The reason is simple: the public knows nothing about this private company. The Commission has commonly limited requirements to material and related items, but that is not because of a legal limit on its authority, but as a subsidiary choice of how to implement Congresss policy judgment to require full and fair disclosure, based on its experience and expertise. Circuit concluded in 1979 that based on the record before it at that time, the Commission was not required to adopt environmental disclosure obligations beyond what it had already adopted, the Court also concluded that it was authorized to and could do so, if the Commission itself came to an expert judgment that doing so was in service of its statutory missions of protecting investors and promoting the public interest. . The subject of a disclosure is new, when the nature of business and investment is dynamic. See also Rodriguez v. Gigamon Inc., 325 F. Supp. Although the rule is more limited than what an impact advocate would want, it is in one important way broader than anything EPA has adopted or is likely to have to power to implement: its geographic reach. Evidence regarding the clear and present financial materiality of transition risk is discussed below. All Rights Reserved. By contrast, the focus of traditional environmental regulationincluding EPA reporting rulesis solely the reversethe impact of companies on climate change. At the time, companies were thought by some to be reluctant to provide forward-looking information at least in part due to the prevalence of so-called strike suits which, irrespective of the merits of the claim, were usually less costly to settle than to fight in court. And now, according to Reuters , Acting Corp Fin Director John Coates remarked during a conference on climate finance that the SEC "'should help lead' the creation of a disclosure system for environmental, social and governance (ESG) issues for corporations." But how to craft the new rules? Congress designed the safe harbor generally to permit and even encourage reporting companies to disclose information about future plans and prospects. In other words, public companies disclosures were expected to go beyond basic financial statements. Those involved should be accountable to relevant constituencies, including investors and companies. He joined his billionaire sister and co-CEO, Denise, in 2001 to launch Bet365 after she . Coates, Lindsey. Nor did Congress trim back the Commissions authority whenafter the Commission published climate-related disclosure guidance in February 2010Congress adopted the Dodd-Frank Act four months later, with numerous additions (not subtractions) to the Commissions disclosure authorities. Instead of the resulting input showing the idea would be a bad one, or not reasonably designed to protect investors, the request generated substantial evidence that climate-related disclosures would be valued by investors. No offers may be made or accepted from any resident outside the specific states referenced. Starting with the costs, critics of ESG disclosure requirements often point to the costs associated with preparing the disclosures. It does not say, for example, annual financial reports, but simply annual reports. As with the 1933 Act, the authority is not unboundedit is limited by the phrase appropriate for the proper protection of investors, with the gloss that the rules also be appropriate to insure fair dealing in the security, a reflection of the fact that the 1934 Act was designed to govern securities that were already trading on securities markets. However, it is also commonly understood that it is the de-SPAC and not the initial offering by the SPAC that is the transaction in which a private operating company itself goes public, i.e., engages in its initial public offering. The financial disclosure that John Coates filed also offered a rare public peek into the costs of corporate compliance monitors. The Securities and Exchange Commission today announced that Renee Jones has been appointed Director of the Division of Corporation Finance. P.C. Rather, as long as the Commission considers that question in good faith and follows appropriate process, Congress has directed that the Commission make that decision, not the courts. John Coates has conceded the Australian Olympic Committee's (AOC) brand has been damaged by a bitter presidency campaign in which he emerged victorious. A topic of a disclosure is political, or controversial, or is not uncontroversially for investor protection, any of which would only invite interest groups to politicize a topic in the hopes of later arguing it should be off limits for the Commission to address. As background, noted in the proposing release, the Commission published a request for comment a year earlieron March 15, 2021so that its current process has already gone beyond the requirements of administrative law. John Jenkins, SPACs: Is the PSLRA Safe Harbor Driving the Boom?, Deal Lawyers.com (Feb. 3, 2021); Bruce A. Ericson, Ari M. Berman and Stephen B. Amdur, The SPAC Explosion: Beware the Litigation and Enforcement Risk, Harv. Contact Us| [1],[2] Shareholder advocates as well as business journalists and legal and banking practitioners, and even SPAC enthusiasts themselves[3] are sounding alarms about the surge. Congressional support for the Commissions clear (but statutorily limited) disclosure authority is shown by the fact that over time, in the face of repeated Congressional amendments and annual budget laws (in which Congress can and has inserted riders further limiting Commission discretion), the Commissions requirements ranged far beyond the limited lists of information in the 1933 and 1934 Acts themselves. These include (for example) asbestos and other sources of tort liability, contract and other kinds of commercial litigation, and cybersecurity and other kinds of technology risks. Another finds that climate risks are reflected (but imperfectly) in out-of-the-money put option prices. 51283 (Mar. But as some critics do ignore the plain language of the statute, it should be emphasized that they find no more support for the notion that the Commission lacks authority in the legislative history, or in generations of legislative, executive, and judicial understanding of the statutes meaning. They believe climate change is not primarily caused by human activity. Rather, they are faced with numerous, conflicting and frequently redundant requests for different information about the same topics. 25, 2021); Jennifer Bennett, Canoo Faces Investor Suits Over Post-SPAC Deal Focus Changes, Bloomberg Law (Apr. Coates was re-elected president at the AOC's annual general meeting in Sydney on Saturday morning, seeing off the challenge of hockey gold medallist Danni Roche by winning the vote count 58-35. Facebook gives people the power to. In addition to being limited and calibrated to U.S. public companies, the rule does not require disclosure related to non-investor impacts. If the SPAC fails to find and acquire a target within a period of two years, the promote is forfeited and the SPAC liquidates. We can and should continue to adapt existing rules and standards to the realities of climate risk, for example, and the fact that investors increasingly are asking for ESG information to help them make informed investment and voting decisions. For example, they point to the broader ESG movement and claim the fictional new rule requires disclosure about ESG, or about environmental impacts not relevant to investors. John C. Coates and R. Glenn Hubbard, Competition in the . The Securities and Exchange Commission won't wait long to act after the June 13 end of a public comment period on potential ESG regulations, John Coates, acting director of the SEC's Division of Corporation Finance, said Friday. Three points about this text are worth emphasizing. In this way, SPACs offer private companies an alternative pathway to go public and obtain a stock exchange listing, a broader shareholder base, status as a public company with Exchange Act registered securities, and a liquid market for its shares. [12] Given this legal landscape, SPAC sponsors and targets should already be hearing from their legal, accounting, and financial advisors that a de-SPAC transaction gives no one a free pass for material misstatements or omissions. Even if one has a strong belief in the value of the major questions doctrine as an important tool for enforcing the constitutional principle of separation of powers, there is no role for a clear statement principle when the text and context of a statute are as clear and consistent as the 1933 and 1934 Acts are. Statement of John Coates, Harvard Law School . Professor Coates served as General Counsel and as Acting Director for the Division of Corporation Finance for the SEC. The proposed rule does not call for opinion or controversial speech of the kind that raises First Amendment concerns. Those choices I do not here address. Over time, the Commission has used its authorities under the 1933 Act and the 1934 Act to specify the details of required disclosures about a range of matters, both in and outside corporate financial statements, as illustrated in detail in Annex A to this post. Third, the 1933 Act includes a specific limit to this authority, that it be for the protection of investorsbut no further qualifier. It is not a transformative surprising regulatory departure, raising such a major question as to justify interpretive methods other than those of a faithful agent of Congress. John Coates, acting director of the SEC's Division of Corporation Finance, similarly stated in a recent speech that the "SEC should help lead the creation of an effective ESG disclosure system so companies can provide investors with information they need in a cost effective manner," noting in particular the task of adapting existing rules and Few of the requirements in Annex A directly involved current or even near-term financial cash flows of the kind required to be reflected in financial statements, such as reserves for contingent liabilities or non-cash commitments to invest in the future. The context for the authorizing sections of those statutes supports the Commissions authority: Canons against ineffectiveness and in favor of validity, and the general terms canon all caution against courts making up their own limits on textual authority, particularly on grounds such as: For the Commission programmatically to refuse to protect investors due to concerns about politics would itself be a political and controversial policy position. S190602 (daily ed. The U.S. Supreme Court has repeatedly and recently emphasized that the fundamental purpose of the 1934 Act [was] to substitute a philosophy of full disclosure for the philosophy of caveat emptor . On April 12, 2021, the Staff of the U.S. Securities and Exchange Commission (SEC), under the signature of Acting Director of the Division of Corporate Finance John Coates and Acting Chief Accountant Paul Munter, released the Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies Those important topics remain for Congress, and the proposal on its own does not raise new major questions warranting a deviation from standard statutory interpretation. It means thoughtful engagement by trusted specialists seeking consensus among investors and companies about useful, reliable and comparable disclosures under standards flexible enough to remain relevant. Robust public disclosure has been a hallmark of effective securities regulation since the 1930s, said SEC Chair Gary Gensler. He observed first-hand the powerful emotions driving traders. The focus of those amendments, however, was the creation of national air quality standardswhat we generally call pollutionand the enforcement of those standards on a set schedule. Companies either do or do not engage in activities that result in the emission of greenhouse gases. Its greenhouse gas emission disclosure elements are aligned with the EPAs existing requirements for US emission sources, which in turn are aligned with the widely used and privately developed Greenhouse Gas Protocol, which was a joint product of companies, investors and other organizations. For example, the Commission could use the rulemaking process to reconsider and recalibrate the applicable definitions, or the staff could provide guidance explaining its views on how or if at all the PSLRA safe harbor should apply to de-SPACs. General Motors announced it plans to sell only electric passenger vehicles by 2035. Bare claims that a later-in-time-statute addressing a different agency and a different set of legislative purposes are ever viewed by courts as silently trumping earlier statutes if their content overlaps in any way, or if the later one is in some way more specific than the earlier one, are wrong as a matter of law. The resulting awareness of the need for detailed specification of disclosures led to the delegation reflected in the 1933 Act. Securities Act Rule 419 (which predated passage of the PSLRA) limits its definition of blank check company to one that issues penny stock. Most SPACs, however, avoid meeting the definition of penny stock issuer and are therefore neither a blank check company nor a penny stock issuer as those terms are defined. But forward-looking information can also be untested, speculative, misleading or even fraudulent, as reflected in the limitations on the PSLRAs liability protections, even when the safe harbor applies. Even as to the financial system, it does not set out comprehensive climate policy. So, instead, like a cuckoo putting its eggs into anothers nest, critics have resorted to mischaracterizing the proposal, and inventing their own, fictional rulenot actually proposedto attack premise two, and claim the Commission lacks authority for their fictional new rule. Congress repeatedly amended and expanded the Commissions disclosure regime, including by adding to the authorities relied upon for the present proposed rule. In sum, the text and context of the 1933 Act itself gives the Commission broad authority to require disclosures about financial risks and opportunities beyond the inevitably incomplete initial lists of information and documents included in the statute. That does not make those rules unduly burdensome or costly. Congress did not direct the Commission to protect investors through disclosure only when it is politically non-controversial to do so. They will go unresolved by this proposed rule. John CoatesActing Director, Division of Corporation Finance. The Helpful Hand Guiding Brisbane's Olympic Victory. But for purposes of assessing the legal issues raised by the proposed rule, this limit underscores how the rule is investor-oriented and tailored, consistent with the securities laws. These higher costs can be particularly burdensome for smaller and more capital constrained companies, and yet if these companies do not provide ESG disclosures, they risk higher costs of capital. Over the past six months, the U.S. securities markets have seen an unprecedented surge in the use and popularity of Special Purpose Acquisition Companies (or SPACs). What is the best way to verify or provide assurance about disclosures? Clear statement canons play no role when statutes speak clearly. It does not regulate climate activity itself (e.g., greenhouse gas emissions) and would have modest effects on the economy as a whole. Even if some may find resistance to the rule (or new regulation generally) to be appealing from a policy standpoint, doing that here has no basis whatsoever in the statutes text.. During my tenure as Acting Director of Corporation Finance, I experienced firsthand the unwavering commitment of the SEC staff, and I look forward to serving in a new role as the Commissions General Counsel., STAY CONNECTED The safe harbor is also not available if the statements in question are not forward-looking. The caption to Section 7Information required in registration statementcontains no qualifiers on information. The authorizing language in Section 7(a)(1) is limited by Section 7(a)(2), but only for a designated class of emerging growth companies, and not as to content. Without such confidence, Congress astutely observed: Easy liquidity of the resources in which wealth is invested is a danger rather than a prop to the stability of [the market] system. Circuit affirmatively held that the Commission had authority to do that, and, in its judgment, to potentially go further. Nonetheless, whatever one thinks about the incentives for companies to go public or private, that question only bears on the efficiency or capital-formation impacts of the proposed rule, and how they compare to its advancement of investor protection, not on its legality. Australian Olympic Committee president John Coates received a $40,000 pay rise last year, part of $300,000 in extra remuneration for senior AOC figures. How might a different disclosure regime have elicited different disclosures? That climate risks overall have been overstated by climate activists. Most public companies could go dark today, if they were prepared to surrender their stock exchange listings. The question of whether the proposed disclosures would in fact be an all-in good idea, cost-justified, appropriately considering efficiency, competition and capital formation is not a legal question. Recognizing innovation in the legal technology sector for working on precedent-setting, game-changing projects and initiatives. Even if the safe harbor clearly applies, its procedural and substantive provisions do not protect against false or misleading statements made with actual knowledge that the statement was false or misleading. Companies either do or do not have property, plant and equipment in flood plains. But for the protection of investors, these limits are features, not bugsthey precisely show how the rule adheres to Congresss clear but limited delegation of disclosure specification to the Commission. As regards climate change, environmental agencies might do well to focus on global activities as well, but it is unclear how EPA could with its existing legal authority impose requirements on companies not operating in the US. The proposal is both narrower and broader than the critics fictional rule because it calls for and is limited to investor-focused information from public companiestraditional and long-standing hallmarks of U.S. securities laws and regulations. To be sure, an IPO is generally understood to be the initial offering of a companys securities to the public, and the SPAC shell company initially offers redeemable equity securities to the public when it first registers to raise funds in order to look for and later acquire a target. Companies in the defense industry report in their Commission-required filings using technical, specialized industry jargon on government procurement, budgets, military strategy, products and market dynamics about which staff at the Department of Defense have far more detailed knowledge than the Commission. That request elicited massive amounts of public input on potential climate-related disclosure, and gave anyone skeptical about the project ample notice that it was on the Commissions agenda, and ample time to adduce evidence against it. As noted above, subsequent to the initial passage of the securities laws, but after the passage of the initial Clean Air Act and in the same year EPA was created (1970), Congress directed the Commission (along with all other agencies of the federal government) to consider environmental protection in its rulemakings. John Coates is a senior research fellow at the University of Cambridge. 2018) (CFO's statement about corporation's large deferred service, healthy product backlog, and consistent quarterly linearity, which was a statement made with another statement as to expected earnings for an upcoming quarter, were non-forward-looking statements and were not protected by the PSLRA's safe-harbor; statement included facts regarding the present state of the corporation, not assumptions); NECA-IBEW Health & Welfare Fund v. Pitney Bowes Inc., No. John Coates is author of the financial bestseller The Hour Between Dog and Wolf: How Risk-Taking Transforms Us, Body and Mind. Companies may chooseas many do nowto go beyond what is required, to convince investors and others that (for example) their strategies are going to succeed. Indeed, the actual proposed rule requires disclosure about subject matters long covered by indisputably authorized disclosure requirementsthe first point made by Commissioner Peirce in her dissent. The claim that the proposed rules requirements are so unrelated to investor protection as to altogether fall outside the Commissions obligation to specify financial risk disclosures is without merit. 5-min read. They argue that because the fictional new rule requires disclosure of environmental impact, the Commissions authority was silently removed when Congress authorized the Environmental Protection Agency (EPA) to address that impact. The multiple places the statutes give the Commission authority to go beyond its text (to create exemptions, tailor its requirements, and add to them). Are current liability protections for investors voting on or buying shares at the time of a de-SPAC sufficient if some SPAC sponsors or advisors are touting SPACs with vague assurances of lessened liability for disclosures? In closing, I want to make three final points. Earnings statements, analyst call scripts, investor presentations, and the regular flows of press releases, investor relations communications and other ways companies supplement disclosure requirements are commonly longer or more complex than anything required by the Commissions rules. They argue that the disclosures required by the fictional new rule would be opinions, not facts, so it would violate the First Amendment. The ways investors may use the information are not predetermined by the rule, nor would the rule itself limit how companies speak about whether (for example) climate risks are currently being overestimated or producing excessive disinvestment. Professor of Law and Economics at Harvard Law School, where he also serves as the Vice Dean for Finance and Strategic Initiatives, and Research Director of the Center on the Legal Profession. The guidance on potential conflicts of interest in the context of the initial public offering of a SPAC is divided into five categories: (1) insiders' competing fiduciary or contractual obligations to other entities, (2) the specified timeframe to complete an initial business combination, (3) deferred underwriter compensation, (4) economic terms A movement is afoot to impose cost-benefit analysis (CBA) on financial regulation (CBA/FR). Going forward, I believe SEC policy on ESG disclosures will need to be both adaptive and innovative. If markets are currently overly negative about a companys physical risks (e.g., to floods), such disclosures would facilitate a reduction in that companys cost of capital. It is not a rule, regulation, or statement of the SEC.