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28 Jul 2017
Hamptons Property Running Scarce

“Hamptons New York” by Mark Jenney, licensed under CC Attribution Share Alike 4.0 International, modified by Guzov, LLC.

New developments are changing the aesthetic of the string of 1980s homes in the Hamptons as developers and homeowners are tearing down beach front property to build brighter, spacious, and more luxurious properties, and then selling for triple the price. Land to build new homes is sparse since the remaining open land is being preserved for agricultural purposes and parks, leaving New Yorkers unable to build their dream home without tearing down another property. Gary DePersia from Corcoran Group explains to the New York Times that “with the towns buying up open space, that diminishes further the available vacant lots, making teardowns even more viable and important for those who want to build a house.”

Houses from even the early 2000’s are yesterday’s news as developers now only see these plots for their rebuild potential. Cody Vichinsky, co-founder of Bespoke Real Estate, adds that these beach front properties are still competitive on the market because people are willing to “pay premiums to have a select piece of dirt” to build their dream homes. This practice however has become quite the profit making scheme. Developer and interior designer, James Michael Howard, tore down a $3.7 million 1980’s Bridgehampton four bedroom and three-bath house on 1.1 acres. Architects Bobby McAlpine and Greg Tankersley helped Howard transform this property into a home with seven-bedrooms and nine-baths, with high ceilings, and completely furnished only to immediately place the new home on the market for $11.95 million. And the high price of these properties does not seem to deter the process of tearing down the old to bring in the new. Properties $15 million plus are being listed and advertised as great redevelopment opportunities. Yet, for those who are eager to develop their dream home this comes as no surprise, as vacant land is mostly protected from any property developments.

It is not just the towns making open plots inaccessible. Hamptons’ homeowners have been taking advantage of the Conservation Easement Incentive Act of 2015, whereby landowners exchange development rights to their land when granting a conservation easement in return for tax benefits. Conservation easements are entered into by the landowner and a land trust, allowing landowners to permanently protect their land even after the property is sold. The landowner is restricted from any activity (which will be stated in the agreement) that conflicts with the protection or conservation of the land.  The 2006 tax incentive was made permanent by the legislature in 2015 (with increased tax benefits) so that landowners donating a conservation easement can now deduct fifty percent of their annual income for the year of the donation and fifteen years thereafter. Farmers and ranchers, who qualify under IRC 2032A(e)(5), can deduct 100% of their income for the year of the donation and again for the following fifteen years. This incentive has conserved over two million acres of American land and has made land in the Hamptons particularly more scarce and valuable.

What’s the solution? If you don’t want to spend in the multi-millions, you can always enter a lottery for affordable housing in East Hampton. A twelve-unit condo will begin development in the fall, after ten years of planning. The asking price is from $150,000 to $300,000. As for developers looking to build luxurious mansions, DePersia recommends learning to integrate the houses with their natural environment and keep open spaces free: “[t]he best of these new homes are designed in a way that respects the character of the property, its surroundings and the views seen from it.”

28 Jul 2017
Skyscrapers to Submarines: the Impact of Climate Change on New York’s Real Estate

Thonis-Heracleion and Canopus existed in the 7th century BC and acted as centers for trade for the Mediterranean, specifically Egypt and Greece. Due to a series ofnatural phenomena and the rising sea level, the cities sank 32 feet under water. Thonis-Heracleion vanished for 1,000 years. Could New York City have the same fate as the ancient Egyptian business hub now after the U.S. pulled out of the Paris Climate Accord?

NASA issued a report in 2015 projecting that sea levels in New York would rise up to 21 inches by 2050.  Rising sea levels and temperatures place real estate developments directly at risk.  Yet, a majority of real estate firms that took party in a survey by the the Real Deal said they would not take part in the action to fight against climate change. Michael Mann, an atmospheric science professor at Pennsylvania State University, explained that for real estate firms to not take the issue seriously is problematic “since the real estate industry may be among the hardest hit by climate change.”

What can be done to slow down the imminent sea level rise? Real estate developers, along with residents, need to cut their fossil fuel use dramatically. Integrating technology should be utilized to adapt new and old buildings to be more environmentally responsible, economically efficient, and sustainable for the future, producing more energy than they consume. Some real estate developers have already implemented environmentally friendly technology and devices. L&M Development inserted wind turbines on the top of luxury apartment buildings. Synapse Development Group successfully built New York’s first passive-house rental apartment building, which is structurally designed with an energy recovery ventilator to regulate temperatures, and uses a staggering 70 to 90 percent less energy than other buildings.

The New York City Council has also recently emphasized the importance of sustainability through Local Laws 31 and 32, passed in 2016, which require New York City-owned buildings to be constructed and designed as low energy intensity buildings to meet sustainability requirements. Buildings will have to meet Leadership in Energy and Environmental Design (LEED) standards so that they use less energy. The Urban Green Council stated:

“We commend the City Council for passing a bill that brings the law up to date and puts NYC on the leading edge … New York designers and builders will need to create a new generation of hyper-efficient buildings that will ultimately advance building practice in the city’s private sector as well, and have worldwide implication given the international reach of many NYC firms.”

New York Local laws have already made a significant impact in the fight against climate change by regulating the amount of energy used by both city-owned buildings and buildings over 50,000 square feet. It is key for co-op and condo owners and apartment renters to be aware of the energy use in their buildings. Although initially implementing technology to create sustainable buildings comes at an extra cost, it is offset by lower utility bills and will help prevent what seems like Manhattan’s inevitable descent and transformation into Atlantis.

26 Jul 2017
Not All Sunshine and Roses: When Community Gardens and Affordable Housing Butt Heads

In a recent push for development, two “forces for good” now find themselves at odds.  New York City’s Department of Housing Preservation and Development (HPD), the chief agency in charge of affordable housing in the city, has recently selected seven development companies to construct 800 units of affordable housing across 67 city-owned lots in Brooklyn, Manhattan, and the Bronx.  However, nine of these sites currently contain community gardens, and proponents of these green spaces are pushing back.

Scattered across New York City are roughly 1,000 city-owned vacant lots.  Of these, 74 have been converted, largely by area residents, into community gardens.  Certain nonprofits and government agencies (such as the Parks Department, which runs a “GreenThumb” initiative to help gardeners negotiate leases and other deals) can lend varying degrees of protection to these gardens, but that is not guaranteed.  In the absence of this help, regulation of community gardens falls to other government agencies, often the HPD.  These gardeners know they could lose their space at any time.  When a garden is constructed in a vacant lot, the owner must sign a contract with the city promising to act as a steward of the lot – essentially, to make it look attractive and help the public – until the city has a better use for it.

On the other side of this issue is the HPD and Mayor Bill de Blasio.  The current push for development is part of Mayor de Blasio’s ongoing campaign to create 200,000 affordable housing units by the year 2024.  The choice of locations has been a strategic effort to maximize land use potential.  The developers for these buildings have already been chosen: Bronx Pro, East Brooklyn Congregations, Fifth Avenue Committee and Habitat for Humanity, JMR and Alembic Community Development, Lemor Realty and Iris Development, MHANY, and Shelter Rock Builders.  Of these seven, six are nonprofits and two are woman or minority-owned.

Advocates of community gardens have been speaking out against the choices made by Mayor de Blasio and the HPD.  René Calvo, founder of Mandela Garden, has publically argued that the city has plenty of other vacant lots to choose from, not to mention an estimated 2,300 vacant apartments owned by the New York City Housing Authority.  He also pointed out that it would cost tens of millions of dollars to build a new community garden.  Friends of Elizabeth Street Garden is currently fundraising on Spotfund for a legal campaign to save its garden.  The head of this organization, Jeannine Kiely, has recommended the city instead develop a vacant lot at 388 Hudson Street, which, if rezoned, would provide even more room for development and better access to amenities.  However, District 1 City Councilmember Margaret Chin, an opponent of Friends of Elizabeth Street Garden’s preservation efforts, has wholeheartedly embraced the building of affordable housing in that spot.  Finally, Aresh Javadi, member of the board of the New York City Community Garden Coalition and director of More Gardens, has argued that development should proceed as long as the city funds one new garden for every 500 units of affordable housing it builds.

In a recent article on this subject, the Commercial Observer recommends one possible strategy the gardeners can use to avoid total loss of their green spaces: negotiating with the developers, themselves.  In one recent case, four gardens on city-owned lots on East 111th Street were to be redeveloped into apartments.  However, the gardeners reached an agreement with the developer to incorporate a new garden into the design of the building-to-be, Sendero Verde.

21 Jul 2017
The Fiduciary Rule: What does it apply to?

The Fiduciary Rule, implemented under the Obama administration, requires financial advisers, brokers, and insurance agents to act in the best interest of the client for retirement and 401(k) accounts rather than pursuing their own interests for financial gain; essentially they must act as fiduciaries. The Department of Labor initiated this rule as brokers frequently recommended retirees to invest in expensive mutual funds which gave them a greater commission. The fiduciary rule aims to limit the conflict of interest risk by requiring advisers to put the customer first and primarily push investment funds with flat fees to avoid such an issue.

On February 3, 2017, President Trump issued a Presidential Memorandum directing the Department of Labor (DOL) to review and revise the Fiduciary Duty Rule, which led to a delay in its implementation from April 10, 2017 to June 9, 2017 (and certain provisions postponed until January 1, 2018). While the substantive principles of the Rule were put into effect on June 9, 2017, the DOL is continuing with its investigation. Critics in the financial services industry argue that the Fiduciary Rule will be a burden to smaller investors as it would require them to increase fees, which can lead to them loosing client accounts. However, the DOL has not found an issue with the substance of the rule as it requires advisers to act ethically specifically to vulnerable clients. Mercer E. Bullard, a law professor at the University of Mississippi explains that “[t]here is no way they can repeal the essence of the rule, which is the fiduciary standard”. In February, Chief Judge Barbara Lynn for the U.S. District Court for the Northern District of Texas, upheld the Fiduciary Rule in Chamber of Commerce v. Edward Hugler, Acting Secretary of Labor.

Many have questioned what the Fiduciary Rule covers and what is now in effect since there are two implementation dates. As of now, the rule is applicable to retail investors’ (investors who buy and sell securities for their personal accounts) retirement accounts, 401(k) accounts, and specific 403(b) plans (government workers are not covered). As of June 9, 2017 advisers are prohibited from acting outside of the client’s best interest, and must adhere to the prudence standard, whereby advice meets a professional standard of care and loyalty standard, whereby all advice must be in the best interest of the client and not in the financial interest of the adviser. They must comply with the “impartial conduct standards” (consumer protection standards) to prevent any conflicts of interest. Advisers are also prohibited from charging unreasonable compensation and fees or making misleading statements regarding investment advice. The Department of Labor has issued FAQs on this matter answering general questions on the transition periods, implementation methods and adviser requirements. Advisers will also be introducing “clean shares” to clients, which are a class of mutual funds with a flat fee to prevent advisers from taking advantage of high commissions from expensive mutual funds. Clean shares were introduced to eliminate the conflict of interest between investors and advisers and also benefit investors with greater returns.

What are the limits of the Fiduciary Rule? The adviser must only act as a fiduciary in relation to new retirement and 401(k) accounts, not all investments. For existing accounts, clients can request a review of their accounts by their advisers to ensure it meets the fiduciary standard. If clients wish to have their advisers act as their fiduciary for all their accounts, they can request that the adviser agree to and sign a fiduciary pledge or oath. This would state that the adviser swears to act in good faith and the best interest of the client. The Committee for the Fiduciary Standard has created a sample oath for advisers to sign.

Chairman of the Securities and Exchange Commission (SEC), Jay Clayton, explained in a statement that the actions of the Department of Labor in regards to the Fiduciary Rule “may have significant effects on retail investors and entities regulated by the SEC. It also may have broader effects on our capital markets. Many of these matters fall within the SEC’s mission of protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation.” Clayton continued by expressing the SEC’s willingness to “engage constructively” when determining what elements will “best serve the interests of [the] nation’s retail investors in this important area.” Since 2006 the SEC has conducted various studies (RAND study, Dodd-Frank Act Section 913 staff study) on investment advice regarding greater disclosure and transparency and seeking a best interest standard for broker-dealers. To better assess the situation, the SEC has asked the public to contribute to their study by submitting general comments and comments in relation to the list of questions on their website regarding the fiduciary standard for advisers.

19 Jul 2017
The Ethics of Airbnb and Its Critics


Airbnb Logo by Airbnb’s Design Department.

On Monday, Airbnb filed a formal complaint against Share Better with the New York State Joint Commission on Public Ethics.  The complaint accuses Share Better of being an unregistered lobbying group backed by major players in New York’s hotel industry, designed to spread propaganda against the popular home-sharing app.  It further alleges that Share Better is in violation of several state laws regulating lobbying groups, including the requirements to disclose funding sources and spending in excess of $5,000.

Share Better’s website describes the company as a “nationwide group of neighbors, community activists and elected officials who have a unique perspective on the so-called ‘sharing economy’ and Airbnb in our neighborhoods.”  Share Better presents itself as a colorful grass-roots organization of dozens of neighborhood groups, as well as assembly members, city councilmembers, and big names like Manhattan Borough President Gale Brewer and U.S. Congressman Jerrold Nadler.  However, instead of community resources, at first glance, the focus of the site is almost exclusively attacks on Airbnb.  The organization even released several commercials against the home-sharing company, one of which is linked here as an example.  Although it is listed nowhere on Share Better’s website, Bloomberg Businessweek reports that Share Better’s main backers are, in fact, the Hotel Association of New York City and New York Hotel and Motel Trades Council, as alleged in Airbnb’s complaint.

Given all this information, Share Better might seem suspect in its motives and strategies.  However, according to Share Better, it is really an advocate for affordable housing.  The main belief that Share Better advances is that Airbnb raises housing costs by buying up affordable units for use as illegal hotels.  Share Better also contends that Airbnb’s business model fosters an atmosphere of racism, as backed up by a recent Harvard Business School study by Benjamin Edelman, Michael Luca and Dan Svirsky, which found that people with names traditionally associated with minority race groups receive 16 percent fewer booking confirmations than applicants with traditionally white names.  Additionally, African American Airbnb hosts receive payments averaging 12 percent lower than white hosts.

A spokesperson for Share Better publicly disputed Airbnb’s case by asserting that Share Better is not incorporated and has no officers, employees or expenditures of its own, and that its chief funders, the Hotel Trades Council and the Hotel Association of New York City, all file lobbying disclosures as appropriate.  On Monday, a Share Better ally, the Illegal Hotel Committee of the West Side Neighborhood Alliance, through member Tom Cayler, filed a complaint with the Joint Commission on Public Ethics asserting that Airbnb has failed to fully comply with New York’s lobbying requirements.  In an email, Airbnb spokesperson Peter Schottenfels responded that, “any complaint by hotel-funded Share Better is like Al Capone accusing Eliot Ness of being a mobster. Somehow the consultants who run this front group were tipped off about an impending ethics complaint regarding their failure to properly disclose lobbying activities, and their response is to make up a retaliatory, sham claim.”

17 Jul 2017
Guzov, LLC’s International Counsel’s Corporate Corner – Corporate Shareholder Activism

Shareholder activists “seek to engage and present well-thought out alternative courses of action … they have to persuade and win the votes and confidence of a majority of fellow shareholders and institutional investors in order to have any strategic impact.”

The second installment of Guzov, LLC’s Ami de Chapeaurouge’s study on shareholder activism is now available in the Hong Kong LawyerThis series examines the frequency of local and international active investments in Hong Kong through a study of 50 different activist campaigns from 2003 to 2015, concluding that these activists make a “significant and quantifiable long-term value” to Hong Kong’s securities market. Furthermore, de Chapeaurouge discusses the role of passive investors in Hong Kong, which are notably large companies such as BlackRock, and the effective methods used by shareholder activists in Hong Kong’s public companies.

This article is the second of three installments. The next installment will be available soon.

14 Jul 2017
Fintech, Meet the U.S. Regulators

U.S. regulators, the Financial Industry Regulatory Authority (FINRA) and the U.S. Commodity Futures Trading Commission (CFTC) are increasingly introducing initiatives to help bridge the gap between the securities industry and the regulators, specifically in regards to the increasing use of financial technology (fintech). Regulators, such as the Securities and Exchange Commission, have had trouble regulating fintech, specifically the use of bitcoin and blockchain technology. As we have discussed in previous blogs it is difficult for them to regulate technology that by nature is unregulated. For instance, in regards to bitcoin, traditional currencies are regulated by governments (which can be seen in instances of inflation), yet bitcoin is decentralized and not regulated by any type of entity or government. Governments and regulators face huge hurdles in attempting to regulate what is known as the ‘dark economy’ and other areas of fintech. Therefore, it is significant that regulators are collaborating with the securities industry to implement regulations that mirror and do not inhibit new technology while still maintaining a fair and efficient market for investors.

The CFTC have initiated LabCFTC with the goal to “promote responsible FinTech innovation and fair competition for the benefit of the American public.” From cryptocurrencies to cloud computing, the CFTC aims to implement forward thinking regulations that coincide with “today’s digital markets.” This includes collaborating with the fintech industry to promote the use of technology and monitor trends. The benefits of implementing new technology in CFTC markets domestically and overseas will create a more efficient market for investors. However, the CFTC does recognize the challenges that come along with new technology, including any potential security threats.

In June, FINRA launched the Innovation Outreach Initiative “to foster an ongoing dialogue with the securities industry that will help FINRA better understand … fintech … innovations and their impact on the industry.” Robert W. Cook, FINRA President and CEO, highlighted the importance of the Initiative in helping FINRA gain a better understanding of fintech innovations in order to safeguard the market and investors, but also be flexible towards an evolving industry. FINRA has even launched a FinTech webpage on their website which discusses fintech’s impact on broker-dealers, investors, and financial institutions, along with any regulations. FINRA established a team run by the Office of Emerging Regulatory Issues who gather fintech intelligence, ensure FINRA rules and programs are compatible with the evolving nature of the fintech and securities industry, and work with regulators domestically and overseas.

Yesterday, July 13, 2017, FINRA hosted the Blockchain Symposium in New York to give regulators and industry leaders the opportunity to collaborate and examine the use of blockchain technology, current and future regulations, and the implementation of Distributed Ledger Technology (DLT) applications. Regulatory and industry leaders such as Robert Cook, Ryan VanGrack from the SEC, Jennifer Peve from the Depository Trust & Clearing Corporation, and James O’Neill of Fidelity Investments were featured speakers at the symposium. The key to these agencies regulating the changing securities and fintech industry is through open communication with industry leaders. The growth of technology has been miles ahead of the regulations. The collaboration and joint efforts from regulators, and the securities and fintech industry will create greater efficiency in the market without being unduly hindered by any draconian regulations.

14 Jul 2017
Can Your Adult Children Live in Your Co-op?

We have previously discussed the parameters of shareholders subletting their co-ops. In regards to subletting a unit, it is ultimately the co-op board’s decision. They can impose time constraints, fees and surcharges, or deny the option outright. However, whatever policies they do intend to impose on shareholders will have to be clearly stated in the proprietary lease (specifically in relation to surcharges, see DeSoignies v. Cornasesk House Tenants’ Corp.) and be reasonable (see Bailey v. 800 Grand Concourse).

There are additional questions raised in the context of allowing your grown children to live in your apartment without you. How do shareholder’s young adult children fit into co-op board by-laws and the proprietary lease? Typically, a spouse or immediate family member has the right to live in the co-op with the shareholder.  The shareholder may also have the ability to transfer their shares to these family members. However, the language of the proprietary lease has been construed by the courts very literally in that only the “Lessee and Lessee’s spouse, their children, stepchildren, grandchildren, parents, stepparents, grandparents, brothers and sisters” can live in the unit as opposed to the lessee or shareholder’s relatives on their own. Interpretation of the proprietary lease could depend on which New York borough you live in. In Brooklyn, Queens and Staten Island, there have been instances where the courts construe the word “and” to mean “or”, which then permits children to live in the unit without the shareholder.

Generally the shareholder should seek board approval before allowing their adult child to live in the apartment, otherwise you run the risk of the board construing the arrangement as a sublet and imposing a sublet surcharge. Would the same issue arise in a rental? Most likely not, since landlords are more concerned about receiving monthly rent rather than who lives in the unit. Co-ops on the other hand have stricter regulations and a tedious interview process. Boards normally are careful as to who they select and look for potential shareholders who will have a long-term interest in the building and are able to pay bills and maintenance fees. During the vetting process, the board will examine the individual’s financial history, business and personal references and tax returns. Young adults who just graduated university do not necessarily have an extensive financial and tax return history, making them an unlikely candidate.

One solution would be to add your children to the proprietary lease, so in the event you have to leave your apartment for an extended period, your children will have the right to occupy the unit. However, boards should be careful with this process and ensure they protect themselves while accommodating shareholders. If the child of a shareholder is on the proprietary lease it means that the shares of the co-op and the lease will be transferred to the child automatically upon the parents’ death. Young adults also tend to have financial debts, such as student loans, so it is important to assess the family unit’s financial stability as a whole to guarantee the maintenance payment and any other fees. Shareholders should discuss these options with their board and managing agent in order to come to the most suitable conclusion for the co-op and the shareholders’ family.

12 Jul 2017
New York Landmarks and How to Renovate Them

“Gramercy Park Entrance” by Beyond My Ken, licensed by CC Attribution Share Alike 4.0. Modified by Guzov, LLC.

The Landmarks Preservation Commission (LPC) is the agency charged with preserving New York City’s cultural and historical locations.  The LPC takes great care in maintaining its protected sites, so if you want to renovate your property, you will likely run into a roadblock or two.  Are you one of the lucky few to own a piece of New York history?  If so, here are some key features of the Landmarks Preservation Commission, what the commission requires for renovations, and how best you can work with it to make the changes you want.

The LPC was founded in 1965 in response to public outcry from the demolition of the old Pennsylvania Station.  The agency now consists of 11 appointed commissioners and about 70 other staff members, including preservationists, historians, architects, attorneys and administrative employees.  The commission designates sites for preservation, usually buildings or districts, but sometimes natural locations (Central Park and Prospect Park are perhaps the most well-known of these).  Most designations of individual buildings concern only the exterior, but sometimes interiors are designated landmarks as well (for example, the concourse of Grand Central Terminal).  According to the LPC website, there are currently over 36,000 landmark designations in New York City.

To renovate a protected building, you must receive a permit from the commission.  To receive a permit, you will have to submit an application describing the existing condition of the building and details of how you want to alter it, including drawing and a list of materials you plan to use.  You will then submit the application, where it will be assessed by an LPC preservationist.  You will likely need to meet with the preservationist to review the jobsite and discuss which type of permit is most appropriate for you.  The LPC issues three basic types of permits: a Certificate of No Effect, which covers work not visible from the exterior of the landmark, but work that requires a Department of Buildings permit; a Permit for Minor Work, which encompasses work that effects the exterior of the building but does not require a Department of Buildings permit (like cleaning or window replacement); and a Certificate of Appropriateness, which covers external work that also requires a Department of Buildings permit.  The first two do not require a public hearing before approval.  For a Certificate of Appropriateness, however, a presentation must be given before the commissioners at a public hearing, reviewed by the LPC staff, and subsequently approved by the commissioners.  There are also two additional types of permits: a FasTrack Service permit and an Expedited Certificate of No Effect Service for Interior Work.  The FasTrack permit streamlines the replacement of windows and other standard, minimally visible features.  The Expedited Certificate covers interior work largely for use in private residences.


The LPC is loath to alter the exterior of a designated building, but it will work in your favor if you can convince it that such changes are necessary for safety, or that they have been done on other landmarks.  Additions to buildings are only allowed when they cannot be seen from any angle on the street.  As Wayne Bellet of Bellet Construction Company explained in an interview with the Cooperator last year, “[The LPC] will ask you to build a frame and paint it orange….They will go to extreme street corners to see if it is visible by the eye.  If it is…they will decline you.”


So if you want to renovate a landmarked building, how can you make working with the LPC easier?  First, preparing a broad, all-encompassing proposal is vital.  Daniel J. Allen of CTA Architects (which won an award in 2016 for its renovation of 36 Gramercy Park East) calls this his “master plan.”  For example, “if I get a nice aluminum-clad wood window approved for a building on Park Avenue,” he says, “and that master plan goes in the file of the commission, the next time someone in that building wants to replace their windows, they simply have to send a letter referring to the master plan.”  Second, mind the details and prepare in advance.  “The [LPC] demands that any patch or replacement must look exactly as it did when the structure was first built,” Bellet says.  “This includes jobs as small as replacing or re-caulking window sills to re-pointing the façade and replacing damaged brick, stone, and mortar.”  Often it is difficult to obtain materials similar to those used at the time of construction, so parts sometimes must be custom-made, which can add tremendous time and expense.  Finally, patience is a virtue.  “When you look at the scope of what happens from the Department of Buildings’ point of view,” Bellet concludes, “it’s amazing anything gets built….Now you sprinkle on the top of it that the building is landmarked…it’s not going to happen tomorrow.”

07 Jul 2017
New SEC Policy for Non-Public Registration Statements Under Clayton

The Securities and Exchange Commission (SEC) has passed its first major policy, under the new chairman Jay Clayton, to extend the Jumpstart Our Business Startups (JOBS) Act and improve capital formation. This development will create greater use of the JOBS Act, increase initial public offerings, and give investors a greater pool of companies to invest in. The Securities Act requires public companies to file registration statements, which include information about the company, the offering, and the securities it offers. This disclosure-based system, implemented in the aftermath of the Wall Street Crash in 1929, allows regulators to review the registration statement and ensure companies follow the regulatory framework to maintain a fair and efficient market.

In 2012 under President Obama, the JOBS Act was implemented to facilitate entrepreneurs and small businesses entering the market by permitting individuals to become investors and easing federal regulations. On June 29, 2017 the SEC announced that the Division of Corporation Finance will “permit all companies to submit draft registration statements relating to initial public offering for review on a non-public basis” starting July 10, 2017. Initial public offerings and spin-offs, in addition to issuers who do not fall within the ambit of Emerging Growth Companies (companies with annual gross revenues of $1 billion or less, pursuant to the JOBS Act and Section 6(e) of the Securities Act of 1933) will be able to submit confidential draft registration statements.

What are the requirements for eligibility and to submit the statements in relation to the Securities Act registration statements? The issuer must agree in a cover letter to publicly file the registration statement along with the confidential drafts at least 15 days prior to either any road show or the requested effective date of the registration statement (pursuant to the Securities Act in regards to IPOs or section 12(b) of the Securities and Exchange Act). The confidential review, however, is only permitted for original submissions. Issuers replying to staff comments will need to submit the registration statement for public filing. The new policy does not impact the confidential review available to Emerging Growth Companies who receive favorable treatment during the IPO review process or for Foreign Public Issuers who may follow this new procedure or the guidelines in the SEC’s May 30, 2012 statement.

Issuers will use the EDGAR access codes system and check on the form that they are submitting a draft registration for non-public review pursuant to JOBS Act §106. This system permits issuers to submit the draft registration and any additional documentation. The SEC has noted that there will not be a delay in the review process if the content of the draft registration does not include financial information that the issuer reasonably believes is not necessary when publicly filing the registration statement. The Commission will review requests under Rule 3-13 of Regulation S-X (filing of other financial statements in certain cases) on a circumstantial basis.

The benefit of the new policy is that companies will have greater flexibility when preparing their offering. All companies will be able to reap the benefits of Emerging Growth Companies who are able to submit their registration statements confidentially. The process of non-public review after the IPO ultimately protects shareholders from possible “market fluctuations”.

The SEC has provided FAQs to review the expanded procedures and requirements.


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