Securities Regulation & Corporate Finance
JOBS Act Deadline Comes & Goes without SEC Action
Congress imposed upon the SEC a July 4th deadline to implement rules under Title II of the JOBS Act that would enable companies to engage in general solicitation under Rule 506 of Regulation D. But on June 29th SEC Chair(wo)man Mary Schapiro testified before Congress that the SEC would not be able to enact rules within the 90 period proscribed by Congress. Ms. Schapiro did state that the SEC anticipates having a vote on a draft rule later this summer:
“The Securities and Exchange Commission will miss its first rulemaking deadline to lift the general solicitation ban as mandated by the Jumpstart Our Business Startups Act, but a draft rule will come to a commission vote this summer.”
The 90 window was always going to be a tough fit for the SEC, and I always thought it was more of an aspirational timeline rather than a realistic one. Among the issues for the SEC to resolve in its implemented rule are:
- Verification requirements–securities issuers will have to verify the accreditation of its investors (currently issuers only have to have a reasonable belief that its investors are accredited).
- Regulation of platforms–Title II authorizes a new type of “platform” for the facilitation of offers, sales, purchases, and negotiations of the sales of securities under the new Rule 506. Additionally platforms are allowed to conduct “ancillary services.”
- Filing requirements–the expansion of Rule 506 will likely result in the changing of standard Form D filings. State regulators are especially concerned that they will not be able to adequately protect their citizens unless Form D filings are filed before an offering.
- Advertising regulation–even though general solicitation will be permitted, all advertisements will still need to conform with conventional prohibitions against misleading, deceptive, and fraudulent advertising.
The SEC has published an agenda for an August 22 open Commission meeting that includes the following “Item 3″: “The Commission will consider rules to eliminate the prohibition against general solicitation and general advertising in securities offerings conducted pursuant to Rule 506 of Regulation D under the Securities Act and Rule 144A under the Securities Act, as mandated by Section 201(a) of the Jumpstart Our Business Startups Act.”
TheCorporateCounsel notes that the 7 weeks notice is unusual; most meeting agendas are posted a week or so in advance. TheCorporateCounsel takes particular note of the fact that the notice doesn’t say it’s considering a proposed rule, leading editor Brok Romanek to believe that an interim final rule could be enacted:
“[N]ote that wording of Item 3 in the notice doesn’t state that the SEC will consider whether “to propose” the rule. The wording of these descriptions are vetted carefully, so the absence of the term “propose” could imply an interim final rule, or perhaps something else. Recall that the JOBS Act called for this rulemaking to be finished within 90 days of the Act’s passage.”
Initial Public Offerings
ServiceNow IPO Provides Software and Tech Companies Hope in IPO Market
After Facebook’s bust of an IPO, software and tech companies can take solace in ServiceNow’s IPO, which rose 37% in its first day of trading. The Wall Street Journal author Matthew Wong speculates that other tech companies may seek to their companies public in the wake of ServiceNow’s success,
“[The success of the ServiceNow IPO] could spur demand for more near-term deal flow as companies such as Palo Alto Networks and Kayak Software consider IPOs.”
Manchester United to Make Public Offering
Premier League giants Manchester United have filed a registration statement with the SEC. The Glazers, who have a controlling interest in the club, are seeking to raise $100 million in the public offering, in part to offset the company’s $664 million debt. The Glazers will retain control, as they will own Class B shares, with 10 votes each, while the stock being offered is Class A shares, with only one vote each.
Contracts & Closely Held Companies
Delaware Court: Breach Must be Material to Excuse Performance
This isn’t breaking news to lawyers or well-drilled law students, but Matthew v. Laudamiel provides a good example to business owners of a fundamental rule of contracts: a party to a contract is still obligated to perform despite the other party breaching the contract, unless the other party’s breach is material. What is a “material breach”? Well, that’s where there’s a bit of gray area. Here’s the law that Vice Chancellor Noble cited:
“To justify termination, it is necessary that the failure of performance on the part of the other go to the substance of the contract. Modern courts, and the Restatement (Second) of Contracts, recognize that something more than mere default is ordinarily necessary to excuse the other party’s performance in the typical situation, subscribing to the general rule that where the performance of one party is due before that of the other party, such as when the former party’s performance requires a period of time, an uncured failure of performance by the former can suspend or discharge of the latter’s duty of performance only if the failure is material or substantial.”
In Matthew v. Laudamiel, the parties were subject to a limited liability company agreement. The company was dissolved in a manner that did not conform with the member agreement, but the manager, who brought the suit failed to attend the company meeting, as he was required to do under the company agreement. The opinion is in response to a summary judgment, which was denied because the plaintiff arguably materially breached the contract by failing to attend the company meeting.