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SEC Investor Advocate Calls Dual-Class Shares a Recipe for Disaster

Thank you, Kerrie Waring, for your kind introduction. I appreciate the opportunity to speak at a conference where you will spend the next two days discussing the stewardship responsibilities of shareholders.[1] I know you take those responsibilities seriously, and I do my best to encourage a regulatory environment that makes companies accountable to their shareholders.

Of course, before I begin, I must give the standard disclaimer given by all SEC speakers, that the views I express are my own and do not necessarily represent the views of the Securities and Exchange Commission, the Commissioners, or my colleagues on the

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Redefining “Accredited Investor” to Put Main Street Capital into Capitalism

While exempt offerings now involve twice as much money as public offerings, only accredited investors (“AIs”) get invited to the private company party.  Thus, individuals who fail to meet the net worth or income thresholds (“non-AIs”) cannot invest early in high-growth ventures and therefore miss out on a lot of investments and upside.  Moreover, because non-AIs make up 87 percent of U.S. households, new and other privately held businesses are not raising capital from a vast majority of society’s individuals.  To these people and firms, well-intentioned rules are keeping the capital out of capitalism.

Expanding the AI definition would increase … Read more

Do Firms Conceal Material Misstatements by Reporting Revisions Rather than Restatements?

Disclosure of financial reporting errors is vital to maintaining investors’ trust in the capital markets. Yet, in recent years the number of misstatements corrected in restatements of financial reports has declined dramatically, and misstatements are now more likely to be corrected in less formal revisions of those reports. Based on materiality guidance, prior years’ financial statements of firms with material misstatements are required to be restated on an 8-K filing.[1] In contrast, revisions, sometimes referred to as “little r” restatements, are considered to be immaterial to prior period financial statements and do not require an 8-K filing. In view … Read more

Cleary Gottlieb Discusses SEC Action for Non-Disclosure of DOJ Investigation

Companies that face non-public government investigations frequently confront challenging questions regarding whether and when to disclose the existence of the investigation, how much to disclose, and any duty to update the disclosure as the investigation proceeds.  On the one hand, regulatory investigations are generally confidential and it is axiomatic that the existence of an investigation does not reflect a conclusion of wrongdoing.  The premature disclosure of what may turn out to be a baseless investigation (perhaps instigated by a person with a grudge or self-interest) can needlessly cause internal disruption, complicate an internal investigation, unnecessarily alarm current shareholders, and – … Read more

How the SEC Should Harmonize Private Securities Offering Exemptions

The Securities and Exchange Commission requested public comment on ways to simplify, improve, or harmonize exemptions from the requirement to register securities offerings.  The SEC acknowledged that the current array of exempt offerings is complex and might be difficult for issuers to navigate.  See Concept Release on Harmonization of Securities Offering Exemptions, 84 Fed. Reg. 30,460 (June 26, 2019).

My comment proposed a new exemption from the registration requirements to replace several of the current exemptions and simplify access to capital for startup companies and small to mid-sized companies.  It would combine features from Rules 506(b) and (c) of Regulation … Read more

SEC, CFTC, and FinCEN Leaders Issue Statement on Digital Asset Activities

The leaders of the U.S. Commodity Futures Trading Commission, the Financial Crimes Enforcement Network, and the U.S. Securities and Exchange Commission (the “Agencies”) today issued the following joint statement to remind persons engaged in activities involving digital assets of their anti-money laundering and countering the financing of terrorism (AML/CFT)obligations under the Bank Secrecy Act (BSA).[1]

AML/CFT obligations apply to entities that the BSA defines as “financial institutions,” such as futures commission merchants and introducing brokers obligated to register with the CFTC, money services businesses (MSBs) as defined by FinCEN, and broker-dealers and mutual funds obligated to register with the

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The Seller’s Curse and IPO Pricing

Benchmark Capital partner and legendary tech investor Bill Gurley recently declared on CNBC, “It took me two decades to figure this out, but I think Silicon Valley’s been on the bad end of a bad joke for about four decades now, in terms of the way the traditional IPO process works.” He and others believe that direct listings, like the ones recently completed by Spotify and Slack, are friendlier to issuers.

The core of Gurley’s concern is that the traditional IPO process yields unfavorable pricing outcomes for issuers. On average since 1980, the stock price of IPO firms has popped … Read more

The Puzzling Case of the WeWork Non-IPO

The dramatic implosion of the IPO of The We Company, parent of office-sharing firm WeWork, (the “WeWork IPO) has attracted intense scrutiny across the business community.  For scholars and practitioners who work at the intersection of law, business, and technology, the sequence of events leading to that implosion raises fascinating and interrelated questions involving corporate governance, the relationship between public markets and private markets, and platform economics.

Is corporate governance going downhill?

One of the most actively discussed topics in corporate governance is the increased use of multi-class stock structures in IPOs, especially in the case of firms in digital … Read more

Attorney General Barr Speaks at SEC’s Criminal Coordination Conference

I am honored to be here representing the dedicated men and women of the Department of Justice. Like the SEC’s Enforcement staff, many of our prosecutors are tasked with investigating financial fraud and corporate crime. They are assigned to the Department’s 94 U.S. Attorneys’ Offices and the Criminal Division’s Fraud Section or its Money Laundering and Asset Recovery Section.

The theme of today’s conference is cooperation and coordination between our two agencies. In speaking with you today, it is my aim to underscore why it is so critical that the Department’s prosecutors work closely with you.

As you well know,

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SEC Chairman Delivers Remarks on Elder Investor Fraud

Thank you all for being here this morning for the Roundtable on Combatting Elder Investor Fraud.

On behalf of the SEC, I want to say we are privileged to host such a dedicated group of experts and public servants.  Protecting older Americans from investor fraud is an important mission and its importance is growing.

At the SEC, we are very concerned about financial exploitation and investment fraud against seniors.  But, I know that many of our panelists are also focused on a broad spectrum of risks elder Americans face, including physical and psychological abuse as well as other forms of

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The Cost to Retail Investors and Public Markets of “Harmonizing” Securities Offering Exemptions

In June 2019, the U.S. Securities and Exchange Commission (“SEC” or the “Commission”) issued a Concept Release on the Harmonization of Securities Offering Exemptions (the “Concept Release”), which set forth proposals to expand the ability of retail investors to invest in private, un-registered securities.  Elisabeth de Fontenay (Duke Law) and I, joined by 13 other securities law professors, submitted a comment letter on the Concept Release on September 24.  Our full letter can be found here.[1] In our letter, we recommend that the commission ask crucial questions before continuing the decades-old trend … Read more

SEC Chair Clayton Talks More Modern Regulatory Framework

Today [Septemer 26] , the Commission announced three important rulemakings.

  • Modernizing the Approval Framework for ETFs.  We adopted a new rule that (1) sets forth a clear and consistent framework that will allow exchange-traded funds (“ETFs”) meeting certain standardized conditions to come to market without obtaining an individualized exemptive order, and (2) amends certain forms to enhance disclosures for investors.
  • Expanding “Testing-the-Waters” Communications to All Issuers.  We adopted a new rule that will extend to all issuers the flexibility provided by the JOBS Act to communicate with institutional investors about potential IPOs and other registered offerings to better gauge

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Commissioners Testify on SEC Oversight: Wall Street’s Cop on the Beat

Chairwoman Waters, Ranking Member McHenry and Members of the Committee, thank you for the opportunity to testify before you today [September 24] about the work of the U.S. Securities and Exchange Commission (SEC or Commission or agency).[1]

Overview—The SEC’s Mission, People and Governance 

The SEC and its tripartite mission—to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation—are critical to the functioning of our economy and the well-being of millions of Americans.  With a workforce of almost 4,400 staff in Washington and across our 11 regional offices, the SEC oversees, among other things: (1) approximately $96

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The Impact of Information Technology on Stock Price Crash Risk

Advances in information technology have revolutionized the dissemination and acquisition of firm-specific information, allowing investors and other stakeholders to quickly assess firm performance and value and monitor management effectively. Our research examines the impact of information technology on the ability of managers to hide and hoard bad news that, when ultimately released, results in a stock price crash.  We use the staggered implementation of the Securities and Exchange Commission’s Electronic Data Gathering Analysis and Retrieval System (EDGAR) from 1993 through 1996 as a proxy for advances in information technology. The EDGAR implementation significantly changed public access to required corporate filings, … Read more

Do Non-GAAP Expense Exclusions Mislead Investors?

A firm has two options when reporting its quarterly and annual earnings: It can report earnings based on generally accepted accounting principles (GAAP), or it can report non-GAAP earnings by excluding (adding) certain expenses that will increase (decrease) its non-GAAP earnings relative to its GAAP earnings. As the rate of non-GAAP reporting has increased, the Securities and Exchange Commission (SEC) has expressed concern that this practice has the potential to mislead investors. In line with this, the academic literature is also mixed when it comes to the usefulness of non-GAAP reporting. In our paper, we further examine firms’ use of … Read more

SEC Chair on Transparent Market Prices, Small Business, and Teamwork

Thank you Bob [Stebbins]. It is such a pleasure to be in a university town.

We drove in just after 11pm last night [September 12] and even then you could feel the energy, the energy that comes with curiosity, a thirst for knowledge and a belief that knowledge, know how, effort and community will bring us a better tomorrow.

As we drove down Mission Street this morning — past the same Buffalo Wild Wings where we got a burger late last night — I took in the health center, and other businesses. I then remarked to Bob about the strength … Read more

Uncovering Hidden Conflicts in Stockholder Class Action Litigation

Stockholder representatives in class and derivative actions are supposed to share in any recovery on the same terms as other stockholders.[1]  Absent court approval, class counsel typically cannot share fee awards with their clients.[2]  Indeed, class-action litigator William Lerach famously served time in federal prison after pleading guilty to a conspiracy charge related to the payment of kickbacks to class plaintiffs.[3]

Direct payments between class counsel and their clients are the most obvious means of encouraging plaintiffs to bring cases, but there are others.  For instance, in a recent federal securities class action involving State Street Bank … Read more

Does Mandatory Disclosure for Private Firms Increase Their Chances of Going Public?

How do disclosure requirements influence a private firm’s decision to go public? This is an important question for regulators and corporate finance professionals, given current debate about how much information private firms should have to disclose. Conceptually, public disclosure requirements for private firms can lead to greater exposure of the firm’s confidential and proprietary information. Keeping this information out of the hands of competitors is a major factor that pushes firms to stay private. However, the introduction of laws that compel firms to disclose their private information essentially strips away this advantage. As a result, one would expect the ability … Read more

Does Reporting Frequency Affect the Allocation of Investor Attention Among Peer Firms? 

The frequency at which public companies must report financial information to investors has been the subject of intense debate in the European Union, Asia, and more recently the United States. For example, the Securities and Exchange Commission (SEC) is examining the pros and cons of giving U.S. companies the flexibility to report on a semi-annual basis (SEC, 2018). While previous studies have espoused the benefits of more frequent quarterly reporting in reducing information asymmetry and the cost of capital, much of the recent debate has been centered around concerns that quarterly reporting would impose significant preparation costs and encourage short-termism … Read more

SEC Chairman Talks Main Street Investors, Foreign Corruption, and Market Issues

Thank you for having me and thanks to those who have contributed to today’s [September 9] event—in particular, the Economic Club, Chair, Marie-Josée [Kravis], President, Barbara [Van Allen], as well as panelists Bob [Pisani] and Harold [Ford].

I am grateful to be back.  The Economic Club is where I gave my first public speech as SEC Chairman in July 2017.  In that speech, I discussed the principles that would guide my SEC Chairmanship.[1]  I believe we—and “we” is important to me—have followed those principles.  We—our exceptional Division and Office heads and the approximately 4,400 dedicated women and men, who

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