Regulation A May Prove Useful Alternative to Form S-4 Registration for Public Companies Doing Smaller M&A Deals

Last month, the U.S. Securities and Exchange Commission (“SEC”) announced it had adopted final rules to amend certain parts of Regulation A[1] promulgated under the Securities Act of 1933 (“Securities Act”).

These new rules implement changes as directed by the Economic Growth, Regulatory Relief, and Consumer Protection Act[2] signed into law on May 24, 2018 by President Donald J. Trump. There are two conceptual changes, both affecting Regulation A as it applies to reporting companies. Continue Reading

Delaware Court of Chancery Declares Ineffective Exclusive Federal Forum Provision for 1933 Act Claims

In Sciabacucchi v. Salzberg, C.A. No. 2017-0931-JTL, 2018 WL 6719718 (Del. Ch. Dec. 19, 2018), the Delaware Court of Chancery (Laster, V.C.) held that a forum-selection provision in a Delaware corporation’s charter or bylaws which purported to govern external investor claims not involving the internal affairs of the corporation are not authorized under Delaware law. Thus, the Court declared ineffective a provision in a certificate of incorporation requiring any claim brought against it under the Securities Act of 1933 (“1933 Act”) to be filed in federal court. This decision clarifies the limits on the scope of forum selection provisions enacted by Delaware corporations. Continue Reading

Opportunity Zones Update

The Tax Cuts and Jobs Act created a new tax incentive program through investment in “qualified opportunity funds”. Qualified opportunity funds are intended to encourage investment in low-income communities by providing three tax incentives to investors:

  • Investors can defer taxes on eligible capital gain arising from a sale or exchange of assets by investing in qualified opportunity funds.
  •  10% of the deferred gain may be permanently excluded from federal income tax by way of a step-up in basis if an investor holds its interest in the qualified opportunity fund for at least five years, with an additional 5% basis step up if the investment is held for seven years.
  • If the investor holds the investment in the qualified opportunity fund for at least 10 years, an elective basis adjustment made upon sale of the interest in the fund provides a permanent exclusion from taxation for any appreciation in excess of the originally deferred gain.

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Getting to Business Judgment in an Interested Transaction: Controlling Stockholder Must Put Procedural Protections in Place Prior to the Commencement of Economic Negotiations

In Flood v. Synutra Int’l, Inc., No. 101, 2018, 2018 Del. LEXIS 460 (Del. Oct. 9, 2018), the Delaware Supreme Court (Strine, C.J.) held that a controlling stockholder who pursues a merger with the controlled company will have the benefit of business judgment review pursuant to Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”), as long as the requisite procedural protections under MFW are put in place prior to the commencement of economic negotiations. In MFW, the Delaware Supreme Court created a framework through which a controlling stockholder could enter into a strategic transaction with the controlled company and still avail itself of the deferential business judgment standard of review. To have the business judgment standard apply, the transaction must be conditioned “ab initio” upon both (1) the approval of an independent, adequately-empowered Special Committee of the board of directors that fulfills its duty of care, and (2) the uncoerced, informed vote of a majority of the minority stockholders (the “MFW Procedural Protections”). Synutra arose from an issue left open in MFW regarding when the MFW Procedural Protections will be deemed to have been in place “ab initio.Continue Reading

CFTC Cryptocurrency Enforcement Receives Further Judicial Support

The Commodity Futures Trading Commission (“CFTC”) obtained an important court win and boost to its regulatory authority over Cryptocurrencies this month. A federal district court in Massachusetts recently issued a decision in CFTC v. My Big Coin Pay Inc. which affirmed the CFTC’s position that all virtual currencies are commodities and subject to CFTC jurisdiction.[1] The opinion follows another recent district court opinion in New York, CFTC v. McDonnell, in which a court also interpreted the Commodity Exchange Act (“CEA”) to find that cryptocurrencies constitute a commodity under the CEA.[2] CFTC Chairman Giancarlo in a speech last week in Minneapolis further emphasized the CFTC is continuing to increase civil enforcement actions with 83 having been filed in the last CFTC fiscal year resulting in over $900 million in civil penalties.[3] The current political efforts to dismantle the Dodd Frank Act apparently have done little to slow down the CFTC Division of Enforcement, in particular when it comes to regulating cryptocurrencies. Continue Reading

Recent Development in Regulatory Enforcement of Digital Securities

In a flurry of activity and confluence of developments, the SEC, FINRA and a Brooklyn federal judge have commenced actions and made rulings that continue to define the regulatory framework and obligations surrounding the sale and trading of digital securities, whether they are labeled as cryptocurrencies or tokens.

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Airdrop of Crypto Tokens Hits Regulatory Flak

On August 14, 2018, the U.S Securities and Exchange Commission (“SEC”) issued a cease and desist order (the “Tomahawk Order”) against Tomahawk Exploration LLC (“Tomahawk”) and David Thompson Laurance (“Laurance”) for their actions in connection with an initial coin offering of digital assets called “Tomahawkcoins” or “TOM” (the “Tomahawk ICO”). Tomahawk and Laurance’s actions were problematic for the same reasons cited by the SEC in other recent orders related to digital assets (e.g. the Munchee Order). Consistent with such orders, the SEC determined that Tomahawkcoins are securities because they constitute investment contracts under the “Howey” test. However, what makes the Tomahawk Order particularly noteworthy are the lessons to be gleaned regarding cryptocurrency “airdropping.” Continue Reading

“Airing Out the Denny Crane Room”: Recent SEC Action Emphasizes Need for Effective Disclosure Controls and Procedures for Executive Perquisites

Last month, Energy XXI, Ltd. (“EXXI”), a publicly-traded oil and gas exploration company, saw its former Chief Executive Officer charged with various securities law violations by the Securities and Exchange Commission (“SEC”). The SEC seeks to have the CEO pay civil money penalties and be barred from any officer or director role with any issuer of registered securities. Continue Reading

SEC Approves Updated Disclosure Requirements

On August 17, 2018, the Securities and Exchange Commission (SEC) approved amendments to certain of its disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded, in light of other SEC disclosure requirements, U.S. generally accepted accounting principles (GAAP), international financial reporting standards (IFRS), or changes in the information environment. These changes include amendments to Regulation S-K and Regulation S-X, which provide many of the disclosure requirements that apply to annual reports on Form 10-K, quarterly reports on Form 10-Q, proxy statements, registration statements and other documents filed with the SEC. These amendments become effective 30 days after publication in the Federal Register. Continue Reading

Not So Fast – Challenges in Reincorporating from California to Delaware

There are several reasons that a California corporation may want to reincorporate to Delaware. Venture capital funds or other investors may demand a reincorporation to Delaware as a condition to financing. Cumulative voting for director elections, required for California corporations but not required for Delaware corporations, may have become a problem. The corporation may want to take advantage of the flexibility of Delaware’s business laws, the abundance of legal precedent and the availability of the Court of Chancery to resolve corporate disputes. Whatever the reason, reincorporating from California to Delaware may be more challenging than originally anticipated due to a few complicating factors: (1) California’s long-arm statute, (2) the availability of exemptions from registration and qualification under state and federal securities laws and (3) restrictions under the company’s contracts.[1] Continue Reading

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