Corporate

Effects of the Shortened T+2 Settlement Cycle

In March 2017, the United States Securities and Exchange Commission (the SEC) adopted amended Rule 15c6-1(a) which shortens the standard trade settlement cycle for most broker-dealer securities transactions from three business days (known as T+3) to two business days, (known as T+2). On Tuesday, September 5, 2017, the amended rule went into effect.

What Does the Change Apply To?

The new T+2 settlement cycle applies to the same securities transactions currently covered under the T+3 cycle, which the SEC states includes “transactions for stocks, bonds, municipal securities, exchange-traded funds, certain mutual funds, and limited partnerships that trade on an exchange.”

However, the new cycle does not apply to certain categories of securities, such as securities exempt from registration with the SEC due to being backed by a government or governmental institution. (more…)

Nasdaq’s Change of Control Rule – Does It Apply in a Public Offering?

Tax inspector investigating financial documents through magnifyi By Kevin Friedmann

Are you concerned about whether Nasdaq’s change of control rule will limit the size of your public offering? According to the Nasdaq staff, you don’t need to worry about this, as long as you have a bona fide public offering.

Nasdaq Listing Rule 5635(b) provides that shareholder approval is required prior to the issuance of securities when the issuance or potential issuance will result in a change of control of the company. According to Nasdaq, a change of control would occur when, as a result of the issuance, an investor or a group would own, or have the right to acquire, 20% or more of the outstanding shares of common stock or voting power and such ownership or voting power would be the largest ownership position (the “Change of Control Rule”). See Nasdaq FAQ ID#195.

Nasdaq Listing Rule 5635(d) provides that shareholder approval is required for the issuance of common stock (or securities convertible into or exercisable for common stock) equal to 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock (the “Private Placement Rule”). Under the Private Placement Rule, however, shareholder approval is not required for a “public offering.” (more…)

Changes From the SEC: Confidentiality is Key

IPO (Initial public offering) By Melanie Figueroa and Blake Baron

In a recent effort to foster increased public offering activity, the U.S. Securities and Exchange Commission (SEC) announced on June 29, 2017 that it will permit all companies to submit voluntary draft registration statements relating to initial public offerings (IPOs), certain follow-on offerings and national securities exchange listings for non-public review. This process will be available for nearly all offerings made in the first year after a company has entered the public reporting system. This benefit will take effect on July 10, 2017.

So, why is this an important change? (more…)

If You SEC Something, Say Something

Cybersecurity of network of connected devices and personal data security By Melanie Figueroa and Susan Kohn Ross

Just about every survey of General Counsels reveals the same #1 culprit of sleepless nights….. a cybersecurity hack. If you run a business in today’s global environment, it is hard to escape the fundamental reality that it is more than likely a matter of when, not if, you will face a cyber threat. And depending on the nature of your business, that threat can have a wide range of implications. If you are a public company, there is an additional issue to consider… what do you have to disclose to your investors and shareholders?

Being prepared for a hack with a comprehensive written information security plan and an equally robust incident response plan is just one component to be considered if you are a public company. You must also have a plan to meet your reporting and disclosure obligations to a variety of governmental bodies. While measuring your response needs in the wake of a hack, and determining if there are state, federal or international laws and regulations that require reporting, you must also pay close attention to possible disclosure obligations in your SEC filings. Specifically, if you have tripped a disclosure to a state attorney general or your company’s customers, then it is possible you may also have a disclosure obligation to your shareholders. (more…)

Supreme Limits: Kokesh v. SEC Imposes a 5-Year Limit on Disgorgement Claims

By John Durrant

On June 5, 2017, the U.S. Supreme Court unanimously ruled that claims by the Securities and Exchange Commission seeking disgorgement must be commenced within five years of accrual. The ruling, which resolved a circuit split, represents a very important curtailment of the SEC’s enforcement authority. The SEC had previously argued that there was effectively no limitations period that applied to disgorgement and accordingly sought to disgorge purportedly ill-gotten gains going back, in some cases, decades. Justice Sotomayor’s lucid opinion categorically rejected the SEC’s position. Potentially more disconcerting for the SEC, language in the decision suggests the Court may look at further limitations on the judicially created disgorgement remedy in the future.

The sole question posed in Kokesh v. SEC, case number 16-529, 581 U.S. ___ (2017), was whether 28 U.S.C. § 2462 applied to claims by the SEC for disgorgement. Section 2462 sets forth a 5-year statute of limitations for “an action, suit or proceeding for the enforcement of any civil fine, penalty or forfeiture” brought by the Government. The SEC argued that its claims for disgorgement did not fit this definition – that a disgorging defendant was merely giving up that to which he or she was not entitled and that disgorgement was an “equitable remedy” not a “penalty.” The Court rejected this argument, holding that disgorgement “bears all the hallmarks of a penalty” (i.e., a Government-imposed “punishment”) in two regards: (i) it seeks to redress a wrong to the public (not an individual); and (ii) it seeks to punish wrongdoers and deter similar wrongdoing by others. (more…)

Data Breaches: An Employer’s Duty to Protect Employees’ Personal Information

By Aaron Wais

Recently, there has been much discussion about the Superior Court of Pennsylvania’s ruling in Dittman v. UPMC, which affirmed a lower court’s order dismissing an employee class action against their employer over a data breach. While this was a significant victory for employers, non-Pennsylvania employers should temper their enthusiasm. As one recent federal court decision in California makes clear, the reasoning of Dittman may not extend far beyond, if at all, the borders of Pennsylvania. Moreover, regardless of their outcomes, both cases also reinforce the need for employers to maintain legally compliant, written policies for safeguarding private information and responding to data breaches.

In Dittman, a data breach resulted in the theft of the personal information (e.g., names, birth dates, social security numbers, banking information) of approximately 62,000 UMPC current and former employees. The information was used to file fraudulent tax returns and steal tax refunds from certain employees.

(more…)

Steps to Take Now to Avoid the EB-5 Dragnet

By Siyuan An, Les Gold, and Mark Hiraide

Photo credit: iStock.com/-goldy-

The Securities and Exchange Commission (SEC) is keeping an eagle eye on EB-5 projects these days, as evidenced by a dramatic increase in the number of fraud cases the agency has filed in federal courthouses across the country. EB-5 refers to the type of visa the government issues to immigrants who invest large sums in U.S. commercial projects that create or maintain a minimum of 10 jobs.

After filing only one EB-5 fraud case in 2014 and two the year before, the SEC filed five EB-5 fraud cases in 2015 and another two so far this year. MSK’s Corporate & Business Transactions attorneys, who practice in this area of law, are noticing that most of these cases accuse issuers of EB-5 offerings of defrauding foreign investors by making misrepresentations in securities offering documents.

Not only does MSK assist clients in preparing EB-5 offering documents, we also defend issuers in SEC enforcement actions. MSK attorneys are currently representing the defendant in two high-profile EB-5 fraud cases, filed in 2015 and 2016We also counsel our clients on how to best conduct their EB-5 offerings and operate their EB-5 projects to comply with the law and avoid the SEC’s heightened scrutiny. (more…)

Corporate & Business Transactions Tips for Startups

By Bryan Wasser

When venture capital (“VC”) firms or private equity (“PE”) firms invest in start-up companies their goal is to work with management to strengthen operations, accelerate growth, enhance profitability and position each portfolio company to become a market leader. One of the most important advantages of a company being owned (or minority or majority-controlled) by such a VC or PE firm (referred to as a “portfolio company”) is the strength and focus of the directors of the portfolio company that are appointed by the VC or PE firm. However, senior management must stay focused as the day-to-day decisions will rest solely with them. To help senior management, we have put together the following set of principles that start-up companies can utilize to forge the strongest possible partnership between their management and the VC and PE firms that they partner with.

1. FREQUENT AND DETAILED COMMUNICATIONS ARE ESSENTIAL.
The most effective CEOs and CFOs are sophisticated communicators. They understand their role in managing the flow of information between the VC or PE firm and the other members of the management team. and can quickly communicate developments in the business to the VC or PE firm’s representatives. Investors expect their CEOs and CFOs to be straightforward and open about the challenges the portfolio company faces. what management is doing about those challenges and the likelihood of successful outcomes. (more…)