In 2021, Congress passed the Corporate Transparency Act (CTA) which will require many companies to report information about the company and its beneficial owner(s) to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). Regulations implementing the CTA became effective Jan. 1, 2024.

Attorney Jack Beeler explains the new regulations and what businesses need to do now in order to comply in this Porter Wright Law Alert.

This summer, the Securities and Exchange Commission (SEC) approved final Dodd-Frank clawback policy listing requirements for both the NYSE (NYSE Listed Company Manual Section 303A.14) and Nasdaq (Nasdaq Listing Rule 5608). The listing standards provide that these compensation recovery policies apply to compensation received on or after Oct. 2, 2023, but listed companies have until Dec. 1, 2023, to adopt compliant policies. We summarize the key requirements of the policies below and recommend actions for publicly traded companies to implement the policies.

Clawback policy key terms

Highlights of the requirements of a compliant policy are below:

• Issuers covered. All issuers, including foreign issuers, whose stock is traded on a U.S. securities exchange, must adopt policies.

• Officers covered. All Section 16 officers, including the issuer’s CEO, CFO, PAO, unit vice presidents and all other policy making officers, must be covered by the policy.

• Clawback trigger. The trigger for recovery is an accounting restatement, including both “Big R” and “Little R” restatements, that result from the material non-compliance with financial reporting requirements. Recoupment is required regardless of fault.

• Compensation covered. The clawback policy must apply to all incentive based compensation received by an executive officer during the three fiscal years immediately preceding the date of a required accounting restatement. Such compensation is defined as any compensation that is granted, earned or vested wholly or in part upon attainment of a financial reporting measure. Financial reporting measures include measures derived directly from the financial statements as well as measured based on stock price or total shareholder return. They do not include subjective measures (such as leadership) or purely time-based vested awards. Compensation is considered “received” on the date the reporting measure was attained, even if the compensation was paid later.

• Amount subject to clawback. The amount of “erroneously awarded compensation” that must be recovered under the policy is equal to the amount that the incentive compensation received, or exceeds the amount that would have been received had the compensation been calculated based on the restated amounts, regardless of taxes paid.

• Disclosures. Issuers generally must file their clawback policy as an exhibit on the Form 10-K. Further, if the issuer must prepare an accounting restatement in the future, it will have additional disclosures related to how it implemented the clawback of incentive-based compensation under the policy.

• Indemnification. Issuers are prohibited from indemnifying executives from the recovery of erroneously paid compensation.

Next steps for public companies

Publicly traded companies should consider taking the following steps to coordinate implementation of the new clawback policies:

• Revise current policy or create a new policy. Many issuers currently have a clawback or recoupment policy. One approach may be to revise the current policy to the extent necessary to comply with the new requirements. If the current policy covers a much larger group of employees than the Section 16 officers, the issuer may want to create a separate policy that complies with the new requirements. Early indication is that most companies are choosing to create a separate policy.

• Have covered officers sign an acknowledgment of the policy. The clawback policy could apply to incentive compensation awards that were granted in prior year. Rather than amend every prior award agreement, issuers could require covered officers to sign an acknowledgment that they have read and understand the policy. A signed acknowledgment can both make the policy enforceable and alert the officers that any clawback will not be indemnified.

• Amend plans and agreements for compliance. If an issuer’s executive compensation plans and employment agreements do not refer to a clawback policy, the issuer should amend these documents to make clear that they are subject to the policy. Any indemnification arrangements also should be reviewed to make sure they do not violate the policy.

• Update compensation practices. Administratively, trying to recover compensation up to three years after it has been paid could be difficult. To make it easier to recover compensation, an issuer may want to consider changing its compensation practices. For example, an issuer might require mandatory deferrals of performance-based pay or additional time-based vesting conditions on awards. That way, recoupment would involve simply reducing the amount of compensation due at a future date rather than recovery of a previously paid amount.

Legislation aimed at increasing access to investment opportunities for all individuals regardless of their income or wealth level passed the House recently on May 31, 2023. H.R. 2797, or, the Equal Opportunity for All Investors Act of 2023, shares the name of a similar bill that never made it past the House after its introduction in 2021. H.R. 2797 was referred to the Senate Committee on Banking, Housing, and Urban Affairs on June 1, 2023. The Securities and Exchange Commission (SEC) limits participation in certain unregistered or private securities transactions to individuals and entities that qualify as “accredited investors.” An accredited investor has the level of financial or business sophistication required to fully appreciate the risks associated with investments of that nature.

SEC accredited investor qualifications before H.R. 2797

Historically, the criteria for an individual to qualify as an accredited investor under the Securities Act of 1933 was a purely financial analysis: excluding the value of your primary residence, do you have a net worth of at least $1 million? Or, do you have an annual income of at least $200,000 individually or $300,000 jointly with a spouse? If you could answer yes to either of those questions, you could qualify as an accredited investor.

The SEC expanded its definition of accredited investor in 2020 to include individuals with certain professional certifications, employment experiences or relationships. However, even with the expanded definition, a significant portion of the population is still excluded from entire categories of investment opportunities, including private equity and hedge funds.

H.R. 2797 introduces exam to certify accredited investors

H.R. 2797 seeks to change this by directing the SEC to establish an exam through which individuals, who may not otherwise meet the criteria, can become certified as accredited investors. The proposed exam would test an individual’s competency and understanding of “…aspects related to investing in unregistered securities, private companies, or private funds.” Additionally, the bill prescribes that the exam be designed “…with an appropriate level of difficulty such that an individual with financial sophistication would be unlikely to fail.”

If enacted, the SEC would have 180 days to establish the exam, and 180 days after that for the Financial Industry Regulatory Authority (FINRA) to begin administering and offering the exam to the public free of charge. The addition of an alternative pathway for achieving accredited investor status beyond wealth would open up investment opportunities to a much broader population and has the potential to significantly change the landscape of the investment industry, promoting greater accessibility and inclusivity for all individuals. The resulting increase in the pool of available investors would hopefully provide avenues for promising start-ups and small businesses to secure the necessary capital to grow and thrive.

On April 14, 2021, the U.S. Senate confirmed Gary Gensler, President Joe Biden’s nominee, to chair the U.S. Securities and Exchange Commission (SEC) until June 5, 2021. The Financial Industry Regulatory Authority (FINRA) issued a statement, in which the organization characterized Mr. Gensler as an advocate “for the interests of investors.” Investors and the SEC have expressed an interest in the reporting of environmental and social issues. Many spectators believe that under Gensler’s leadership, the SEC may implement a required disclosure of ESG issues.

What are ESG issues?

“ESG” stands for environmental, social and governance issues. While these factors may impact each industry differently, most ESG disclosures consist of climate change matters, community involvement and diversity and inclusion initiatives. Some companies already disclose this information in various formats, such as statements on their websites or entire sections in their 10-K reports. The SEC released several statements over the past few months hinting toward required disclosure of ESG issues.

On Feb. 24, 2021, Allison Lee, acting chair of the SEC, published a statement in which she directed the Division of Corporation Finance to “enhance its focus on climate-related disclosure in public company filings.” On March 11, 2021, John Coates, acting director of the Division of Corporation Finance issued a statement in which he addressed the considerations for adopting an ESG disclosure system. The SEC’s Asset Management Advisory Committee met on March 19 to discuss an ESG disclosure framework and the following week, the SEC launched a webpage to display all agency statements and developments relating to ESG issues. Accordingly, ESG disclosure has recently gained an increasing amount of traction.

The future of ESG disclosure

The Biden Administration has showed an interest in focusing on ESG issues. Hence, mandatory ESG disclosure may be on the horizon. However, the SEC has not released guidance on the disclosure framework. According to Mr. Coates’ statement, “there remains substantial debate over the precise contents and details of what ESG disclosures might or should encompass. Part of the difficulty is in the fact that ESG is at the same time very broad, touching every company in some manner, but also quite specific in that the ESG issues companies face can vary significantly based on their industry, geographic location and other factors.”

In the meantime, public companies should aim to keep track of all ESG initiatives. Sustainability practices, donating to community organizations and implementing diversity and inclusion initiatives are all ESG factors that may soon be reported.

Most companies established or registered to do business in the U.S. do not have to disclose or report their ownership information—but that is about to change. The recently-enacted Corporate Transparency Act, which went into effect Jan. 1, 2021, requires certain companies to report their beneficial owner(s) to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN).

My colleagues Jack Beeler and Diana Jia explain the new law, how it applies to businesses and what happens if they don’t comply, in this Porter Wright Law Alert.

Borrowers of Paycheck Protection Program (PPP) loans – together with their affiliates – who have loans in excess of $2 million and seek loan forgiveness will potentially need to complete necessity questionnaires according to the Small Business Administration. There are separate forms for for-profit and non-profit businesses and will likely affect 52,000 borrowers.

My colleagues Jack Beeler, Cat Rice and Jack Meadows explain the purpose and questions asked in these questionnaires in this law alert.

On Oct. 7, 2020, the Securities and Exchange Commission (SEC) proposed a limited and conditional exemption from broker registration for natural persons, referred to as “finders,” who seek to help non-reporting, private companies raise capital from accredited investors in exempt offerings, subject to certain conditions. Generally, persons who effect transactions in securities for the account of others cannot do so through interstate commerce unless the person is registered with the SEC. There has long been ambiguity about when or if finders, who seek to bridge the gap between businesses and investors by identifying potential investment opportunities, must register as broker-dealers with the SEC. The proposed exemption seeks to clarify the role and obligations of finders so that small businesses can more easily connect with the investments they need to succeed. In the current market, small businesses often struggle to identify potential investors, and few broker-dealers are willing to raise capital in the smaller transactions.

The proposal looks to create two classes of finders: Tier I Finders and Tier II Finders. These new classes of finders do not need to register as “brokers” under federal regulations if they adhere to certain requirements, including only offering exempt securities and soliciting only “accredited investors.” Tier I Finders are limited to only providing contact information of potential investors to the issuer, whereas Tier II Finders may conduct additional activities such as screening potential investors, distributing offering materials, discussing the offering generally (but without providing advice as to the investment’s value), and arranging or attending meetings between potential investors and the issuer. Because of the additional authority granted to Tier II Finders, those who wish to rely on this exemption must provide certain disclosures to potential investors, including the compensation arrangement with the issuer and a disclaimer to the investor that indicates: the finder is acting as the issuer’s agent, is not an associated person of a broker-dealer, and is not assuming a role to act in the investor’s best interest. Neither the Tier I nor Tier II Finders can structure transactions, negotiate terms, handle funds, prepare sales materials, preform analyses of the sales, engage in due diligence or provide financial support.

Currently, finders generally must comply with both state and federal registration requirements. To register with the SEC, a broker-dealer must apply to a self-regulatory organization, most commonly the Financial Industry Regulatory Authority (FINRA), and comply with any subsequent restrictions on business activities. In Ohio, dealers must be registered with the Ohio Division of Securities, and Ohio law offers very limited exemptions from such registration. Ohio Revised Code 1707.01(E) defines “dealer” as a person who engages in the business of the “purchase or sale of securities for the account of others in the reasonable expectation of receiving a commission, fee, or other remuneration.” As explained by the division in Ohio Securities Bulletin 2013:2 (May 2013), few exceptions apply to exempt finders from registration as dealers when they are receiving compensation, even indirectly, that is tied to the sale of securities. Thus, even if registration with the SEC is no longer required following adoption of the proposal, persons working as finders in Ohio likely will still need to register with the division or risk substantial penalties.

The proposed exemption has not yet been adopted, and there will be 30-day comment period for the exemption following its publication in the Federal Register. You can learn more about the types of permitted activities by the Tier I and Tier II Finders in a chart released by the SEC here, and you can read the full press release here.

On Aug. 26, 2020, the Securities and Exchange Commission (SEC) adopted amendments to Rule 501(a), Rule 215 and Rule 144A of the Securities Act of 1933 (Securities Act). These amendments are part of the SEC’s efforts to more effectively identify qualified investors and allow for expanded investment opportunities, while still maintaining appropriate levels of investor protections.

Likely the most impactful of these amendments was the update to the definition of “accredited investor” under Rule 501(a). The existing text of Rule 501(a) states that a natural person would qualify as an accredited investor if they met certain income or net worth thresholds. With the updates, the SEC will now consider persons with certain professional certifications, designations or credentials (as designated by the SEC from time to time) to qualify as accredited investors. The SEC initially identified holders of Series 7, Series 65, and Series 82 licenses as qualifying under this new expansion. Additionally, the amendments contemplate that a “spousal equivalent” can be considered for purposes of determining qualification based on income or net worth. The SEC first recognized spousal equivalents when it adopted Rule 202(a)(11)(G)-1 in 2011, where it defined a spousal equivalent as “a cohabitant occupying a relationship generally equivalent to that of a spouse.” (See 17 C.F.R. 275.202(a)(11)(G)-1). In addition to persons with certain certifications, individuals that qualify as “knowledgeable employees,” as defined in Rule 3c-5(a)(4) of the Investment Company Act of 1940 (Investment Company Act), of the private-fund issuer of the securities being offered may also qualify as accredited investors, but only as it relates to those specific securities.

The amendments also expanded the scope of certain entities that would qualify as accredited investors. First, the amendments create a new category for any entity that owns “investments” (as defined under Rule 2a51-1(b) of the Investment Company Act) in excess of $5 million, so long as that entity was not formed for the specific purpose of investing in the securities offered. The amendments also make some important clarifications regarding “family offices,” and their “family clients” (as defined under the Investment Advisers Act), as well as limited liability companies. So long as each has at least $5 million in assets, or assets under management as it relates to family offices and family clients, those entities may now qualify as accredited investors.

Similar expansions and clarifications were made to the definition of “qualified institutional buyer” under Rule 144(A) to conform to the revised accredited investor definition. Specifically, the amendments expand the list of qualified institutional buyers to include rural business investment companies, limited liability companies, and any institutional investors included in the new accredited investor definition not already contemplated in the definition of “qualified institutional buyer,” so long as each of the foregoing satisfies the $100 million in securities owned and invested threshold.

These amendments and any corresponding orders will take effect 60 days after publication in the Federal Register, which is expected to be sometime in November this year.

You can read more at the SEC Press Release here.

Forum-selection provisions are common tools for corporations seeking to counteract potentially abusive shareholder litigation. Last month, the Supreme Court of Delaware held that Federal forum provisions, which require actions arising under the Federal Securities Act of 1933, as amended, to be filed in a Federal court, could survive a facial challenge.

In Sciabacucchi v. Salzberg, Plaintiff Matthew Sciabacucchi purchased shares of common stock from Roku Inc., Stitch Fix, Inc. and Blue Apron Holdings, Inc., either in the initial public offerings for those entities or shortly thereafter. Prior to the initial public offerings, each of the companies adopted a Federal forum provision in its Certificate of Incorporation, requiring any claim under the Securities Act to be filed in Federal court. Sciabacucchi commenced a putative class action, seeking declaratory judgment that the Federal forum provisions are invalid.

The Delaware Chancery Court found the Federal forum provisions were ineffective. It held that a Securities Act claim is an external claim distinct from internal affairs claims brought by stockholders qua stockholders, and that it could not be regulated by the corporations’ forum selection clauses in a Certificate of Incorporation. To support that a Securities Act claim is external, the Chancery Court pointed out that (i) the definition of “security” encompasses a wide range of financial products and are not limited to stocks; (ii) the identity of the possible defendants for a Securities Act claim include those who do not have a director or officer status; (iii) a Securities Act claim arises out of purchase of a share, rather than ownership of the share; and (iv) a purchaser does not have to continue to own the security to be able to assert a Securities Act claim.

Following this decision, Sciabacucchi was awarded attorneys’ fees and expenses in the amount of $3 million.

The Supreme Court of Delaware reversed.  The Court started its analysis by noting that this is a facial challenge, where Sciabacucchi must show that charter provisions cannot operate lawfully or equitably under any circumstances, that the provisions do not address proper subject matters as defined by statute or the provisions can never operate consistently with law.

The Court then stated that the Federal forum provisions fell within the broad text of Section 102(b)(1) of the Delaware General Corporate Law (“DGCL”), which provides that a Certificate of Incorporation may include:

1. Any provision for the management of the business and for the conduct of the affairs of the corporation, and
2. Any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders, or any class of the stockholders, if such provisions are not contrary to the laws of this State.

According to the Court, the Federal forum provisions can provide a corporation with efficiencies in managing the procedural aspects of securities litigation, noting that post Cyan, Inc. v. Beaver County Employees Retirement Fund, parallel state and Federal Securities Act litigation increased substantially and no procedural mechanism is available to consolidate or coordinate parallel suits.  The Court emphasized that Section 102(b) of DGCL is broad. The statute allows freedom for businesses to adopt the most appropriate terms for the organization, finance and governance of their operation, unless the provision would achieve a result forbidden by settled rules of public policy.

As to whether a Securities Act claim is an external claim, the Court once again noted that this is a facial challenge because it is possible to have a scenario where Federal forum provisions could apply to an intra-corporate claim, that is enough to survive a facial challenge.  The Court further disagreed with the Chancery Court’s analysis, indicating that there is a category of matters that is situated on a continuum between the “internal affairs” and purely “external” claims.  Section 102(b)(1)’s plain language encompasses “intra-corporate” matters that are not limited to “internal affairs.”  The Court concludes that because the Federal forum provisions are within the Section 102(b)(1), they are facially valid under Delaware law.

Sciabacucchi v. Salzberg addresses the Federal forum provisions in Delaware corporations’ Certificates of Incorporation and holds that these provisions could survive a facial challenge.  “As applied” challenges are still available to contest the enforcement of such provisions.  Sciabacucchi has until June 2020 to file a petition for certiorari to the United States Supreme Court.

On March 27, 2020, President Donald Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law. Among other things, the CARES Act made some important changes to the U.S. Bankruptcy Code.  My colleague Jack Meadows explains on our Banking & Finance blog.