Tag: Securities Act


SEC Adopts Final Rules Implementing “Regulation A+”

The following post comes to us from James Moloney, partner and co-chair of the Securities Regulation and Corporate Governance Practice Group at Gibson, Dunn & Crutcher LLP, and is based on a Gibson Dunn publication. The complete publication, including footnotes, is available here.

On March 25, 2015, in a unanimous vote, the U.S. Securities and Exchange Commission (the “SEC” or the “Commission”) approved final rules to create a new avenue for certain issuers to raise capital in transactions exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). The set of new rules, collectively referred to as “Regulation A+,” amends the existing Regulation A offering exemption and is intended to create additional opportunities for companies to raise capital without having to comply with several of the more burdensome aspects of the traditional registration process. The new rules are expected to be effective on or about June 19, 2015. The adopting release and the Regulation A+ rules are available here: Final Rules.

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Implications of the Supreme Court Omnicare Decision

Boris Feldman is a member of Wilson Sonsini Goodrich & Rosati, P.C. This post is based on a WSGR alert authored by Mr. Feldman, Robert G. Day, Catherine Moreno, and Michael Nordtvedt.

On March 24, 2015, the U.S. Supreme Court issued its decision in Omnicare, Inc., et al. v. Laborers District Council Construction Industry Pension Fund et al., addressing when an issuer may be held liable for material misstatements or omissions under Section 11 of the Securities Act of 1933 for statements of opinion in a registration statement.

Among other things, the Supreme Court held that an issuer may be held liable under Section 11 for a statement of opinion, even one that is sincerely held, if its registration statement omits facts about the issuer’s inquiry into, or knowledge concerning, a statement of opinion and if those facts conflict with what a reasonable investor, reading the statement fairly and in context, would take from the statement itself.

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Supreme Court’s Omnicare Decision Muddies Section 11 Opinion Liability Standards

The following post comes to us from Jon N. Eisenberg, partner in the Government Enforcement practice at K&L Gates LLP, and is based on a K&L Gates publication by Mr. Eisenberg. The complete publication, including footnotes, is available here.

The Supreme Court has a long history of rejecting expansive interpretations of implied private rights of action under Section 10(b) of the Securities Exchange Act. Most notably, since 1975, it rejected the argument that mere holders, rather than only purchasers and sellers, may bring private damage actions under Section 10(b), rejected the argument that Section 10(b) liability may be imposed based on negligence rather than scienter, rejected the argument that Section 10(b) may be applied to “unfair” as opposed to fraudulent conduct, rejected the argument that purchase price inflation is enough to show damages under Section 10(b), rejected the argument that Section 10(b) reaches aiders and abettors rather than only primary violators, and rejected efforts to muddy the distinction between primary and secondary liability under Section 10(b).

The Court, however, has barely even mentioned Section 11 of the Securities Act in its opinions, much less interpreted it. Section 11, unlike Section 10(b), 1) provides an express private right of action, 2) is limited to misrepresentations and omissions in a registration statement, and 3) requires no proof of culpability although defendants other than an issuer have due diligence affirmative defenses. The Supreme Court’s March 24, 2015 decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, No. 13-435, is the Court’s first meaningful foray into Section 11. Unfortunately, the decision, which addresses opinion liability under Section 11, provides an amorphous standard that is likely to lead to unpredictable results. It should provide little comfort to plaintiffs or defendants and should make defendants more cautious about including unnecessary opinions in registration statements and, where appropriate, should lead them to carefully qualify opinions that they do include.

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Supreme Court Clarifies Liability for Opinions in Registration Statements

Robert Giuffra is a partner in Sullivan & Cromwell’s Litigation Group. The following post is based on a Sullivan & Cromwell publication by Mr. Giuffra, Brian T. Frawley, Brent J. McIntosh, and Jeffrey B. Wall; the complete publication, including footnotes, is available here.

On March 24, 2015 in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, No. 13-435, the U.S. Supreme Court addressed the requirement in Section 11 of the Securities Act of 1933 that a registration statement not “contain[] an untrue statement of a material fact” or “omit[] to state a material fact … necessary to make the statements therein not misleading.” Specifically, the Court considered what plaintiffs need to plead under each of those phrases with respect to statements of opinion. The Court’s guidance is significant in light of the importance of pleading standards and motions to dismiss in securities litigation. The Court held, consistent with a majority of the federal courts of appeals, that a pure statement of opinion offered in a Section 11 filing is “an untrue statement of material fact” only if the plaintiff can plead (and ultimately prove) that the issuer did not actually hold the stated belief. At the same time, the Court held that the omission of certain material facts can render even a pure statement of opinion actionably misleading under Section 11. But the Court emphasized that pleading an omissions claim will be difficult because a plaintiff must identify specific, material facts whose omission makes the opinion statement misleading to a reasonable person reading the statement fairly and in context. The Supreme Court’s decision should curtail Section 11 litigation over honestly held opinions that turn out to be wrong, but it may cause the plaintiffs’ bar to bring claims that issuers have not accompanied their opinions with sufficient material facts underlying those opinions. To ward off the risk of such lawsuits, issuers should consider supplementing their disclosure documents with information about the bases of their opinions that could be material to a reasonable investor.

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A Modest Strategy for Combatting Frivolous IPO Lawsuits

Boris Feldman is a member of Wilson Sonsini Goodrich & Rosati, P.C. The views expressed in this post are those of Mr. Feldman and do not reflect those of his firm or clients.

With a minor change to the customary lock-up agreement, issuers and underwriters may be better able to fight frivolous IPO lawsuits. By allowing non-registration statement shares to enter the market, underwriters may prevent Section 11 strike-suiters from “tracing” their shares to the IPO. This could enable ’33 Act defendants to knock out the lawsuits against them.

Basics of Section 11 Standing and Tracing

Section 11 of the Securities Act of 1933, 15 U.S. Code § 77k, provides a private remedy for those who purchase shares issued pursuant to a registration statement that is materially false or misleading. The remedy applies to “any person acquiring such security.” Section 11(a). That is, a person may assert a claim with respect to shares issued pursuant to the particular registration statement.

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California Court Clarifies Scope of Class Action Judgment Reduction Provision

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

In Rieckborn v. Velti plc, 2015 WL 468329 (N.D. Cal. Feb. 3, 2015) (Orrick, J.), the United States District Court for the Northern District of California clarified the scope of the judgment reduction provision that is found in almost all class action settlement agreements by holding that nonsettling defendants are entitled to a judgment reduction measured by the proportion of fault of all settling defendants, not just a dollar-for-dollar judgment reduction, on all settled claims under the Securities Act of 1933 (the “Securities Act”). In so holding, the court handed a major victory to nonsettling defendants in actions under the Securities Act by granting them a favorable form of judgment reduction on claims not explicitly covered by the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). The court’s opinion also makes clear that bar orders cannot preclude “independent claims” and that bar orders must be “mutual,” thereby giving guidance to the drafters of class action settlement agreements.

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Successful Motions to Dismiss Securities Class Actions in 2014

The following post comes to us from Jon N. Eisenberg, partner in the Government Enforcement practice at K&L Gates LLP, and is based on a K&L Gates publication by Mr. Eisenberg; the complete publication, including footnotes, is available here.

Motions to dismiss have been called “the main event” in securities class actions. They are filed in over 90% of securities class actions and they result in dismissal close to 50% of the time they are filed. In contrast, out of 4,226 class actions filed between 1995 and 2013, only 14 were resolved through a trial, and of those, only five resulted in verdicts for the defendant. In between a denial of a motion to dismiss and a trial are i) discovery, ii) opposition to class certification, iii) motion for summary judgment, iv) mediation, and v) settlement. Unfortunately for defendants in securities class actions, class certification is granted in whole or in part 84% of the time, and there is no summary judgment decision at all over 90% of the time. Thus, for most defendants in securities class actions, a denial of a motion to dismiss usually results in writing a settlement check, often after years of costly discovery. Defendants that fail to give adequate attention to motions to dismiss are shortchanging the very best opportunity they have to avoid what may otherwise become multi-year, expensive litigation.

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Corporate Governance and the Creation of the SEC

The following post comes to us from Arevik Avedian of Harvard Law School; Henrik Cronqvist, Professor of Finance from China Europe International Business School (CEIBS); and Marc Weidenmier, Professor of Economics at Claremont Colleges.

Severe turmoil in financial markets—whether the Panic of 1826, the Wall Street Crash of 1929, or the Global Financial Crisis of 2008—often raises significant concerns about the effectiveness of pre-existing securities market regulation. In turn, such concerns tend to result in calls for more and stricter government regulation of corporations and financial markets. It is widely considered that the most significant change to U.S. financial regulation in the past 100 years was the Securities Act of 1933 and the subsequent creation of the Securities and Exchange Commission (SEC) to enforce it. Before the SEC creation, federal securities market regulation was essentially absent in the U.S. In our paper, Corporate Governance and the Creation of the SEC, which was recently made publicly available on SSRN, we examine how companies listing in the U.S. responded to this significant increase in the provision of government-sponsored corporate governance. Specifically, did this landmark legislation have any significant effects on board governance (e.g., the independence of boards) and firm valuations?

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Liabilities Under the Federal Securities Laws

Paul Vizcarrondo is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz specializing in corporate and securities litigation and regulatory and white collar criminal matters. This post is based on the introduction of a Wachtell Lipton memorandum by Mr. Vizcarrondo; the complete publication is available here.

This post deals with certain of the liability provisions of the federal securities laws: §§ 11, 12, 15 and 17 of the Securities Act of 1933 (the “Securities Act”), and §§ 10, 18 and 20 of the Securities Exchange Act of 1934 (the “Exchange Act”). It does not address other potential sources of liability and sanction, such as federal mail and wire fraud statutes, state fraud statutes and common law remedies, RICO and the United States Securities and Exchange Commission’s (“SEC”) disciplinary powers.

On December 22, 1995, the Private Securities Litigation Reform Act of 1995 (the “Reform Act” or “PSLRA”) became law after the Senate overrode President Clinton’s veto. Pub. L. No. 104-67, 109 Stat. 737 (1995). Where relevant, this post discusses changes and additions that the PSLRA made to the liability provisions of the Securities Act and the Exchange Act.

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Spin-Off and Listing by Introduction of Feishang Anthracite Resources Limited

The following post comes to us from Sullivan & Cromwell LLP, and is based on a Sullivan & Cromwell publication by William Y. Chua, Kung-Wei Liu, and Kenny Chiu.

China Natural Resources, Inc. (“CHNR”), a natural resources company based in the People’s Republic of China (the “PRC”) with shares listed on the NASDAQ Capital Market, recently completed the spin-off (the “Spin-Off”) and listing by introduction (the “Listing by Introduction”) on The Stock Exchange of Hong Kong Limited (the “Hong Kong Stock Exchange”) of its wholly-owned subsidiary, Feishang Anthracite Resources Limited (“Feishang Anthracite”), which operated CHNR’s coal mining and related businesses prior to the Spin-Off. [1] S&C represented CHNR and Feishang Anthracite in connection with the Spin-Off and Listing by Introduction, which is the first-of-its-kind where a U.S.-listed company successfully spun off and listed shares of its businesses on the Hong Kong Stock Exchange, including advising on the U.S. and Hong Kong legal issues that arose in connection with this transaction.

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