Bouncing Around the Federal Securities Laws

By: Michael H. Altman

As securities lawyers, we get used to proposals by which the whole world changes every few years. In the 1990s, the SEC proposed a set of rule changes so massive that the proposal was quickly dubbed the “aircraft carrier release.” More recently, moves toward company disclosure, modernization of electronic filing, disclosure and proxy delivery rules, the welcome preemption of the most onerous state “blue sky” laws in the private placement contexts and the SEC’s enaction of rules to implement Sarbanes-Oxley and Dodd-Frank have, at times, stood various aspects of this practice on its ear.

One thing hasn’t changed, however. Issue equity to enough holders and you risk triggering the 500 holder threshold, in place since 1964, which would require periodic filings and public disclosure of financial results, executive compensation and other company information. In 2003, Google held its IPO when it crossed that threshold, saying “[b]y law, certain private companies must report as if they were public companies. The deadline imposed by this requirement accelerated our decision [to go public].” The most prominent company to currently face this hurdle is, of course, Facebook, which, instead of going public as Google did, raised money in another private placement which was exempt because it went to non-US investors under Regulation S. Of course, the offering only became foreign-only when the SEC questioned Goldman Sachs’ initially proposed structure for getting around the 500-holder rule.

Well, as of this week, the SEC chairman stated that the commission is “taking a fresh look at” this rule. This would allow Facebook and companies in similar situations to remain “private.” Because they would not be subject to periodic reporting, arguably management could more easily focus on long-term strategy, rather than on the quarter-by-quarter analysis and expectations that public companies must consider. In addition, these companies could continue to avoid the detailed disclosure requirements and costs attendant with compliance with the securities laws, including Sarbanes-Oxley. Finally, the emergence of secondary markets and private exchanges have enabled these companies to provide some liquidity for their equity-holders, even in the absence of a public offering.

This proposal is interesting, because it seems to go directly against the SEC’s often-repeated preference for increased disclosure and transparency. We’ll keep an eye on it.

I’ll end with one unrelated SEC action this week – the arrests of a former Wilson Sonsini lawyer and a Wall Street trader with insider trading in advance of at least 11 merger announcements involving Wilson Sonsini clients. The two individuals had no direct relationship with each other, but were only linked through a mutual friend who passed along the information. All 3 used only public telephones and disposable prepaid phones. Despite all these precautions, they were caught. There is no question that the SEC has stepped up its enforcement efforts in the insider trading realm, and the SEC and US Attorney have sufficient tools to track even sophisticated efforts. Trading while in possession of material non-public information is, of course, illegal, and there is no foolproof way of hiding tipping or trading activities from the authorities.

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