Securities Regulation and Corporate Governance

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Direct Listings on Nasdaq May Include Primary Capital Raise

​In May, the SEC issued an order (here) approving a proposal by The Nasdaq Stock Market LLC (Nasdaq) permitting primary offerings in connection with a direct listing. This allows companies that are going public through a direct listing to raise proceeds in the direct listing, similar to an IPO. This development follows the SEC's prior approval of a similar rule proposed by the New York Stock Exchange (NYSE) that also permits primary capital raises in connection with a direct listing. See Gibson Dunn's Current Guide to Direct Listings (here) and Nasdaq's Direct Listing page (here) for more information.

The key elements of the final Nasdaq rules are similar to the basic tenets of the NYSE's rules. Under Nasdaq's approved rule, to conduct a primary offering in connection with a direct listing, the aggregate market value of publicly held shares immediately prior to listing together with the market value of shares sold in the opening auction must total at least $110 million (or $100 million, if the company has stockholders' equity of at least $110 million), with such market value calculated using a price per share equal to the lowest price of the range established in the related prospectus. For purposes of this calculation, shares purchased by officers, directors and >10% holders in the opening auction are allowed to be included (these shares would not otherwise qualify as “publicly held").  The approved rule (1) requires that all shares to be offered in a primary direct listing be sold within the price range specified in the applicable registration statement, and (2) calculates the value of the listing company's shares based on the minimum price set forth in the range within the registration statement. Nasdaq's approved rule also requires that the offering price in the primary offering remain below the highest price set forth in the registration statement's price range.

Direct listing practice is evolving and presents novel risks. Companies contemplating a direct listing encounter a number of open questions, some of which are highlighted here. Any company considering a direct listing is encouraged to carefully consider the risks and benefits in consultation with counsel and financial advisors. Members of the Gibson Dunn Capital Markets team are available to discuss strategy and considerations as the rules and practice concerning direct listings evolve. Gibson Dunn will also continue to update its Current Guide from time to time to further describe the applicable rules and provide commentary as practices evo...

SEC Staff Issues Cautionary Guidance Related to Business Combinations with SPACs

​There were more initial public offerings (“IPOs") of special purpose acquisition companies (“SPACs") in 2020 alone than in the entire period from 2009 until 2019 combined, and in the first three months of 2021, there have been more SPAC IPOs than there were in all of 2020. All of these newly public SPACs are looking for business combinations and many private companies are or will be considering a combination with a SPAC as a way to go public.

After an IPO, a SPAC has a limited amount of time to acquire a target company. Many of these business combinations move quickly and a private company becomes a public reporting company in a relatively short period of time. It is important for sponsors, target companies and investors to be aware of some of the special attributes of SPACs and the post-business combination public company.

On March 31, 2021, the staff of the Division of Corporation Finance (the “Staff") of the Securities and Exchange Commission (the “SEC") issued a statement addressing certain accounting, financial reporting and governance issues related to SPACs and the combined company following a SPAC business combination.

Shell Company Restrictions

Before contemplating a business combination, both SPACs and their target companies must consider the following limitations that arise from the SPAC's status as a Shell Company:

  • Target Financial Statements in 4 Business Days: The financial statements for the acquired business must be filed within four business days of the completion of the business combination (See Item 9.01(c) of Form 8-K). The registrant is not entitled to use the 71-day extension under Item 9.01(c).
  • No Incorporation by Reference in Form S-1 for 3 Years: The combined company will not be eligible to incorporate by reference Exchange Act reports, or proxy or information statements filed pursuant to Section 14 of the Exchange Act, until three years after completion of the business combination. (See General Instruction VII.D.1(b) to Form S-1.)
  • No Form S-8 until 60 days after filing current Form 10 information: The combined company will not be eligible to use Form S-8 for the registration of compensatory securities offerings until at least 60 calendar days after the combined ...
SEC Chair Lays Out a Climate- and ESG-Oriented Agenda and Calls for Comments on Mandatory Climate-Related Disclosure Rules

On March 15, 2021, the Acting Chair of the Securities and Exchange Commission (SEC), Allison Herren Lee, gave a speech entitled “A Climate for Change: Meeting Investor Demand for Climate and ESG Information at the SEC,"[1] in which she sets forth a near-term regulatory agenda for the SEC that centers on climate and Environmental, Social, and Governance (ESG) topics. On the same day, she also jump-started the regulatory process toward adopting potentially extensive new disclosure requirements for public companies on climate-change matters by issuing a request for comments on 15 broad issues.[2]

The SEC's ESG-Oriented Rulemaking Agenda.

In her speech, Acting Chair Lee proclaimed climate and ESG issues to be “front and center for the SEC." This is due to what Chair Lee referred to as “ESG integration" over the past decade – in other words, a shift in investor focus toward the use of climate and ESG risk analysis in investment decision-making. Chair Lee stated:

ESG factors often represent a core risk management strategy for portfolio construction. That's because investors, asset managers responsible for trillions in investments, issuers, lenders, credit rating agencies, analysts, index providers, and other financial market participants have observed their significance in terms of enterprise value. They have embraced sustainability factors and metrics as significant drivers in decision-making, capital allocation, and pricing.


As a result, Chair Lee stated that the SEC is “taking a holistic look at all of the ways climate and ESG intersect with our regulatory framework." In that context, she set forth the following topics as potential areas for SEC regulatory action in the coming years:

  • Adopting a mandatory comprehensive ESG disclosure framework for reporting companies aimed at producing “consistent, comparable, and reliable data...
SEC Announces Enforcement Task Force Focused on Climate and ESG Issues

On March 4, 2021, the Securities and Exchange Commission (SEC) announced the creation of the “Climate and ESG Task Force" in the SEC's Division of Enforcement.[1]  The purpose of the Task Force is to “develop initiatives to proactively identify ESG-related misconduct."  The Task Force's initial focus will be to identify “any material gaps or misstatements in issuers' disclosure of climate risks under existing rules."  The Task Force will also “analyze disclosure and compliance issues relating to investment advisers' and funds' ESG strategies."  

In carrying out these responsibilities, the Task Force will coordinate the Enforcement Division's resources to identify potential violations, including through “the use of sophisticated data analysis to mine and assess information across registrants."  In addition, the Task Force will evaluate and pursue tips, referrals, and whistleblower complaints on ESG-related issues, and assist teams working on ESG-related matters across the Enforcement Division.  The SEC's press release also provided a link to the SEC's website “Report Suspected Securities Fraud or Wrongdoing," noting that “tips, referrals and whistleblower complaints on ESG related issues" can be submitted there. 

The Task Force includes 22 members from the SEC's headquarters, regional offices and specialized units within the Enforcement Division.  The Task Force will be led by Acting Deputy Director of Enforcement Kelly L. Gibson, who noted that “proactively addressing emerging disclosure gaps that threaten investors and the market has always been core to the SEC's mission."  The SEC also announced that the Task Force will work closely with other SEC Divisions and Offices, including the Divisions of Corporation Finance, Investment Management, and Examinations. 

The creation of the Climate and ESG Task Force follows a series of announcements by the SEC regarding increased activity on climate change and related matters.[2]  In response to this recent “steady flow of SEC 'climate' statements and press releases," SEC Commissioners Hester Peirce and Elad Roisman issued on the same day a joint public statement titled “Enhancing Focus on the SEC's Enhanced Climate Change ...

Nasdaq Amends Proposed Rules to Allow Primary Direct Listings

As discussed in Gibson Dunn's Current Guide to Direct Listings,  the New York Stock Exchange (NYSE) recently amended its rules to permit a primary offering in connection with a direct listing. The Nasdaq Stock Market LLC (Nasdaq) also had proposed rules permitting primary offerings in connection with a direct listing.[1] On February 24, 2021, in the course of the SEC's review, Nasdaq amended its original proposal to bring its rules more in line with those adopted by the NYSE and approved by the SEC - clearing up some confusion caused by the original proposal.[2]

The NYSE requires that all shares to be offered in a direct listing with a primary capital raise be sold within the price range specified in the applicable registration statement. Nasdaq's original proposal had required that all shares be sold at a price that exceeds the price that is equal to 20% below the lowest price specified in the applicable registration statement (Initial Proposed Minimum Offering Price). In addition, Nasdaq had proposed to calculate the value of a listing company's shares for purposes of the minimum value requirement using the Initial Proposed Minimum Offering Price. In December 2020, the SEC issued a notice to Nasdaq[3] that criticized the original proposal for its use of the Initial Proposed Minimum Offering Price for valuation purposes and inconsistency in the proposed rules that would allow a direct listing with a primary offering to be conducted if the “expected" offering price was up to $0.50 less than the Initial Proposed Minimum Offering Price. In addition, the SEC criticized Nasdaq's original proposal for not establishing a maximum price at which the shares may be sold in a primary direct listing. The absence of a maximum price had caused confusion among market participants because of the conflict with the SEC's rule that the full amount of all securities being offered must be covered by the applicable registration statement.

Nasdaq's amended proposal is largely consistent with the NYSE's approved rules.  Nasdaq's amended proposal (1) requires that all shares to ...

ISS Issues Significant Update to Governance QualityScore

​On January 29, 2021, Institutional Shareholder Services (ISS) updated the ISS ESG Governance QualityScore (“QualityScore") product to include 17 new factors and various other changes, representing what ISS calls “the largest Governance QualityScore methodology release in recent years." 

Background

QualityScore is ISS's ESG ratings product that in the U.S. covers the S&P 500 and Russell 3000.  U.S. public companies are rated in four categories—Board Structure, Shareholder Rights & Takeover Defenses, Compensation/Remuneration, and Audit & Risk Oversight—based on publicly available data applicable to over 147 data points.  This data is updated on an ongoing basis to reflect company disclosures and is “augmented by proprietary analytics and information stemming from ISS analyses, interpretations, and proxy voting policies and subsequent recommendations to [ISS] clients for these shareholder meetings." Companies receive scores in each of the four categories as well as an overall score.  The scores range from 1 to 10 with a score of 1 reflecting “higher quality and relatively lower governance risk," compared to a score of 10 reflecting “relatively lower quality and higher governance risk." 

Summary of January 2021 Updates

The January 2021 QualityScore updates include:

  • Eleven new factors in the Audit category that are in two new subcategories:  Information Security Risk Oversight and Information Security Risk Management.
  • Three new factors in the Board Structure category, including:  whether the board “exhibit[s]" ethnic and racial diversity, in the Diversity and Inclusion subcategory; the percentage of the sustainability committee that is independent (or the committee that oversees sustainability issues if not a separate committee), in the Board Practices subcategory; and an unscored question that is for informational purposes only regarding the percentage of the board that has familial relationships with other directors, in the Board Composition subcategory.
  • Three new factors in the Compensation category, including:  evaluating the level of disclosure of diversity and inclusion performance metrics in executive incentive plans...
Now Available: Considerations for Preparing Your 2020 Form 10-K

As we do each year, we offer our observations on new developments and recommended practices for calendar-year filers to consider in preparing their annaul report on Form 10-K. In addition to the many challenges of the past year, the SEC adopted and provided guidance on a number of changes to public company reporting obligations impacting disclosures in the 10-K for 2020. In particular, we discuss the recent amendments to Regulation S-K, disclosure considerations in light of COVID-19, a number of technical considerations that may impact your Form 10-K, and other considerations in light of recent and pending changes in the executive branch and at the SEC.​  The full memo is available at the following link:

https://www.gibsondunn.com/wp-content/uploads/2021/02/considerations-for-preparing-your-2020-form-10-k.pdf​


SEC Proposes Changes to Rule 144, Form 144, Form 4 and Form 5

​On December 22, 2020, the Securities and Exchange Commission (the “SEC") proposed and published for comment amendments to Rule 144, Form 144, Form 4, Form 5 and Rule 101 of Regulation S-T.  These amendments primarily seek to (a) mitigate the risk of unregistered distributions in connection with sales of market-adjustable securities under the current Rule 144 safe harbor by revising the holding period for such securities to begin upon the conversion or exchange of such securities, and (b) update and streamline Form 144 by mandating electronic filing and eliminating the Form 144 filing requirement with respect to non-reporting issuers.  Comments on the proposed rules will be due 60 days after publication of the proposal in the Federal Register and  may be submitted electronically using the SEC's internet comment form (http://www.sec.gov/rules/submitcomments.htm) or by mail to the following address: Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.  All submissions should refer to File Number S7-24-20.

Rule 144 – Holding Period for Certain Conversions and Exchanges

The proposed amendments to Rule 144(d)(3)(ii) would eliminate the ability to tack the holding period of securities acquired upon the conversion or exchange of certain market-adjustable securities (also referred to as floating rate convertibles or future-priced convertibles) issued by an unlisted issuer.  Rule 144 currently provides that the holding period for such securities can be tacked back to when the securities surrendered for conversion or exchange were acquired. If adopted, the holding period for affected securities would begin when the conversion or exchange of the market-adjustable security was complete.

The adopting release emphasizes that Rule 144 would remain unaffected for most convertible and variable-rate securities transactions.  The changes would only apply to if both:

  • if the issuer is an unlisted issuer (i.e., an issuer without a class of securities listed, or approved for listing, on a national exchange) at the time of the conversion or exchange; and
  • the securities surrendered are “market-adjustable securities", by which the Commission means securities that contain terms, such as conversion rate or price adjustments, that offset declines in market value of the underlying securities. 
Securities containing price protection (otherwise known as “ratchet") provisions would be “market-adjustable securities."  However, convertible or exchangeable securities containing standard anti-dilution provisions, including adjustment...
SEC Adopts New Rule Relating to Submissions through EDGAR and Electronic and Remote Online Notarization

​On December 11, 2020, the Securities and Exchange Commission (the “SEC") announced its adoption of a new rule under Regulation S-T in connection with its administration of the Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR") to promote the reliability and integrity of EDGAR submissions, and also the adoption of revisions to Volumes I and II of the EDGAR Filer Manual and related rules under Regulation S-T, including provisions regarding electronic notarizations and remote online notarizations, which include electronic signatures.

Rule 15 under Regulation S-T

1.    The new Rule 15 under Regulation S-T allows the SEC to take the following actions to promote the reliability and integrity of submissions made through EDGAR:

2.    Sensitive Personally Identifiable Information: if the SEC determines that a submission contains personally identifiable information that if released may result in financial or personal harm to an individual:

  • redact such personally identifiable information from the submission;
  • prevent dissemination of the submission; and/or
  • remove the submission from the SEC's public website;

3.    Cybersecurity Threat: prevent any submission to EDGAR that poses a cybersecurity threat, including but not limited to, submissions containing any malware or virus;

4.    System or SEC Staff Errors: correct and/or prevent public dissemination of any submission to EDGAR, if the SEC determines that such submission:

  • has not been processed by EDGAR;
  • has been processed incorrectly by EDGAR; or
  • contains an error attributable to the SEC staff;

5.    Incorrect EDGAR Identifier: remove and/or prevent public dissemination of a submission, if the SEC determines that a submission is made under an incorrect EDGAR unique identifying number;

6.    Disputes Over Authority: prevent a filer's ability to make submissions, if the SEC determines that a dispute exists regarding the authority to make submissions on behalf of a filer, until the dispute is resolved;

7.    Misleading or M...

SEC (Finally) Adopts Resource Extraction Disclosure Rules (Again)

​On December 16, 2020, the Securities and Exchange Commission (the “SEC") adopted final rules (available here) requiring certain disclosure by public companies that engage in the commercial development of oil, natural gas or minerals. Under the final rules, domestic or foreign “resource extraction issuers" (the definition of which is discussed below) will have to file a Form SD on an annual basis that includes information about payments related to the commercial development of oil, natural gas or minerals that are made to a foreign government or the U.S. federal government.

What's the History Here?

The SEC's release sets forth the tortured, more-than-eight-year history of this rulemaking process (see previous Gibson Dunn posts regarding this topic in 2019, 2015, 2013 and 2010). The SEC adopted these rules by mandate pursuant to Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act") after having earlier-adopted versions of the rules vacated in 2012 by the U.S. District Court for the District of Columbia (a ruling which the SEC declined to appeal) and disapproved in 2016 by Congress pursuant to its authority under the Congressional Review Act (the “CRA"). While Congress disapproved of the rules adopted in 2016, it did not repeal Section 1504 of the Dodd-Frank Act, so the SEC's rulemaking mandate remained in place. Revised rules cannot be substantially similar to the ones disapproved by Congress under the CRA. As such, the SEC proposed new rules in 2019 that differed from the 2016 rules (see this earlier blog post for a breakdown of the differences between the 2016 rules and the 2019 proposed rules). Today's newly adopted rules follow the proposed 2019 rules with a few minor differences (which are discussed in more detail below).

What Does This Entail?

The final rules implement Section 13(q) of the Securities Exchange Act of 1934, as amended, and will require disclosure of the following company-specific, project-level information in an amended version of Form SD (available on page 212 of the adopt...

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Current thoughts on development and trends in securities regulation, corporate governance and executive compensation published by Gibson Dunn.

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