Social Media and the SEC’s Disclosure Regulations: Netflix

By Ann Koppuzha, J.D. Candidate 2015 | Posted on

According to Netflix CEO Reed Hastings’ Facebook post in July 2012, “Netflix[‘s] monthly viewing exceeded 1 billion hours for the first time ever in June.”  This 15-word sentence might involve Netflix in a lengthy dispute with the SEC, which believes that the posting may be in violation of the SEC’s Regulation FD.  The regulation requires public entities to make full and fair public disclosure of material non-public information.  Though it is unclear whether disclosing company information through social media is a violation of SEC regulations, Hastings has implied that the SEC intended such announcements to be made through a press release or a regulatory filing.

The SEC notified Hastings and Netflix of the violation through a Wells Notice.  A Wells Notice indicates that a securities regulator has concluded an investigation, found infractions, and will recommend enforcement action of either a cease-and-desist action and/or a civil injunction against Netflix and Hastings.  The notice gives the respondent the opportunity to explain why such an action is not needed.

Hastings has responded that he does not believe the post revealed material information.  However, analysts have pointed out that Netflix’s share price increased 13 percent after the posting.  Hastings also wrote that posting to his Facebook page, where many of his 200,000+ friends who are reporters can see the posting, is public disclosure.

The broader question, however, is to what extent can public companies release information through social networks without violating SEC regulations?  There is no clear answer, but the SEC’s response to Netflix may give an indication of how the agency will regulate social media.

Supreme Court Issues Significant Class Certification Decision in Antitrust Case

By Davis Polk & Wardwell, LLP | Posted on

[Editor’s Note:  The following post is from Davis Polk’s recent Client Newsflash. This and other updates from Davis Polk are available here.]

Supreme Court confirms that courts must evaluate merits issues in connection with class certification

On March 27, 2013, the Supreme Court, in an opinion by Justice Scalia, held that putative antitrust class plaintiffs must affirmatively establish that damages are capable of measurement on a class-wide basis to satisfy Rule 23(b)(3)’s predominance requirement.  In the case before it, Comcast Corp. v. Behrend, the Court found that the putative antitrust class had failed to satisfy this burden and that the Third Circuit had erred by refusing to scrutinize plaintiffs’ proffered damages methodology at the class certification stage.  Justices Ginsburg and Breyer issued a joint dissent in which Justices Sotomayor and Kagan joined.

This case is consistent with a line of recent Supreme Court decisions setting strict evidentiary standards for class certification.

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SEC Charges Craig Berkman and His Lawyer over Pre-IPO Facebook Con

By Valerie Ramos, J.D. Candidate 2015 | Posted on

The SEC has charged former Oregon gubernatorial candidate, Craig Berkman, with a violation of the antifraud provisions of federal securities laws. Berkman’s fraud has been referred to as a Ponzi-like scheme where investors were promised access to pre-IPO shares in Facebook, Groupon, Zynga, and LinkedIn. The SEC alleges that John B. Kern, and Berkman’s lawyer, aided and abetted this violation.

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Who is the General Counsel’s Client? The Company vs. CEO

By Ann Koppuzha, J.D. Candidate 2015 | Posted on

A General Counsel (GC) is one of a small group of c-suite executives charged with leading a company.  In serving the GC’s primary client, the corporation, the GC works closely with other c-suite executives, including the CEO.  The CEO often has substantial say over the GC’s compensation and work.  But what happens when the CEO seeks personal advice from the GC?

Kenton King of Skadden Arps, Scott Haber of Latham & Watkins, and Michael Ross, former general counsel of Safeway, spoke to the Berkeley Center for Law, Business and the Economy (“BCLBE”) community about conflicts that can occur when the company’s CEO personally solicits assistance from the GC.  Often the prospect of personally advising a CEO creates a catch-22 situation.  Though the GC needs to have a professional relationship with the CEO, providing advice may conflict with the GC’s loyalty to the corporation.  This is especially true if the corporation and the CEO are on opposite sides of the bargaining table.

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Professor Robert Bartlett speaks on the JOBS Act at Orrick, Herrington & Sutcliffe LLP.

By Ann Koppuzha, J.D. Candidate 2015 | Posted on

Within a month of the Initial Public Offering (“IPO”) Task Force’s white paper, “Rebuilding the IPO On-Ramp,” Congress developed the Jumpstart Our Business Startups (“JOBS”) Act.  The legislation aims to create new companies, and ultimately new jobs.  The JOBS Act loosens security regulations, making it easier for startups to access funding and go public.  Professor Robert Bartlett recently spoke about the effects of the JOBS Act at a Berkeley Law Alumni Center event held at Orrick, Herrington & Sutcliffe LLP.

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Are All MOE’s Created Equal

By Daniel E. Wolf and Sarkis Jebejian, Kirkland & Ellis, LLP | Posted on

[Editor’s note: the following post comes from a recent M&A Alert by Kirkland and Ellis partners Daniel E. Wolf and Sarkis Jebejian.]

With valuations stabilizing and the M&A market heating up, a rebirth of stock-for-stock deals, after a long period of dominance for all-cash transactions, may be in the offing. If this happens, we expect to see renewed use of the term “merger of equals” (MOE) to describe some of these all-equity combinations. As a starting point, it may be helpful to define what an MOE is and, equally important, what it isn’t. The term itself lacks legal significance or definition, with no requirements to qualify as an MOE and no specific rules and doctrines applicable as a result of the label. Rather, the designation is mostly about market perception (and attempts to shape that perception), with the intent of presenting the deal as a combination of two relatively equal enterprises rather than a takeover of one by the other. That said, MOEs generally share certain common characteristics. First, a significant percentage of the equity of the surviving company will be received by each party’s shareholders. Second, a low or no premium to the pre-announcement price is paid to shareholders of the parties. Finally, there is some meaningful sharing or participation by both parties in “social” aspects of the surviving company

While each of the aspects of an MOE deal will fall along a continuum of “equality” for the shareholders of each party, there are a handful of key issues that require special attention in an MOE transaction:

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JOBS Act Symposium: Liveblog Recap & Review

By Valerie Jon Ramos, J.D. Candidate 2015 | Posted on

This post will detail the two panels from last Friday’s 2013 BCLBE and BBLJ JOBS Act Symposium:  1)  The IPO On-Ramp and 2) Crowdfunding.

Panel 1:        The IPO On-Ramp

Moderator:  Ian Peck

Robert Bartlett, Professor, UC Berkeley, School of Law

Reza Dibadj, Visiting Professor, UC Berkeley, School of Law

Martin Zwilling, Startup Professionals 

Background: Title I of the JOBS Act

Title I of the JOBS Act was originally pitched as a job creation vehicle.  Title I seeks to accomplishes this through its two provisions: (1) providing an “on-ramp” to going public for emerging growth companies (“EGCs”), a company within five years of going public, using existing principles of scaled down regulation; and (2) improving the availability and flow of information for investors before and after an IPO.

There are four­ major changes that were discussed during the panel:

1)    Creation of the “Emerging Growth Company” as a new category of issuer

2)    EGCs eligible for IPO On-Ramp enjoy significant benefits, including:

  • A reduced two-year requirement of audited financials needed in registration statements versus the standard three to five years
  • Allows communication between EGCs and qualified institutional buyers prior to filing registration statement (although there is an SEC Rule that does not allow solicitation of filing)
  • Research reports can be filed even while the EGC is making an offer

3)    EGCs have less extensive financial reporting/audit obligations (exempt from SOX)

4)    EGCs have limited executive compensation disclosures 

Moderated Q&A

When questioned about what problems exist in the IPO market and how the JOBS Act approached these problems, there was a general consensus that the worry stemmed from the dramatic decline in IPOs in the market over the past decade. IPOs going overseas, problems that came with the economic downturn, and the choice of M&A as the preferred exit strategy.  Zwilling spoke beyond the general market on how entrepreneurs, in general, want control of their company, and when they are ready to exit, M&A serves as a better exit strategy due to its lower costs and fewer regulations.

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JOBS Act Symposium: Crowdfunding–Finance Democratization or Investor Protection?

By Christopher Hammond, J.D. Candidate 2015 | Posted on

The crowdfunding panelists discussed what Mary Dent referred to as a “fundamental tension” between the democratization of finance and protecting unsophisticated investors.  In traditional securities law, S.E.C. has protected Main Street consumers from especially risky investments, unless an investor can demonstrate they he or she is a sophisticated investor—using net worth, for example, as a proxy for sophistication.

Professor Bartlett agreed with the tension and added that they crowdfunding marketplace may suffer from the “bad apple” problem.  Even if a vast majority of crowdfunding investors or entrepreneurs have good intentions, a small number of ‘bad actors’ could easily shake confidence in the crowdfunding brand or marketplace. 

JOBS Act Symposium: Do the crowdfunding provisions make bigger problems than the ones they try to solve?

By Will Schildknecht, J.D. Candidate 2015 | Posted on

The Symposium’s second panel discussed the JOB Act’s crowdfunding exception.  Our morning panelists are joined by Mary Dent, Jerome Engel, and Eric Brooks.

Eric Brooks sees investors defrauded everyday in his job with the SEC. As a result, the cynic in him says that the crowdfunding provisions do create greater problems than the solve. Fraud is even easier to perpetrate over the internet and the Act sanctions the funding portals. The SEC will likely face an increase in customer complaints from investors who lose money through crowdfunding investments which then have to be researched. Nevertheless, the Act and attendant regulations can work well if protections are preserved.

Robert Bartlett analogized crowdfunding to the ability to generally solicit investments up to a million dollars in the 90’s. That freedom led to significant instances of fraud. There is a definite potential for this act to be a repeat of those failures.

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JOBS Act Symposium: Crowdfunding

By Christopher Hammond, J.D. Candidate 2015 | Posted on

The Symposium’s second panel discussed the JOB Act’s crowdfunding exception.  Our morning panelists are joined by Mary Dent, Jerome Engel, and Eric Brooks.  [Note:  Mr. Brooks is with the S.E.C., but noted that his remarks are not official and do not represent the administration’s position.  His comments are his own.]

What is crowdfunding (“CF”) is trying to achieve?

Professor Dibadj began, noting that the CF movement is largely motivated by technology and the concept that individuals can pool money towards a common cause.  The idea had worked in other sectors (e.g. natural disaster relief or political campaigns), so some wanted to apply CF in the private sector.  The problem, pre-JOBS Act, was that capital transfers could be considered an unregistered investment or security, thus easily violating federal securities laws.  Martin Zwilling agreed that investors saw CF structures work in the non-profit space, so they asked, “Why couldn’t it work for for-profit companies?”

Mary Dent added that the CF movement was spurred by the perception (whether or not it is true) that small companies have recently been the biggest contributor to job growth.  However, many startups could not access funding from skeptical VCs or banks.  Congress wanted to encourage these small, growing companies so created the JOBS Act’s CF exemption to allow alternative funding networks.

Martin Zwilling cautioned that investors might be funding weak or under-developed companies.  VCs might argue that the market has not suffered from a lack of available funds, but a shortage of good investment opportunities.  Zwilling concluded, “I don’t think CF will solve [those companies’] problems if they’re not ready for the market yet.”

Professor Bartlett viewed the rise of CF as “the democratization of finance.”  Many CF platforms and groups press their case by framing it as a fairness issue, whereby small, less-sophisticated investors can participate in startup financing opportunities.  However, Mr. Brooks drew upon his experience as a securities regulator, noting that this very democratization creates serious concerns of fraud.