On March 1, 2024, the SEC announced an enforcement action against an investment advisory firm (“Investor"), stemming from its failure to promptly convert from a Schedule 13G to 13D after forming a “control" purpose within the meaning of Section 13(d) of the Exchange Act and Rule 13d-1 thereunder.[1]

Investor initially reported its holdings on Schedule 13G on February 14, 2022, disclosing beneficial ownership of 5.6% of the outstanding common stock of a logistics company (the “Company"). Between January 1 and April 18, 2022, Investor purchased an additional 2 million shares, increasing its position to 9.9% of the Company's outstanding common stock. Investor also entered into cash-settled swaps with financial counterparties between April 27 and May 12, 2022, providing economic exposure to another 1% of the Company's shares.

According to the SEC's Cease-and-Desist Order, between February and April 2022 Investor engaged in discussions with a large private equity firm regarding its investment in the Company centered around obtaining financing for a potential go-private transaction. During this time Investor also shared its proprietary valuation models and analyses with the firm. On April 26, 2022, Investor prepared a draft offer letter specifying $85 per share as a placeholder price and noting that financing would come from a private equity firm. Investor contacted legal counsel the next day to advise on its Schedule 13D filing obligations and was provided a copy of the draft offer letter. On May 12, 2022, Investor first met with Company management to discuss whether the Company might be receptive to an acquisition bid. The next day Investor sent a letter to the Company proposing to acquire all outstanding shares at a price of $86 per share.

The SEC notes in its Order that as of April 26, 2022—the date of the draft offer letter—Investor had formed a “control" purpose, and thus could no longer satisfy the “passive investment" certification required by Schedule 13G. As such, Investor was required to convert from 13G to 13D no later than May 6, 2022 (within 10 calendar days of April 26). In this case, Investor filed a Schedule 13D on May 13, 2022, the same day it delivered its acquisition proposal to the Company. The SEC fined Investor $950,000 for its failure to timely convert from Schedule 13G to Schedule 13D (the difference in timing between when Investor actually converted to 13D and when the SEC believed conversion was appropriate—7 calendar days).

This is the latest example of the SEC's increased enforcement activity focusing on non-compliance with Regulation 13D/G following the amendments to the beneficial ownership reporting rules adopted in October 2023. Persons reporting their ownership on 13D and 13G should be wary about timely compliance with their reporting obligations, particularly when filing initially on Schedule 13G and later forming a “control" purpose or intent.

Special thanks to corporate associates Chris Connelly and Cody Wong in our Orange County office for their assistance in the preparation of this post.

[1] At the time of the enforcement action, investors with beneficial ownership greater than 5% of a class of an issuer's securities were required to file a Schedule 13D within 10 calendar days of exceeding such threshold. The deadline to file Schedule 13D has since been amended to 5 business days after exceeding the 5% threshold or losing eligibility for reporting on Schedule 13G (for example, by subsequently holding the securities with a disqualifying “control" purpose or effect). See our October 2023 client alert detailing these amendments here.

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