SEC Adopts Rules Allowing General Solicitation in Private Securities Offerings
On 23 September 2013, US Securities and Exchange Commission ("SEC") rule changes permitting general solicitation and general advertising in private placements and offerings became effective. The rule changes fulfil a requirement of the Jumpstart Our Business Startups Act ("JOBS Act").
The rule changes specifically are to: (i) SEC Rule 144A, which allows resales of securities to certain large institutional investors known as "qualified institutional buyers", or QIBs, without registration and is the exemption invoked by underwriters in private offerings, and (ii) Rule 506, which provides a safe harbour for issuers from registration if, among other things, securities are sold only to "accredited investors" and up to 35 other investors. "Accredited investors" are a broader category of investors than QIBs that still must meet certain size/value/worth thresholds.
In the case of Rule 144A resales, the rule now states that only sales, as opposed to both offers and sales, must be made to QIBs or to purchasers reasonably believed to be QIBs. As a result, the Rule 144A exemption will be available even if general solicitation is actively used in the marketing process or occurs inadvertently, as long as the ultimate sales are only to QIBs.
In the case of offerings exempt under Rule 506, general solicitation will be permitted as long as the issuer takes "reasonable steps to verify" that purchases are made by accredited investors or purchasers reasonably believed to be accredited investors at the time of sale. Sales to 35 non-accredited investors are no longer allowed if general solicitation is conducted. The "reasonable steps to verify" determination is left flexible and depends on the facts and circumstances, with the SEC outlining some relevant factors and verification methods.
The SEC has made clear that, in a global offering conducted by an issuer pursuant to both Rule 144A (in order to exempt the US offering from registration) and Regulation S (to exempt the non-US offering from registration), conducting general solicitation by itself will not adversely impact the availability of Regulation S to exempt the non-US offering. In this context, general solicitation will not be construed as "directed selling efforts" prohibited by Regulation S.
The SEC also adopted rule changes, now effective, which disqualify felons and other bad actors from being able to rely on the Rule 506 safe harbour.
In a separate release dated 10 July 2013, the SEC proposed new data collection measures that expand the filing requirements under Rule 506, including requiring the temporary submission of general solicitation materials to the SEC. The comment period for these proposals is open until 4 November 2013.
Our related client publication, which contains more detail on the mechanics of the exemptions after these changes, is available at:
SEC Proposes Long-Awaited Pay Ratio Rules
On 18 September 2013, the SEC proposed rules to require public companies to disclose the median annual total compensation of all employees other than the chief executive officer ("CEO"), the annual total compensation of the CEO, and the ratio of these two amounts ("pay ratio rules"). Total compensation is to be calculated in the same manner as in the summary compensation table under Regulation S-K. These rules implement Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank").
While the proposed pay ratio rules exempt foreign private issuers from the requirements, they reflect the increasing focus by regulators globally on the need for more transparency in executive compensation disclosure. Smaller reporting companies and emerging growth companies are also exempt from these requirements.
Summary of the Proposed Pay Ratio Rules
The proposed pay ratio rules require a registrant to disclose the median annual total compensation of its entire employee population (other than the CEO), the annual total compensation of the CEO, and the ratio of the two. The disclosure would be required in filings that mandate executive compensation disclosure under Item 402 of Regulation S-K, including annual reports on Form 10-K for US issuers and registration, proxy and information statements.
Exempt Companies
The proposed rules cover only those registrants required to provide summary compensation disclosure under Item 402(c) of Regulation S-K, and therefore exempt foreign private issuers and smaller reporting and emerging growth companies.
Covered Employees
The median total compensation must be determined based on a measure of all of a registrant's employees, including temporary, seasonal, part-time and non-US employees and those employed by direct and indirect subsidiaries, but, notably, excluding independent contractors and leased employees. The rules allow, but do not require, registrants to annualise compensation for permanent employees employed for less than the registrant's full fiscal year but do not allow annualising for seasonal or temporary employees. The rules prohibit full-time equivalent adjustments for part-time employees and cost-of-living adjustments.
The SEC has requested information on non-US data privacy laws and regulations that may impact the collection or transfer of employee data.
Calculation Date and Covered Time Period
The proposed rules generally require registrants to determine the median by reference to those employed as of the last day of the registrant's fiscal year, a calculation date consistent with the date used to determine the named executive officers under Item 402 of Regulation S-K.
Identifying the Median
In response to concerns that calculating the annual total compensation of all of a registrant's employees under the Item 402 rules would be unduly burdensome if not impossible, the proposed rules require instead a comparison of the compensation of a "median employee" to the compensation of the registrant's CEO. The SEC, moreover, has proposed a flexible approach for identifying the median employee and determining median total compensation. The proposed rules give registrants discretion to determine a methodology for identifying the median employee, including the use of statistical sampling, random sampling, reasonable estimates of total compensation or a reasonable determination of the median employee through a review of more readily identifiable figures, such as total direct compensation (including salary, hourly wages and any performance-based pay).
The SEC acknowledges that the proposed rules may place a disproportionately higher burden on large multinational companies and companies that operate across multiple industries. Nevertheless, the SEC reasons that, overall, the use of sampling would help to minimise costs and the time necessary to identify the median.
Instead of requiring all registrants to conform to a single methodology for determining the median, the proposed pay ratio rules require the consistent application of a particular methodology by each registrant.
Total Compensation
Once a registrant has identified the median employee, it would be required under the proposed rules to determine that employee's total compensation in accordance with Item 402(c) (the rules governing the summary compensation table). However, the SEC included in the proposed rules the option to use "reasonable estimates" to calculate the annual total compensation or any elements of total compensation for employees other than the CEO.
Disclosure of Methodologies
Registrants would be required under the proposed rules to briefly disclose the methodology used and any material assumptions, adjustments or estimates used to identify the median or determine total compensation or any elements of total compensation. The proposed rules allow for reasonable supplemental information, including additional pay ratios (i.e., comparing pay of other employee groups), as long as the supplemental information is clearly designated as supplemental and would not confuse investors.
Proposed Transition Period
Registrants would be required to comply with the pay ratio rules with respect to the first fiscal year commencing on or after their effective date. The disclosure would need to be included in the registrant's Form 10-K, proxy statement or registration statement no later than 120 days after the end of the relevant fiscal year. Thus, if the pay ratio rules were to go into effect in 2014, a registrant with a fiscal year ending 31 December would first be required to comply with the rules with respect to the 2015 fiscal year and would be required to include the disclosure for the first time in its Form 10-K, proxy statement or registration statement filed in 2016.
For newly public companies, the proposed rules require initial compliance with respect to compensation for the first fiscal year commencing on or after the date the company becomes subject to the reporting requirements under the US Securities Exchange Act of 1934 ("Exchange Act").
Our related client publication is available at:
http://www.shearman.com/sec-proposes-long-awaited-pay-ratio-rules-09-24-2013/
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