On March 22, 2017, as previously anticipated by the market, the SEC adopted an amendment to Rule 15c6-1 under the Securities Exchange Act of 1934 to shorten the standard settlement cycle for most broker-dealer transactions from three business days after the trade date (T+3) to two business days (T+2).  The SEC proposed the amendment on September 28, 2016, in connection with a variety of related changes to the SEC’s rules and the rules of self-regulatory organizations such as FINRA to facilitate the U.S.’s move to a T+2 settlement cycle.

For more information, see our blog post on The BD/IA Regulator.

On February 28, 2017, the SEC released a white paper analyzing crowdfunded offerings during the first six months following the effective date of Regulation Crowdfunding (May 16, 2016). The white paper noted that crowdfunding has thus far been attracting issuers that have not extensively utilized Regulation D.  Despite a relatively small sample size and a short observation period, the white paper makes, among others, the following observations:

  • There were 163 separate offerings by 156 issuers, seeking a total of approximately $18 million, excluding withdrawn offerings. The median offering amount was $53,000 and the average offering amount was approximately $110,000. However, almost all of the offerings accepted oversubscriptions up to a higher amount (typically close to $1 million) for a total amount of approximately $101 million.
  • As of January 15, 2017, approximately $10 million in proceeds was raised in 33 offerings by issuers filing a Form C-U. The median amount raised in these offerings was $171,000 and the average amount raised was approximately $303,000.
  • For offerings initiated in 2016, 24 were withdrawn by issuers or associated with an intermediary whose FINRA membership was terminated and funding portal registration withdrawn. These offerings sought a total of approximately $2.3 million (approximately $19.5 million if oversubscriptions are included).
  • Most of the offerings solicited in all states.
  • The most popular type of security was equity, followed by “simple agreements for future equity” and debt.
  • The most popular state of incorporation for issuers was Delaware and the most popular principal place of business for issuers was California.
  • The median issuer had under $50,000 in assets, under $5,000 in cash, $10,000 in debt, no revenues, and three employees. Approximately 40% of the issuers reported positive revenue and approximately 9% of the issuers reported a net profit in the most recent fiscal year. Among the issuers that reported non-zero assets in the prior fiscal year, the median growth rate was approximately 15%.
  • 21 intermediaries, including 13 funding portals and 8 broker-dealers, were involved in the offerings. As of December 31, 2016, 21 funding portals have registered with the SEC and FINRA and one funding portal had its FINRA membership terminated and withdrew its SEC registration. The median intermediary percentage fee was 5%, and intermediaries took a financial interest in the issuer in approximately 16% of the offerings.

A copy of the white paper is available at: https://www.sec.gov/dera/staff-papers/white-papers/RegCF_WhitePaper.pdf

On February 28, 2017, the SEC issued an order (the “Order”) temporarily suspending the ability of Web Debt Solutions, LLC (“Web Debt”) to utilize Regulation A, pursuant to its authority under Securities Act Rule 258. The Order stems from untrue statements of material fact made in Web Debt’s offering statement on Form 1-A, which was filed with the SEC on July 11, 2016 (the “Offering Statement”). The SEC specifically noted that the Offering Statement: (i) contained inconsistent, contradictory balance statements regarding Web Debt’s total assets in 2016; (ii) included erroneous statements that Web Debt’s chief executive officer had 15 years of experience in the debt collection industry prior to forming Web Debt; and (iii) listed as the address of Web Debt’s principal office, a building that, as of the date of the Order, was currently under construction and without any businesses operating from it. The SEC also noted that Web Debt’s chief executive officer had failed to fully cooperate with the SEC’s investigation, including failing to: (i) produce, in response to a voluntary document request, any documentation related to Web Debt by a stipulated deadline; and (ii) respond to subsequent communications from the SEC regarding the voluntary document request.

A copy of the Order is available at: https://www.sec.gov/litigation/admin/2017/33-10316-order.pdf

On March 1, 2017, the SEC proposed the use of the Inline XBRL (eXtensible Business Reporting Language) format for the submission of operating company financial statement information and certain mutual fund information.  Inline XBRL allows filers to embed XBRL data directly into an HTML document.  With Inline XBRL, filers need to tag the required disclosures using the applicable taxonomy.  The tagging would be performed within the HTML document instead of a separate XBRL exhibit.  The objective of using Inline XBRL is to improve the data available to investors and other market participants.  The proposed Inline XBRL requirements for financial statement information would apply to all operating company filers, including smaller reporting companies, emerging growth companies, and foreign private issuers that are currently required to submit financial statement information in XBRL.  The proposed Inline XBRL requirements would be phased in based on the category of filer.

On March 1, 2017, the SEC also made IFRS taxonomy available.  As a result, foreign private issuers under Securities Act Rule 405 that prepare their financial statements in accordance with IFRS as issued by the IASB may begin submitting their financial data in XBRL format with their first annual report on Form 20-F or 40-F for fiscal periods ending on or after December 15, 2017.

For more information, see our client alert available at: https://media2.mofo.com/documents/170306-inline-xbrl.pdf.

On March 1, 2017, the Securities and Exchange Commission (the “Commission”) adopted amendments that require that registrants that file registration statements under the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”) and periodic reports under the Exchange Act subject to the exhibit requirements of Item 601 of Regulation S-K and foreign private issuers that file Forms 20-F and F-10 include hyperlinks to each exhibit listed on the exhibit index in such filings.  The amendments require that all filings be submitted in HTML format.  The amendments become applicable to filings made after September 1, 2017.  Registrants that are “smaller reporting companies” or that are neither “large accelerated filers” nor “accelerated filers” (i.e., “non-accelerated filers”) and that make submissions in ASCII format must comply with the new requirements by September 1, 2018.  A phase-in period also will be applicable to certain securitization related filings made on Form 10-D.  As discussed in August 2016 when these amendments were proposed the objective is to facilitate investor access to exhibits.

Registrants will be required to include a hyperlink to each exhibit identified in the exhibit index, unless the exhibit is filed in paper pursuant to a temporary or continuing hardship exemption.  The requirements are not applicable to any multi-jurisdictional disclosure system (“MJDS”) forms or to Form 6-K.  An active link must be included for each exhibit listed in the exhibit index and if an exhibit is incorporated by reference an active hyperlink to the exhibit separately filed on EDGAR.  The rules do not require that previously filed paper-only exhibits be re-filed.

Registration statements and reports subject to the exhibit filing requirements must be filed in HTML (not ASCII) format.  Schedules or forms not subject to the exhibit filing requirements are not subject to the HTML requirement and may continue to be filed in ASCII format.

See the Commission’s final rule:  https://www.sec.gov/rules/final/2017/33-10322.pdf

At an open meeting today, the SEC voted to issue a request for comment (RFC) on the disclosures required by Industry Guide 3, which applies to the description of business portions of bank holding company registration statements.

As the SEC noted, the financial industry has changed since Guide 3 was last updated in the 1980s.  The RFC will solicit comments with a view toward modernizing Guide 3’s requirements for today’s banking industry.  Quantitative and qualitative disclosures, and the current tabular disclosure format, will all be open to comment.

The RFC will address the disclosures required by Guide 3 and other disclosures to which bank holding companies are subject.  Some of the areas to be covered by the RFC are:

  • Is there overlap or duplication that can be eliminated?
  • Should other disclosure requirements applicable to financial companies, such as those required by Regulation S-K, be incorporated into Guide 3?
  • How should Guide 3 capture activities other than lending and deposit taking?
  • Should Guide 3 require disclosure of non-interest income?
  • Should the scope of Guide 3 be expanded to include public financial companies other than bank holding companies?
  • What other disclosures should be required to help investors make informed investment decisions?

Acting Chair Piwowar made remarks at the the Dialogue on Crowdfunding hosted by the Securities and Exchange Commission and the Salomon Center for the Study of Financial Institutions at New York University.  In his remarks, Acting Chair Piwowar shared the following statistics regarding crowdfunding, noting that:  163 U.S. securities-based crowdfunding deals have been initiated, of which 33 have completed their fundraising.  Over $10 million has been raised since the regulation went into effect, with most offerings still ongoing.  There are currently 21 registered funding portals in the United States.  He also expressed concern as to whether the final rules are too restrictive or too burdensome and raised the possibility that the Commission consider steps to improve the regulations, including through the use of the Commission’s exemptive authority.

Commissioner Stein closed the session by noting some challenges.  Stein addressed the role of funding portals, noting that from May 2016 to January 2017, 27 crowdfunded offerings were withdrawn and of these 16 were hosted by the funding portal that was recently expelled by FINRA.  Along these lines, Commissioner Stein suggested revisiting the role of funding portals as gatekeepers for these transactions.  Stein also commented on the types of securities offered to date in crowdfunded offerings, which were predominantly equity (36%) and 26% of which were for SAFE securities.  She raised the possibility that the Commission should review whether SAFE securities are appropriate for retail investors.  Stein also noted concentration with the top five federal crowdfunding states accounting for 60% of offerings and over 90% of the total amount raised from completed offerings. The location of registered portals is heavily concentrated in California, Texas, and along the East Coast.

At today’s Practising Law Institute SEC Speaks annual program, Acting Chair Piwowar made opening remarks.  During his wide-ranging discussion, Acting Chair Piwowar, inspired by William Graham Sumner’s the “forgotten man” referred throughout to the Securities and Exchange Commission’s investor protection mission and the objective of keeping in mind the interests of the “forgotten investor.”  Piwowar commented on the Commission’s focus on effective disclosure requirements and the need to be guided by the concept of materiality in formulating disclosure requirements.  He pointed to various specialized disclosure requirements introduced by the Dodd-Frank Act, including the resource extraction, conflict minerals and related matters.  Piwowar noted the importance of avoiding disclosure overload.  Piwowar also commented on Regulation D and questioned the utility of applying the “accredited investor” standard as a means of identifying individual investors that do not require the protection of the disclosures associated with registered offerings.

Providing a glimpse into upcoming actions, Piwowar noted that the Commission will consider whether to propose a request to comment on the requirements of Industry Guide 3 for offerings by financial services companies, consideration of a final rule requiring registrants that file registration statements and periodic and current reports that are subject to the exhibit requirements under Item 601 of Regulation S-K, or that file on Forms F-10 or 20-F, to include a hyperlink to each exhibit listed in the exhibit index of these filings and in order to enable the inclusion of such hyperlinks, to require that registrants submit all such filings in HTML format (see the proposed rule:  https://www.sec.gov/rules/proposed/2016/33-10201.pdf), a proposed rule relating to the use of inline XBRL data in filings, and amendments to Rule 15c2-12 relating to muni disclosures.

The use of non-GAAP financial measures by public companies continues to be an area of growing concern for the Securities and Exchange Commission (“SEC”). Since the staff of the SEC’s Division of Corporation Finance (the “Staff”) released its updated Compliance and Disclosure Interpretations on May 17, 2016, on the use of non-GAAP financial measures (the “Updated C&DIs”), the Staff has issued more than 200 comment letters related to non-GAAP financial measures that have become publicly available.

In this alert, we look at common themes or areas of concern identified by the Staff in these comment letters, as well as responses given by registrants. We also highlight pronouncements by senior members of the Staff on the important “critical gatekeeper” role audit committee members play in ensuring credible and reliable financial reporting, including compliance with the Updated C&DIs. Finally, we look at industry initiatives aimed at improving the dialogue among management, audit committee members, external auditors and other stakeholders with respect to the use and disclosure of non-GAAP financial measures.

Read our Practice Pointers: Anticipating and Addressing SEC Comments on Non-GAAP Financial Measures.

On February 14, 2017, President Trump approved Congress’ joint resolution to repeal the SEC’s resource extraction disclosure rule. That action effectively brings to a conclusion the SEC’s efforts to implement a resource extraction disclosure rule mandated more than six years ago by the Dodd-Frank Act.

Read our client alert here:  https://www.mofo.com/resources/publications/170222-repeal-of-resource-extraction-disclosure-rule.html