SEC Announces New Enforcement Initiatives For High Risk Market Areas

SEC to focus on financial reporting, microcap companies and new analytical tools to detect fraud.

The SEC recently announced new initiatives that will “build on the Division’s unmatched record of achievement and signal our increasingly proactive approach to identifying fraud.”(1)

First up is the Financial Reporting and Audit Task Force, which will concentrate on efforts to identify securities-law violations relating to financial statements, which we thought was a large part of what the SEC did before this release.

Next up is the Microcap Fraud Task Force, which will “investigate fraud in the issuance, marketing, and trading of microcap securities.”  Considering the types of operators who often work in this area, this is probably a good use of SEC resources as long as they recognize that people can operate in this space with integrity.  Being small is not an indication of being dishonest.  However, the hallmarks of microcap fraud should give a good indication of which players to target.

Finally, we have the Center for Risk and Quantitative Analytics.  The CRQA, as the SEC calls it, “will support and coordinate the Division’s risk identification, risk assessment and data analytic activities by identifying risks and threats that could harm investors, and assist staff nationwide in conducting risk-based investigations and developing methods of monitoring for signs of possible wrongdoing.”

Much like the Dodd-Frank provisions for identifying systemic risk, there is little to suggest that the government has the capabilities to address these issues in this manner.  If the SEC could not recognize the wisdom for investigating Bernie Madoff after being handed the quantitative analysis demonstrating that Madoff’s claims were impossible, what is there to suggest they can do it on a market-wide scale?

Expect fishing expeditions on innocent firms and excuses relating to “concealment” and “lack of cooperation” for guilty ones.  However, we applaud the SEC for focusing on areas where attention is needed.

(1)Umm, none of Enron, Worldcom, Madoff, Fannie/Freddie or the rest of the mortgage-related misconduct were in the plus column of “the Division’s unmatched record of achievement.” But, we digress . . .

Startup Tips and Lessons from Zynga: Knowing When To Step Aside

Sometimes the skills needed to start a company are different from the skills needed to run a company.

Cross-posted at My Gamasutra Blog.

Earlier this week, Zynga made an announcement that was not too surprising to folks following the company.  Mark Pincus was out as CEO.

Zynga was a high-flying casual game developer sailing on the winds of its relationship with Facebook.  Zynga described itself as “the world’s leading social game developer.”  It went public in December 2011 at $10.00/share, and its stock price had traded as high as $14.69/share in early 2012.

Since that time, Zynga’s fortunes have fallen.  Its stock has traded below $4.00/share since Summer 2012 as its daily and monthly active users declined and it continued to lose a lot of money.

What was surprising was the Pincus was staying on as Chief Product Officer and Chairman of the Board.

In addition, reports state that Don Mattrick, the new CEO, was chosen by Pincus as his successor.  Pincus was quoted as saying:

“that if I could find someone who could do a better job as our CEO I’d do all I could to recruit and bring that person in. I’m confident that Don is that leader.”

So, what are the lessons here for startups, particularly tech startups?

I’ve previously written about how startups need people different skillsets at different points in their maturity.*  What is remarkable in the Zynga story is that Pincus seemed to understand that Zynga had grown past his skillset as a CEO, and a different kind of leader at this point in its development.

Most founders, even those that do not name the company after a beloved pet, consider that company to be “their baby,” even after taking VC money and public investor money.  They have nurtured the company from idea-to-business, and they believe that they should maintain control of it, even in the face of mounting evidence to the contrary, like, say, gigantic losses of money and declining user numbers, prying a founder out of a controlling role can be difficult and painful.  This can be particularly painful for the founder, who may be faced with a loss of confidence and sense of shame despite the company he or she may have built.

Pincus will continue to have a powerful role at Zynga, particularly as one of the two members of the Executive Committee of the Board of Directors.  However, if the reports of how this transfer of power took place are accurate, Pincus should be commended for his maturity and foresight in recognizing the changing needs of Zynga.

Or maybe he should be admired for his strategic foresight in maintaining a powerful role before being dispatched entirely by the Board of Directors and angry shareholders.  Maybe Mafia Wars does prepare you for real life after all.

*For Gamasutra readers, see here for a discussion of how companies begin to need salespeople as they mature, a position that founders may not be suitable.

SEC To Vote On Rules For General Solicitation In Some Private Offerings

It has been quite a while since the SEC proposed rules relaxing the prohibition of general solicitation in Rule 506 and Rule 144A offerings.  The criticism to the proposed rules flowed from issuer and investor advocate groups for a variety of reasons.  These rules are required by Section 201(a) of the JOBS Act.

According to WSJ MarketWatch, the SEC will vote on the proposal on July 10.

At this point, it may be worth going back through the proposal to be ready for the new rules.  Issuers will be anxious to begin advertising.  However, the proposal includes onerous requirements for verifying investor eligibility.  We look forward to seeing what changes, if any, the SEC plans to make to the proposed rules.

 

My Favorite Apps For Work – LectureNotes

I never used a tablet at The Big Firm.  I had the firm-issued Blackberry and my own iPhone, but I was not a fan of integrating my personal electronics with the firm’s system.

I was also not an early adopter for tablets.  However, since I went solo, I started using a tablet frequently.  I tend to use it for reading articles and as a replacement for printouts.  This leads me to LectureNotes.

LectureNotes is an Android app for taking notes on the screen.  Simple enough, as there are many apps that do this, including the native apps that were pre-installed on the tablet.

LectureNotes is great for the note-taking function, but what really sets it apart is when it is paired with PDFView.  PDFView renders .pdf documents for viewing and marking on LectureNotes.  You can import .pdf’s to have them available to mark them up as if they were paper documents.  You can customize the size and color of the “pen” you use and note deletions, insertions and notes.  It also allows you to organize your documents in a customizable way.

You may say that Adobe Reader does the same thing, and it does.  However, I found that there is far less latency in LectureNotes when I am marking up a document than when I use Adobe Reader.  The fraction of a second latency in Adobe Reader is enough to catch my attention and break my concentration as I stop to make sure the program recognized that I was writing.

LectureNotes is priced at less than $5.00 at this writing and worth it.  PDFView is free.  Paired together, they are responsible for a great deal of changing how I interact with documents.

 

Winklevoss Twins (Of Facebook Fame) To Create A Bitcoin ETF

The Winklevoss Twins, best known for their supporting role in the early Facebook saga, have filed a fascinating registration statement. The Winklevoss Bitcoin Trust has made a filing with the SEC to register around $20 million of Winklevoss Bitcoin Shares.

The point of this investment will be to reflect the performance of the “Blended Bitcoin Price” of Bitcoins. This price is the weighted average market price of Bitcoins on Bitcoin exchanges chosen by the Winklevosses.

The Winklevosses intend for the Trust to hold Bitcoins “using the Trust’s proprietary Security System,” whatever that means for a digital asset.

While this is sort of novel and interesting in its own way, what I found most fascinating is the fact that the financial statements filed with the Form S-1 were blank. Completely blank.

While initial registration statement filings often contain blanks, I’ve never seen “Form of Financial Statements” before. Financial statements may change over the course of a filing history, such as in response to SEC comments. However, it will be interesting to see if the SEC sends the Winklevosses a bedbug letter for this filing.

Best line from The Social Network.

Finally Completed CLE For The Year

My CLE year, that is.  With about a week to go, I had 0.5 hours remaining for my outstanding required CLE credits.  One Supreme Court Securities Law Litigation Update a buffet lunch of pot roast at the Dallas Bar Association, and I’m 0.5 credits ahead for 2014!

I will be posting about CLE resources for the solo practitioner soon.  It is another of those adjustments from big firm life that must be considered.

Startup Tips: Knowing When To Add Salespeople

When you work in the startup world, you see it over and over again.  A company has founders, a product and, maybe, some angel or friends and family investors.  It is time to get that product out the door and some cash in your pocket.

Many founders believe that their wonderful and innovative idea combined with their passion will explode into sales.  This is not always the case, particularly when your target market is other businesses.

Being an inventor, administrator, financier or (even) attorney is not the same thing as being a salesman.  Selling is a talent and a skill.  Not everyone is born with the ability to sell.  Not everyone has taken the time to develop this particular skill.  However, if your business depends on personal sales calls to buyers, whether they are end users or intermediaries, you may want to consider whether you should hire a dedicated salesperson.

Generally, when the product has been tested and is ready for entry into the market, it is a good time for the startup to have a committed salesperson on board.  Preferably that person would know the industry and show up with a ready-made contact list, as ‘Rolodex’ is so-old economy.  However, even a person who has sales experience and can understand the product will be preferable to an inventor or founder who may not have the right experience to turn an opportunity into revenue.

SEC Highlights Warnings About Unregistered Broker-Dealers in Private Oil And Gas Offerings

The SEC is taking notice of private oil and gas offerings and has increased its scrutiny of these deals. They have noted the recent increase in fraud cases for these deals at the federal and state levels. Thus, the SEC has released an Investor Alert for Private Oil and Gas Offerings. And the first thing they recommend to investors approached to invest?

“Is the person recommending the investment registered? Most people offering you securities must be registered as a broker with the SEC and must be a member of the Financial Industry Regulatory Authority, or FINRA.”

The SEC cautions that being registered is not a seal of approval and that there may be conflicts of interest between the broker-dealer and the issuer.

In a general alert regarding the oil and gas industry, it is not surprising to find the SEC focused on the broker-dealer issue. Many advisors (including this writer) have been approached to sign off on an offering sales arrangement without a licensed broker-dealer with the explanation that:

  • “I do this all the time and it has never been a problem.”
  • “I am not acting as a broker-dealer, just a consultant who gets paid when the investment closes.”

Unfortunately for the would-be commission-eers, the SEC and state securities authorities do not share that analysis.

As the SEC said in the alert:

“If someone who is not registered solicits your investment, that person may be violating the law. One exception from broker registration is available to employees of the company offering the securities and who engage in strictly limited sales activities. If you aren’t consulting a registered broker or adviser, you should consider doing so. A registered broker or adviser that is familiar with the oil and gas industry and not connected to the offering can help you analyze the investment. Most importantly, working with a registered broker or investment adviser affords you certain legal protections.”

The SEC then illustrated benefits of using a licensed professional to assist in the investment decision:

Keep in mind that if the investment opportunity is an outright fraud, the written materials may look legitimate and every question you have about the opportunity may be answered to your satisfaction, but that doesn’t make any of it true. It is important to conduct your own independent research. One good way to do that may be to engage an investment professional specializing in oil and gas.”

It should be instructive to practitioners that in the course of a general industry investor alert, the SEC chose to highlight the risks of dealing with unlicensed broker-dealers. They are still clearly focused on this issue. Although some bad actors promote these deals, hoping to stay under the radar is a bad strategy for the promoter, issuer and investor.

Google Buys Waze, Among Biggest Startup Exits Of The Year

Deal demonstrates need for growth in mobile applications.

Waze, a community-based traffic and navigation app whose users share real-time traffic and road info, announced it was being acquired by Google.

Google confirmed the acquisition and noted that the Waze team will remain in Israel and operate separately for now.

The purchase price was reportedly in excess of $1 billion, rivaling Yahoo!’s purchase of Tumblr for mega-deals for private tech companies this year.  Deal terms were not announced, but a even a cash deal would not be a problem for Google as it had over $15 billion in cash at March 31, 2013.

Waze has been the subject of acquisition rumors for months, with many of tech’s biggest names as purported acquirors, including Apple and Facebook.  This deal demonstrates again that while “social” is okay for a business strategy, it is “mobile” that is driving growth.

 

While Feds Increase Insider Trading Enforcement, Other Feds Increase Insider Trading Activity, Part 2

In this previous post, I discussed the federal government’s newly aggressive enforcement of insider trading laws while federal government employees seemed to be providing tips to investors about pending government decisions that impact share prices of health care companies.  In the corporate world, this is known as “tipping” material non-public information and has severe consequences.  In the government world, “Congress and the executive branch — along with the reporters and lobbyists who track them — are accustomed to a relatively unfettered exchange of information, compared with the more regulated environment on Wall Street.”

This reminded me that in April 2013, Congress passed a bill striking down a key provision of the federal law prohibiting insider trading by members of Congress and their staff and high-level executive branch employees.  It is amazing that this was not the law until 2012.  However, the STOCK Act provided that securities transactions would be reported within 45 days and filed electronically so people could actually see it.

Congress voted to kill the broad disclosure provisions without hearings or public notice due to laughable national security and personal safety concerns.  According to a report on the matter:

“Virtually all the cybersecurity, national security, and law enforcement experts interviewed during this study noted that making this information available in this fashion fundamentally transforms the ability (and the likelihood) of others — individuals, organizations, nation-states — to exploit that information for criminal, intelligence, and other purposes.”

In addition, several groups representing the interests of federal employees have criticized the law.

Let us not forget that directors, officers and holders of 10% or more of a public company must disclose transactions in that company’s stock:

  1. Publicly on EDGAR, and
  2. Within 2 business days of the transaction.

I guess those people don’t have the same security concerns as federal employees.

60 Minutes confronts John Boehner generally about insider trading rules for federal employees (at 2:08) and Nancy Pelosi specifically about her participation in the Visa IPO (at 3:00 and Pelosi’s hilarious response at 3:15).