It’s not just the Justice Department that’s looking into PPP loans—although there appears to be plenty of that going on—the SEC’s Division of Enforcement is also conducting an investigation into “Certain Paycheck Protection Program Loan Recipients” to determine whether there have been violations of the federal securities laws. To that end, Enforcement is conducting a “fact-finding inquiry,” requesting that certain PPP loan recipients produce a variety of documents. While the primary focus of DOJ prosecutors appears to be whether representations made in certifications to the SBA to obtain the PPP loans were fraudulent, the SEC is apparently looking at PPP loans and related company disclosures from a different angle.
At the end of last week, SEC Chair Jay Clayton addressed the Financial Stability Oversight Council, focusing on three areas: market function, market monitoring and corporate and other issuer disclosure. Early in his remarks, Clayton praised the efforts of FSOC “to preserve the flows of credit and capital in our economy[, which] have substantially mitigated the economic consequences of COVID-19.” He noted in particular that “the rapid fiscal, monetary and financial regulatory response to market and economic effects of COVID-19 has been both remarkable and appropriate.” However, it was the data he provided on market functioning and volatility that was most revealing.
The SEC has declared immediately effective (yet another) proposed change to the rules of an exchange—this one from the NYSE. The NYSE has adopted new Section 312.03T of the NYSE Listed Company Manual, which will provide a temporary exception, through June 30, 2020, from the application of the shareholder approval requirements for specified issuances of 20% or more of the outstanding shares (Section 312.03) and, in certain narrow circumstances, by a limited exception for issuances to related parties or other capital-raising issuances that could be considered equity compensation (Sections 312.03 and 303A.08). Although not entirely congruent, the exception appears to be modeled closely on the comparable Nasdaq exception that was approved just over a week ago. (See this PubCo post.) In light of the unprecedented disruption in the economy as a result of COVID-19, many listed companies “are experiencing urgent liquidity needs during this period of crisis due to lost revenues and maturing debt obligations.” The temporary exception is designed to respond to this unprecedented emergency and to help companies access necessary capital quickly.
In April, the SEC approved a Nasdaq rule change to expedite delisting (1) for securities with a closing bid price at or below $0.10 for ten consecutive trading days during any bid price compliance period and (2) for securities that have had one or more reverse stock splits with a cumulative ratio of one for 250 or more shares over the prior two-year period. (See this PubCo post.) The rule change modified the Nasdaq listing rules to shorten compliance periods and permit earlier delisting and enhanced review procedures for securities in these two categories. As approved, the rule change would have been applicable for companies that first received notification of non-compliance after the date of the approval order, April 21. But, in the midst of a pandemic, was that rule change really the way to go? Apparently, Nasdaq has had some regrets. Now, the SEC has declared immediately effective another proposed rule change to delay the implementation date to September 1, 2020.
New FAQ 46 from the SBA provides a “safe harbor” for borrowers of less than $2 million under the Paycheck Protection Program provisions of the CARES Act. Under the safe harbor, for borrowers of amounts below the $2 million threshold, the SBA will deem their certifications regarding the “necessity” of the loans to have been made in good faith. What’s more, while loans over the $2 million threshold will be subject to SBA review (as has been widely publicized), if the SBA determines that the borrower “lacked an adequate basis” for the required “necessity” certification, but the borrower then repays the loan, the SBA “will not pursue administrative enforcement or referrals to other agencies” with respect to the “necessity” certification.
In his keynote address to Securities Enforcement Forum West 2020, SEC Enforcement Co-Director Steven Peikin discussed some of the efforts of the Division of Enforcement to detect misconduct arising out of the COVID-19 pandemic and related market disruption, including the formation of a steering committee to proactively identify and monitor areas of potential misconduct. Of particular interest here are the focus on insider trading and financial and disclosure-related fraud.
As discussed in this PubCo post, in April, the Treasury Department issued a series of FAQs related to loans made under the Paycheck Protection Program provisions of the CARES Act, one of which was addressed to borrowers that are large companies and, particularly, public companies. The FAQ provides that, to be eligible for a PPP loan, a borrower must certify, in good faith, that the loan is necessary to support continuing operations. According to the FAQ, that may be difficult in some cases, contending that “it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith….” The FAQ provided a safe harbor, under which the SBA would deem the borrower to have made the required certification in good faith if the funds were repaid in full by May 14 (as extended in question 43). As reported here, Treasury Secretary Steven Mnuchin has warned that companies receiving loans over $2 million would be audited and could have potential criminal liability if their certifications were untrue. Now, a House oversight subcommittee has demanded that certain public companies return the funds.
On April 6, the Governor of Delaware signed an emergency order applicable to public reporting companies addressing the urgent need of many companies, in light of COVID-19, to change their annual meetings from physical locations to virtual-only formats, including at different dates. The order allowed companies to provide notice of the change by issuing and filing with the SEC a press release instead of complying with the Delaware requirement to send a formal written notice to stockholders or convening the meeting to adjourn, which could be extremely difficult under the current circumstances. (See this PubCo post.) However, the order provided relief only to companies that had already sent out, as of the date of the order, notice of a meeting of stockholders that indicated a physical location. What about companies that sent out their notices after April 6, but still needed to make a change? The relief under the Delaware order was apparently not available to them. Now, the Corporate Law Section of the Delaware State Bar has approved a proposal to amend the DGCL to address this issue. Will the Delaware legislature provide the necessary relief? And if so, when? [Update: this bill was signed into law on July 16.]
When I first saw this temporary relief from the NYSE, I dismissed it as relief designed to help an overwhelmed Broadridge. The relief temporarily allowed discretionary voting on routine matters even if the proxy materials were transmitted to beneficial owners only 10 days in advance of shareholders’ meetings instead of the required 15 days. I had no idea there might be a tragedy underlying it.
The SEC has declared immediately effective new Nasdaq Rule 5636T, which will provide a temporary exception, through June 30, 2020, from the shareholder approval requirements for certain issuances of 20% or more of the outstanding shares (Rule 5635(d)) and for a narrow subset of capital-raising issuances that could be considered equity compensation (Rule 5635(c)). Given that stay-at-home orders in effect in many communities have wreaked havoc on the revenue streams of many businesses, companies may have urgent needs to raise capital. Nasdaq believes that this temporary exception “will permit companies to raise capital quickly to continue running their businesses and address the immediate health crisis caused by the COVID-19 pandemic, including its impact on their employees, customers, and communities.”