of 1933 and the Securities Exchange Act of 1934. In a separate action, the CFTC obtained a federal court order against a Kansas City man in a case alleging violations of the antifraud provisions of the swap dealer external business conduct rules in Part 23 of the CFTC regulations. [1] Swap dealers and security-based swap market participants may wish to consider these orders and the agencies’ approach to enforcement as firms further develop, review and update their compliance programs.


Regulation A+ Takes Effect

Thomas J. Kim is a partner at Sidley Austin LLP. This post is based on a Sidley Austin publication authored by Mr. Kim, Craig E. Chapman, and John J. Sabl.

On June 19, 2015, the Securities and Exchange Commission’s (SEC) recently adopted rule amendments to Regulation A under the Securities Act of 1933 (the Securities Act)—colloquially known as “Regulation A+”—took effect. Regulation A is intended to ease the burden of Securities Act registration for small public offerings. These rule amendments, among other things, increase the amount of capital that can be raised in Regulation A offerings from $5 million to $50 million over a 12-month period.

The extent to which Regulation A+ will result in issuers and other market participants actually using Regulation A to raise capital will depend on a number of factors—including how it compares to other methods for raising capital, how the SEC Staff will administer the offering process and the market’s acceptance of Regulation A-compliant offering materials.

Capital Unbound: Remarks at the Cato Summit on Financial Regulation

Michael S. Piwowar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Piwowar’s recent remarks at the Cato Summit on Financial Regulation. The complete publication, including footnotes, is available here. The views expressed in the post are those of Commissioner Piwowar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

I am happy to be with you in New York City. When I have the opportunity to travel for meetings or to conferences such as this, I have fundamentally different conversations than when I am in Washington, D.C. In Washington, conversations frequently are scripted. Participants, who may be accompanied by trade association representatives and lawyers, use their talking points and have been coached to “stay on message.” Those discussions are undoubtedly meaningful as we at the Securities and Exchange Commission (“Commission” or “SEC”) engage in rulemaking and otherwise set policy.

But outside of Washington D.C., people generally want to talk about something else. They want to share their dreams and concerns about running their businesses. They want to show how their products, services, and innovations contribute to the economy, create jobs, and improve standards of living. And more importantly, they want to demonstrate how inside-the-beltway regulations are often focused on concerns that do not represent the biggest risks of harm to investors, customers, and businesses outside the beltway. I hear how regulations distract attention from the real risks and challenges of operating a business in globally competitive markets.

Compliance with securities laws and regulations is only one component of running a company. A business must also comply with laws on consumer protection, taxes, safety, employment, zoning, and the environment, to name only a few. If you have multiple locations—such as in New York, New Jersey, and Connecticut—you must deal with regulators in each jurisdiction. Soon, it may seem like you exist not to provide a good or service, but just to stay in compliance with the law.


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