OCTOBER 2011 NUMBER TWOSEC NEWS

© 2011 Blank Rome LLP. Notice: The purpose of this newsletter is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This newsletter should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel. Additional information on Blank Rome may be found on our website www.BlankRome.com.

CONTENTS

SEC NEWS

SEC Grants No-Action Relief for ............................. 1Twitter’s RSU Program

SEC Staff Provides Guidance on............................. 2Reverse Merger Form 8-K Disclosures

SEC Institutes Proceedings to ................................. 3Determine Whether to Disapprove ofNASDAQ’s Proposed Rule Regardingthe Listing of a Company Conductinga Reverse Merger with a Public Shell

PRACTICE TIPS

Is Your Company’s Form of .................................... 2Confi dentiality Agreement Up to Date?

Cybersecurity Risk Disclosure ................................. 3

EXECUTIVE COMPENSATIONAND CORPORATE GOVERNANCE

Say-on-Pay Lawsuit Survived a Motion ................ 4to Dismiss

ISS’ Proposed Changes to ....................................... 4Proxy Voting Policies

Advice for Audit Committee Members ................ 5

INVESTMENT ADVISER REGULATION

SEC Provides No-Action Relief from ..................... 5Pay-to-Play Recordkeeping Rule to Advisersto Registered Investment Companies

SEC COMMENT LETTER TRENDS

SEC Focuses on Loss Contingency ........................ 6Disclosures

LEGISLATIVE CORNER

Proposed Bills Would Ease Regulatory ................ 7Burdens

(continued on page 2)

The SEC’s Division of Corporation Finance recently granted no-action relief to Twitter for its restricted stock unit, or RSU, program allowing the company to issue RSUs to its employees, offi cers and directors without registering the RSUs under Section 12(g) of the Securities Exchange Act of 1934, as amended (Exchange Act).1 Although it does not break new ground (the SEC issued a similar no-action letter for Facebook in 2008),2 it serves as a reminder that private companies with RSU programs should carefully structure their programs to come within the Twitter and Facebook fact patterns and should consider applying for no-action relief to avoid registration and reporting require-ments that would otherwise result under the Exchange Act.

Generally, Section 12(g) of the Exchange Act and Rule 12(g)(1) promulgated thereunder require every issuer with total assets of more than $10 million and a class of equity securities held of record by 500 or more persons to register that class of equity securities under the Exchange Act. Without the requested relief, Twitter was concerned that it would become subject to the registration and reporting requirements of the Exchange Act when it reached 500 or more record holders of its RSUs.3

The SEC granted the no-action relief on the following facts presented:• the recipients of the RSUs were limited to employees, directors and consultants;• recipients paid no consideration for the RSUs, other than continued employment or services, or

for the shares issuable under the RSUs; • RSUs were not transferable, except upon death, and could not be pledged or shorted;• the shares of common stock subject to the RSUs were not issuable until either a change in

control of the company or the company’s IPO, and absent either, the RSUs would expire 10 years after the date of grant;

• the conversion of the RSUs into shares of common stock was automatic upon one of the events described above and, accordingly, holders were not required to make any investment decisions with respect to the RSUs;

• RSUs did not confer upon the holder any voting, dividend, liquidation or other rights of share-holders;

• there was no forfeiture of the RSU’s upon termination of employment (although further vesting would cease);

SEC Grants No-Action Relief for Twitter’s RSU Program

BLANK ROME LLP 2 • UP TO DATE OCTOBER 2011 NUMBER TWO

PRACTICE TIPSSEC NEWS (continued)

Is Your Company’s Formof Confi dentiality AgreementUp to Date?

When drafting confi dentiality agreements, often the focus is on protecting confi dential or proprietary information from disclosure so that it does not become known to com-petitors and is not used by the recipient to the commercial disadvantage of the dis-closing party. However, care should also be taken to draft confi dentiality agreements that also preclude the recipient from trading in securities on the basis of the confi dential information provided.

While the law is not entirely settled,5 in order to preclude not only a recipient’s disclo-sure of confi dential information, but also a recipient’s trading in securities on the basis of confi dential information, confi dentiality agreements should specifi cally limit the use of the confi dential information to certain defi ned purposes (such as evaluating a pos-sible transaction) and specifi cally preclude the trading of securities on the basis of any confi dential information. Simply requiring the recipient to keep the information confi den-tial may not be suffi cient. The addition of a specifi c clause whereby the recipient agrees to not trade on the basis of the disclosed confi dential information should serve as not only a reminder that the information being disclosed may constitute material nonpublic information, but also as deterrent to misuse. Furthermore, having a clear provision in the confi dentiality agreement prohibiting trading on the basis of the confi dential information will provide the disclosing party a contrac-tual right of action against the recipient in the event of misuse of the confi dential infor-mation for securities trading. This contractual claim would be separate and apart from any securities law claim that may be brought.

SEC Grants No-Action Relief (continued from page 1)

SEC Staff Provides Guidance on Reverse Merger Form 8-K Disclosures

The SEC’s Division of Corporation Finance recently issued “CF Disclosure Guidance: Topic No. 1” summarizing the Division’s frequent comments on Form 8-K reports fi led by shell companies (i.e.a SEC registered reporting company that has no or nominal operations and assets (excluding cash and cash equivalents)) to report reverse mergers and similar transactions by which they cease to be shell companies.4

Generally, in a “reverse merger,” a shell company acquires a private operating company, with the result that the operating company becomes a public company. The combined company is required to fi le a Form 8-K report, sometimes referred to as a “Super 8-K,” within four business days after completion of the acquisition. The Form 8-K is required to provide the same information that would be required in a Form 10—in other words, the kind of fulsome disclosure that would be required if the operating company was fi ling a Form S-1 registration statement.

Frequent comments of the SEC include:• The need for three years of audited fi nancial statements of the operating company (two years if

the combined company is a smaller reporting company) and unaudited fi nancial statements for the most recently completed quarter as well as pro forma fi nancial statements of the combined companies;

• Enhancing disclosure about the post-transaction business of the combined company;• Tailoring individual risk factors to the combined company’s specifi c facts and circumstances;• Identifying in Management’s Discussion and Analysis of Financial Condition and Results of

Operations (MD&A) any signifi cant elements of historical income or loss that will not continue post-closing;

• Increasing disclosure about new directors and offi cers of the combined companies, including the specifi c experiences, qualifi cations, attributes and skills that led to their selection, part-time status, if applicable, and details of any formal agreements under which they allocate their time, and any involvement in certain legal proceedings during the last 10 years;

• Enhancing disclosure about compensation awards, practices and policies, including post-closing compensation arrangements for executive offi cers and directors and the material terms of any employment agreements. In addition, a summary compensation table must be provided for the shell company for the appropriate period of time and for the acquired company’s most recently completed fi scal year;

• Providing related party transaction disclosures for the last three completed fi scal years and the current fi scal year;

• Describing the standards used to determine whether directors are independent; and • Disclosure about recent sales of unregistered securities.

These SEC comments serve as a useful reminder of key points to be covered in a “Super 8-K.”

• the company agreed to provide holders the same type of information and at the same fre-quency required for option plans exempt from Section 12(g) registration under Rule 12h-1(f)(1)(vi) (generally, information about risks of the investment and fi nancial statements); and

• there was no trading market for the RSUs.

As is normal for no-action letters, the SEC limited the relief to the facts presented. We recommend that any private company with a RSU program that would like to avoid Exchange Act registration and reporting if the number of its RSU holders reaches 500 or more tailor its program to fi t within the facts of Twitter and Facebook letters as closely as possible and request no-action relief from the SEC.

BLANK ROME LLP 3 • UP TO DATE OCTOBER 2011 NUMBER TWO

PRACTICE TIPS (continued)

Cybersecurity Risk Disclosure

The SEC issued guidance reminding com -panies to review their disclosure and adequately address risks in documents fi led with the SEC relating to cybersecurity.7

The SEC noted that cyber attacks could cause a company to incur substantial costsand cause negative consequences to thecom pany, which may include, but are not limited to:

• Remediation costs; • Increased cybersecurity protection costs; • Lost revenues; • Litigation; and • Reputational damage.

Disclosures that a company may need to make, which the SEC notes in the guidance, include, but are not limited to, the following:

• Discussion of the company’s business or operations that give rise to mate-rial cybersecurity risks and the potential costs and consequences;

• To the extent the company outsources functions that have material cybersecurity risks, description of those functions and how the registrant addresses those risks;

• Description of cyber incidents experi enced by the company that are individ ually, or in the aggregate, material, including a description of the costs and other con-sequences;

• Risks related to cyber incidents that may remain undetected for an extend-ed period; and

• Description of relevant insurance coverage.

Although, the cybersecurity guidance doesn’t create new disclosure standards, a company should consider its risks relating to cyber-security and review and revise disclosure, as necessary, in the documents it fi les with the SEC, including disclosure contained in the following sections: business, risk factors, MD&A, fi nancial statement notes, disclosure controls and procedures.

SEC NEWS (continued)

The NASDAQ Stock Market LLC (NASDAQ), the New York Stock Exchange LLC (NYSE) and NYSE Amex LLC (NYSE Amex) each submit-ted proposed rules for approval from the SEC that would make it more diffi cult for a reverse merger company6 to list its securities on their respective exchange. NASDAQ’s proposed rule, however, differs materially from the NYSE and NYSE AMEX proposed rules. As a result of these material differences, the SEC has instituted pro-ceedings to determine whether the NASDAQ proposed rule should be disapproved.

The exchanges proposed rules generally pro-vide that a reverse merger company would not be eligible for listing unless the combined entity had, immediately preceding the fi ling of the initial listing application, complied with the following:

• Seasoning Period—With respect to the NYSE and NYSE Amex proposed rules, fol-lowing the consummation of the reverse merger, the security must be traded for at least one year in the U.S. over-the-coun-ter market, on another national securities exchange or on a regulated foreign exchange and, in the case of a domestic issuer, the issuer must have fi led with the SEC a Form 8-K including all of the information that would be required in a Form 10, including all required audited fi nancial statements, or, in the case of a foreign private issuer,fi led com parable information on Form 20-F. With respect to the NASDAQ proposed rule, the security must be traded for at least six months in the U.S. over-the-counter market,

on another national securities exchange, or on a foreign exchange, following the fi ling with the SEC or other regulatory authority of all required information about the transac-tion, including audited fi nancial statements for the combined entity.

• Minimum Stock Price—Under the NYSE proposed rule, the security must on both an absolute and an average basis for a sustained period maintain a minimum stock price of at least $4. Under the NYSE Amex proposed rule, the security must on both an absolute and an average basis maintain for a sustained period a minimum closing stock price equal to the stock price requirement applicable to the initial listing standard under which the reverse merger company was qualifying to list. Under the NASDAQ proposed rule, the security must have a bid price of $4 per share or higher on at least 30 of the most recent 60 trading days.

• Timely fi le certain information—Under the NYSE and NYSE Amex proposed rules, all required reports since the consumma-tion of the reverse merger, including the fi ling of at least one annual report con-taining audited fi nancial statements for a full fi scal year, must be fi led. Under the NASDAQ proposed rule, the timely fi ling in the case of a domestic issuer, of its most recent two required periodic fi nancial re-ports with the SEC or other regulatory authority (Forms 10-Q or 10-K) containing

SEC Institutes Proceedings to Determine Whether to Disapproveof NASDAQ’s Proposed Rule Regarding the Listing of a CompanyConducting a Reverse Merger with a Public Shell

(continued on page 4)

BLANK ROME LLP 4 • UP TO DATE OCTOBER 2011 NUMBER TWO

SEC NEWS (continued) EXECUTIVE COMPENSATION AND CORPORATE GOVERNANCE

at least six months of information about the combined entity, or, in the case of a for-eign private issuer, comparable information on Forms 6-K, 20-F or 40-F is required tobe fi led.

Even if the foregoing criteria are met, an exchange could still decide not to list a reverse merger company’s securities. Under the pro posed rules, the exchanges will conduct risk-informed reviews of reverse merger companies seeking to list on the exchange using broad discretion on a case-by-case basis.

The NYSE and NYSE Amex proposed rules exempt from the proposed rules reverse merger companies that have conducted certain under-written offerings.

The NYSE, NYSE Amex and NASDAQ pro-posed rules also exempt companies formed by reverse mergers with special purpose acquisi-tion companies.

In deciding to institute the proceedings to determine whether the NASDAQ proposed rule should be disapproved, the SEC noted that the NASDAQ proposed rule should be consid-ered together with the NYSE and NYSE Amex proposed rules “to assure that the exchanges develop and implement consistent and effec-tive enhancements to their listing standards….”8 The SEC further noted three material differences between the NYSE and NYSE Amex proposed rules and the NASDAQ proposed rule changes. They are: (1) the NYSE and NYSE Amex pro-posed rules require a one year seasoning period while the NASDAQ proposed rule requires a six-month seasoning period; (2) the NYSE and NYSE Amex proposed rules provide for a more general requirement to maintain the minimum listing price for a “sustained period” rather than on at least a 30 of the 60 trading days prior to fi ling the listing approval as provided for in the NASDAQ proposed rule; and (3) the NYSE and NYSE Amex proposed rules provide for an exemption for reverse merger companies that list in connection with certain underwritten pub-lic offerings.

SEC Institutes Proceedings (continued from page 3)

Pursuant to the Dodd-Frank Act, public com-panies are required to seek a non-binding shareholder vote approving the company’s executive compensation at least every three years. While the say-on-pay vote is non-bind-ing, shareholders have fi led lawsuits against a number of companies as a result of a negative say-on-pay vote. In late September, the United States District Court for the Southern District of Ohio refused to grant a motion to dismiss and allowed a lawsuit over a company’s negative say-on-pay vote to proceed.9

In May 2011, Cincinnati Bell’s say-on-pay vote failed. Thereafter, a shareholder fi led a lawsuit alleging that the company’s board breached its duty of loyalty when it approved large pay raises and bonuses to its executives in a year that the company performed poorly. Cincinnati Bell’s offi cers and directors moved to dismiss the lawsuit, arguing, in part, that the board’s ac-tions with respect to executive compensation were protected by the business judgment rule. In refusing to grant the motion to dismiss, Judge Black found that whether the defendants would be entitled to rely on the business judgment rule was a question of fact for trial and cited the plaintiff’s assertion “that the negative shareholder advisory vote on executive compensation… provides direct and probative evidence that the 2010 executive compensation was not in the best interests of the Cincinnati Bell shareholders.”

In contrast to early predictions that say-on-play lawsuits would be seen as frivolous, the Ohio court’s refusal to grant the motion to dismiss in the Cincinnati Bell case makes it likely that we will see more lawsuits as a result of failed say-on-pay votes. Therefore, in an effort to avoid a negative say-on-pay vote, it is important that companies carefully prepare the executive com-pensation disclosure in their proxy statement, including their description of the company’s compensation policies and the board’s actions related to executive compensation.

Say-on-Pay Lawsuit Surviveda Motion to Dismiss

ISS’ Proposed Changes to Proxy Voting Policies

As part of its 2012 policy formulation process, ISS announced the opening of an annual com-ment period for 2012 proxy voting policies.10 The following is a summary of certain issues on which ISS is seeking comment:

Pay-for-Performance. ISS suggested a new meth-odology to identify pay-for-performance alignment over a sustained period, which includes a quantita-tive pay-for-performance analysis based on peer and absolute (over a fi ve-year period) alignment and, under some circumstances, qualitative re-view of pay-for-performance compensation.11 If the peer and absolute alignment appears to be weak, ISS suggested further qualitative review to consider factors that include, but are not limited to the following:

• the ratio of performance to time-based equity awards;

• the overall ratio of performance-based compensation;

• the robustness of disclosure and rigor of performance goals;

• actual results of fi nancial/operational metrics, such as growth in revenue, profi t, cash fl ow, etc., both absolute and relative to peers; and

• special circumstances related to, for example, a new CEO in the prior fi scal year or equity grant practices (e.g., biannual awards).

Say-on-Pay Proposal. ISS issued a policy update that clarifi es that ISS will issue recommenda-tions on a case-by-case basis on compensation committee members and the say-on-pay pro-posal if votes on the company’s prior say-on-pay proposal refl ected signifi cant opposition.12 Moreover, the recurrence of previously identi-fi ed compensation issues or newly identifi ed compensation concerns may result in a recom-mendation of an against vote on the say-on-pay proposal and the compensation committee members. In addition, ISS suggested that when a signifi cant number of shareholders oppose the management’s say-on-pay proposal, the company should include disclosure of its out-reach efforts to major institutional investors as

(continued on page 5)

BLANK ROME LLP 5 • UP TO DATE OCTOBER 2011 NUMBER TWO

ISS’ Proposed Changes (continued from page 4)

EXECUTIVE COMPENSATION ANDCORPORATE GOVERNANCE (continued)

At the 2011 annual meeting of the Asso-ciation of Audit Committee Members,14 Daniel Goelzer, Esquire, a founding member of the Public Company Accounting Oversight Board (PCAOB), a former acting PCAOB chair and cur-rently a PCAOB board member, spoke on: “What Audit Committees Should Know about the Work of the PCAOB.”15 In the speech, Mr. Goelzer dis-cussed three recent PCAOB initiatives designed to strengthen the audit. The initiatives include:

• mandatory rotation of audit fi rms;• increasing the information provided in

auditor’s report to include: – an auditor’s discussion and analysis; – emphasis paragraphs; – auditor assurance on information outside

the fi nancial statements, such as MD&A, earnings announcements, or non-GAAP information in company releases; and/or

– clarifi cation of language used in a stan-dard auditor’s report; and

Advice for Audit Committee Members

INVESTMENTADVISER REGULATION

SEC Provides No-Action Relieffrom Pay-to-Play RecordkeepingRule to Advisers to RegisteredInvestment Companies

The Staff of the SEC recently granted no- action relief to the Investment Company Institute (ICI) concerning certain recordkeeping requirements related to the SEC’s “pay-to-play” rules.16 Gen-erally, the SEC’s pay-to-play rules prohibit an investment adviser from providing advisory services for compensation to a government entity within two years after the adviser, or cer-tain of its employees or third-party solicitors, makes a contribution to certain candidates or elected offi cials.17 In connection with adopt-ing the pay-to-play rules, the SEC also adopted Rule 204-2(a)(18)(i)(B) under the Investment Advisers Act of 1940, as amended, which gen-erally requires registered investment advisers to maintain a list of all government entities to which the adviser has provided advisory services, or which are or were investors in any covered investment pool18 to which the investment adviser provides or has provided investment advisory services in the past fi ve years (but not prior to September 13, 2010).

In its no-action request, ICI explained to the Staff of the SEC that a government entity may hold shares in a registered investment company (an investment company registered under the Investment Company Act of 1940, as amend-ed (Investment Company Act)) through one or more omnibus accounts in such a way that such government entity is wholly unknown to the adviser of such registered investment com-pany. Further, the ICI stated that “[t]his lack of transparency is impeding the ability of . . . advisers to comply” with the new recordkeeping require-ments with respect to such accounts. To address this concern, the Staff of the SEC agreed not to bring enforcement actions against advisers to registered investment companies who make and keep a list or other record that includes:

(continued on page 6)

well as concrete actions that it has taken or will take to address the compensation issues that resulted in signifi cant opposition votes.

Say-on-Pay Frequency Proposal. ISS proposed to withhold votes or vote against all incumbent director nominees if the board implements an ad-visory vote on executive compensation on a less frequent basis than the frequency which received the majority of votes cast at the shareholders’ meeting and to vote on case-by-case basis if the board implements an advisory vote on executive compensation on a less frequent basis than the

frequency which received a plurality, but not ma-jority, of votes cast at the shareholders’ meeting.13

Although the foregoing policies are subject to the comment period, which closes on November 7, 2011, they identify issues that ISS will focus on in making voting recommendation to its clients during the 2012 proxy season. ISS expects to release fi nal policy updates for clients in November 2011 and issue the updated Global Policy Summary and Concise Guidelines in December 2011.

• increasing transparency by having the engage ment partner sign the report in her or his own name and having the principal audit fi rm disclose the names of all other fi rms that participated in the audit.

Mr. Goelzer noted that the proposals are con-troversial and suggested that audit committee members review the proposals and provide comments to the PCAOB.

Mr. Goelzer also suggested that, with respect to the periodic inspection of audit fi rms by the PCAOB, the audit committee should ask their auditors the following questions:

• Is the PCAOB reviewing our engagement as part of its inspection of your fi rm?

• Did the PCAOB identify issues with our au-dit in your inspection report?

• If the PCAOB did fi nd a problem with our audit, what was your fi rm’s response?

• Did the PCAOB identify any issues with your fi rm’s quality controls that could affect our audit?

Mr. Goelzer emphasized that PCAOB inspections can assist audit committees in their oversight and evaluation of the auditor—provided that they ask the right questions. As a best practice, we recommend that audit committees insert a provision in the engagement letter requiring the auditor to make these disclosures to the audit committee.

BLANK ROME LLP 6 • UP TO DATE OCTOBER 2011 NUMBER TWO

Yelena M. Barychev215.569.5737Barychev@BlankRome.com

Christin R. Cerullo 215.569.5744Cerullo@BlankRome.com

Francis E. Dehel 215.569.5532Dehel@BlankRome.com

Melissa Palat Murawsky215.569.5732Murawsky@BlankRome.com

Michael E. Plunkett 215.569.5471Plunkett@BlankRome.com

This newsletter was authored by:

www.BlankRome.com/PublicCompanies

SEC COMMENT LETTER TRENDS

At the end of 2010, the SEC made clear that reporting companies’ loss contingency disclo-sures in periodic reports would be an area of focus.19 As such, it should come as no surprise that the SEC issued numerous comment letters questioning companies’ loss contingency dis-closures during 2011. In reviewing recent SEC comment letters, two areas of focus were par-ticularly evident.

First, the SEC asked issuers to revise their loss contingency disclosures to use the specifi c terms from Accounting Standards Codifi cation (ASC) 450 (probable, reasonably possible, remote), rather than other words such as ‘possible.’ In ad-dition, when fi lers used phrases to describe the possible effect of a loss contingency, such as “material adverse,” the SEC questioned whether the phrase represented a higher threshold than “material” and requested that future “disclo-sures provide information in the context of that which is material to” the issuer’s fi nancial state-ments “rather than any variation thereof.” The clear lesson is that loss contingency disclosures should use the specifi c terms used in ASC 450 and provide information in the context of that which is “material” to an issuer’s fi nancial state-ments, without any qualifi ers.

Where an estimate of the reasonably possible loss is not provided, the SEC has generally required a statement that an estimate of the

• Each government entity that invests in a reg-istered investment company whose account can reasonably be identifi ed as being held in the name of or for the benefi t of the govern-ment entity on the records of the registered investment fund or its transfer agent;

• Each government entity whose account was identifi ed as that of a government entity—at or around the time of the initial investment—to the adviser or one of its client servicing employees, regulated per-sons or covered associates;

• Each government entity that sponsors or establishes a 529 Plan and has selected a specifi c registered investment company as an option to be offered by such 529 Plan; and

• Each government entity that has been solicited to invest in a registered investment company either (i) by a covered associate or regulated person of the adviser; or (ii) by an intermediary or affi liate of the registered investment company if a covered associ-ate, regulated person, or client servicing employee of the adviser participated in or was involved in such solicitation, regardless of whether such government entity invest-ed in the registered investment company.

It should be noted that ICI’s no-action letter only applies to advisers to entities registered under the Investment Company Act and not to all “cov-ered investment pools.” The SEC, in its no-action response, purposely “excludes a category of company that is included in the defi nition of ‘covered investment pool’ for purposes of Rule 204-2(a)(18)(i)(B), namely, any company that would be an investment company under sec-tion 3(a) of the Investment Company Act but for the exclusion provided from that defi nition by section 3(c)(1), section 3(c)(7) or section 3(c)(11) of the Investment Company Act. This category is excluded for purposes of this letter” because ICI (whose members are registered investment companies) limited its request for no-action assurance to investments in registered investment companies. It is not known whether the SEC would give similar no-action relief to registered investment advisers of unregistered 3(c)(1) and 3(c)(7) funds.

SEC Provides No-Action Relief(continued from page 5)

SEC Focuses on Loss Contingency Disclosures

loss cannot be made. Issuers should be mindful, however, that the SEC has requested additional detailed information about the issuer’s efforts to estimate the possible loss and has issued comments to the effect that the SEC would expect issuers to be able to provide an estimate at some point in the lifecycle of the claim or litigation.

Second, the SEC issued comments asking for additional explanation and/or disclosure where litigation or claims were disclosed in the body of the reviewed periodic report pursuant to Item 103 of Regulation S-K, but for which there was not corresonding disclosure in the fi nancial statements pursuant to ASC 450. As such, if the issuer discloses litigation in the body of a periodic report, but does not provide disclosures related to the same matters in the fi nancial statements, the issuer should be pre-pared to explain and defend its reasoning for not including such disclosure.

Given the SEC’s focus on loss contingency dis-closures, reporting companies should carefully review their proposed disclosures, with a par-ticular focus on using the specifi c terms used in ASC 450 and carefully considering any dif-ferences between matters disclosed pursuant to Item 103 under Regulation S-K and in the fi nancial statements.

INVESTMENTADVISER REGULATION (continued)

BLANK ROME LLP 7 • UP TO DATE OCTOBER 2011 NUMBER ONE

Blank Rome LLP is an international law fi rm representing businesses and organizations ranging from Fortune 500 companies to start-up entities. The Firm’s practices cover areas, including public companies and capital formation; business tax; commercial and corporate litigation; employ-ment, benefi ts and labor; fi nancial services; bankruptcy and business restructuring; government relations; health law; intellectual property; maritime, international trade and procurement; matri-monial; privately held and emerging companies; product liability; public fi nance; real estate; trusts and estates; and white collar, internal and government investigations. More information about the fi rm is available at www.BlankRome.com.

Boca Raton | Cincinnati | Hong Kong | Houston | Los Angeles | New YorkPhiladelphia | Princeton | Shanghai | Washington | Wilmington

Recently, two bills were introduced in Con-gress that, if enacted into law, would have a substantial impact on capital raising and signifi -cantly expand the universe of public companies that could avoid compliance with Section 404 of the Sarbanes Oxley Act of 2002 (Sarbanes-Oxley Act). The fi rst, the “Access to Capital for Job Cre-ators Act”20 would require the SEC to revise Rule 506 of the Securities Act of 1933, as amended, to eliminate the prohibition on general solicita-tion. The second, the “Startup Expansion and Investment Act” (Startup Act)21 would modify Section 404 of the Sarbanes-Oxley Act to allow companies with a market capitalization of less than $1 billion and that have been subject to the reporting requirements of the Exchange Act for fewer than ten years to opt out of the inter-nal control over fi nancial reporting assessment and auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act.

Given the manner in which the ban on general solicitation has been interpreted by the SEC,22

some relaxation of the ban in connection with

Rule 506 offerings would make it easier for companies to raise capital from investors. How-ever, many would see the elimination of the ban on general solicitation in Rule 506 offerings as tilting the balance too far in favor of capital raising to the detriment of protecting the invest-ing public.23

The second bill, the Startup Act, addresses Sec-tion 404 of the Sarbanes-Oxley Act, one of that Act’s more onerous provisions. The purported purpose of the proposed Startup Act is to allow emerging companies easier access to capital to allow for expansion and the creation of jobs.24

However, as the Dodd-Frank Act already allowed public companies with public fl oats of less than $75 million to opt out of the auditor attestation provision of Section 404, which is probably the most burdensome and costly requirement of Section 404, it is unlikely that allowing com-panies with market capitalizations of less than $1 billion the option to opt out of the auditor attestation provision of Section 404 will lead to any signifi cant uptick in initial public offerings.

Proposed Bills Would Ease Regulatory Burdens

QUESTIONS: If you have a question regarding the issues raised in this newsletter, you may obtain additional guidance from the authors and other members of our Public Companies Group.

PHILADELPHIA

Yelena Barychev 215.569.5737 • Barychev@BlankRome.com

Christin R. Cerullo 215.569.5744 • Cerullo@BlankRome.com

Frank E. Dehel 215.569.5532 • Dehel@BlankRome.com

Barry H. Genkin 215.569.5514 • Genkin@BlankRome.com

Timothy French 215.569.5394 • French-T@BlankRome.com

Alan H. Lieblich 215.569.5693 • Lieblich@BlankRome.com

Frederick D. Lipman 215.569.5518 • Lipman@BlankRome.com

John McGrory 215.569.5431 • McGrory@BlankRome.com

Richard J. McMahon 215.569.5554 • McMahon@BlankRome.com

Arthur H. Miller 215.569.5544 • AMiller@BlankRome.com

Melissa Palat Murawsky 215.569.5732 • Murawsky@BlankRome.com

Michael E. Plunkett 215.569.5471 • Plunkett@BlankRome.com

Mary Stokes 215.569.5530 • Stokes@BlankRome.com

Josh Strober 215.569.5491 • Strober@BlankRome.com

Larry R. Wiseman 215.569.5549 • Wiseman@blankrome.com

NEW YORK

Kathleen A. Cunningham 212.885.5175 • KCunningham@BlankRome.com

Richard DiStefano 212.885.5372 • RDistefano@BlankRome.com

Pamela E. Flaherty 212.885.5174 • PFlaherty@BlankRome.com

Eliezer M. Helfgott 212.885.5431 • EHelfgott@BlankRome.com

Eric Mendelson 212.885.5159 • EMendelson@BlankRome.com

Robert J. Mittman 212.885.5555 • RMittman@BlankRome.com

Brad L. Shiffman 212.885.5442 • BShiffman@BlankRome.com

Jeffrey N. Siegel 212.885.5173 • JSiegel@BlankRome.com

Kristina Trauger 212.885.5339 • KTrauger@BlankRome.com

Thomas R. Westle 212.885.5239 • TWestle@BlankRome.com

Huan Xiong 212.885.5130 • HXiong@BlankRome.com

WASHINGTON, D.C.

Dawn M. Bernd-Schulz 202.772.5946 • DBernd.Schulz@BlankRome.com

Keith E. Gottfried 202.772.5887 • Gottfried@BlankRome.com

Edward L. Lublin 202.772.5933 • Lublin@BlankRome.com

LOS ANGELES

Dennis P. Codon 424.239.3441 • Codon@BlankRome.com

SHANGHAI

Scott C. Klein +86.21.2089.3203 • SKlein@BlankRome.com

Jeffrey A. Rinde +86.21.2089.3206 • JRinde@BlankRome.com

LEGISLATIVE CORNER

BLANK ROME LLP 8 • UP TO DATE OCTOBER 2011 NUMBER TWO

ENDNOTES

1. Twitter, Inc. No-Action Letter (September 13, 2011), available at http://sec.gov/divisions/corpfi n/cf-noaction/2011/twitter091311-12gh.htm.

2. Facebook, Inc. No-Action Letter (October 14, 2008), available at http://www.sec.gov/divisions/corpfi n/cf-noaction/2008/facebook101408-12gh.htm.

3. Rule 12h-1(f) provides an exemption for compensatory stock options issued to directors, offi cer and employees by private companies satisfying the requirements of the exemption, including restrictions on ownership and transfer and informational re-quirements, and Rule 12h-1(g) provides an exemption for compensatory stock options issued to directors, offi cer and employees of public companies; however, the exemptions by their terms do not apply to RSUs.

4. CF Disclosure Guidance: Topic No. 1, “Staff Observations in the Review of Forms 8-K Filed to Report Reverse Mergers and Similar Transactions,” Division of Corporation Finance, Securities and Exchange Commis-sion (September 14, 2011), available at http://sec.gov/divisions/corpfi n/guidance/cfguidance-topic1.htm

5. Compare 17 C.F.R.§240.10b-5-2(b)(1) (duty of trust or confi dence suffi cient to give rise to insider trading exists whenever a person agrees to maintain information in confi dence), with SEC v. Cuban, 634 F. Supp. 2nd 713 (N.D. Tex. 2009) (agree-ment to keep information confi dential without an agreement to not trade on or otherwise use the confi dential information insuffi cient to give rise to insider trading violation); vacated and remanded, 620 F.3d 551 (5th Cir. Tex. 2010). While the Circuit Court vacated the District Court decision, it did not rule on whether a mere agreement to keep information confi dential, without more, could give rise to insider trading liability.

6. A reverse merger company, in this context, is a company which results from a public shell company merging with a private operating company in a transaction in which the shell company is the surviving legal entity.

7. CF Disclosure Guidance: Topic No. 2, “Cybersecurity,” Division of Corporation Finance, Securities and Exchange Com-mission (October 13, 2011), available at http://www.sec.gov/divisions/corpfi n/guid-ance/cfguidance-topic2.htm.

8. SEC Release No. 34-65319, Order Institut-ing Proceedings to Determine Whether to Disapprove Proposed Rule Change to Adopt Additional Listing Requirements for Reverse Mergers (September 12, 2011).

9. NECA-IBEW Pension Fund v. Cox, No. 1:11-cv-451 (S.D. Ohio Sept. 20, 2011), available at http://www.fedseclaw.com/uploads/fi le/CINCINNATI%20BELL%202011%209%2020%20Opinion%20Deny-ing%20Motion%20to%20Dismiss.pdf.

10. 2012 Draft Policies for Comment, avail-able at http://www.issgovernance.com/policy/2012comment (Oct. 18, 2011).

11. Evaluation of Executive Pay (Management Say-on-Pay) (US*), available at http://www.issgovernance.com/policy/2012comment/MSOP.

12. Board Response to Management Say-on-Pay Vote (U.S.), available at http://www.issgovernance.com/policy/2012comment/BoardMSOP.

13. Board Response to Management Say-on-Pay Frequency Vote (U.S.), available at http://www.issgovernance.com/policy/2012comment/BoardMSOPFreq.

14. The Association of Audit Committee Mem-bers is a non-profi t organization formed to assist audit committee members in meeting the challenges imposed in today’s regulatory environment through an organization inde-pendent of the public companies they serve, independent of any accounting fi rms, and controlled predominately by chairpersons of audit committees. For more information, go to http://www.aacmi.org.

15. The speech is available on the PCAOB web-site at http://pcaobus.org/News/Speech/Pages/10042011_GoelzerAACMMeeting.aspx.

16. Investment Company Institute No-Action Letter (September 12, 2011), available at

http://www.sec.gov/divisions/investment/noaction/2011/ici091211-204.htm.

17. Political Contributions by Certain Investment Advisers, SEC Release No. IA-3043 (July 1, 2010) available at http://www.sec.gov/rules/fi nal/2010/ia-3043.pdf.

18. “Covered investment pool” means: (i) an investment company registered under the Investment Company Act of 1940 that is an investment option of a plan or program of a government entity; or (ii) any company that would be an investment company under the Investment Company Act of 1940, but for the exclusion provided from that defi nition by either section 3(c)(1), section 3(c)(7) or section 3(c)(11) of that Act.

19. Current Developments in the Division of Corporation Finance, presented at the National Conference on Current SEC and PCAOB Developments, December 7, 2010, slides 64-66, www.sec.gov/news/speech/2010/spch120710wc.pdf.

20. H.R. 2940, 112th Congress, available at http://thomas.loc.gov/cgi-bin/query/z?c112:h2940:#.

21. H.R. 2941, 112th Congress, available at http://thomas.loc.gov/cgi-bin/query/z?c112:h2941:#.

22. The SEC has generally interpreted the ban on general solicitation to require that the issuer, or a person acting on behalf of the issuer, have a preexisting business or other substantive relationship with the persons to whom an offer of securities is directed. See, e.g., Securities Act Release No. 33-6455, Section II. C. (March 3,1983).

23. Testimony of Heath Abshure, Chairman of the Corporation Finance Section Com-mittee of the North American Securities Administrators Association, Inc. before the House Subcommittee on Capital Markets and Government Sponsored Enterprises, available at http://www.nasaa.org/5941/legislative-proposals-to-facilitate-small-busi-ness-capital-formation-and-job-creation/.

24. Representative Quayle’s press re-lease, September 15, 2011, available at http://quayle.house.gov/index.cfm?sectionid=49&itemid=242.