by T. GormanPosted on Posted in SECActions

Capital formation is one of the primary missions of the SEC. Commissioner Kara Stein recently discussed this basic SEC mission in remarks delivered at the Stanford Rock Center for Corporate Governance, Stanford Law School (here), outlining several new options. The Commissioner began by noting that while “[i]nnovation isn’t explicitly part of our mission . . .” the SEC does support it. In this regard a “key question the Commission is always grappling with is – how do we continue to facilitate innovation as business models are disrupted, financial markets change, and technology evolved? How do we ensure that our rules keep pace with all this innovation?”

Set in in this context, Commissioner Stein turned to the question of capital formation and approaches which are either being considered or might be in the future. While many start-ups benefit from venture financing, there are other options which can provide them with a variety of choices. One is Regulation A+. This option traces to the JOBS Act and “would expand upon the Commission’s current, but little used, Regulation A exemption. Reg A+ would enable companies to offer up to $50 million in a 12-month period without registering its securities with the Commission, as opposed to the current $5 million limit. It also would allow small businesses to raise money from the public with a streamlined approach to oversight by the Commission. Reg A+ is a creative example of reimagining a capital formation option that was essentially broken” the Commissioner declared. The rules for Regulation A+ are in the process of being finalized.

A second option is crowdfunding. This path to raising capital also traces to the 2012 JOBS Act. It would permit “small companies to harness the power of a community of small investors via the internet, to fund themselves quickly and efficiently,” according to Commissioner Stein. A variation of this approach might be to pool “each class of crowdfunding investors into a fund vehicle. If done right, this could potentially solve the problem of hundreds or thousands of small investors on a company’s register, while also ensuring that crowdfunding investors could effectively exercise their governance rights . . . other jurisdictions are experimenting with this idea.”

At the same time crowdfunding presents substantial “challenges” according to the Commissioner. It does not fit into the current framework of the securities laws. Rather. it requires new rules and a new approach. It also presents new risks which must be effectively resolved. A lack of investor confidence in the approach could undermine its effectiveness.

A third option might be regional exchanges. The state legislature in Hawaii passed legislation in 2011 authorizing this approach. This could benefit local enterprises and investors while providing more secondary market liquidity. A variation of this approach is venture exchanges. “These exchanges could allow small companies to exclusively trade their shares. Disclosure and other rules might be somewhat relaxed. Perhaps such an exchange could provide a new runway for growth for smaller companies, while also providing the essential, material disclosures that investors need,” Commissioner Stein stated.

In the end Commissioner Stein noted that “many of our securities laws have held up remarkably well . . .” over time. At the same time the “Commission should always be innovating to make it work better” she declared.

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by T. GormanPosted on Posted in SECActions

The U.S. Attorney’s Office in Manhattan is trying to have the Second Circuit’s decision in U.S. v. Newman, No. 13-1837, 13-1917 (2nd Cir. Decided December 10, 2014 ) reheard and reversed. In seeking that rehearing the Government has argued in part that the decision will hamper insider trading prosecutions. Whether the Court will agree to rehear the case remains to be seen, although such hearings are rare.

The SEC may have found another approach however. Last month the Commission filed an insider trading case styled SEC v. Zeringue, Civil Action No. 3:15-cv-00405 (W.D. La. Filed Feb. 19, 2015). It involved tipping. The core of the action is straight forward. Defendant Scott Zeringue was a the vice president of construction operations at Shaw Group, Inc., an energy construction company. Defendant Jessie Roberts is his brother-in-law.

The complaint centers on the acquisition of Shaw by Chicago Bridge & Iron in a deal announced on February 13, 2013. Prior to the deal announcement, Mr. Zeringue learned of the then pending transaction through his employment. He purchased 125 shares of Shaw. He also told his brother-in-law about the deal and asked him to purchase additional shares for him. Mr. Roberts made purchases, and tipped Friend A. Both traded. Overall Mr. Roberts had trading profits of $765,000 while the other traders profits totaled $154,000 The action alleges violations of Exchange Act Section 10(b).

There was little question, based on the face of the complaint, that the tip from Mr. Zeringue to his brother-in-law met the Newman personal benefit test. There the court, returning to Dirks v. SEC, 463 U.S. 646 (1983), held that there has to be a benefit to the insider from the tip that is in the nature of a quid pro quo and is known to the tippee. The Zeringue complaint in this regard claims that Mr. Roberts paid his brother-in-law $30,000 for the tip. It also alleges that Mr. Zeringue initially told his brother-in-law about the deal because he wanted him to trade additional shares for his benefit.

Now, however, the SEC has amended its complaint, adding Billy Joe Adcox, Jr. as a defendant. Mr. Adcox is employed as a pharmaceutical salesman. He is, according to the complaint, a “long-time friend” of Mr. Roberts. Mr. Roberts told his long-time friend about the then pending deal. In doing so “Roberts told Adcox he had learned the information from his brother-in-law, a Shaw insider.” Mr. Adcox traded while in, possession of the information. He had $28,000 in trading profits. Mr. Adcox also tipped another individual who traded.

The SEC does not make any reference to the Newman personal benefit test in describing the Roberts-Adcox tip. Rather, the allegations are limited to a claim that Mr. Adcox learned the information came from a corporate insider. The complaint does allege violations of Exchange Act Section 10(b).

Mr. Adcox has not settled with the Commission. There is good reason. On its face the amendment to the complaint does not appear to comply with Newman. Rather, it follows the Commission’s long time, pre-Newman approach of apparently relying on the relationship between the two men. Whether the SEC can convince a district court in the another circuit that Newman should not be followed remains to be seen. If so, eventually there could be a circuit split – assuming that Newman is not reheard by the Second Circuit. That would give the Commission an opportunity to roll back Newman to the more prosecution friendly standard of proof the U.S. Attorney is seeking with the request to rehear Newman. On the other hand, the SEC might do well to remember that Newman stems from the reversal of a district court decision in which the U.S. Attorney convinced the court not to give a personal benefit instruction. See Lit. Rel. No. 23215 (March 6, 2015).

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