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Dodd-Frank, SOX, JOBS, & Legislation

SEC & CFTC Adopt Rules For Definitions of Terms in Derivatives Transactions under Dodd-Frank

On April18, 2012, the SEC, jointly with the Commodities Futures Trading Commission (CFTC), implemented part of the Dodd-Frank Act by adding definitions for use in interpreting what are swaps-related transactions. The new Rule 3a71-1 under the Securities Exchange Act defines the term “security-based swap dealer” consistent with the criteria set forth in the Dodd-Frank Act as someone who: Holds themselves out as a dealer in security-based swaps. Makes a market in security-based swaps. Regularly enters into security-based swaps with counterparties as an ordinary course of business for their own account. Engages in activity causing them to be commonly known in the trade as a dealer or market maker in security-based swaps. There is an exception for those who are only involved in a de minimis quantity of these transactions to not be held to this rule.  The rule will go into effect 60 days after the rule is published in the Federal Register. You can read the entire release and rule through the SEC’s website at:...

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What Do the JOBS Act, Reg D Change, and Crowdfunding Bills Actually Say? Which bill is right? Read H.R. 3606

I have noticed quite a bit of confusion in blogs when discussing crowdfunding, the JOBS Act, and other recent legislation regarding small business, startups, and emerging growth companies.  Even respected news organizations don’t get the specifics exactly right about what this legislation actually says, so I thought I would set the record straight. President Obama is set to sign H.R. 3606 this week.  The best way to know exactly what this bill says is to read it, despite the somewhat dense language and references to other parts of U.S. law.  Here is a link to the actual PDF format of H.R. 3606.  This is an easier to read version I put together on my site with hyperlinks to each section.  For an overview and summary of this bill and its history you can read here.  These are links directly to the information provided by Congress.  Some of the confusion has been that the legislative process involves a very confusing system where bills are introduced, amended, and sometimes added to existing bills.  That was the case with the JOBS Act and the crowdfunding provisions.  H.R. 2930 was the original crowdfunding bill that passed the U.S. House and went to the Senate, but did not actually pass the Senate.  After adding and deleting portions from various amended versions similar to H.R. 2930, the crowdfunding and other provisions were all put into one bill called H.R. 3606.  This passed the Senate and then went back to the U.S. House after amendments to be passed.  It has passed and was forwarded to the President for signature on March 27, 2012.  He is expected to sign it this week. Title I of the bill implements reduced reporting and other limited disclosure requirements for emerging growth companies (those with under $1 billion in gross annual revenue and haven’t hit the other limitations to take them out of this classification). It also sets out changes to Regulation S-K and actions to be taken by the SEC within 180 days to ease the burden on these small to middle market companies to register or comply with SEC rules. Title II provides the ability to use general advertising and solicitation by companies of investors if they are relying upon a Reg D Rule 506 exemption for that issuance of securities, but all investors must be accredited.  Rule 506 previously allowed large private fundraising by companies, but the investor...

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"Emerging Growth Companies"- JOBS Act May Provide Eased Regulations

With H.R. 3606, or most commonly referred to as the “JOBS” Act (Bill Summary |  Bill Text PDF), likely to be signed into law this week by President Obama, there are some new changes that may be of help to startup and small companies.  In addition to the so-called crowdfunding exemption from securities registration which allows pooling of small amounts from investors to fund a company, the JOBS Act puts in place regulations that carve out a category called “emerging growth companies” which have an intermediate level of reporting obligations with the SEC.  It is between the level of disclosures required for a fully reporting large company and a private, non-reporting company.  This could be a very good help for these small to middle market companies to ease the burden of time and expense in being a fully reporting company. An emerging growth company is defined as a company with less than $1 billion in annual gross revenue; however, the company loses that status upon hitting certain targets related to the amount of debt securities issued, after 5 years of first having sold stock per an effective registration statement, or upon being declared a large accelerated filer under SEC rules. The new rules for an emerging growth company (EGC) is to exclude it from some of the restrictions imposed under the Sarbanes-Oxley Act or Dodd-Frank Act.  EGCs are excluded from the requirements of say-on pay executive compensation disclosures and other proxy disclosures under Dodd-Frank.  EGCs are also not required to comply with the internal controls audit requirements of SOX.  The JOBS Act also requires the SEC to review Regulation S-K and make any changes to make it easier and less costly for companies to register their securities under that regulation.  It is not required to implement those, but the SEC must transmit its recommendations for streamlining registration of EGC securities within 180 days of implementation of the JOBS Act.  An EGC need not provide more than the last 2 years audited financial statements in an IPO registration statement and further reporting obligations do not need to include the selected financial data normally required under Section 229.301 of the Code of Federal Regulations under Regulation S-K.  However, smaller reporting companies were already excluded from this requirement under Section 229.10(f)(1) for those companies that meet the$75 million in public float or $50 million in annual revenue test. It is hard to...

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To Stagger or Not to Stagger Your Board of Directors, That is the Question

One question faced by companies from startup through Fortune 500 status is whether they should stagger or classify their board of directors.  Staggering or classifying occurs when the corporation sets up voting for election of only a minority of members of the board every year, so it often takes several years to replace an entire board.  This is viewed as a good takeover defense and also argued to be good for the corporation because frequent changes of directors can result in corporate policy and corporate governance changing more often or more dramatically. Those against it feel that it doesn’t give shareholders the ability to make major changes when problems arise with the current board’s decisions and it entrenches existing corporate policy and management to not as easily allow for necessary change.  Although some would downplay trying to make this about shareholder rights versus management or existing structure, that is a major factor of the argument. Originally, corporations would implement a simple once a year vote of shareholders for either current or new directors.  These types of corporate governance decisions are put into articles of incorporation, bylaws, or state corporate law, although most commonly in the company’s bylaws.  The idea of staggered boards was implemented within the last several decades as essentially a takeover defense, although they are now common for corporate stability.  There is no right answer at this point, although legislative changes like SOX and Dodd-Frank continue to expand shareholder protections and rights to deal with things like “Too Big to Fail,” the Madoff Scam, and other shakeups. The battle continues with a war of words between Harvard Law’s Shareholders Rights Project and law firm Wachtell, Lipton, Rosen, & Katz.  The firm continues to argue for staggering and that it is not just about takeover defense.  Harvard’s project argues that staggering needs to be eliminated to get rid of low valuations and bad corporate decision-making.  Wachtell says there is no correlation between staggered boards and bad decision-making or lower company valuations.  The project has gotten about a third of the Fortune 500 companies to agree to bring forward proposals to get rid of staggered boards. In addition, Dodd-Frank is implementing shareholders ability to weigh in on corporate governance and ways to provide nominations for the board of directors (instead of current management simply proposing who they recommend you vote for on their annual proxy), so the trend is...

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Crowdfunding Passed Senate but Reduced By Bill Amendment

H.R. 2930, one part of the multi-bill JOBS Act being pushed through Congress, was to allow more eased securities regulation of so-called crowdfunding.  Some have argued that sites like Kickstarter or others could change their business model (currently only accepts gifts or donations, called pledges, to raise money) to help companies raise money for companies in exchange for stock in that company.  Currently, that model would be prohibited under securities laws as general advertising and public sales of stock are not allowed, especially through an intermediary, with certain exceptions like using a registered broker-dealer or registering the stock with the SEC. H.R. 2930 passed the U.S. House last year, but was stuck in the Senate until today.  The Senate passed the JOBS Act, including H.R. 2930, but in amended form so that it must go back to the House for another vote.  The prevailing thought is that it will easily pass, even with this amendment, and become law soon. The amendment puts more limitations on how crowdfunding can be used.  Previously, a company could get up to $10,000 per investor to raise a total of $1 million in a 12 month period, or up to $2 million if audited financial statements are provided to investors.  Now the total raised would be capped at $1 million and certain financial disclosures to investors would be required in all cases, such as financial statements certified by the CEO and other descriptions of the business.  Also, intermediaries used to help bring in this money would now need to be registered with the SEC as a broker-dealer or funding portal, as before they would not need to be a registered broker-dealer. The term funding portal will start to be heard much more as it will be used by intermediaries to help raise money and the newly proposed definition is: Definition.–Section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)) is amended by adding at the end the following: “(80) FUNDING PORTAL.–The term `funding portal’ means any person acting as an intermediary in a transaction involving the offer or sale of securities for the account of others, solely pursuant to section 4(6) of the Securities Act of 1933 (15 U.S.C. 77d(6)), that does not– “(A) offer investment advice or recommendations; “(B) solicit purchases, sales, or offers to buy the securities offered or displayed on its website or portal; “(C) compensate employees, agents, or...

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Insider Trading Crackdown on Congress- STOCK Act | H.R. 1148 S.1871

The Stop Trading on Congressional Knowledge Act (STOCK) has now passed both the U.S. House and Senate and should be signed into law by the president very soon. (Actual Text | Bill Summary & Status) H.R. 1148 or Senate Version S.1871 is the bill that seeks to impose heavier restrictions on insider trading that is done by or is connected to members of congress, federal employees, or employees of congress. Insider trading is covered by the Securities Act of 1934 and other related federal legislation and rules by the SEC and CFTC. It occurs when someone uses inside information as a basis to trade in stocks, commodities, or other types of securities. Inside information is defined as material non-public information. An example would be someone who works for a public company, gains information about something about to happen with that company that has not been disclosed to the public (e.g. significantly increased profits, new products about to be launched, etc.), and trades based upon that information. This can also be extended to include what is referred to as “tipper-tippee” insider trading where the insider tells their friend or some other outside person about this inside information for them to use to trade a make a gain. The famous example is Martha Stewart who received insider tips from brokers or other people with knowledge in order to trade and make money before the public knew about the inside information. The point is to level the playing field so that well connected people can’t gain an advantage over the average public to get in prior to news being released. STOCK seeks to extend specifically liability for insider trading to inside information obtained: “(1) knowingly from a Member or employee of Congress, (2) by reason of being a Member or employee of Congress, or (3) from other federal employees and derived from their federal employment.” It also “amends the Code of Official Conduct of the Rules of the House of Representatives to prohibit any Member, officer, or employee of the House from disclosing material nonpublic information relating to any pending or prospective legislative action relating to any publicly-traded company or to any commodity if such person has reason to believe that the information will be used to buy or sell the securities of that publicly traded company or that commodity for future delivery based on such information.” It also extends certain required...

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