On December 1, 2017, the SEC’s Division of Corporation Finance updated its Financial Reporting Manual for the following changes:

  • Revising guidance related to the pro forma impact of adopting new accounting standards (Sections 3250.1(m)-(n)), including clarifying that if a registrant:
    • acquires a significant business, and such business adopts a new accounting standard as of a different date and/or under a different transition method than the registrant, than the registrant must conform the date and method of adoption of the acquired business to its own date and method in its pro forma financial information; however, the guidance suggests that the SEC Staff will consider requests for relief from this requirement; and
    • retrospectively adopts a new accounting standard on January 1, 2018, makes a significant acquisition in September 2018, and later files a Form 8-K that includes pro forma financial information for the year ended December 31, 2017 and the six months ending June 30, 2018, than the registrant does not need to apply the new accounting policy to the pro forma information for periods prior to adoption until it has reflected the new standard in the historical financial statements for those periods; however, if the registrant believes the effect of the new standard on 2017 historical information will be material, it should make appropriate disclosure to that effect in the notes to the pro forma financial information.
  • Revising guidance to address the adoption of new or revised financial accounting standards after an EGC loses its EGC status (Section 10230.1), clarifying that:
    • EGCs that take advantage of an extended transition period provision are encouraged to review their plans to adopt accounting standards upon losing EGC status and to discuss with the SEC Staff any issues they foresee in being able to timely comply; and
    • generally, if an EGC loses its status after it would have had to adopt a standard absent the extended transition, the issuer should adopt the standard in its next filing after losing status, but depending on the facts and circumstances the SEC Staff may not object to other alternatives.
  • Clarifying the effective dates for ASU No. 2014-09 “Revenue from Contracts with Customers” and ASU No. 2016-02 “New Leasing Standard” for certain public business entities (Sections 11100 and 11200).

The updates to the Financial Reporting Manual are available here.

On December 4, 2017, the SEC’s Chief Accountant, Wesley Bricker spoke at the 2017 AICPA Conference on Current SEC and PCAOB Developments.  Highlights of Mr. Bricker’s comments include the following:

  • Ongoing Priorities. Bricker identified the following priorities: (1) supporting the successful implementation of the new GAAP standards (i.e., revenue recognition, leases, and current expected credit losses); (2) conducting oversight of the FASB; (3) conducting oversight of the PCAOB; (4) consulting on accounting issues and auditor independence rules; (5) monitoring internal control over financial reporting (“ICFR”); (6) advancing the effectiveness of audit committees in financial reporting; (7) contributing to international accounting, audit, and disclosure work; and (8) identifying innovations and emerging issues and evaluating their implications for financial reporting.

To continue reading, click here.

Below, a continuation of our bibliography of thought-provoking articles on issues related to right-sizing regulation, staying private versus going public, and related topics:

JOBS Act and Information Uncertainty

A recent paper titled “The JOBS Act and Information Uncertainty in IPO Firms,” published by Mary E. Barth, Wayne R. Landsman, and Daniel J. Taylor, has garnered quite a bit of attention.  The paper examines the extent to which omission of certain information by emerging growth companies (EGCs) can be tied to IPO underpricing.  According to the paper, EGCs that present compensation information for fewer than five top executives and present fewer than three years of audited financial statements are associated with higher levels of underpricing.  It is difficult to conclude whether there really is a correlation since, in our experience, many of the EGCs that choose to rely on the accommodations and omit this information are concentrated in particular sectors and those are usually associated with underpricing.  Similarly, in our experience, many companies in those sectors have concentrated ownership and existing investors participating in the IPOs.  The paper also concludes that EGCs have higher levels of institutional ownership than non-EGCs. This may not be all that surprising given trends in private capital raising over the last eight to ten years.  The authors suggest that this information should be considered in connection with additional regulatory reforms that might reduce disclosure burdens.  Without more detail comparing the sectors of the companies that are or are not EGCs, and of the EGCs that choose to omit disclosures, and the pricing issues specific to IPOs of companies in such sectors, as well as of companies by age or maturity, it would seem difficult to draw any conclusions.

NASDAQ Private Markets and Morrison & Foerster recently described the process for verifying the status of investors when a company chooses to use general solicitation to conduct a Rule 506(c) offering.  In this video blog, Anna Pinedo reviews the SEC Staff’s principles-based guidelines for verification of an accredited investor and also non-exclusive methods for verification.

To watch this video, visit the NASDAQ Private Markets Resource Center.

 

Thursday, December 14, 2017
12:00 p.m. – 1:30 p.m. EST
5:00 p.m. – 6:30 p.m. GMT

With companies remaining private longer, their stockholder base often becomes more widely dispersed. More and more privately held companies are facing interesting challenges in communicating effectively with various stakeholders, without violating securities laws. Companies contemplating or undertaking an initial public offering face particularly acute issues as they try to establish effective communications approaches. Finally, public companies face Regulation FD and other regulatory requirements that may require that they map out a careful communications approach. During this session, we will address the following:

  • Trends and developments in capital markets communications;
  • New modes of communication and engagement (e.g., social, digital);
  • Non-GAAP financial measures;
  • Navigating disclosure risks and requirements, including Regulation FD;
  • Assessing materiality and whether there is an obligation to disclose (and when);
  • Forward-looking statements, financial guidance and communicating with investment professionals, including analysts and rating agencies;
  • Competitive benchmarking and key metrics;
  • Optimizing value in an exit strategy, whether it is an IPO or an M&A exit; and
  • Best practices in public debt communications (as a private company).

Speakers:

  • Jeff Grossman
    Co-CEO, Solebury Communications Group
  • Scott Lesmes
    Partner, Morrison & Foerster LLP
  • Anna Pinedo
    Partner, Morrison & Foerster LLP

Additional speakers to be announced.

CLE credit is pending for California and New York.

For more information, or to register, please click here.

On November 15, the House Financial Services Committee approved 23 bills, which included various bills that facilitate capital formation and reduce certain regulatory requirements.‎  Chairman of the Committee, Jeb Hensarling, stated that these bills “…will provide smaller businesses with greater access to the capital markets so those businesses can grow and create jobs.”  The following were included among the approved bills:

  • H.R. 4263‎, the Regulation A+ Improvement Act, which proposes to increase ‎the amount that companies can offer and sell under SEC Regulation A, Tier II, from $50 million to $75 million. The bill passed 37-23.
  • H.R. 4015, the Corporate Governance Reform and Transparency Act of 2017, which provides for the registration of proxy advisory firms with the SEC, disclosure of proxy firms’ potential conflicts of interest and codes of ethics, and the disclosure of proxy firms’ methodologies for formulating proxy recommendations and analyses.  The bill passed 40-20.
  • H.R. 4248, which proposes to repeal Section 1502 of the Dodd-Frank Act, and would require public companies to disclose in annual reports filed with the SEC whether the company sources “conflict minerals” from the Democratic Republic of Congo and its nine neighboring countries. The bill passed 32-27.
  • H.R. 4267, the Small Business Credit Availability Act, which proposes to amend the Investment Company Act of 1940 in order to require the SEC to streamline the offering, filing, and registration processes for BDCs.  The bill also increases a BDCs’ ability to deploy capital to businesses by reducing its asset coverage ratio—or required ratio of assets to debt—from 200% to 150% if certain requirements are met. The bill passed 58-2.
  • H.R. 4279, the ‎Expanding Investment Opportunities Act, which directs the SEC to amend its rules to enable closed-end funds that meet certain requirements to be considered “well-known seasoned issuers” (WKSIs) and to conform the filing and offering regulations for closed-end funds to those of traditional operating companies. The bill passed 58-2.
  • H.R. 4281, the Expanding Access to Capital for Rural Job Creators Act, which proposes to amend the Securities Exchange Act of 1934 to have the SEC’s Advocate for Small Business Capital Formation identify any unique challenges to rural area small businesses when identifying problems that small businesses have with securing access to capital. H.R. 4281 also requires that the annual report made by the SEC’s Small Business Advocate include a summary of any unique issues encountered by rural area small businesses. The bill passed 60-0.

At the PLI Securities Regulation Institute, Mark Kronforst, the SEC’s Division of Corporation Finance (“Corp Fin”) Chief Accountant, reminded registrants that the SEC is willing to consider and process Rule 3-13 waiver requests.  Rule 3-13 of Regulation S-X (“Rule 3-13”) allows the SEC, upon the informal request of a registrant and where consistent with investor protection, to permit the omission of financial statements otherwise required by the SEC rules or their substitution by financial statements of a comparable character.

In July this year, SEC Chair Jay Clayton stated that under Rule 3-13, issuers can request modifications to their financial reporting requirements in certain circumstances where disclosures are burdensome to generate, but may not be material to the total mix of information available to investors. Chair Clayton encouraged companies to consider whether such modifications may be helpful in connection with their capital raising activities and assured them that SEC staff is placing a high priority on responding with timely guidance.

Echoing Mr. Clayton’s earlier remarks in July, Mr. Kronforst stated that Rule 3-13 is about facilitating capital information, and allows companies to be granted relief where consistent with investor protection.  Mr. Kronforst said the SEC staff is encouraging companies with reporting problems to come to them and that, under a pilot program, the SEC staff usually responds within five days from the date of request.  He also noted that the Corp Fin Financial Reporting Manual (the “Manual”) has been updated to include the names of particular SEC staff members who are experts within particular fields pertinent to Rule 3-13 waivers.  He said requests for relief need not be sent by certified mail or via Fedex, instead they should be submitted by email to the email address link provided in the Manual.  Finally, Mr. Kronforst reminded everyone that Rule 3-13 has two parts; just as the SEC can grant waivers, it can also ask for additional financial information that has not been provided, where necessary or appropriate and consistent with investor protection.

For many years, most successful companies followed a relatively predictable capital-raising path. A lot has changed. The companies that tend to pursue IPOs in recent years are more mature, better capitalized, and often seek to pursue IPOs for different reasons than did their predecessors. In our updated Short Field Guide to IPOs, we detail the path to an IPO, discuss some of the important steps along the way and highlight some of the detours or forks in the road.

Download a copy of the guide.