October One-Minute Reads

SEC adopts EDGAR Next

As outlined in this October 22 Cooley alert, the Securities and Exchange Commission (SEC) adopted final rules implementing EDGAR Next on September 27, 2024, which will change the way constituents access and manage accounts on the EDGAR (Electronic Data Gathering, Analysis, and Retrieval) system. The amended rules require EDGAR filers to authorize identified individuals who will be responsible for managing their accounts, and will require those individuals to present individual account credentials obtained from login.gov to access those EDGAR accounts to make filings. The application for access to EDGAR – known as Form ID – will be modernized to make the form more user-friendly. Compliance with amended Form ID is required by March 24, 2025.

Starting on March 24, 2025, the EDGAR Filer Management dashboard will go live, and filers may begin to enroll on the dashboard, while still being able to file pursuant to the legacy filing process through September 12, 2025. Compliance with EDGAR Next will be required by September 15, 2025. For further reading, see the SEC’s fact sheet and press release, as well as this September 30 PubCo post.

SEC charges 23 entities with late ownership filing violations

On September 25, 2024, the SEC announced settled enforcement proceedings against 23 entities and individuals arising out of late Schedule 13D and 13G reports and Section 16 ownership reports. The charges stem from SEC enforcement initiatives focused on Schedule 13D and 13G reports and Forms 3, 4 and 5 that certain shareholders are required to file. These reporting requirements apply irrespective of whether the trades were profitable and regardless of a person’s reasons for the transactions. SEC staff used data analytics to identify the charged individuals and entities that filed the required reports late. Because the SEC has indicated this is part of an enforcement sweep, companies and shareholders should be mindful of the reporting deadlines for both Schedule 13D and 13G reports (13G accelerated filing deadlines became effective on September 30, 2024). For further reading, see this September 27 PubCo post.

SEC charges company with misleading IPO investors regarding market potential and sales prospects

On September 13, 2024, the SEC announced settled charges against Zymergen for allegedly misleading initial public offering (IPO) investors about the overall market potential, revenue prospects and customer pipeline for its only commercially available product, an electronics film named Hyaline. Zymergen raised approximately $530 million through its IPO in April 2021 and filed for bankruptcy in 2023.

Zymergen agreed to pay a $30 million civil penalty to resolve the SEC’s charges. According to the order, Zymergen claimed that it had a $1 billion electronics display market opportunity for Hyaline, but the estimate was based on flawed and unreasonable assumptions – including product markets that were poor fits for Hyaline’s technical characteristics and unsupported premium pricing. The SEC’s order also stated that Zymergen provided misleading revenue forecasts to research analysts that far exceeded internal estimates. Additionally, the order stated that Zymergen misled investors during its first public earnings call by misrepresenting the status of Hyaline’s customer pipeline while omitting significant technical and commercial problems the product faced. For further reading, see this September 17 PubCo post.

SEC charges company and former executives with misleading claims about clinical trials

The SEC announced charges against Cassava Sciences, its founder and former CEO, Remi Barbier, and its former senior vice president of neuroscience, Dr. Lindsay Burns, for misleading statements made in September 2020 about the results of a phase 2 clinical trial for the company’s purported therapeutic for the treatment of Alzheimer’s disease. The SEC’s complaint alleged that Cassava misled investors by announcing that the company’s therapeutic significantly improved patient cognition. Among other things, Cassava claimed that the phase 2 results showed significant improvement in episodic memory of the Alzheimer’s patients involved in the clinical trial. In reporting the results, however, Cassava failed to disclose that the full set of patient data – as opposed to the subset of data hand-selected by Burns – showed no meaningful effect in the patients’ episodic memory or an effect consistent with the phase 2a trial. For further reading, see this October 1 PubCo post.

SEC charges independent director and former CEO with disclosure failures related to personal relationship

The SEC announced settled charges against James R. Craigie, former CEO, chairman and board member of Church & Dwight Co., for violating proxy disclosure rules by standing for election as an independent director without informing the board of his close personal friendship with a high-ranking Church & Dwight executive, thereby causing Church & Dwight’s proxy statements to contain materially misleading statements. The SEC alleged that, between January 2020 and March 2023, Craigie maintained a close personal relationship with a member of Church & Dwight’s executive team. Among other things, Craigie frequently vacationed with the executive and the executive’s spouse, including six trips that spanned eight countries on five continents. Craigie paid more than $100,000 for them to join him and his spouse on several of these international vacations. Craigie never disclosed this relationship with the executive to Church & Dwight, and he allegedly encouraged the executive to conceal the relationship as well. As a result, the company’s board was unaware of Craigie’s personal relationship with the executive, and the company’s proxy statements identified Craigie as an independent director.

Fidelity releases proxy voting guidelines

Fidelity has released its proxy voting guidelines for the upcoming proxy season. The changes relate primarily to provisions about director independence, including that Fidelity will generally oppose the election of certain directors if all directors on the audit, compensation, and nomination and governance committees are not sufficiently independent. Fidelity also will consider relevant listing standards when determining director independence, but may apply more stringent criteria and adapt its criteria for foreign markets. Fidelity generally finds the following positions to be nonindependent: former CEOs, company founders and directors, and director family members that were employed as senior executives at the subject company within the past five years. In addition, Fidelity may evaluate financial relationships, equity ownership and voting rights when assessing director independence. These guidelines replace the January 2024 guidelines.

PCAOB releases report on auditor independence

The Public Company Accounting Oversight Board (PCAOB) has released a report on its observations related to auditor independence. The report highlights recent staff observations on independence – including common deficiencies that resulted in the issuance of comment forms, good practices and other reminders – that can help audit firms and audit firm personnel comply with PCAOB and SEC independence standards and rules. For further reading, see this September 23 PubCo post.

California amends climate disclosure laws

As noted in our September 2024 edition of One-Minute Reads, California Gov. Gavin Newsom signed Senate Bill 219 into law, tweaking some of the requirements of California’s climate disclosure bills – including SB 253, greenhouse gas emissions (GHG) disclosure, and SB 261, climate risk disclosures. Among other technical changes, SB 219 provides that the California Air Resources Board (CARB) will have an extra six months (until July 1, 2025) to adopt implementing regulations for the GHG emissions requirements. The amendments do not change the timing for compliance with reporting requirements for reporting entities under SB 253 or SB 261.

NYSE proposes rule change to limit use of reverse stock splits to regain compliance with price criteria

On October 10, 2024, the SEC posted notice of a New York Stock Exchange (NYSE) proposal that would, if approved, make it harder for penny stocks to remain as listed companies. Per 802.01C, a company will be considered below compliance standards if the average closing price of a security as reported on the consolidated tape is less than $1.00 over a consecutive 30- trading-day period (price criteria).

The NYSE proposed rule provides: “Notwithstanding the foregoing, if a company’s security fails to meet the Price Criteria and the company (i) has effected a reverse stock split over the prior one-year period or (ii) has effected one or more reverse stock splits over the prior two-year period with a cumulative ratio of 200 shares or more to one, then the company shall not be eligible for any compliance period specified in this Section 802.01C and the Exchange will immediately commence suspension and delisting procedures with respect to such security in accordance with Section 804.00. Furthermore, a listed company may not effectuate a reverse stock split if the effectuation of such reverse stock split results in the company’s security falling below the continued listing requirements of Section 802.01A.” For more insight, see this October 15 PubCo post.

SEC approves Nasdaq rule change to modify application of bid price compliance periods

On October 7, 2024, the SEC approved Nasdaq’s proposal to amend Rule 5810(c)(3)(A) to modify application of the bid price compliance periods, where a listed company takes an action to achieve compliance with the $1.00 minimum bid price continued listing requirement (bid price requirement), and that action causes noncompliance with another listing requirement. If a company uses a reverse stock split to regain compliance with the minimum bid price requirement, and that causes the company to fall below the minimum number of publicly held shares and holders that Nasdaq standards require, the company does not get additional time to cure the new violation. For further reading, see this October 8 PubCo post.

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