CURRENT MONTH (August 2019)

Securities Regulation

SEC Qualifies First Token Offering Under Regulation A

By: F. Dario de Martino, John T. Owen, Alfredo B. D. Silva, Susan I. Gault-Brown, Daniel R. Kahan, and Dylan Kelsey Naughton, Morrison & Foerster LLP

On July 10, 2019, Blockstack Token LLC (“Blockstack”), a wholly-owned subsidiary of Blockstack PBC, a Delaware public benefit corporation, became the first company to have an offering of digital assets qualified by the U.S. Securities and Exchange Commission (“SEC”) under Regulation A.

Blockstack is a technology company that offers an open-source blockchain-enabled network for developers to build and publish their own decentralized applications. According to Blockstack’s website, over 165 applications have been built on the Blockstack platform. Purchasers of Blockstack’s tokens (“Stacks Tokens”) will be able to use the tokens on its platform.

Token offerings have been under increasing scrutiny, especially with respect to whether tokens are securities. In its offering circular disclosure, Blockstack acknowledges that the Stacks Tokens are characterized as investment contracts under the Howey test, while noting that the Stacks Tokens “will not have the rights traditionally associated with holders of debt instruments, nor…equity.” The disclosure, in its discussion about the nature of Blockstack’s decentralized network, also references the SEC’s recent guidance on evaluating whether digital assets constitute securities for purposes of the Securities Act of 1933, as amended.

Many blockchain-based companies have conducted token offerings in the United States under various securities exemptions, including Regulation D, which do not require SEC approval.

One notable difference in Regulation D offerings is that when general solicitation is used, non-accredited investors cannot participate, and in certain other offerings, the number of participating non-accredited investors will be limited. Blockstack’s approval to offer its tokens under Regulation A will allow an unlimited number of retail investor to buy Stacks Tokens and permit Blockstack to conduct advertising activities.

Our full article on the qualification notes capital raising options for companies issuing tokens and other blockchain-based digital assets, general requirements under Regulation A, and takeaways from Blockstack’s qualification. 

SEC Holds Roundtable Host Roundtable on Short-Term/Long-Term Management of Public Companies, our Periodic Reporting System and Regulatory Requirements

By Cydney Posner, Cooley

On July 18, 2019, the SEC’s Division of Corporation Finance organized a roundtable to discuss the issues surrounding short-termism. The roundtable consisted of two panels: the first explored “the causes and impact of a short-term focus on our capital markets,” with the goal of identifying potential market practices and regulatory changes that could promote long-term thinking and investment. The second panel was centered on the periodic reporting system and potential regulatory changes that might encourage a longer-term focus in that system.

Echoing his remarks in connection with the announcement of the roundtable in May, SEC Chair Jay Clayton observed that the needs of “Main Street investors” must be the focus, and they are investing for the long term—for their retirements or other life events. As he noted in May, their needs have changed; they now have a longer life expectancy, and, in light of the shift from the security of company pensions to 401(k)s and IRAs, they now have greater responsibility for their own retirements.

Many views were expressed and many questions were raised at the roundtable, as noted in my blog posting on July 22, 2019.

SEC Approves Long Term Stock Exchange’s Registration as a National Securities Exchange

By Rani Doyle

The SEC recently approved a new national securities exchange – the Long Term Stock Exchange (LTSE). The LTSE describes its vision as “A new way of being for companies that aim to build their businesses, advance their visions and generate value for decades to come.” In a July 8 filing with the SEC the LTSE proposes to adopt a rule that would require listed companies to develop and publish long-term policies that the LTSE believes will facilitate long-term focus and value creation. The proposed policies should be consistent with the following principles:

  • Long-term focused companies should consider a broader group of stakeholders and the critical role they play in one another’s success;
  • Long-term focused companies should measure success in years and decades and prioritize long-term decision-making;
  • Long-term focused companies should align executive compensation and board compensation with long-term performance; 
  • Boards of directors of long-term focused companies should be engaged in and have explicit oversight of long-term strategy; and 
  • Long-term focused companies should engage with their long-term shareholders.

The LTSE states that it anticipates being ready to accept listings and start trading later this year.

CAQ Issues Updated Guidance on Auditor Evaluation and Internal Controls

By Thomas White, Retired Partner, WilmerHale          

The Center for Audit Quality (CAQ), a public policy organization associated with the accounting profession, often issues resources to assist public companies, audit committees, investors and other stakeholders in applying and understanding auditing and financial reporting matters.  In recent weeks, the CAQ has issued updates of two important publications:

External Auditor Assessment Tool—This resource provides a framework for public company audit committees to evaluate the performance of the external auditor as part of their responsibilities to hire, compensate and oversee the auditor.  The tool, which was first issued in 2012 and updated in 2017, provides a framework for the assessment and a form of questionnaire and sample questions.  Many committees have used the CAQ tool as a source of best practices for evaluation of auditor performance, and the April 2019 update reflects the increasing emphasis on firm-level audit quality considerations and addresses changes in accounting standards and new and emerging risks.

Guide to Internal Control Over Financial Reporting—This publication, first issued in 2013 and updated in May 2019, is a valuable resource to help the non-specialist understand the arcane concept of internal control over financial reporting (ICFR).  It provides an overview of ICFR, focusing on key ICFR concepts such as the control environment, control activities, reasonable assurance, and the hierarchy of ICFR deficiencies. The guide also covers the ICFR roles and responsibilities for management, audit committees, and auditors.

PCAOB Issues CAMs Resources for Audit Committees and Investors

By Thomas White, Retired Partner, WilmerHale          

The Public Company Accounting Oversight Board’s requirement for auditors to discuss “critical audit matters” (CAMs) in their reports on financial statements has taken effect for audits of the largest public companies for periods ending after June 30, 2019.  CAMs are intended to provide tailored information specific to the audit—from the auditor’s point of view—on matters that require especially challenging, subjective, or complex auditor judgment.  As implementation of the standard has approached, the Board has engaged in a major outreach effort to assist auditors and other stakeholders in understanding and applying the CAMs standard. 

On July 11, the Board’s Office of External Affairs issued two documents targeted at stakeholders other than auditors.  One is an “Audit Committee Resource” regarding CAMs.  The Audit Committee Resource aims to inform audit committees as they engage with their auditors on the new CAM requirements.  In addition to a summary of the standard and information about implementation of the standard, the Resource contains detailed FAQs about issues that may arise in audit committee interaction with auditors concerning CAMs.  The Resource also provides sample questions that audit committees may consider in asking their auditors about efforts related to implementation of new CAM requirements.  The other document is an “Investor Resource” that is aimed at investors, who may find CAM information useful when considered among other information regarding a company’s financial statements.  The Investor Resource covers much of the same ground as the Audit Committee Resource, excluding sample questions.

Taken together, these releases should be very helpful for lawyers and other non-accountants who wish to understand the standard and key issues that the standard will present as implementation begins later this year.

Department of Justice Guidance for Corporate Compliance Programs

By Cydney Posner, Cooley

In April 2019, the Department of Justice (DOJ) released updated guidance for Evaluation of Corporate Compliance Programs. The DOJ Manual identifies factors that prosecutors take into account “in conducting an investigation of a corporation, determining whether to bring charges, and negotiating plea or other agreements.” Among these factors is the “adequacy and effectiveness of the corporation’s compliance program.” Although the guidance is designed to assist prosecutors in assessing and making informed decisions about the extent of “credit” to be attributed to a company in light of its corporate compliance program, the factors that prosecutors are advised to consider in evaluating these programs should not be lost on companies seeking to develop and implement their own compliance programs.  Of course, the guidance is not intended to be formulaic and recognizes that the relevance and significance of the factors and questions identified will vary depending on a range of company attributes, including “each company’s risk profile and solutions to reduce its risks.”

The guidance is framed around three fundamental categories and provides additional questions and other relevant information under each:

  1. “Is the corporation’s compliance program well designed?
  2. “Is the program being applied earnestly and in good faith? In other words, is the program being implemented effectively?
  3. “Does the corporation’s compliance program work in practice?”

Chancery Examines Framework of Fiduciary Disclosure Obligations in Soliciting Private Investments

By H. Manwaring, IV, Kathleen A Murphy, and K. Tyler O’Connell, Morris James LLP

This opinion decides a motion to dismiss fraud and related tort claims arising out of various investments against a former director and CEO and an employee of a controlling stockholder.

When the investments turned out to be worthless, the plaintiff investor brought suit for breach of fiduciary duties and common law fraud arising from information that the investor received before investing in a company controlled by a business colleague and friend. 

The Court began by contrasting the less common factual scenario presented of a corporate fiduciary selling shares directly to a stockholder in a private transaction, with the more common case when directors are requesting stockholder action.  While not argued by either party, the Court reasoned that private stock sale transactions between corporate fiduciaries and a stockholder may be governed by the “special facts doctrine,” which imposes a duty of disclosure on a director when she possesses special knowledge of future plans or secret resources and deliberately misleads an unknowing stockholder.  See In re Wayport, Inc. Litig., 76 A.3d 296 (Del. Ch. 2013).  The parties had argued, however, that the director disclosure requirements articulated in Malone v. Brincat were applicable.  The Malone disclosure requirements apply when directors speak outside the context of seeking stockholder action, and result in liability only when a fiduciary knowingly disseminates false information.  The Court reasoned that the “knowing misconduct” standard for liability set forth in Malone is a more stringent legal test than common law fraud, where a plaintiff may prevail by demonstrating the lesser mens rea of “reckless indifference.”  Accordingly, if a plaintiff cannot successfully plead a common law fraud claim, then the same facts cannot give rise to a Malone claim based on a breach of fiduciary duties.  Compared to a Malone claim, a claim under the “special facts doctrine” is an easier claim to bring, because a private stock sale does not implicate the same policy concerns when directors publicly speak outside the context of stockholder action. 

Also of potential interest, a plaintiff’s fraud claim will only be dismissed as a result of a contractual “anti-reliance” clause if the language clearly articulates a plaintiff’s agreement that he did not rely upon statements outside the contract’s four-corners.  Basic integration clauses or murky anti-reliance provisions will not bar a plaintiff from later asserting a fraud claim.  Here, the Court reasoned inter alia that a contractual integration clause did not bar fraud claims.  The opinion otherwise discusses certain recurring pleading issues with common law fraud claims, including the particularity requirement, the extent to which statements of opinion are actionable, and the type of allegations that would suffice to impute one defendant’s fraud to other defendants. 

Business Roundtable Announces a New “Statement of the Purpose of a Corporation” Signed By 181 CEOs and the Council for Institutional Investors Responds

By Rani Doyle

Since 1978, Business Roundtable has periodically issued Principles of Corporate Governance. Each version of the document issued since 1997 has endorsed principles of shareholder primacy – that corporations exist principally to serve shareholders. A new Statement issued on August 17, 2019, supersedes those prior statements. The new Statement is copied here:

Statement on the Purpose of a Corporation

Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity. We believe the free-market system is the best means of generating good jobs, a strong and sustainable economy, innovation, a healthy environment and economic opportunity for all.

Businesses play a vital role in the economy by creating jobs, fostering innovation and providing essential goods and services. Businesses make and sell consumer products; manufacture equipment and vehicles; support the national defense; grow and produce food; provide health care; generate and deliver energy; and offer financial, communications and other services that underpin economic growth.

While each of our individual companies serves its own corporate purpose, we share a fundamental commitment to all of our stakeholders. We commit to:

  • Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.
  • Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.
  • Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.
  • Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.
  • Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.

Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country.


The Council for Institutional Investors published a response to the Business Roundtable’s new Statement, which in part states:

The Council has a productive relationship with BRT that has included discussion on corporate “stakeholder” obligations, but we respectfully disagree with the statement issued by the BRT earlier today. The BRT statement suggests corporate obligations to a variety of stakeholders, placing shareholders last, and referencing shareholders simply as providers of capital rather than as owners.

CII believes boards and managers need to sustain a focus on long-term shareholder value. To achieve long-term shareholder value, it is critical to respect stakeholders, but also to have clear accountability to company owners.

Accountability to everyone means accountability to no one. BRT has articulated its new commitment to stakeholder governance (which actually resurrects an older policy view) while (1) working to diminish shareholder rights; and (2) proposing no new mechanisms to create board and management accountability to any other stakeholder group.

Americans depend on strong companies not only as employees and communities, but also as owners, including through pension funds and other retirement holdings. CII supports putting capital to its best use for long-term performance, which includes addressing stakeholder contributions to that objective. It is government, not companies, that should shoulder the responsibility of defining and addressing societal objectives with limited or no connection to long-term shareholder value.

Click on the links above to see the full BRT announcement and the full CII response.

SEC Issues a New Proposal: Modernization of Regulation S-K Items 101, 103 and 105

By Rani Doyle  

On August 8, 2019, the SEC proposed rule amendments to modernize the description of business, legal proceedings, and risk factor disclosures that registrants are required to make pursuant to Regulation S-K.  The proposed amendments are intended to update the rules to improve disclosures for investors and to simplify compliance efforts for registrants.

A press release announcing the proposal quoted Chairman Jay Clayton as follows:

The world economy and our markets have changed dramatically in the more than 30 years since the adoption of our rules for business disclosures by public companies.  Today’s proposal reflects these significant changes, as well as the reality that there will be changes in the future. I applaud the staff for their efforts to modernize and improve our disclosure framework, including recognizing that intangible assets, and in particular human capital, often are a significantly more important driver of value in today’s global economy.  The proposals reflect a thoughtful mix of prescriptive and principles-based requirements that should result in improved disclosures and the elimination of unnecessary costs and burdens.

Highlights of the proposal are noted in the press release.

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