A popular two-tier merger and acquisition structure may trigger certain prohibitions under the Securities Exchange Act of 1934.  In particular, this problem relates to the so-called “Burger King” structure, arising from the private equity fund acquisition of the fast-food chain by a private equity fund, and its simultaneous pursuit of a tender offer and a traditional one-step merger. 

The Burger King deal required that the PE firms agree that, if they could not reach a share majority in the tender offer of generally 90 percent, the PE firms could swith to the one-step merger in the middle of the transaction.  Such a practice would allow the PE firms to save time as well as move faster on the ultimate acquisition.  This practice has been adapted in several other transactions.

Nonetheless, there are always issues.  This dual structure may violate Exchange Act Rule 14e-5.  This Rule prohibits buying or offering to buy the target company’s securities outside of the tender offer.  This happens in the Burger King process although a preliminary proxy statement is actually filed with the SEC, triggering this problem.

Subsequently, the SEC has warned of this potential predicament.  However, the SEC has not offered any clarity on this point or if there will be a Staff statement on this potential problem.  That leaves those who wish to pursue this method in a bind.  If they seek no-action relief from the SEC Staff, they will have to address the Staff’s concerns or outright refusal to go along with the transaction.  In any event, those working on these transactions should be careful with the timing of the filing of these proxys with the SEC, and consider contacting the SEC prior to any filing in the hope the Staff may offer some “pre-clearance.”

Well, as Chaucer said, “all good things must come to an end,” however, we still have the Whopper.

The SEC’s Division of Corporation Finance will consider a bar on so-called “bad actors” from private offerings before announcing rules on crowdfunding under the JOBS Act.  However, we anticipate there will be an additional delay given the turnover at the SEC and the recent departure of its Corp Fin Director. 

As you have undoubtedly heard, the SEC has been criticized for delay in propounding these rules by various investor and industry groups.  The SEC is required by the JOBS Act to provide for an exemption for crowdfunding as well as disqualify those persons barred by a state authority from engaging in the securities business, convicted of a felony or misdemeanor relating to the sale of securities, or making false SEC statements.  To complicate matters, the SEC already has a pending Dodd-Frank Act rule to preclude certain “felons and bad actors” from participating in private offerings pursuant to Regulation D.  This proposed rule included certain events that occurred prior to the enactment of the Dodd-Frank Act.  Interestingly, when questioned about the delay, the SEC’s response was there were a lot of comments on this proposed rule. 

We expect that whenever the SEC finally gets around to approving final rules, the criticism and rancor should be deafening.

The SEC’s Division of Corporation Finance has indicated that lawyers for issuers and issuers themselves should focus on and respond to the SEC’ Staff’s comments during the corporate filing review process.  

The SEC’s Staff has seen that issuers and their counsel are not necessarily responding completely to comments.  The SEC Staff believes that this has caused the process to become more complicated.  In particular, the SEC Staff has suggested issuers are not responding to comments relating to cyber-security disclosures.  This is an essential issue that companies must address. 

This blog has previously discussed this critical issue in the past, and issuers and their counsel need to prepare the company to address and deal with these cyber-security issues.

Despite some strenuous objections, the SEC agreed to propose a rule to lift the ban on general solicitation and advertising for certain private offerings as required by the JOBS Act.

The JOBS Act required to the SEC to allow Securities Act of 1933 Rule 506 issuers to broadly market their securities so long as the securities were purchased only by accredited investors, and to eliminate the advertising prohibition under Securities Act Rule 144A.  One issue left open by this rule proposal is that there is no specific verification method to determine accredited investor status.  The SEC believes such an approach would not be worthwhile since there are many ways to do so.  Issuers must instead take “reasonable steps” to determine such a status under the proposal.

Although the SEC proposed this rule sometime ago, no action has been taken. 

An intriguing phenomenon has occurred.  Regulators have recently noticed that there is a sharp rise in Internet crowd-funding sites. 

Ironically, the SEC still has not promulgated rules for allowing small businesses to raise capital online.  The SEC believes that those rules are months away.  Nonetheless, regulators estimate that there are almost 9,000 websites already dedicated to crowd-funding.

Regulators are deeply concerned that the proliferation of these sites could create more trouble for regulators, who are charged with enforcing thse rules and ensuring investor safety.

“Big Boy Letters” are usually used to identify that the buyer in a transaction has made its own independent assessment of certain risks involved and that certain information has not been disclosed to the buyer by the seller.  In particular, this means that a party is not relying upon certain representations or the lack of representations.

The critical step in these letters is considering the application of these non-reliance provisions are received by the courts and the SEC.  In particular, the SEC has taken the position that such a letter will not foreclose an insider trading liability case under a misappropriation theory  However, courts and private litigants could effectively eliminate or at least limit the potential liability from these letters.

Essentially, the use of these letters is somewhat uncertain depending upon the context.  Nonetheless, these letters are certainly not a complete “get out of jail free” card, and will depend upon the facts and circumstances of each situation.

A senior Congressman has indicated that he wants to see a wide-ranging pilot program to examine different minimum spreads for different stocks.  He believes that such a program would allow the SEC to determine if tick sizes in equity markets are appropriate.

Tick sizes are increments whereby a stock price may move, and, currently, that size is $0.01.  Other global markets have different values.  This senior Congressman wanted a large number of stocks in the program to provide enough data, and he wanted the review completed by the end of this year.  There is no indication that this study is currently being conducted.

Nonetheless, at least theoretically, it presents an interesting possibility for real market change if taken seriously.

The SEC is extremely concerned about foreign auditors.

In particular, the SEC is worried that those who work in certain European countries and in China are not subject to auditor requirements or the PCAOB.  Essentially, the SEC is concerned over the lack of US oversight over these foreign auditors.  Further, the SEC is concerned about if their audit reports provide accurate information for investors.

Although the SEC has not indicated enforcement action, it is considering if it should instruct the  PCAOB to engage in further regulation of these entities and their issuers.  See http://WWW.SEC.GOV/NEWS/SPEECH/120312LAA.HTM

In a not so surprising development, the SEC announced that even SEC registered broker dealers may not act as a crowd funding intermediaries under the JOBS Act because the SEC has not adopted regulations. 

Crowd funding allows companies to finance new businesses by accepting and pooling donations of up to $1 million over the Internet if certain conditions are met.  However, the SEC has to adopt regulations governing these funding portals before allowing anyone to register with the SEC.  Currently, the SEC has not finished adopting those regulations. 

Accordingly, it is important to keep in mind that those wishing to engage in crowd funding should not engage in such activities until the SEC announces these regulations. 

The SEC’s Chief Accountant announced that a number of companies may be unaware they fall under the disclosure requirement for Emerging Growth Company status under the JOBS Act. 

As a result of this status, the JOBS Act requires these companies to disclose such a status in their public filings with the SEC.  This disclosure and the resulting status has impacted both the accounting and auditing sides of the business, requiring these companies to act accordingly.  The SEC has also issued Frequently Asked Questions guidance to address these requirements and status under the JOBS Act.  Further, the PCAOB will also be limited in requiring mandatory audit rotation for these Emerging Growth Companies.

In short, the JOBS Act is still a work in progress, and it will be interesting to see its long-term applications on the public filings of these Emerging Growth Companies.