Weinberg & Company

BEST PRACTICE Newsletter – January 2022

By January 19, 2022 No Comments

Discriminate-or-explain rule-

17 States Join in Challenge to Nasdaq Board Diversity Rule –

Seventeen attorneys general have joined an earlier lawsuit challenging the SEC’s approval of a Nasdaq rule requiring its listed companies to adopt corporate board race and gender diversity quotas or face possible delisting.

The amicus brief filed December 27, 2021 in the U.S. Court of Appeals for the Fifth Circuit argues that Nasdaq’s new rule “violates the Constitution’s guarantee of equal protection,” and that the “SEC’s approval of it is subject to Constitutional scrutiny.”

The brief further argues that “Nasdaq and the SEC’s rulemaking authority is limited in scope,” thereby questioning whether the regulatory agency and the exchange had the power to impose the mandate.

Proposed by Nasdaq and approved by the SEC on August 6, 2021, the new diversity rule requires the over 4,700 Nasdaq-listed companies to include on their boards at least one director who identifies as female, at least one who identifies as a racial minority, or who self identifies as LGBTQ+. To comply, Nasdaq-listed companies now are required to regularly report on the demographics of their corporate boards. Those that don’t, or can’t justify non-compliance, would face delisting.

The original “Petition for Review” challenging the diversity mandate was filed in Federal Court by the Alliance for Fair Board Recruitment (AFFRB), following the SEC’s approval of Nasdaq Rule 5605(f).

In its August 9, 2021 press release, the AFFRB said it was “seeking a review of the approval of the Securities and Exchange Commission of the corporate board diversity quotas proposed by Nasdaq” and argued that the Nasdaq rule “will compel many of our nation’s largest publicly traded corporations to illegally discriminate on the basis of gender, race, and sexual orientation in selecting directors.”

The AFFRB further stated that “Nasdaq’s discriminate-or-explain rule also exceeds its role and the authority granted by federal securities law and violates core Bill of Rights guarantees against compelled speech and discrimination based on sex and race by stereotyping all people of the same skin color or sex as being alike and interchangeable. Further, the rule will not deliver the promised benefits.”

The 17 states included in the amicus brief include: Alabama, Alaska, Arizona, Arkansas, Florida, Indiana, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, Oklahoma, South Carolina, Texas and Utah.

Covering the Privates

SEC Considering New Regs for Privately-held Companies

The SEC is reviewing new rules that would require privately-held companies to disclose on a regular basis information about their finances and operations.

In a January 10 interview on CNBC’s Squawk Box, SEC Chairman Gary Gensler said his staff is reviewing new rules that would require more transparency from large private companies which have opted to seek growth capital through private capital markets.

The new rules, if approved, would target “unicorns”—private companies valued at $1 billion or more, which have delayed going public thanks to ample funding from both institutions and wealthy individuals.

The private capital markets, which include venture capital firms, mutual funds, and private equity funds represent approximately $17 trillion, according to Gensler.

Opposition to such rules is likely to come from Silicon Valley, where young companies and start-ups look to venture capital and private equity as a key source of funding for product research and development, manufacturing, marketing and product launch and distribution.

As part of this effort, the SEC also is considering tightening the qualifications of investors who participate in private funds and may change rules on how those investors are counted.

Existing Federal rules require companies with more than 2,000 shareholders “of record” to provide financial disclosure with the SEC, regardless of whether they have gone public. Under the current rule, an unlimited number of people can own shares through the same broker dealer or investment vehicle and still be counted as one shareholder.

That could change. SEC staff is working on a proposal that would allow it to take into account the total number of shareholders in an investment vehicle or fund. If the shareholder number exceeds 2000, private companies may be required to comply with the same disclosure requirements as their public company counterparts.


SPAC GAAP Disclaimers Raise SEC Red Flag

The use of blanket disclaimers has been a common practice for Special Purpose Acquisition Companies (SPACs) but following a year of increased scrutiny, where approximately 200 SPACs were required to file restatements, the SEC is pulling the blanket off at least one such disclaimer pertaining to accounting risks: SPACS cannot disclaim that their financial reporting may later be found to be in error.

Bloomberg is reporting that the SEC has been sending out letters to SPACs asking them to amend their registration statements and provide explanation to support certain risk factors noted in the registration statement. For instance, a risk factor may state that future changes to the accepted accounting practices for special purpose acquisition companies could result in the recognition of accounting errors in previously issued financial statements.

In a sample letter published by Bloomberg, The SEC asks SPAC management, “Please tell us what ‘accepted accounting for special purpose acquisition companies’ means and how it relates to (1) the requirements in Regulation S-X that the financial statements must be prepared in accordance with generally accepted accounting principles in the U.S. (U.S. GAAP), and (2) your financial statements and related audit opinion that state your financial statements were prepared in accordance with U.S. GAAP. In addition, address how ‘a change’ in accounting could result in an accounting error when the U.S. GAAP definition of an ‘accounting change’ explicitly scopes out ‘the correction of an error in previously issued financial statements.”

Bloomberg is reporting that both SPAC management teams and their auditors were “taken aback because even though the accounting was wrong, the accounting methods were ingrained in practice and hadn’t been questioned in the past.”

Since taking the helm at the SEC, Chair Gary Gensler has been saying SPACs should be adhering to the same disclosure standards and receiving the same scrutiny as their traditional IPO counterparts.

In his December 9 remarks to the Healthy Markets Association, Gensler said “Functionally, the SPAC target IPO is akin to a traditional IPO. Thus, investors deserve the protections they receive from traditional IPOs, with respect to information asymmetries, fraud, and conflicts, and when it comes to disclosure, marketing practices, and gatekeepers.”

Another record but returns lag

2021 IPO Deals and Dollars Raised Hit Record Highs

Year two of the pandemic set a record high in both the number of IPOs and their deal value, with nearly 1,000 companies accessing U.S. public markets in 2021. As 2022 emerged, however, two thirds of those newly minted IPO companies were trading below share offering prices.

According to data from both Dealogic and Factset, 2021 SPACs continued to outpace traditional IPOs in both the number of deals and deal value. Last year, total deal value of some 600 SPAC IPOs was $162.27 billion. Traditional IPOs numbered about 400, with a total deal value of $153.51 billion.

Though transactional activity soared, IPO stock prices dropped by year end. Reports of rising inflation and the Federal Reserve’s announcement that higher interest rates are on tap for 2022 caused investors to rethink the potential of future profits. Higher costs of debt adversely affect companies that rely heavily on cheap capital to support growth. This combination of factors triggered an exit by investors.

Hard hit were tech IPOs, both SPACs and traditional IPOs, where dropping share prices pushed stocks into bear market territory. By year end, all but one had lost less than 20% of its high stock price, reported CNBC.

It’s too early to tell whether 2022 will see another year of brisk transactional activity, but The Wall Street Journal is reporting that, “The pipeline is strong for 2022 IPOs, with more than 900 private companies globally that are worth more than $1 billion.”

For whom the bell tolls

Ringing a Bell at the Exchange – Remotely and Pre-Recorded

As the COVID Omicron variant surges nationwide, the in-person bell ringings that have been both prized and fought over when a company went public on both the NYSE and Nasdaq exchanges are getting tougher to pull off.

While both exchanges are still allowing some management teams to participate in the coveted in-person bell ringings, access has become more restricted, forcing some management teams to get creative and go virtual.

Such was the case with Fintech company Dave Inc. (Nasdaq: DAVE), which went public on January 6, 2021. In light of the Omicron surge and tightened restrictions at the exchange, its opening day bell ceremony was pre-recorded at the company’s Los Angeles office, and then aired on opening day. To make it happen, the stock exchange shipped a duplicate podium to the management team on the West coast.

So, perhaps the question is not “for whom the bell tolls,” but from where and when.