Securities Act of 1933

SEC to Allow Issuers to File Draft Initial Registration Statements on a Nonpublic Basis

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On June 29, 2017, the Securities and Exchange Commission (“SEC“) announced that it would begin to allow issuers to file draft initial registration statements under the Securities Act of 1933 (the “Securities Act“) on a nonpublic basis. Any company, foreign or domestic, will be allowed to submit registration statements for nonpublic review, similar to the benefit granted to emerging growth companies under the Jumpstart Our Business Startups Act (JOBS) as long as it confirms in a cover letter that it will publicly file its registration statement at least 15 days prior to any road show or, in the absence thereof, at least 15 days prior to the requested effective date of its registration statement. The SEC also announced that it would begin to accept draft registration statements submitted prior to the end of the 12th month following the effective date of an issuer’s initial Securities Act registration statement, or its registration statement under Section 12(b) of the Securities and Exchange Act of 1934, for nonpublic review so long as the issuer confirms in a cover letter that it will publicly file its registration statement and nonpublic draft submission on EDGAR at least 48 hours prior to any requested effective time and date. Report. Press Release.

SEC Adopts Jobs Act Amendments

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On April 5, the Securities and Exchange Commission (“SEC“) announced that it has adopted amendments to increase the amount of money companies can raise through crowdfunding to adjust for inflation. It also approved amendments that adjust for inflation a threshold used to determine eligibility for benefits offered to “emerging growth companies” (“EGCs“) under the Jumpstart Our Business Startups (JOBS) Act.

The SEC is required to make inflation adjustments to certain JOBS Act rules at least once every five years after it was enacted on April 5, 2012. In addition to the inflation adjustments, the SEC adopted technical amendments to conform several rules and forms to amendments made to the Securities Act of 1933 (“Securities Act“) and the Securities Exchange Act of 1934 (“Exchange Act“) by Title I of the JOBS Act. The Commission approved the new thresholds on March 31. They will become effective when they are published in the Federal Register.

The Commission provided a helpful chart that sets out the inflation-adjusted amounts for the maximum amount of offerings and investment limits, specifically: (i) the maximum aggregate amount an issuer can sell in a 12-month period; (ii) the threshold for assessing an investor’s annual income or net worth to determine investment limits; (iii) the lower threshold of Regulation Crowdfunding securities permitted to be sold to an investor if annual income or net worth is less than the adjusted thresholds; (iv) the maximum amount that can be sold to an investor under Regulation Crowdfunding in a 12-month period; and (v) the inflation-adjusted amounts for determining financial statement requirements.

Also, pursuant to sections of the Securities Act and the Exchange Act added by the JOBS Act, which define the term “emerging growth company,” every five years the Commission is directed to index the annual gross revenue amount used to determine EGC status to inflation. To carry out this statutory directive, the SEC has adopted amendments to Securities Act Rule 405 and Exchange Act Rule 12b-2 to include a definition for EGC that reflects an inflation-adjusted annual gross revenue threshold. Press Release.

FinCEN Proposes Funding Portals Regulations under Bank Secrecy Act

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On April 4, 2016, the Financial Crimes Enforcement Network, a bureau of the Department of the Treasury (“FinCEN”), proposed amendments to the definitions of ‘‘broker or dealer in securities’’ and ‘‘broker-dealer’’ under the regulations implementing the Bank Secrecy Act (“BSA”). This rulemaking would amend those definitions explicitly to include “funding portals” that are involved in the offering or selling of “crowdfunded securities” pursuant to Section 4(a)(6) of the Securities Act of 1933. The consequence of those amendments would be that funding portals would be required to implement policies and procedures reasonably designed to achieve compliance with the BSA Act requirements currently applicable to brokers or dealers in securities. FinCEN stated that:  “The proposal to specifically require funding portals to comply with the Bank Secrecy Act regulations is intended to help prevent money laundering, terrorist financing, and other financial crimes.”  Written comments of this proposal must be submitted on or before June 3, 2016.

The Jumpstart Our Business Startups Act, enacted into law on April 5, 2012, established the foundation for a regulatory structure for startups and small businesses to raise funds by offering and selling securities through “crowdfunding” without having to register the securities with the Securities and Exchange Commission (“SEC”) or state securities regulators.  In order to take advantage of this exemption for offerings of crowdfunded securities, an issuer must use the services of an intermediary that is either a broker registered with the SEC or a “funding portal” registered with the SEC.

SEC Issues Staff Report on Accredited Investor Definition

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On December 18, the Securities and Exchange Commission issued a staff report (the “Report”) on the definition of “accredited investor” set forth in Rule 501(a) of Regulation D under the Securities Act of 1933. The Dodd-Frank Wall Street Reform and Consumer Protection Act directs the Commission to review the accredited investor definition as it relates to natural persons every four years to determine whether the definition should be modified or adjusted. Staff from the Divisions of Corporation Finance and Economic and Risk Analysis prepared the Report in connection with the first review of the definition.

The Report examines the history of the accredited investor definition and considers comments on the definition received from a variety of sources, including public commenters, the SEC’s Investor Advisory Committee and its Advisory Committee on Small and Emerging Companies. The Report considers alternative approaches to defining “accredited investor,” provides staff recommendations for potential updates and modifications to the existing definition and analyzes the impact potential approaches may have on the pool of accredited investors.

The primary recommendations of the Report are:

  • The Commission should revise the financial thresholds, requirements for natural persons to qualify as accredited investors and the list-based approach for entities to qualify as accredited investors.
  • The Commission should revise the accredited investor definition to allow individuals to qualify  as accredited investors based on other measures of sophistication besides their net worth and income.

The Report suggests detailed alternate approaches to implementing these recommendations.

The Commission is inviting members of the public to provide comments on the accredited investor definition, generally, and specifically on the staff recommendations contained in the Report, although a deadline for submitting comments has not been set.

Court Enters $806 Million Judgment in FHFA v. Nomura

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On May 16, 2015, Judge Denise Cote of the United States District Court for the Southern District of New York entered a judgment requiring Nomura and RBS to buy back, at a total cost of $806 million, seven RMBS certificates sold to Fannie Mae and Freddie Mac from 2005 to 2007.  The judgment stemmed from Judge Cote’s May 11, 2015 Opinion finding Nomura and RBS liable for violations of the Securities Act of 1933, the D.C. Securities Act, and the Virginia Securities Act.  For those certificates for which FHFA prevailed under multiple statutes, FHFA was permitted to, and did, elect the maximum available remedies.  Judge Cote also ordered that FHFA is entitled to post-judgment interest, reasonable attorneys’ fees, and costs.  Judgment.

Citigroup, Goldman, and UBS to Pay $235 Million Settlement in MBS Class Action

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On February 13, 2015, the plaintiffs in New Jersey Carpenters Health Fund, et al., v. Residential Capital, LLC, et al., No. 08-cv-8781 (S.D.N.Y.) filed an unopposed motion for certification of the class and to approve a preliminary settlement.  The complaint, originally filed in 2008, included claims for materially false and misleading statements in securities offering documents under the Securities Act of 1933 against Citigroup, Goldman Sachs, and UBS as underwriters for 16 mortgage-backed securities transactions in 2006 and 2007.  The class consists of investors who purchased the certificates, with the majority of the settlement funds set aside for investors who purchased their certificates within ten days after the relevant initial offering.  The proposed $235 million settlement does not include a $100 million settlement with Residential Capital, LLC that had previously been reached in the case.  Motion.

Federal Home Loan Bank of San Francisco Settles RMBS Claims Against Banks

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On January 15, 2015, the Federal Home Loan Bank of San Francisco (FHLB) agreed to a $459 million settlement with various banks stemming from the sales of billions of dollars of RMBS.  FHLB originally filed the claims in the Superior Court of California, County of San Francisco in 2010 against Bank of America Corp., Credit Suisse Securities (USA) LLC, Countrywide Financial Inc., Deutsche Bank Securities, Inc. and other banks concerning 229 RMBS transactions.  FHLB alleged causes of action for violation of the Securities Act of 1933 and the California Corporate Securities Act as a result of dealers allegedly concealing information and lying about the quality of RMBS sold to FHLB.  It is unclear which banks are involved in the settlement.

Court Finds FHFA Claims Against Nomura Are Not Time-Barred

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On November 18, Judge Denise Cote of the United States District Court for the Southern District of New York granted the Federal Housing Finance Agency’s motion for partial summary judgment on the statute of limitations defense asserted by Nomura and related entities.  FHFA, as conservator for Fannie Mae and Freddie Mac, alleges that Nomura made materially false statements in offering documents for RMBS between 2005 and 2007 in violation of Sections 11 and 12(a)(2) of the Securities Act of 1933.   Judge Cote found that Fannie and Freddie did not have sufficient information by September 2007 to determine whether the offering documents contained misstatements, and that a reasonably diligent investor in their position would not have investigated the offering documents or discovered the misstatements by that date.  As a result, the Court held that FHFA’s claims were not barred by the statute of limitations.  Opinion & Order.

Bank of America and Merrill Lynch Settle RMBS Lawsuit with FDIC

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On November 17, Bank of America and Merrill Lynch settled securities claims brought by the FDIC related to RMBS sold to United Western Bank.  The FDIC, as the receiver for United Western Bank, alleged claims under the Securities Act of 1933 and the Colorado Securities Act against Bank of America, Merrill Lynch, Morgan Stanley, and RBS Securities related to $110 million in RMBS. The case against Morgan Stanley and RBS remains pending.  Stipulation.

Court Grants in Part and Denies in Part JPMorgan’s Motion to Dismiss RMBS Action

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On October 16, Judge Susan J. Dlott of the United States District Court for the Southern District of Ohio granted in part and denied in part several JPMorgan entities’ motion to dismiss a complaint filed by several Western & Southern Life Insurance entities relating to $202 million in RMBS certificates.  Western & Southern asserted 14 causes of action, including claims for violations of the Ohio Securities Act, the Ohio RICO statute, the federal Securities Act of 1933, and for common law fraud, conspiracy, and tortious interference with contract.  The court dismissed Ohio Securities Act claims as to certain certificates, finding them time barred under Ohio’s five-year statute of repose.  The court declined to dismiss the remaining Ohio Securities Act claims as untimely, holding that when Western & Southern was put on notice of its claims for statute of limitations purposes was a question of fact.  The court also held that Western & Southern adequately alleged falsity and scienter with respect to alleged misstatements concerning underwriting guidelines, appraisals, owner occupancy, credit ratings, and title transfer.  As to the federal Securities Act claims, the court held that they were time barred under the applicable three-year statute of repose and that Western & Southern could not rely on American Pipe tolling to extend the period for filing its claims.  The court dismissed the tortious interference with contract claim on the ground that the claim is not available against a party to the contract at issue.  Finally, the Court held that the Ohio RICO claims were sufficiently pled.  Order.