STOCK Act, Activist SPV Disclosures

I was yeah, I just was getting my script set up. Okay. hey Matt. Good morning. We have another great podcast for you. I hope you like it. so let us know. All right, Ann, I'll take us in. Three, two, one. Welcome to Shareholder Primacy from Free Float Media, a podcast about activist investing, securities law, and all the ways the financial and legal worlds intersect and collide in real life. Anne Lipton and I are here again for you. Anne, of course, is a law professor at the University of Colorado who teaches and researches securities and business law. She holds up the legal end of the podcast. And that's Mike Levin, an activist investor who lives and works in Chicago. He covers the financial side of our podcast. I try to. Anyway, how ya doing? Is it the doldrums of the academic year right now? Are you busy or what's happening? It's the summer with exactly the point where you start panicking over everything you need to get done before classes resume. Yeah. Yeah. Yeah. everything you promised to the the rest of your your research collaborators. Yeah, no, I got I got a couple of things that are kind of cooking. But as we've signaled to our followers here, these past couple weeks and the next few weeks are gonna be a little slower. I have some travel planned to go see our kids and so forth. And I I hope you have something fun on the docket. So between now and Labor Day we may book another one of these or maybe another couple if we get our That's nice. Absolutely. Yeah. get our crap together. but at least we have this one to work with. all right. All right. So we do have two subjects that have come up this week. One involves some recent news, unexpected in my opinion, from the SEC. And the other is a little more longstanding subject with a new fun, interesting development related to truth social and insider trading. Yeah. so the re recent news is basically a new SEC reg that affects as we've been calling them financial activists what they need to disclose in some situations about their investors in a portfolio company. And then the longstanding subject is the really pertains to the intersection of this new announcement from Trump media and Stock act which has been in place for a little while. so we'll talk about that as well. Maybe we'll talk about that one first and then we can handle handle the the other one about the the f financial disclosures a little later. But first Yeah. Okay. But first a reminder, you can email us. And yes, we do read the emails and we do get to the requests. We know we have some actually pending that we have to get to. But we do get to it. Yeah. we should do maybe maybe we'll do a mailbag. Maybe we'll do a mailbag this in the next couple of weeks if we get really lazy. Maybe. But but yes, if we get really lazy and nothing else happens. which anyway, so but you can email us at shareholder primacy one word at freefloat.lc. All right, so let's jump into it. we saw a new announcement last week from TMTG is the ticker, not DJ no, excuse me, TMTG is the company, the ticker is DJT, as we all know. It's Trump Media and Technology Group. just a routine announcement, you know, they're publicly traded company that, you know, sent out a pr I think an eight K, who knows? and their main business is they own Truth Social. Right. which is the social media company that is where President Trump sends out his his truths, as they're called. truths. it's his preferred social media platform. I don't think he actually uses posts on on acts or anything because I'm pretty sure somebody told him, you know, you really should try to boost T T G His truths, yes. yeah, I don't think he posts on other other ones anymore. I I don't think so I had to tell him, but yeah, like he was banned from Twitter after January sixth and then when Musk took over he his account was restored, but I don't think he's come back and I think it's because he wants to Yeah. Right. Mm-hmm. No, I don't think he's been back. Right. So so so TMTG, DJ T, whatever you want to call it, is his main social media feed. I know everybody knows this. interesting. The announcement last week was it's actually kinda routine for social media companies. Right. And and they were going to sell a feed, like a like a real time feed to like its top ten accounts. And others do this. For social media companies, sure. But of course the the top ten accounts are Donald Trump's and probably nobody else. I don't know who else posts there. I don't read it. Or don yeah. Exactly. Like he yeah, exactly. So like other right, no, I mean other social media companies sell access to their data feeds, but in this case it's a data feed of the top ten accounts, but as a practical matter, it's Donald Trump's account. Right, right. And so so so you'll have a little bit of advanced knowledge of what's getting posted. And and it can range from milliseconds to probably a few seconds. But you'll have some sort of edge. and again, you and me, even if we and I don't have a true social account, I'm imagining you don't either. Okay, yeah, cool. Yeah, right. No, and I've I all that. I just n I never got around to opening a true social account. I do not have a truth social account. I I do have blue sky. You y normal people like you and me would not notice this, but high speed traders that like depend on this kind of news stuff would love this stuff. So they'll make some quick trades before the posts are public. so w what what what do we what do we make of this announcement? What what do we what do we think? Other than other than a money grab, other than, you know, I don't know what they're gonna charge for the feed, which is probably not gonna be cheap. it was? Yeah. Yeah, so Yeah. No, they I well what was reported was that they were asking a hundred thousand dollars per subscription, but I don't know if I I'm not actually sure. It was reported in the FT and like but That's probably an annual number, I'm gonna guess. Annual. The feeling is that a lot of traders are gonna feel like they all have to get it because you can't have one person get it because they can beat you. So now they all have to buy it and it could be a a substantial boost for TMTG. and re and and yeah. So this is this is an insider trading problem. And I'm gonna start with a caveat, which is that like whenever I want like this is Great. But w what do we think of this? Go ahead. This was made in a bottle for someone like Matt Levine to comment on, but like he and Nat he mentioned it, but he hasn't really gotten into it. And I kind of feel like we're recording this Monday morning and I'm just waiting for him to come out with a column. And quite frankly, if it comes out before this drops, you could just read Lat Levine. But anyway, this is Matt this so the this is insider trading. And I wanna be clear. So let to understand that, you kind of have to understand the legal framework. And we'll start with there is Right. Yes. Interestingly, nothing in the federal securities statutes that explicitly prohibits insider trading. There is no prohibition on insider trading in the statutes. The law just doesn't say anything about it. What we have is Section 10B, which prohibits fraud. Section 10B of the Exchange Act just says don't commit fraud. And over time, courts have come to hold that insider trading is fraudulent and therefore it violates 10B. Okay. So the question then, if you're talking about whether this trade is legal or illegal, you have to ask is it fraudulent and who is being defrauded? And there's and there's one one rule. I mean, this is a complex area, so I'm only giving what needs to be said, but one of the rules is it's if you receive information from someone and they expect you to keep that information private and only use it for particular purposes, if you receive it in confidence. Okay. Then it's fraudulent for you to use it for personal gain. And personal gain can mean trading, and it can also mean selling it to someone else, like tipping in exchange for money. So, like the classic case, the case that kind of set the standard is this is actually a case. Lawyer works for a white shoe firm, one of the clients of the firm is planning to make an offer to merge with a target company. The target isn't the client, the acquirer is the client. Yes. But obviously, as soon as it's public news that the acquirer is going to pay a premium for the target, the target's stock price is going to go up. So the lawyer learns right, exactly. So the lawyer learns of the merger and trades in the target's company's stock. And the Supreme Court held that's fraudulent because the lawyer got his information from his firm and from the client. And when he got this information, there was a sort of implicit or explicit understanding that he'd only use it for the client and he'd keep it in confidence. So if he takes it for personal gain to profit from trading, It's gonna ru go up, right, exactly, right. He deceived his client, he deceived his firm, and he committed fraud. And and it would have been the same if he had traded himself or if he had tipped somebody else about what's going on. Okay, got it. If you had tipped, either way, and they had trade. And and except in that case, the person who traded, they are also legally committing fraud. Anyone down the chain who who gets which is gonna matter. So anyway, if it's fraud, then the SEC can sue you civilly, and you can even be prosecuted criminally by the Justice Department. But the weird thing about this theory is it's a fraud. Who is being defrauded? The person who's being defrauded is the source of the information. The corporate client, because the corporate client gave you that information in confidence and you betrayed that confidence. That's the fraud. But it also means that if the corporate client were to give you permission and say, no, it's completely fine. I don't care. Go ahead, trade. God bless, then there's no fraud. Because the because the Yeah. Right. If they if right. Even if it was confidential information, if the if the source of the information authorized use of it for whatever purpose or for a specific purpose and that person uses it for that purpose, there's no ten B violation. wow. Yeah. Exactly. Exactly. That's that's how it works. But of course, that you know usually doesn't happen. Clients don't go to law firms and say, I'm doing a merger, and by the way, feel free to trade. That usually does not happen. Okay. by the way Right. No. All right. So what hap so I think this is a good time to ask in the context of Trump media. The information that the information that we're talking about here are the shit that comes out of Donald Trump's head. Which could be which could be go ahead, I'm sorry. so so the first the first question that comes up is this Yeah. Yes. Well yeah, but first yeah No, no, no. I did go ahead yep yes go on. the the nature of the information is not, you know, corporate secrets here. It's government policy. It's we're gonna we're gonna do we're gonna do this tariff or we're gonna you know, bomb the another straight of Hormuz or so. I mean, there's things that Donald Trump does that clearly move markets. And so it's it seems that this and and he communicates those things largely It exactly. Yes. And it yeah. Yes, exactly. So right. So so here's the issue. you so now we have to take what I gave like the actual case that I gave you was like traditional corporate stuff. How does that apply to government? So Or in la in in some part over truth social. Okay. So so we could start like with the abstract. Like what if a government employee, just random government employee, finds out there's going to be a proposed regulation, there's going to be a military action, COVID's coming down the pike. That was an issue once. Yeah. And and and trades on it. Is it the same rule? And under the legal principles I just described, the source gave it to you for a confidential reason to use for your work, say, and you used it for personal gain. That's considered fraud. And everybody kind of and and and and Right, yeah, sh yeah, sure, of course. Yeah. So that would seem to apply to the government just as much to a corporate entity anyway. But in twenty twelve, there was concern that what if it didn't? What if the same legal principles wouldn't apply to government as they would to a private company? So Congress passed Yeah, there still is no statute. Exactly. Right. So so just in case there was any doubt that the same principles wouldn't apply to government, just to make sure. Right. Because this is this is also case law. So what if the case law doesn't d there was no statute up until then that right, right, about for corporate, but right. Congress passed this law and it's called the Stock Act, which stands for Stop Trading on Congressional Knowledge Act. And the Act says explicitly, just in case there was any doubt, the same rules apply. So whatever the law is in the corporate context for someone taking from like corporate employers or private employers, the same rule applies to government employees. Right. So if it is, you know, if you got it for particular purpose and you trade on it, that is a fraud on the source of the information. And a government employee is committing a fraud on the US government if they use inf confidential government information for their own personal gain. And the act even says which employees are covered by this act. It names them. And it's basically all federal employees, including, and it says this very explicitly, the president and the vice president. It says that explicitly in the statute, right there. interesting. So, government officials are not allowed to trade on confidential government information, and they aren't allowed to sell it to someone else to trade on. Right, exactly. In the exact same rules as they would apply in the government context. So, as you say, therefore, Donald Trump is not allowed as president to tip people in exchange for money. So, and so the question is: is that what Trump media is proposing? And I think it is, because Or t or or ti or tip. Okay, so I think we're starting to starting to understand a little better this Right. I I well let we'll take that apart in a second, but let let's let me just confirm what the Stock Act does, just to make sure we we have a grounding here. First, y and I've you know, I don't follow it as closely as you do, but I've always thought of the Stock Act in the context of Congress. Okay, 'cause that's in the title. And and Yeah. Well Yeah. Yeah. Yeah. Because of the title, because they wanted it to have a cute little acronym. Cause stop trading on Government Knowledge Act is Or w of course, but but you know, and and we read about and we read about we read about, you know, Nancy Pelosi's husband or something. I mean, there's other congresspeople who have been more in the news. But importantly, this is everybody, including President Vice President, named in the statute. Okay, sec Yeah. Yes. Named. It says it says president and vice president statute, it's all the executive branch employees, it's the judicial employees. They're all there. It also has other things about disclosing your trades and so forth. But right now. Great, wonderful. So everybody. Okay, but importantly, and and the nature of it is not to set forth some sort of n new definition of insider trading. It doesn't say here's the timing, here's the statute of limit, nothing like that. All it says is that to the extent that there exists law, and for our purposes we mean case law, on Exactly. No, it just says insider trading, however defined in that case law, it applies to all those people. So if as that as l as that law evolves and becomes stricter or looser or whatever, it just applies so it applies equally to all these government employees, including Donald Trump, principal shareholder of truth of t of Trump Media and Technology Group. all right. Exactly. Including the president. Exactly. That's exactly. So and I think so, because like I mean, as you say, Trump and his sons, they have a majority interest in Trump media. And Trump, as you said, uses Truth Social to make a lot of official statements about the Iran War, about tariffs, about who's gonna be investigating, which ones are cooperating with investigations. And because these are presidential announcements, they move markets. Alright, so so is this how do we make of this? Is tr is he violating the S Stock Act? I I think I know the answer. But okay. Right. If he announces talks with Iran are going well, stock prices go up. If he announces new tariffs, stock prices go down. And that's exactly why institutional investors want to pay money to access the feed. And the company's announcement was really clear. I mean, it wasn't like they were being shy about this. The pr the the press release says we are selling the feed because the put our posts move markets and institutional investors are going to want access. That is actually what the press it's in the press release. So, so Right. that was I didn't I didn't it says it wow. So so okay. As practical matter, this is traders paying the president of the United States to get an advanced peak on what he's going to say so that they can trade. This is the president of the US taking government information and selling it. That's exactly what a stock app prohibits. Okay, so now is this there's one little nuance here about the nature of the information. I do the I mean these po up until he started selling the feed, which I think is live now. I'm guessing people can start buying it. I don't all right, whatever. Who they're taking orders. Okay, great. you know, normally he'd just be doing this and this wouldn't be Yeah. No, I think it just starts in August. Like they're taking the they're they they've got they're signing people up but they're starting it on yes. confidential because it the whole po I mean the whole p the public is seeing it. But is this i within the definitions of confidential or proprietary information in the case law, is th are these posts that kind of information? Well, it's not the post, the posts are public. The confidential information is what is the president going to post in the future? That is what's confidential. And they're getting that in enough time to trade on it. That's the point. And and though and that information, what is the president going to post? That is confidential government information. Because I mean, let's be clear: if this post were about like personal matters, like Okay, okay. Okay. You know, my son's getting married, or I'm redecorating Mul Mar-a-Lago. he can sell that information if he wants to. He's free to sell that information, but no one would want to buy it because it's not material. The only reason exactly, the only reason that these post-move markets is because they are presidential information. They are pronouncements of government policy, they are pronouncements of government status, they are pr you know, they're pronouncements even in the insight of the president. This is information that is generated by him. Yeah. It's not tradable. Right, yeah, right. In his capacity as president. So it belongs to the US government. It's not his personal property. And they ended directly to people. So if we analogize to a corporation, which literally the act tells us to do, it would be like a CEO of a corporation selling advanced access to the fact that he's going to announce he's contemplating a merger. That might be information that the CEO generated, like in his head, he's contemplating a merger, it's about his thought process. And a and indirectly the US people. This is right, okay. But it's about his thought process as the CEO of a company, po corporate policy. Yeah. Right. Where where he where he owes a duty. And and in corporate life there's a specific, you know, duty of loyalty that that CEO owes. I in the government context, it sounds like the Stock Act has basically created that duty of loyalty about confidential information related to what the president thinks and says. I got it. Cool. interesting. Yeah. It says Yes. Exactly. That's exactly what it does. And I mean, the press release, the Trump Media's press release is really outrageous. It says explicitly, and I'm quoting now, that they're selling this to, and this is the quote: monetized proprietary assets. These are not Trump media's proprietary assets, these are government assets, and he's selling them. okay, no this no no no no no no no. Right. This is this is this belongs to you and me. All right. So does this how how materi I mean, is this materi material or does it really matter? So, you know, look, for better, for worse, we don't really talk about it here because we try not to talk too much about social or or civic affairs, but you can't not sometimes like today. you know, the the the Trump family has made We're trying not to start. Yes. Yes. billions with a B off of the presidency in ways that we can debate are good or bad. I personally think it's not great. It's a bad look. But anyway. and they've said the Trump media, his company said there's no conflict, and he is d I mean he's denying any involvement. He says I don't really manage these investments anyway, which is not credible. I mean what's what's what what's the broader reason why this is going to be important to us? Yeah. Okay, so one of the interesting things about insider trading law, and this is actually why the law itself is fairly convoluted, is there's a lot of disagreement about the policy, like why do we even prohibit insider trading in the first place? Yeah. Yeah. yeah, there's a there's a whole I'm sorry to interrupt, there's a whole thread, a whole rich thread that in in financial literature that insider trading should not be illegal. Exactly, but not completely. There's one, like that's the thing. There are a lot of people who argue that it shouldn't be that we should permit a lot more than we do. Exactly. It makes prices more efficient. It's better for, you know, all there are all kinds of reasons to not prohibit as much as we do. But where I believe, and I haven't like, you know, read every single person, but where there's a core of where there's agreement on what we should prohibit, that core is when there's a risk. Right. It it it adds information to the market. There's also okay, you're right. Right. That the insider with the information will stop doing what they were hired to do because they can make so much money on the trading instead. So the here's here's imagine a CEO. CEO is supposed to run the company profitably. You want him to increase stock prices. And maybe you pay him to increase stock prices. But if he can insider trade, he makes money whether stock prices go up or down. What he makes money on is volatility. So if he thinks prices are gonna go down, he'll short the stock. And if he thinks prices are gonna go up, he'll buy the stock. And and and he'll then he'll then behave and disclose stuff in ways that will c well, this creates this is everything is agency problems. Agency cost, right? Exactly. It it exactly. He won't be focused on running the company well. He'll be focused on running the company volatily so that he can get the trades in. He he'll delay disclosure so he can get a trade in. He'll make disclosure specifically to move the stock. So it really so the the fact that he's insider trading causes this divergence in what he's supposed to do versus what he's actually doing. And that's exactly the problem with the Trump media thing, because this feed that Trump media is selling. Yeah. It's only valuable, it's only worth paying for if Trump posts information that moves markets. If he doesn't post, no one pays for the feed. If he posts less, people pay less for the feed. So now Trump is incentivized to post things that move markets, regardless of whether that benefits the American people. He's got an incentive to disclose negotiations with Iran or disclose negotiations with other countries or corporations or whatever, not because it's good for America. But because it'll move markets and make the feed more valuable. Exactly. And his whole thing about like, well, I have no idea what my investments are doing, which as you say is not credible. But even if you believe it, it doesn't matter. All he has to know is that someone's paying for this feed, which obviously he does. And that gives him the incentive to make the feed as material as possible. Because it's gonna help his help his trader customer. Now here's a question. Yeah. Yes, and then we have to move on. That's fine. you know, let's is this is this actionable? I mean, is is the is the fraud that this is a ten B case, right? Is this actionable? I mean, we we think I know what you think and I think I think that too, about that this is fraud. This is insider trading, and that Trump media should be brought before some judge to account for this. and they would defend themselves and say, No, no, no, it's this, that, or the other thing. wha what Yeah, yeah. What would how would that look? What would what would the what would the case start to look like? Well, okay, right. So we're gonna talk about what what kind of case it would be, but you're right. There's they have a defense. There really is. There is a flaw in the theory that I've just laid out, and I will tell you the catch. As I said, the securities laws don't prohibit insider trading, they prohibit fraud, they prohibit deception, fooling someone, tricking someone. And the theory is insider trading is fraudulent, it's deceptive, because this employee or whoever. Okay, go ahead. Right. They received the information for a purpose and they secretly took it for profit. The fraud is pretending loyalty to whoever the source of the information is, and then betraying them by illicitly using the information for personal gain. So in this case, the theory of fraud would be Trump has this information that is government information and he's using it for personal gain, but he announced he's doing it publicly. We all know. We saw the press release. Right. i th n not not the actual truths, but his policy, his program of charging was fully disclosed. Yes! So so he could so what he would say, what he will say, should a court get hold of this, is he didn't secretly, he didn't secretly do anything. He announced it right there for everyone to hear. I am taking this government asset and I am selling it for personal gain. So you might say the government is wronged, you might say there's some other statute that would apply. I have no idea, but it's hard to call it. Or the CEO will say, yeah. man. Fraud because who's deceived? Everyone, everyone knows he plans to do this. There was a press release. There are headlines in the Wall Street Journal. He's not betraying a confidence. Yeah. Yeah. So if it's exactly if it's not fraud, it doesn't violate section ten B. But It was it's it's so so there's there's there's an old there's an old saying in I can't remember who it's is possibly a apocryphal, it's that the the the real problem isn't what's is it no it was the cover up. The real problem with what happens isn't what's illegal, it's the it's what's legal. Here's the thing. Let's say he actually did make that argument. Like, let's say this somehow got to a court. Let's pretend. I'm not sure it's a slam done. Well, well, well, we actually I I have a theory on this, but but but but let's say it got to a court. He makes that argument. It's very possible a court would accept that defense, but it's also possible they would reject it. And the reason I say that is there have been cases where defendants made that exact argument. I disclosed. Which is it and it by the way, that's not happening. No w I don't think the S E no one's gonna rebring this case. I disclosed and therefore it wasn't fraudulent. Yeah. And it turns out courts don't like that argument. They dislike it and they find reasons to f say that disclosure wasn't good enough. So theoretically, disclosure is supposed to mean there's no fraud, but in practice, I can already think of what of what you might argue here. My my plan to share co right, yeah, right. Like a court could say, it's not enough to generally disclose the feed is available because he hasn't been specific about what precise information he's gonna take for himself and post about. For any specific pip piece of information he has, we don't know if he plans to keep it in confidence. If he goes into a room with Pentagon officials and the meeting is categorized as so top secret, should everyone just assume he has his fingers crossed behind his back? We don't know. Trump media is already Trump media, as you said, is already insisting there's no conflict. No. And Trump's Trump's job as president between Trump's job as president and what they're selling. Now, if that's true, that means he's not selling any per governmental information. So does that mean they're disclaiming that he's planning to post proprietary government information? I mean, it's just not clear that this disclosure of the feed itself is sufficient to to moot the fraud or to you know, get rid of the fraudulent aspects of any specific post about specific information. And Trump might say something like, Well, I gave myself permission to use the government information, but I don't think that flies at all for a bunch of reasons. I mean, you can't put the president in the statute and say he's covered by it, and then the president can unilaterally say, no, I'm not. Right. No. Okay. interesting. And that assumes, like I said, that this'll go somewhere. And I think it's unlikely that anyone's gonna pick up this case. no? That's not exactly true. Because I agree there is no chance that this SEC or this DOJ is going to bring a case. But private plaintiffs can sue. Under general instantrading law, anyone who trades at around the same time of the illicit trade is allowed to sue. Justice Department, right. Yeah. under under the Stock Act? Yeah. For disgorgement of the illicit gains, anyone who traded and anyone who tipped the traders. So that means a private plaintiff could theoretically, if I'm right, sue Trump media and the high-speed leak, leave aside whether they could sue Trump himself, whether there's an immunity doctrine. I have no idea. But they could sue Trump media and they could sue anyone who buys the feed. So so But they'd have to know who that was and they'd have to show that they traded at about the same time. But otherwise they can sue for a disgorgement of the illegal profits for the price that was charged for the data feed. So it wouldn't absolutely shock me if some enterprising plaintiff took a shot. It could happen. Yeah. I think they said the August 1st. Okay. that will be fun to see. Wow. All right. So we'll have to follow this starting like in around August, you said. Is next month is when they're all right, cool. We'll see who buys this. All right. Well, we have more to talk about related to the SEC rul the new SEC rules affecting spa SPA SPVs, and we'll do that shortly here at Shareholder Primacy. Yes. was fun. I like that. You like that, Matt? Hope you insider trading's so interesting. All right, cool. Insider trading live, it's always fun. My students love it. It it it 'cause I mean the the the the fact pat everything about it is hilarious. Yes. All right, cool. back to you, Ann, take us in. Welcome back to Sherald of Primacy. I'm Ann Lipton here with Mike Levin. So last week we saw this little bit of SE little noticed bit of SEC, not regulation, interpretation of the regulations, pertaining to financial activist. And based on this announcement, as I gather, activists like which are institutional investors, are going to have yeah, are gonna have to disclose their own investors, their own limited partners, I guess. Largely. Yeah. Yeah. In some situations. Okay, so what are these situations? In certain in certain situations, exactly. So so this pertains to special purpose vehicles, SPVs. So and there's all sorts of definitions about what an SPV is, but basically a SPV is like a one time use corporate shell that holds investment from Right. you know, a syndicate or from a diverse group of shareho of investors. Could be anybody, could be individuals, could be institutions, could be foundations, whatever, who all contribute kind of money. they create the vehicle and that's used it's for a special purpose. Okay. And the special purpose in this instance is to invest in a given company for activist intent. Okay. And this this happens More than people might expect, but it's still not highly common. Yeah, I mean I usually think of you investing in a fund that does different engagements rather than Right. Yeah. Mo most most activists that we read about, and in fact most activists that are at work have funds. So they go and, you know, raise a bunch of money and then invest in a number of of situations. I know one fund that I'm friends with that their number is two. They have two different investments that they work that are activists. I mean there's others, but All right. But and and but when investors invest in those, they don't necessarily know, like the pitch isn't we're going to act do an activism at this one company. Correct. Right. I right. If if you if you're being pitched for that investment, you know, sometimes the portfolio managers say, Here's the ten companies I'm considering or something. But this is very specific. Someone goes to you, Anne, and says, If you have a million dollars, we're planning on putting it to work at SpaceX. That's not happening, but you know, okay. we mentioned it. We try not to mention SpaceX and Must, but it c i it came up. Sorry, sorry. Right. Mm-hmm. Right, that is we almost won a whole show. and so it's a vehicle that invests specifically for that purpose. And you sometimes you'll lay out your plan and say, This is what we're doing. We're doing a proxy contest or whatever. And that'll come up in a minute about the proxy contest. and this again happens a little more. You know, there's probably a a a few dozen, not even that many, that get formed in a given year to do this, but it's not completely unusual. it's Mm-hmm. I I I I didn't even know it was a thing. Y yes. Well, you know, sometimes a newer activist or someone who doesn't do it a lot, might you know, because they haven't raised a fund, nonetheless is a really good idea and they'll go talk to somebody who'll say, Okay, I'll give you the ten million dollars. I know you need thirty. If you can go find twenty other million do millions of dollars, we'll put it in this vehicle. And and we'll go off and we'll go off to the races and we'll start doing the activism at the company that you just talked to me about. So that's kind of what's going on with an SPV. now immediately you can sort of see some why would you form an SPV? Why wouldn't you just like tell all ten people to just go make an individual investments in and then we'll form a thirteen D group? Assuming that you're hitting the five percent threshold or form a group or something like that. Why don't you just co well, it it does make life a little easier. Okay. But SPVs in some part are designed to not reveal, conceal the identity of some of these investors. Okay. Maybe they don't want to be associated with it. Maybe they it's too small for them. They're really big investors and they don't wanna, you know, manage it separately. Hmm. Yeah. Right. Yeah. And if there are gonna be lawsuits or whatever, you don't wanna be the target of the lawsuit. Yeah. if if they were to okay. So so You're not right, you don't want to be sued individually. You it helps limit liability. Okay. So that's kind of what's going on with SPVs. Well, what happened last week is the SEC, through the corporate Corp Fin, corporate finance, you know, their their pr you know, marquee division of of the SEC, issued a CFI, corporate finance interpretation about these SPVs. now the interpretation was very straightforward. It's that any SPV that forms that files a third form thirteen D because they have more than five percent in an activist intent needs to disclose all the investors in the SPV. In in that thirteen D file. I think it's item three. I can't remember. So so you can't shield your identity if you invest in a vehicle that is intended that is just intended for one particular engagement. Right. Now Correct. So and this was interesting at a few different levels. But let's let's make sure that, you know, we make mention one thing, which is that this only applies to thirteen D filers. Okay, so Well there but there was a right, yeah. so if you're not a thirteen D filer because you have less th so if you're but but there's a pro but there's a proxy one too. Okay. If you're not a thirteen D filer. Yes, there's a related one related to soliciting proxies, which we'll which we'll get to in a sec. Okay. because soliciting proxies is a little down the road. That presumes you're in a proxy contest, right. Okay, so if you're so if you if you if you're do okay, right. So but if you're if you're right, so if you're doing your engagement at a four percent level, you're not filing a 13D, and so you're not revealing anything. Right. Although yeah. A at least until you run into an advanced notice philo that requires disclosure, but that's a whole separate show. Right, exactly. And so right, and so your SP V can, you know, go forth, you could I mean, but you know Or something exac yeah, right. so so it's the for thirteen D filers. and again all you know, all your two, four, ten, whatever number of investors will be on that thirteen D, assuming that you're at at five percent. so l and and that again, based on what we talked about SPVs and why form them, that may give some SPV activist investors or their limited partners, because usually these are like LLCs or something like that. so a little bit of heartache. You know, is it gonna be a little harder to raise investment? You know, if you know you're gonna be just disclosing who I am, assuming you hit the five percent threshold. Okay. so there's a couple of two or three th aspects of this we wanna we wanna cover. First we'll cover the thirteen D mechanics, then we'll talk about proxy solicitation. first, let's ask Yeah. Right. Okay. We let's talk a little bit about what the the actual it's not even a regulation, this interpretation is. It's C F I, corporate finance interpretations. These used to be called C and D I's, the compliance and disclosure interpretations. And you're probably, you know, a little familiar with with that little bit of of SEC policy or whatever making. they only come f I think they only come from Corpfin Corporate Finance. I don't believe any other Yeah, yeah. division of the SEC issues these kind of interpretations. right. And I think this is like the the lowest level of SEC kind of taking a stand on something. there's this is this is less relevant than like no action letters. This is certainly different than, you know, regulation and whatever the commission itself does. This is just the staff Yeah, no, because they're they're the ones who do the yeah. The the regs that require that question. Hm. Yes. It Yes, but we've also seen ones where it was pretty clear that the staff was taking its marching orders from higher ups. Like it's supposed to be just administrative. Like, remember remember when they did their whole thing where they said you can't be a thirteen G filer if you engage in ESG conversations? There is no question that was coming from the higher ups, even if the st yeah. Then that basically saying here's kinda how we think about this particular issue. Go ahead. okay. y yeah well that's and that's an interesting question we have. Right. That and and and that was a C that was a C F I. That was a C and D. I right or whatever it was. And it's just basically a public statement saying and usually it's in the form of like Q and A. It's like it I I kinda th I've been rereading some of these to kinda get up to speed on this one. And this is kinda like the SEC Corp Fin staff's mailbag. Yes. Mm-hmm. Yeah. Yes, it is. Although I I always wonder if they're generating their own questions because they want to put out an answer. I don't I wonder that about podcasters too. So anyway. so this is just the staff saying here's how we're going to interpret this and in this case it's how they're going to interpret the rules around r for tea f filing form 13d. That if it's an SPV and there and the language in this CFI is actually pretty precise. It says if you form an activist a a vehicle for a specific purpose and the investors are informed of that purpose in advance and so on and so forth. There's some very specific conditions that have to be met. That's when you have to disclose them in the in the 13d. But again, this is just corp fin staff saying this is kind of how we think about it. There is a good chance that this kind of came down from the commission, but that's something I want to I'll talk about in a minute. The next Right. Right. Yeah. interesting part of this is this little bit of companion regulation that came out related to a specific part of activism, proxy contests. Okay. So and and it's one of the least read, I'm guessing, parts of a proxy statement, and certainly one of the least understood, is that at some point in a proxy statement, remember reading about who the participants in the proxy solicitation are? The participants. I don't know well, I mean, I think there's liability. yeah. Okay. Okay. Go reread it. Okay, so anyway, there's a list of what are called participants and you list all the principals and you list some the proxy solicitor and some of their staff. It's anybody who can reasonably be expected to kind of be touching or contacting or talking to a shareholder in the solicitation of the proxy. So usually you list as the participants like the portfolio manager and the relevant staff from the fund, all the director candidates, because sometimes you might talk to a director candidate. Okay. This is just to give the shareholder world a little heads up about who you might be talking to. Okay. If I can't remember the threshold I said, five hundred dollars of cost or investment. if you exceed that, and almost every SPV investor would be part of this, you have to list the Yeah. Yeah, of course. investors, those limited partners, as participants in the solicitation as well. So if this SBV gets as far as the proxy contest, Then they're gonna have to disclose again. You just have to be doing the proxy And that's when there's actually gonna be liability risk, because if you're named as being a solicit is soliciting proxies, then if there's a charge that there's a false proxy, you're gonna be on the hook for that. They're gonna have to just a and y and here you don't have to be five percent. Here you could be under five percent, right? Right. Right, or some fraudulent exactly, right. So so that's the other thing. So this may this will possibly affect how SPVs kind of get involved in proxy contests, maybe. Well I I wonder I mean can you shield it by like so the limited partners form a limited partnership first and like the you know it's like the the special purpose vehicle for the special purpose vehicle and that's what they disclose. Like is there a way to where I did maybe. interesting. Well I don't know. There may be there may be some workarounds here that I haven't thought about. No one's tested this yet. I don't think I've tested this yet. Right. so so that's the other thing is that there's now related to the proxy solicitation rules, all the investors in an SBV will have their identities disclosed. Again, and that's regardless of whether you file thirteen D. So Yeah, I know, it's brand new, yeah. And and and once again and and yeah, be potentially liable. I mean, I don't know how likely that is. I don't see a whole lot of lawsuits charging but Right. Now this this could send a little chill through SPVs. Again, most investors are trying to avoid the five percent threshold anyway, at least are they kind of time. We've talked about that. So so there's there's a chance that people may be looking for and I've actually heard from a couple of friends of mine who are already starting to look for workarounds to say is there some some way to kind of get around this? Again and the SPVs are not Well, really? completely common, but they they happen. I know a a bunch of friends of mine that have started SBVs over the years to for one or another investment. Activist investment. So this would this would affect them. now and part of the problem is I I I can't disagree vehemently with the SEC staff at least thinking this way. 'Cause if yeah, if the look, the the point of thirteen and again, if if i if we're If we agree with the policy that we should be disclosing who investors in a company are, and I'm not sure I agree or disagree, this in one sense kind of closes a little bit of a loophole that you'd be able to conceal investors in a company by putting them behind an SPV rather than by having them make direct investments and being listed, you know, as a long list and a group in in the thirteen D filing. Yeah, but I mean I always thought I mean, I don't know, the I always thought I mean I I'm not opposed to sort of knowing who investors are, but the the group pol policy, the thirteen D, I mean, I think the bigger issue is that you're there and what your plans are. But yeah, wait a sec. I absolutely I I we we we can have much larger discussion about whether thirteen D makes sense in its current form and so forth. Yeah. Right. Yeah. No, but but just yeah, I mean like the who the you know members of the group are is a lot less important unless it's like a name like Elliot than than the fact that they are there and they do have these plans and not being yeah. Yeah. Yeah, absolutely. Right. Yeah, but there's but there's still plenty of of of you know, a very large number of investors who like the idea of investing in activist situations, but for reasons they don't necessarily want to be disclosed. And, you know, we have to decide, you know, as a matter of policy whether that makes sense or not. Yeah, I yeah, I mean, yeah. I mean, we can think of all kinds of situations. Obviously, nobody's gonna do the activism stuff at the Elon Musk companies, but he's a good example of sorry. But but but but they're like, but one reason, like, you know, you're not gonna like you don't want to challenge leaving aside all the other issues. if you want access to his private companies, and SpaceX is not private anymore, but if you want access to his private companies, you can't piss him off and his public companies, so therefore you may not want to like, you know, those kinds of things. Like it might damage relationships, yeah. No, no, no. There's many smaller ones where this is this starts to happen. Right, yeah, yeah, right. you brought him up again. Yeah. All right. There's one other broader issue that occurred to me as I was thinking about this and how it affect me. And again, I don't I've I've, you know, started setting up S P Vs for various you know, once or twice, but I've never really made an activist investment through an S P V. it just hasn't been necessary. I mean, you they're a bit of a hassle to set up and there's some legal cost and you know, you gotta Yeah. manage things in the right way, you gotta put together an operating agreement 'cause it's an L L C so, but I'm wondering, and this gets back to your point about whether this was just the staff kind of clearing up a loophole that's bugged some senior staff person for a long time, or whether this is something broader coming down like from the commission. And if it come down from the commission, you know it's coming down from some place greater than the commission. It's probably the White House. All right. Yeah. This is, as far as I can tell, the first effort under SEC Chair Atkins to really make life harder for financial activists. Okay. most direct efforts to make life harder for activists have all been in the ESG world about shareholder proposals and proxy advisors and all that kind of stuff. Okay. And we talked about it that most financial activists just, you know, aren't troubled greatly by at least directly, you know, in terms of their own interest, by those efforts. you know, clearly it's it, you know, it bugs some more than others and so forth, but it doesn't really affect the ability the all the ESG stuff about like fourteen A eight does not affect the ability of a financial activist to kind of do their thing. Okay. This yeah, and you could argue that maybe the move from quarterly to semi annual reporting Yeah. is but but that's not designed I don't think to make life hard for like financial activists. I think that's just you know an expression of policy that some people have long advocated and we can disagree and I we I do disagree with that. I like quarterly reporting. but you know that's not aimed directly at you know that hedge fund activist financial activist community. This is And that's and that and I'm not sure what to make of that. Go ahead. Yeah. I I well, you've heard my theory on this before, which is this is all what going in one direction, which is consolidating the power of managers against all their shareholders in general. And I've made this argument before. ESG is sort of like it's the tip of the spear. it like you can what like I don't Yeah, yeah. Right. I I've gotten pushback on this. There are definitely people who want to who their interest is ESG and they want to get rid of it specifically for political reasons. And they are, you know, the proxy advisor attacks and all of that stuff. That and 14A8, that's very specifically because they think ESG is bad for political reasons and they want to get rid of it. But I think there's sort of a marriage, a kind of an alliance with people who it's like it's not so much they care about ESG specifically, it's what they want to do is limit shareholder power. And so what we're seeing. Is like ESG becomes the excuse to limit shareholder power across the board. And then of course it spreads out in other ways. And it's not that there aren't people who like really for them it's about ESG and I don't want ESG activism because, you know, I'm conservative Republican Texas, whatever. But it's just that they get a lot of their support and they get a lot of, you know, you know, sort of political alliance with the people where it's just. no, I don't want shareholders to be bothering management at all. And this is why of those proxy advisor laws that we've talked about, a lot of them, like they start with because proxy advisors make ESG recommendations, but they end with and therefore will burden any advice against management. So Right. i I yes. I I I know where you're going with this and I like I said I that it's a it's a very credible interpretation of what's going on. It's just not clear to me that this is directly part of that or whether the because it's a C because it's a C F I, because it's a policy thing that, you know, it's from the staff. See, I so was the so but so was the thing with ESG commentary from the big mutual funds. I think it's just all part of one larger project, and that project is to make management less accountable to shareholders. Period, on all things. Right. Yeah. Okay. Yeah. Okay. so h however, if it is in fact part of an effort to start to crack down on financial activists, that th this worries me. I mean it worries me per se a lot. You know, the SPV stuff, again we could talk about it so forth, but it's gonna make life harder for some activists. But whether this is the beginning of a trend to really make life harder for activists, w again, that's been a dream of you know, a lot of corporate members of the business round table and so forth to really make life difficult for, you know, the starbirds and the right, yeah. So Yeah, like the retail shareholder voting program. Excel's retail shareholder voting program. I mean, it starts as: no, we want to get rid of climate activists, but it becomes share we've got a bank of shareholder votes that are all yeah. Yeah. Right, we're gonna make we're gonna make life har for Exactly. All right. So so this is one thing I'm gonna be kinda pondering and wondering about. We'll sort of see I mean there's there's a ways to sort of see what the S P V V world looks like. again it's a very small sample, but we can sort of see and sort of see how it works. So anyway, that's what I had for you about this. and it's it's an interesting little bit of of Mm-hmm. Okay. I did not even know that the SPV thing was a thing, so yeah. no, this is this is again, it's not a huge deal, but it's not a small deal either. So anyway. All right. We'll return to that at some time soon. But in the meantime, this is Shareholder Primacy, hosted by Ann Lipton and me, Mike Levin. I'm an independent activist investor and advisor to investors about their activist situations. Anne is professor of law and the Lawrence W. Demuth, Chair of Business Law at the University of Colorado Law School. You can find me, Mike, at the activist investor, one word dot com. And Anne at Law. dot Colorado dot EDU Thanks for listening. We'll talk again soon. Stop.