A year ago, President Obama signed the Jumpstart Our
Business Startups (JOBS) Act, a legislative product of rare bipartisan
collaboration that was intended to improve employment and make it easier for
smaller firms to raise private equity. (For an overview of the Act's
provisions, refer here.)
Twelve months later, many of the rules needed to implement the JOBS Act remain
uncompleted and the legislation's promise remains largely unfulfilled.
As detailed in a March 29, 2013 Washington Post article
entitled "JOBS Act Falls Short of Grand Promises" (here),
"nearly a year after its enactment, major portions of the act are in limbo, and
other parts have failed to measure up to the grandiose job-creation promises."
The JOBS Act was specifically intended to aid "Emerging
Growth Companies" (ECGs), which the Act defined as companies with annual
revenues under $1 billion. Among other things, the Act was intended to make it
easier for these companies to go public. It would be hard to make the case that
the JOBS Act has delivered a boost to initial public offerings. As detailed in
a March 27, 2013 Wall Street Journal article entitled "JOBS Act Sputters
on IPOs" (here),
in the twelve months since the Act's passage IPOs of ECGs "are on track to fall
21% to 63 from 80 in the prior year." The Journal article does note that
a number of market and economic factors "helped chill the climate for IPOs over
the past year" and "the IPO market is showing signs of improving health."
Another concern about the IPOs that are taking advantage
of the Act's provisions is that some may not be exactly represent the kind of
companies Congress had in mind. For example, one of the companies that
completed its offering while taking advantage of the JOBS Act's so-called "IPO
on-ramp" provisions, was Manchester United, a 135 year old sports club based in
Manchester, England, that, though obviously unlikely to create any U.S. jobs, nevertheless
qualified as an "Emerging Growth Company." As Jason Zweig noted in his
August 3, 2012 Wall Street Journal article entitled "When Laws Twist Markets" (here),
among the other companies taking advantage of the JOBS Act provisions are
"blank check companies," noting that "In an irony only Congress could foster,
many of the blind pools rushing to list under the JOBS Act have no employees
and say in their prospectuses that they might never hire anybody at all."
Even for ECGs that completed IPOs after the JOBS Act was
enacted, the impact of the IPO on-ramp provisions has been mixed.
A January 2013 memo from the Skadden firm entitled "The JOBS Act: What We
Learned in the First Nine Months" (here)
analyzed the 53 ECGs that completed IPOs between April 5, 2012 ad December 15,
2012. The memo relates that certain of the Act's provisions, such as the
provision allowing draft registration statements to be submitted confidentially
and the provision allowing ECGs to provide scaled-down executive compensation
disclosure, have met with "strong acceptance." Other provisions such as the
option for ECGs to provide an abbreviated period of financial statement
disclosure, have met with only "weak acceptance." Yet other provisions, such as
those allowing "test the waters" communications in advance of the offering,
have met with "mixed acceptance." As pointed out in the March 2013 issue of CUG.COMments
while "certain aspects" of the JOBS Act "have been seized upon by ECGs," the
ECGs' "utilization of the available benefits" has been "inconsistent."
While the IPO on-ramp provisions have had a mixed effect,
the "most significant bits" of the Act, according to a March 30, 2013 Economist
article entitled "America's JOBS Act: Still Not Working" (here)
are "bottled up at the SEC." Most importantly, the SEC still has not issued
rules to implement the Act's provisions relating to Crowdfunding. The SEC also
has not issued rules to allow companies to raise as much as $50 million in the
public markets without undertaking reporting obligations, nor has it issued
rules lifting restrictions on advertising private securities offerings.
Among the reasons for the delays on the crowdfunding
rules has been an internal debate within the SEC about the best approach to
take. According to the Economist, Mary Shapiro, the outgoing SEC
chairman was concerned that the JOBS Act would "eliminate important protections
for investors" and she was particularly critical of the crowdfunding
provisions. It remains to be seen what the approach will be of the incoming
chair, Mary Jo White; at a minimum, it may be many months before the final
rules are put into effect.
My earlier post on concerns about problems with
crowdfunding can be found here.
A more basic question concerns who will actually be able to take advantage of
crowdfunding, given the Act's statutory constraints, an issue I discussed here.
According to the Post article linked above, the
Act's mixed record has occasioned some concerns and even regrets on Capitol
Hill. There is now a perception in Washington that the Act, described in the
article as "a grab bag of ideas cobbled together for greater impact," was
"hastily introduced" and enacted due to election year pressures with "record
speed." The result, according to unnamed critics, is "laws fraught with risks
to investors." At a minimum, the Act "underscores how difficult it can be for
Washington to spur job creation even when there's strong bipartisan consensus
on a plan."
The picture is not entirely negative. According to the Journal,
biotechnology companies, which have been "a bright spot for IPOs during the
past year," appear to be "using the new rules more than other companies." Many
biotech firms are unprofitable when they go public and they find that "the
ability to save time and money by taking advantage of the relaxed standards was
Among many others concerned with the Act and its possible
implications, D&O insurers continue to weigh the Act's effects. For now,
most insurers continue to await developments, particularly the introduction of
the crowdfunding rules. The insurers remain concerned about possible
crowdfunding abuses and about the liability measures in the crowdfunding
provisions. Some insurers have already started adding crowdfunding exclusions
to their private company D&O insurance policies. At a minimum, the delays
attending the Act's implementation have introduced an element of uncertainty,
which likely has increased the insurers' general wariness. The general
perception seems to be that the Act could still have a significant impact on
the scope of policyholders' potential liability, but exactly what that might
mean remains to be seen. Even after a year, the Act's impact remains unclear,
for insurers as for other observers and commentators.
About the Ruling in the Consolidated
Libor-Scandal Antitrust Litigation: Readers interested in
Judge Buchwald's opinion in the consolidated Libor-scandal antitrust litigation
(about which refe here),
and who are wondering what remains after the recent rulings and what the
implications may be for the other Libor-related lawsuits will want to review
Alison Frankel's April 1, 2013 post on her On the Case bliog (here).
Frankel has a detailed analysis of what portions of the consolidated cases remain
after the ruling, as well as what it all might mean for the other cases before
Judge Buchwald as well as the cases that have not yet been consolidated in her
Yet Another Modest Securities Suit Settlement
Involving U.S. Listed Chinese Company: During 2010 and 2011,
plaintiffs' lawyers rushed to file lawsuits against U.S.-listed Chinese
companies that caught up in various accounting scandals. However, as I have previously
noted, even the cases that have survived the preliminary motions have
produced only very modest settlements.
In the latest example of one of these cases settling modestly,
on April 1, 2013, the plaintiffs' lawyers in the securities suit involving Deer
Consumer Products announced
that the case had been settled for $2.125 million. As noted in the parties'
stipulation of settlement (here),
the settling defendants include the company and two individuals, although the
released defendants appear to include all of the Deer company-related
defendants. The settlement does not appear to involve the payment of any
insurance funds; the stipulation recites that the settlement amount "shall be
paid exclusive by the Settling Defendants."
As I recently noted (here,
second item), the exceptions to this pattern of the securities suits against
U.S.-listed companies settling modestly are the cases in which there are
significant settlement contributions from the companies' outside professionals.
For example, as discussed in the recent post, the recent $20 million settlement
in the case involving Sinotech Energy Limited included an $18 million
settlement contribution from the company's offering underwriters. And of course
there is the eye-popping $117
million settlement payment by Ernst & Young in the Ontario securities
class action lawsuits involving Sino Forest.
The plaintiffs' lawyers in the Deer Consumer Products,
perhaps recognizing the impact of the claims against the Chinese companies'
outside advisors, on March 9, 2013 filed a separate action in the
Central District of California against the company's outside auditors,
Goldman Kurland Mohindin, in what appears to be something of a second
phase of litigation.
Rule 10b5-1 Trading Plans: "Avoiding the
Heat": The SEC promulgated Rule 10b5-1 in order to allow
company insiders to safely trade in their company securities without incurring
liability under the securities laws. As it has turned out, trading under Rule
10b5-1 plans has been a source of significant scrutiny, as I recently noted
here. Nevertheless Rule 10b5-1 trading plans can still provide significant
liability protection, if they are set up, implemented and maintained
A March 11, 2013 memo from the Covington & Burling
law firm entitled "Rule 10b5-1 Trading Plans: Avoiding the Heat" (here)
lays out the practical steps that companies and their executives can take to
try to take advantage of the Rule and to avoid the issues that have caused
problems with trading plans in the past. The memo's authors note that "remains
a beneficial and frequently utilized provision to permit corporate insiders to
sell the securities of their companies while minimizing the risk of engaging in
insider trading." However, they add that "public companies and insiders seeking
to rely on Rule 10b5-1 should renew their focus on ensuring that their trading
plans comply with the requirements of the rule."
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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