Securities Regulation

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Stephen Davidoff recently posted a piece on DealBook
entitled “A Push to End Securities Fraud Lawsuits Gains Momentum,” in which he notes
that “Halliburton is asking the Supreme Court to confront one of the
fundamental tenets of securities fraud litigation: a doctrine known as “’fraud
on the market.’”  He goes on to provide a
lot of interesting additional details, so you should definitely go read the
whole thing, but I focused on the following:

In its argument, Halliburton is asking the
Supreme Court to confront one of the fundamental tenets of securities fraud
litigation: a doctrine known as “fraud on the market.” The doctrine has its
origins in the 1986 Supreme Court case Basic v. Levinson. To state a claim for
securities fraud, a shareholder must show “reliance,” meaning that the
shareholder acted in some way based on the fraudulent conduct of the company. In
the Basic case, the Supreme Court held that “eyeball” reliance — a requirement
that a shareholder read the actual documents and relied on those statements
before buying or selling shares — wasn’t necessary. Instead, the court adopted
a presumption, based on the efficient market hypothesis, that all publicly
available information about

…

The 2013 Nobel Prize in Economics winners were announced
earlier this week and the award was shared by three U.S. Economists for their
work on asset pricing.  Eugene
Fama of the University of Chicago, Lars
Peter Hansen of the University of Chicago and Robert Shiller of Yale University
share this year’s prize for their separate contributions in economics research.

The work of the
three economics is summarized very elegantly in the
summary publication produced by The Royal Swedish Academy of Sciences
titled “Trendspotting in asset markets”.  The combined economic contribution of the
three researchers is described below:

The behavior of asset prices is essential for many important
decisions, not only for professional inves­tors but also for most people in
their daily life. The choice on how to save – in the form of cash, bank deposits
or stocks, or perhaps a single-family house – depends on what one thinks of the
risks and returns associated with these different forms of saving. Asset prices
are also of fundamental impor­tance for the macroeconomy, as they provide
crucial information for key economic decisions regarding consumption and
investments in physical capital, such as buildings and machinery. While asset
prices often seem to

…

The JOBS Act offers two new opportunities to offer securities on the Internet without Securities Act registration. Both the Rule 506(c) exemption and the new crowdfunding exemption could be used to sell securities on web sites open to the general public. But could a single web site offer securities pursuant to both exemptions at the same time (assuming the SEC eventually proposes and adopts the regulations required to implement the crowdfunding exemption)?

Background: The two exemptions

Rule 506(c) allows an issuer to publicly advertise a securities offering, as long as the securities are only sold to accredited investors. Rule 506(c) is not limited to Internet offerings, but it could be used by an issuer to advertise an offering on an Internet site open to the general public—as long as actual sales are limited to accredited investors.

The new crowdfunding exemption, added as section 4(a)(6) of the Securities Act, allows issuers to sell up to $1 million of securities each year. The offering may be on a public Internet site, as long as that site is operated by a registered securities broker or a “funding portal,” a new category of regulated entity created by the JOBS Act.

Could a single intermediary…

On October 16th, the US Chamber of Commerce’s
Center for Capital Markets Competitiveness will host a half-day event to
examine trends from the 2013 proxy season and look ahead to 2014.  The day
will start with a presentation from the Manhattan Institute about the 2013 season
and then I will be on a panel with Tony Horan, the Corporate Secretary of
JP Morgan Chase, Vineeta Anand from the Office of Investment of the AFL-CIO,
and Darla Stuckey of the Society of Corporate Secretaries and Governance
Professionals. Our panel will look  back at the 2013 proxy season and discuss hot
topics in corporate governance in general.  Later in the day, Harvey Pitt
and other panelists will talk about future trends and reform proposals, and
depending on the state of the government shutdown, we expect a
member of Congress to be the keynote speaker. The event will be webcast for
those who cannot make it to DC.  Click here
to register.

Dodd-Frank requires the SEC to issue rules barring national exchanges
from listing any company that has not implemented a clawback policy that does
not include recoupment of incentive-based compensation for current and former
executives for a three-year period.  Unlike the Sarbanes-Oxley clawback rule,  Dodd-Frank requires companies to recover compensation,
including options, based on materially inaccurate financial information,
regardless of misconduct or fault.

Although the SEC has not yet issued rules on this provision,
a number of companies have already disclosed their clawback policies, likely
because proxy advisory firms Glass Lewis and Institutional Shareholder Services
have taken clawback policies into consideration when making Say on Pay voting
recommendations. Equilar has reviewed the proxy statements for Fortune 100
companies filed in calendar year 2013 for compensation events for fiscal year
2012. The organization released a report
summarizing its findings, which are instructive. 

Of the 94 publicly-traded companies analyzed by Equilar, 89.4%
publicly disclosed their policies; 71.8% included provisions that contained
both financial restatement and ethical misconduct triggers; 29.1% included
non-compete violations as triggers and 27.2% had other forms of triggers.  68% of the policies applied to key executives
and employees including named executive officers, while only 14.6% applied to
all employees. 7.8%…

Michael B. Dorff has posted “The Siren Call of Equity
Crowdfunding” on SSRN.  Here is the
abstract:

The JOBS Act opened a new frontier in start-up financing,
for the first time allowing small companies to sell stock the way Kickstarter
and RocketHub have raised donations: on the web, without registration.
President Obama promised this novel form of crowdfunding would generate jobs
from small businesses while simultaneously opening up exciting new investment
opportunities to the middle class. While the new exemption has its critics,
their concern has largely been confined to the limited amount of disclosure
issuers must provide. They worry that investors will lack the information they
need to separate out the Facebooks from the frauds. This is the wrong concern.
The problem with equity crowdfunding is not the extent of disclosure. The
problem is that the companies that participate will be terrible prospects. As a
result, crowdfunding investors are virtually certain to lose their money. This
essay examines the data on angel investing – the closest analogue to equity
crowdfunding – and concludes that the majority of the issuers that sell stock
to the middle class over the internet will lose money for investors, with many

…

Too bad I
didn’t have this information from today’s
Wall Street Journal to add to my arsenal of reasons of why I think the Dodd-Frank conflict minerals
SEC disclosure is a well-intentioned but bad law to address rape, forced labor,
plundering of villages, murder, and exploitation of children in the Democratic
Republic of Congo. I won’t reiterate the reasons I outlined in my two-part blog
post a couple of weeks ago.  According
to press reports, while acknowledging her responsibility to uphold the law, SEC Chair Mary Jo White mirrored some of the arguments about
discretion that business groups and our amicus brief raised on appeal to the DC
Circuit, and further explained, “seeking
to improve safety in mines for workers or to end horrible human rights
atrocities in the Democratic Republic of the Congo are compelling objectives,
which, as a citizen, I wholeheartedly share … [b]ut, as the Chair of the SEC, I
must question, as a policy matter, using the federal securities laws and the
SEC’s powers of mandatory disclosure to accomplish these goals.”  I couldn’t agree more. While I have no problems with appropriate and relevant disclosure, corporate responsibility, and due diligence related to human rights, Congress should…

The SEC’s new Rule 506(c) exemption, mandated by the JOBS Act, allows issuers to solicit anyone to purchase securities, through public advertising or otherwise, as long as they only sell to accredited investors (or investors that the issuer reasonably believes are accredited investors). For most individuals, accreditor investor status depends on the investor’s annual income and net worth.

The crowdfunding exemption added by the JOBS Act allows issuers to sell securities to anyone, accredited or not, but the amount of securities each investor may purchase depends on the investor’s net worth and annual income. (For more on the new crowdfunding exemption, see my article here.)

Because of these requirements, it is important under both exemptions to know the net worth and annual income of each investor.

NOTE: Many people are referring to Rule 506(c) as “crowdfunding” but
the actual crowdfunding exemption is something different. Brokers and
others selling under Rule 506 began calling that crowdfunding as a
marketing ploy to capitalize on the popularity of crowdfunding. Some
academics have adopted that usage, which I think is unfortunate and only
leads to confusion.

The simplest way to deal with these requirements would be to allow investors to self-certify. If an…

Arguably related to the SEC’s recently proposed CEO pay ratio
rules, Alberto Salazar and John Raggiunti have posted “Why Does Executive Greed
Prevail in the United States and Canada but Not in Japan? The Pattern of Low
CEO Pay and High Worker Welfare in Japanese Corporations” on SSRN.  Here is the abstract:

According to a list of the 200 most highly-paid chief
executives at the largest U.S. public companies in 2013, Oracle’s Lawrence J.
Ellison remained the best paid CEO and earned $96.2 million as total annual
compensation last year. He has received $1.8 billion over the past 20 years.
The lowest paid on the same list is General Motors’ D. F. Akerson who earned
$11.1 million. The average national pay for a non-supervisory US worker was
$51,200 last year and a CEO made 354 times more than an average worker in 2012.
Hunter Harrison, Canadian Pacific Railway Ltd., was the best paid CEO in Canada
for 2012 and received $49.2-million as total annual compensation, significantly
higher than the 2011 best paid CEO, Magna’s F. Stronach who received $40.9
million. In 2011, the average annual salary was $45,488 and Canada’s top 50
CEOs earned 235 times

…

I have spent the
past two days at West Virginia University attending a conference entitled “Business
and Human Rights: Moving Forward and Looking Back.” This was not a bunch of academic
do-gooders fantasizing about imposing new corporate social responsibilities on
multinationals. The conference was supported by the UN Working Group on
Business and Human Rights, and attendees and speakers included the State
Department (which has a dedicated office for business and human rights), the Department
of Labor, nongovernmental organizations, economists, ethicists, academics,
members of the extractive industry (defined as oil, gas and mining),
representatives from small and medium sized enterprises (“SMEs”), Proctor and
Gamble, and Monsanto.

Professor Jena
Martin organized the conference after the UN Working Group visited West
Virginia earlier this year to learn more about SMEs and human rights issues.
She invited participants to help determine how to ground the 2011
UN Guiding Principles on Business and Human Rights into business practices
and move away from theory to the operational level. The nonbinding Guiding
Principles outline the state duty to protect human rights, the corporate duty
to respect human rights, and both the state and corporations’ duty to provide
judicial and non-judicial remedies to aggrieved parties.  Transnational corporations…