Securities Regulation

The SEC Pursues Action Against SPAC and Insiders for Misleading Investors

By John R. Ablan and Anna T. Pinedo, Mayer Brown

On July 13, 2021, the US Securities and Exchange Commission (“SEC”) announced charges against a special purpose acquisition company (“SPAC”), the proposed merger target company in the space transportation industry, each company’s CEO, and the SPAC’s sponsor. The charges were announced in connection with misleading statements made by the SPAC and target company to its investors.


Mandatory Climate Risk Disclosures: SEC Chair Gensler’s Remarks

By Melissa Pfeuffer, Mayer Brown

On July 28, SEC Chair Gary Gensler spoke at the “Climate and Global Financial Markets” webinar, hosted by the Principles for Responsible Investment (PRI), the UN-supported network of investors—focusing his remarks on: “So, what does the SEC have to do with climate?”  Giving a timely analogy related to the Olympics, the Chair explained that if sports never changed over the years and we were forced only to ever view the first Olympic games of 1896, it would be a poor reflection of where we are today.  Comparing investors to sports fans, he said they each speak up when they want to see something different.  And so, Chair Gensler responded to his own question: “When it comes to climate risk disclosures, investors are raising their hands and asking regulators for more.”

Over 550 response letters were submitted to SEC Staff after then Acting Chair (now Commissioner) Lee’s public statement on climate disclosure. Three out of four response letters show support for mandatory climate disclosures.  Investors seek “consistent, comparable, and decision-useful disclosures,” said the Chair.  Their desire to understand the climate related risks of companies whose stocks they own or may consider investing in is “overwhelming.”  “Over the decades,” Chair Gensler noted, “there’s been debate about disclosure on things that, today, we consider pretty essential for shareholders.”

Chair Gensler believes disclosure requirements are necessary to ensure consistency and comparability.  Chair Gensler stated that he has asked SEC Staff to recommend for proposal by the SEC mandatory climate risk disclosure requirements by the end of 2021. Specifically, SEC Staff is to take the following into consideration:

  • Whether the disclosures should be included in a company’s Form 10-K
  • Which qualitative (i.e., leadership management for climate-related risks) and quantitative (i.e., greenhouse gas emissions metrics) information about climate risk investors currently rely on, or believe would help, in making investment decisions
  • Whether there should be certain metrics disclosed for certain industries (i.e., transportation)
  • Whether companies should provide scenario analyses on how they adapt to potential physical, legal, market, and economic changes in the future (i.e., physical risks associated with climate change)
  • Which data/metrics companies use to inform investors about how they are meeting jurisdiction-specific regulatory or economic requirements
  • Whether fund managers should disclose the criteria and underlying data they use when labeling funds as “green” or “sustainable”

See the Chair’s complete remarks here.


SEC Chair Issues Statement on Investor Protection Related to Developments in China

By Alan J. Wilson, WilmerHale 

On July 30, SEC Chair Gary Gensler issued a statement concerning investor protection related to recent developments in China.  The statement summarizes risks to US investors as a result of recent government-led developments in China and outlines new requests to the SEC staff to seek certain disclosures with respect to these risks.  The new directives to the SEC staff build on the November 2020 guidance issued by the Division of Corporation Finance – CF Disclosure Guidance: Topic No. 10, “Disclosure Considerations for China-Based Issuers” (Nov. 23, 2020)

Chair Gensler summarized that “the government of the People’s Republic of China provided new guidance to and placed restrictions on China-based companies raising capital offshore, including through associated offshore shell companies.  These developments include government-led cybersecurity reviews of certain companies raising capital through offshore entities.”  Most notably, Chair Gensler’s statement focuses on the risks related to the China-based Variable Interest Entity (VIE) structure.

To ensure US investors are aware of these risks, Chair Gensler has instructed the SEC staff to “seek certain disclosures from offshore issuers associated with China-based operating companies before their registration statements will be declared effective,” and to seek additional disclosures from “all China-based operating companies seeking to register securities with the SEC, either directly or through a shell company.”  The requested “prominent and clear” disclosures should address specific VIE-related considerations, as well as risks related to permissions required from Chinese authorities and delisting risks under the Holding Foreign Companies Accountable Act.  Moreover, Chair Gensler made clear that the SEC “will continue to hold all companies to the securities laws’ high standards for complete and accurate disclosure.” 

Chair Gensler has also asked the SEC Staff to engage in targeted additional reviews of filings for companies with significant China-based operations. 


The SEC Adjusts the “Qualified Client” Tests for Inflation

By Melissa Pfeuffer, Mayer Brown

Effective August 16, 2021, the SEC will apply new threshold amounts with respect to the definition of “qualified clients,” raising the starting dollar amounts of the assets-under-management and net worth tests under Rule 205-3 of the Investment Advisers Act of 1940 (“Advisers Act”).

Rule 205-3 allows an investment adviser to charge a qualified client performance fees.  A qualified client meets one of the two following tests:

  • Assets-under-management test: A client that has at least a certain dollar amount in assets under management (currently, $1,000,000) immediately after entering into the advisory contract; or
  • Net-worth test: A client that the adviser reasonably believes, immediately prior to entering into the contract, has a net worth of more than a certain dollar amount (currently, $2,100,000).

Every five years, the SEC is ordered, under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), to adjust the threshold amount of the tests for inflation, increasing the dollar amount to the nearest multiple of $100,000.  As it started to do in July 21, 2011, the SEC began to adjust the thresholds for inflation.

Now, another five years have elapsed since the most recent assessment, and the SEC has released its Order adjusting the thresholds again, bringing the assets-under-management test threshold to $1,100,000 and the net worth test to $2,200,000 (reflecting inflation adjustments from 2016 to the end of 2020).


FINRA Expands Scope of Filing Requirements for Private Placements

By Bradley Berman, Mayer Brown

In Regulatory Notice 21-26 (July 15, 2021), FINRA amended the filing requirements of Rules 5122 and 5123 to require members to file with FINRA any “retail communications,” as defined in FINRA Rule 2210, that promote or recommend private placement offerings.  FINRA Rule 5122 covers private placements of securities issued by a FINRA member, while Rule 5123 covers other private placements.  Both rules have filing requirements, as well as exemptions from those filing requirements for offerings to institutional accounts (as defined in FINRA Rule 4512(c)), qualified purchasers (as defined in the Investment Company Act of 1940), and qualified institutional buyers (as defined in Rule 144A under the Securities Act of 1933), among others.

The filing requirements of Rules 5122 and 5123 currently require the filing of any “private placement memorandum, term sheet, or other offering document” provided to any prospective investor, for Rule 5122, or used in connection with the sale, for Rule 5123. The amendments to these rules, which will come into effect on October 1, 2021, add to each rule’s filing requirement, “any retail communication (as defined under Rule 2210) that promotes or recommends the [member private offering] [private placement] ….” A “retail communication” means “any written (including electronic) communication that is distributed or made available to more than 25 retail investors within any 30 calendar-day period.”

According to FINRA, most members currently file these retail communications, although not required by the current versions of Rule 5122 or 5123.  Examples provided by FINRA of retail communications that will now fall within the filing requirements include web pages, slide presentations, fact sheets, sales brochures, executive summaries, and investor packets.


Rani Doyle

Rani Doyle

Managing Editor, Securities Law


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