Securities Industry Commentator by Bill Singer Esq

March 5, 2020

SEC Provides Conditional Regulatory Relief and Assistance for Companies Affected by the Coronavirus Disease 2019 (COVID-19) / SEC is closely monitoring the impact of the coronavirus on investors and capital markets (SEC Release)

Please Consider Adding a Trusted Contact to Your Account / FINRA and the SEC's Office of Investor Education and Advocacy are issuing this Investor Bulletin to urge you to consider adding a "trusted contact person" to your brokerage account (FINRA Release)

UTMA and UGMA Accounts / FINRA Reminds Member Firms of Their Responsibilities for Supervising UTMA and UGMA Accounts (FINRA Regulatory Notice)

The Securities and Exchange Commission today proposed a set of amendments to the exemptive framework under the Securities Act of 1933 that would simplify, harmonize, and improve certain aspects of the framework to promote capital formation while preserving or enhancing important investor protections. 

The proposed amendments would:
  • address, in one broadly applicable rule, the ability of issuers to move from one exemption to another, and ultimately to a registered offering, providing more certainty to issuers raising capital;
  • increase the offering limits for Regulation A, Regulation Crowdfunding, and Rule 504 offerings, and revise certain individual investment limits based on the Commission's experience with the rules, marketplace practices, capital raising trends, and comments received;
  • provide greater certainty to issuers and protection to investors by setting clear and consistent rules governing offering communications between investors and issuers, including permitting certain "demo day" activity without running afoul of the prohibition on general solicitation; and
  • harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions to reduce differences between exemptions, while preserving or enhancing investor protections.
The SEC Proposed Harmonizing Rule

Harmonizing, Simplifying and Improving the Exempt Offering Framework by SEC Chair Jay Clayton expressing his support for the proposed harmonizing rule, SEC Chair Clayton states in part that:

The proposed amendments seek to address the gaps and complexities in the offering framework that may impede access to capital for issuers.  I believe the complexity of the current framework particularly affects those smaller issuers that are more likely to rely on the exemptions to raise capital-including rural issuers, and women, minority and veteran-owned issuers-the types of issuers whose limited resources spent on navigating our complex rules are diverted from direct investment in the issuers' growth.  The amendments would benefit issuers and investors by creating an offering framework that is more consistent, transparent and rational. 

Statement on Proposed Amendments for Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets by SEC Commissioner Hester M. Peirce
In expressing her support for the proposed harmonizing rule, SEC Commissioner Peirce states in part that:

[I]nvestors need to be able to trust the integrity of the marketplace, so antifraud protections are essential.  Investor protection also encompasses writing rules that foster effective disclosure.  Effective disclosure does not mean disclosure that pleases lawyers whose minds have been shaped by years of reading regulations.  Rather, our rules should be designed to encourage issuers to communicate when, where, and how investors prefer.  Investor protection also means allowing investors of all income levels to participate in a wide range of offerings that allows them to build balanced and diversified portfolios.  The proposal today demonstrates a recognition of some of these often-overlooked tenets of investor protection.    

Statement on Proposed Amendments to the Exempt Offering Framework by SEC Commissioner Allison Herren Lee
In expressing her opposition to the proposed harmonizing rule, SEC Commissioner Lee states in part that:

[M]y disagreement is with the policy direction of this proposal, which blurs important differences between public and private markets - differences that go to the heart of our core mission of protecting investors.

Among other things, today's proposal would:
    • raise the offering limits for three different exempt offerings;
    • remove statutorily imposed investment limitations for certain investors;
    • shorten the integration safe harbor period from six months to 30 days, thus effectively collapsing different exemptions to the lowest common denominator for investor protection;
    • reduce the disclosure required for non-accredited investors under Regulation D;
    • expand the use of test-the-waters communications across all exempt offerings and for all types of investors;
    • expand the use of general solicitation overall; and,
    • weaken requirements for establishing whether an investor is accredited to little more than self-certification.
This does not reflect a balanced approach to revising the exempt offering framework. 

Statement on the Harmonization Proposal by SEC Commissioner Elad L. Roisman
In expressing his support for the proposed harmonizing rule, SEC Commissioner Roisman states in part that:

I state often that we must encourage and facilitate the entrance of companies to our capital markets, and I think the SEC's work to update our regulations relating to private offerings can help accomplish that. This proposal is based on our study of the different profiles and needs of companies raising money in our private markets and how the current exemptions are utilized.

My vote is not intended to expand the private markets, but to simplify and adjust our exempt offering framework with the hope that the proposed changes will make it easier for private companies to transition to public companies. Encouraging and enabling issuers to raise capital in our private markets earlier may result in them raising money in our public markets at an earlier growth stage than we presently see. This, in turn, could allow Main Street investors to invest in public companies that have more growth potential.
As set forth in part in the SEC Release:

The Commission has enacted this Order having due regard for the needs and safety of companies impacted by COVID-19 while also considering the importance of markets and investors receiving materially accurate and timely information. For those companies seeking to rely upon the Order, attention is directed to the various conditions, including the requirement to furnish a Form 8-K or Form 6-K by the later of March 16 or the original reporting deadline.

In connection with the Commission relief issued in the order, the Commission staff will take the following positions with respect to certain obligations under the Securities Act and the Exchange Act:
    • For purposes of eligibility to use Form S-3 (and for well-known seasoned issuer status, which is based in part on Form S-3 eligibility), a company relying on the exemptive order will be considered current and timely in its Exchange Act filing requirements if it was current and timely as of the first day of the relief period and it files any report due during the relief period within 45 days of the filing deadline for the report.
    • For purposes of the Form S-8 eligibility requirements and the current public information eligibility requirements of Rule 144(c), a company relying on the exemptive order will be considered current in its Exchange Act filing requirements if it was current as of the first day of the relief period and it files any report due during the relief period within 45 days of the filing deadline for the report.
    • Companies that receive an extension on filing Exchange Act annual reports or quarterly reports pursuant to the order will be considered to have a due date 45 days after the filing deadline for the report.  As such, those companies will be permitted to rely on Rule 12b-25 if they are unable to file the required reports on or before the extended due date.
The SEC Coronavirus Order

SEC Investment Management Staff Statement
Attorney Aegis Frumento just doesn't think that the stock markets care about the threat of the Covid-19 virus -- or the fear that it evokes. Frumento says that's because markets, unlike humans, calculate probabilities correctly. Further, the markets have not historically reacted to pandemics, not even pandemics much worse than this one. Uncertainty is what markets are all about. The wisdom of the crowd discounts future uncertainties into the market price. Pandemics are certainly one of those uncertainties that, throughout history, markets have taken in stride because they already priced them in.

Two Bank Insiders And A Third Man Arrested In Bank Bribery And Money Laundering Conspiracy (DOJ Release)
In a Criminal Complaint filed in the United States District Court for the Southern District of New York, Herode Chancy and  Adedayo Illoria are charged with conspiracy to commit wire fraud, wire fraud, aggravated identity theft, and conspiracy to commit money laundering; and Michael Albarella is charged with conspiracy to commit money laundering, and bank bribery. As alleged in part in the DOJ Release:

From at least in or about March 2019 up to and including at least in or about March 2020, CHANCY and ILORI conspired to obtain business loans fraudulently from a third-party commercial lender with the intent to "bust out," that is, not repay, the loans.  CHANCY and ILORI submitted eight fraudulent business loan applications for a total of $1,025,000 in business loans in furtherance of this scam.  The business loan applications submitted by CHANCY and ILORI included doctored bank statements and listed the identities of other persons as the loan applicants.  CHANCY and ILORI also opened bank accounts using the identities of those other persons in order to receive the loan payments from the third-party commercial lender.  CHANCY and ILORI believed that the underwriter for the third-party commercial lender was participating in the scheme and agreed to pay the underwriter a "commission" for the underwriter's role in the scheme.  In reality, however, the underwriter was an undercover law enforcement officer.

To effect their illegal scheme, CHANCY and ILORI conspired with bank insider ALBARELLA to launder approximately $1 million of the expected proceeds of the loan scheme.  ALBARELLA opened a bank account at Bank-1 using a stolen identity in order to launder the proceeds of the loan scheme, and ALBARELLA accepted a $10,000 bribe in order to open the bank account.
FINRA issues a very worthwhile recommendation that many investors should consider. In part, the FINRA Release offers the following Q&A:

Why would you add a "trusted contact person" to your brokerage account?
  • If your brokerage firm cannot reach you, adding a trusted contact person to your brokerage account may help your firm ensure that your current address and contact information are correct.
  • Adding a trusted contact person to your brokerage account may help your brokerage firm respond to possible financial exploitation or fraud in your account and protect your account's assets. 
  • If your brokerage firm suspects that you are experiencing a health issue, adding a trusted contact person to your brokerage account may help your broker confirm your current health status.
  • Adding a trusted contact person to your brokerage account may help your brokerage firm verify the identity of any legal guardian, executor, trustee or holder of a power of attorney on your account.
UTMA and UGMA Accounts / FINRA Reminds Member Firms of Their Responsibilities for Supervising UTMA and UGMA Accounts (FINRA Regulatory Notice 20-07)
As set forth in the "Background and Discussion" section of the FINRA Notice [Ed: footnotes omitted]:

UTMA/UGMA Accounts are custodial accounts that allow for the transfer of funds, securities and other assets to minors without the need for a formal trust. UGMA and UTMA are model laws developed and approved by the Uniform Law Commission. All states have adopted some version of either UGMA or UTMA through their state legislatures to allow for the establishment of UTMA/UGMA Accounts. While the specific requirements for UTMA/UGMA Accounts vary from state to state, the accounts share common characteristics. Generally, when UTMA/UGMA Accounts are established, the donor appoints a custodian, designates a minor beneficiary and deposits assets into the account. Depositing assets into an UTMA/UGMA Account represents an irrevocable transfer from the donor to the beneficiary. 

The custodian is responsible for managing the assets in the UTMA/UGMA Account, including executing transactions and withdrawing or transferring funds, for the benefit of the beneficiary (i.e., the custodianship) until the custodianship terminates. The custodianship generally terminates when the beneficiary reaches the age of majority, reaches an alternative age of termination set forth in the relevant state statute or dies. Some states also permit extending the custodianship to a higher specified age by the donor when establishing the custodianship or by the custodian, provided that the beneficiary receives notification of his or her right to compel distribution of the assets upon reaching a specified age. 

In considering the state of UTMA/UGMA supervision by its member firms, FINRA admonishes in part that [Ed: footnotes omitted]:

[F]INRA has also found that some member firms permitted customers to open UTMA/UGMA Accounts, yet failed to have reasonably designed systems and procedures to supervise UTMA/UGMA Accounts, including reasonable diligence procedures to determine the authority over those accounts in and around the time the beneficiary reaches the relevant age. In addition, some member firms permitted custodians to effect transactions and withdraw or transfer funds from UTMA/UGMA Accounts months or years after the custodianship terminated, and ignored red flags of the activity (e.g., customer complaints).