The Staff of the Office of the Chief Accountant and of the Division of Corporation Finance issued SAB 118 (see: https://www.sec.gov/interps/account/staff-accounting-bulletin-118.htm) in order to provide guidance for issuers as they prepare their financial statements. The staff guidance provides a “measurement period” for issuers to evaluate the impacts of the Tax Cut and Jobs Act on the their financial statements and sets forth staff expectations for disclosure to investors during the measurement period. The Staff also issued a Compliance and Disclosure Interpretation 110.02, which we set out below:

Question 110.02

Question: Does the re-measurement of a deferred tax asset (“DTA”) to incorporate the effects of newly enacted tax rates or other provisions of the Tax Cuts and Jobs Act (“Act”) trigger an obligation to file under Item 2.06 of Form 8-K?

Answer: No, the re-measurement of a DTA to reflect the impact of a change in tax rate or tax laws is not an impairment under ASC Topic 740. However, the enactment of new tax rates or tax laws could have implications for a registrant’s financial statements, including whether it is more likely than not that the DTA will be realized. As discussed in Staff Accounting Bulletin No. 118 (Dec. 22, 2017), a registrant that has not yet completed its accounting for certain income tax effects of the Act by the time the registrant issues its financial statements for the period that includes December 22, 2017 (the date of the Act’s enactment) may apply a “measurement period” approach to complying with ASC Topic 740. Registrants employing the “measurement period” approach as contemplated by SAB 118 that conclude that an impairment has occurred due to changes resulting from the enactment of the Act may rely on the Instruction to Item 2.06 and disclose the impairment, or a provisional amount with respect to that possible impairment, in its next periodic report.

See our more detailed client alert here.

Yesterday, the Staff of the Division of Corporation Finance provided additional guidance on Rule 701 by issuing this new Compliance and Disclosure Interpretation, Question 271.25, reprinted below:

Question:

To protect against the unauthorized disclosure of Rule 701(e) information, may companies that are using electronic delivery to satisfy Rule 701(e) disclosure requirements implement safeguards with respect to electronic access to Rule 701(e) information?

Answer:

We understand that some companies satisfying their Rule 701(e) delivery obligations electronically have concerns about the potential disclosure of sensitive company information. Standard electronic safeguards, such as user-specific login requirements and related measures, are permissible. The use of a particular electronic disclosure medium either alone or in combination with other safeguards, such as the use of dedicated physical disclosure rooms that house the medium used to convey the information required to be disclosed, should not be so burdensome that intended recipients cannot effectively access the required disclosures. For example, we would expect that physical disclosure rooms would be accessible during ordinary business hours upon reasonable notice. Once access to the required information has been granted, however, the medium used to communicate the required disclosure should provide the opportunity to retain the information or have ongoing access substantially equivalent to personal retention. [November 6, 2017]

With the effectiveness of Regulation Crowdfunding in May 2016 and amended Securities Act Rule 147 and new Securities Act Rule 147A in April 2017, there has been increasing interest in intrastate crowdfunded offerings.  The SEC also recently issued C&DIs on new Rule 147A in April 2017 that clarified that (1) offers and sales made in reliance on new Rule 147A will not be integrated with prior offers and sales of securities, including offers and sales made in reliance on amended Securities Act Rule 147, and (2) issuers must still comply with all applicable state securities law requirements. However, state crowdfunding regulations are not all identical and many have significant differences.

Click here to view our chart summarizing the current crowdfunding regulations in the various states.

We would also like to acknowledge the contribution made by Morrison & Foerster summer associate Lily Westergaard to the preparation of the chart.

The use of non-GAAP financial measures by US public companies continues to attract scrutiny. As concern grows that non-GAAP measures are being employed in company disclosures to distort actual performance numbers and, in some cases, mislead the investing public, the SEC has stepped in.

In this exclusive report by Morrison & Foerster, and co-published with the International Financial Law Review, we examine the regulations relating to the use of non-GAAP financial measures, commonly used non-GAAP financial measures, the SEC’s guidance relating to the use of non-GAAP measures, comments issued by the SEC Staff on this subject, and what companies can do to revise their disclosures, earnings calls and other communications.

Read our report here.

On October 17, 2017, the staff (the “Staff”) of the SEC’s Division of Corporation Finance issued two new compliance and disclosure interpretations (“C&DIs”) on the use of non-GAAP financial measures in forecasts for business combination transactions. In the first C&DI, the Staff clarified that financial measures provided to a financial advisor, including financial measures included in forecasts used in connection with a business combination transaction, would be excluded from the definition of non-GAAP financial measures, and therefore not subject to Item 10(e) of Regulation S-K and Regulation G, if and to the extent:

  • the financial measures are included in forecasts provided to the financial advisor for the purpose of rendering an opinion that is materially related to the business combination transaction; and
  • the forecasts are being disclosed in order to comply with Item 1015 of Regulation M-A or requirements under state or foreign law, including case law, regarding disclosure of the financial advisor’s analyses or substantive work.

Therefore, assuming these two conditions are satisfied, the guidance should provide comfort to M&A deal participants that the disclosure of management forecasts in merger registration statements, proxy statements and tender offer statements would not be subject to Item 10(e) of Regulation S-K and Regulation G. In the second C&DI, the Staff clarified that the exemption from Item 10(e) of Regulation S-K and Regulation G for non-GAAP financial measures disclosed in communications relating to a business combination transaction does not extend to the same non-GAAP financial measures disclosed in registration statements, proxy statements and tender offer statements.

The new C&DIs are available here.

On September 20, 2017, the staff of the SEC’s Division of Corporation Finance issued revised compliance and disclosure interpretations (“C&DIs”) for purposes reflecting updates for prior amendments to Securities Act Rules 147 and 504, the repeal of Securities Act Rule 505 and non-substantive changes throughout the Rule 147 and Regulation D C&DIs based on the SEC’s current rules.  Highlights of the C&DIs (Questions 257.08, 258.03, 258.05, 258.06 and 541.03) include, among other things, the following guidance:

  • A Securities Act Rule 506 offering will not lose “covered security” status under Securities Act Section 18 if an issuer fails to file a Form D with the SEC.
  • Rule 504 is available to a private fund excluded from the definition of “investment company” by Section 3(c)(1) or 3(c)(7) of the Investment Company Act so long as the offering under Rule 504 is not a “public offering.”
  • The example of the calculation of the aggregate offering price provided in the instruction to paragraph (b)(2) of Rule 504 does not contemplate integration of two or more offerings.
  • Rule 504 is not available to any issuer that is subject to disqualification under Rule 506(d) on or after January 20, 2017. On or after this date, issuers must determine if they are subject to bad actor disqualification any time they are offering or selling securities in reliance on Rule 504.
  • If a family trust that is not deemed to be a separate legal entity has two trustees, only one of which resides in a state where a Rule 147 offering is being made, the issuer may still offer and sell securities to the family trust in the Rule 147 offering.

Questions 258.04, 260.02 and 541.02 and Section 259 were removed.

The revised C&DIs are available here.

On September 14, 2017, the staff of the SEC’s Division of Corporation Finance (the “Staff”) issued three new compliance and disclosure interpretations (“C&DIs”) addressing Regulation A offerings with a concurrent Exchange Act registration and clarifying when financial statements must be current and when annual and quarterly financial statements must be filed.  Highlights of the C&DIs (Questions 182.21, 182.22 and 182.23) include, among other things, the following guidance:

  • When an issuer registers a class of its securities pursuant to the Exchange Act on a Form 8-A concurrently with (i.e., within 5 days after) the qualification of a post-qualification amendment to a Form 1-A, the financial statements in the post-qualification amendment must be current at the time it is qualified.
  • If an issuer’s qualified Form 1-A did not contain financial statements for the last full fiscal year preceding the fiscal year of effectiveness of the Form 8-A (filed concurrently with the qualification of a post-qualification amendment to the Form 1-A), then the Staff would not object if the issuer files its first annual report on Form 10-K for the fiscal year preceding the fiscal year in which the Form 8-A went effective within 90 calendar days after effectiveness of the Form 8-A.
  • If an issuer’s qualified Form 1-A did not contain financial statements for one or more quarterly periods that followed the most recent annual or semi-annual period for which financial statements were included in the Form 1-A and that were completed prior to effectiveness of the Form 8-A, then the issuer is required to file quarterly reports for these quarterly periods.  The Staff would not object if the issuer files a Form 10-Q for the completed quarterly period, or two Forms 10-Q if financial statements for more than one quarterly period were not included in the Form 1‑A, within 45 days after effectiveness of the Form 8-A.

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.

The SEC and the SEC Staff had a busy second half of 2016.  In late 2016, the SEC Staff issued guidance principally in the form of C&DIs on various topics.  Join Morrison & Foerster for our two-part recap of items you may have missed.

Session One
Wednesday, February 8, 2017
11:00 a.m. – 12:00 p.m. ET

During our first session, we will review Regulation A:  what do we know about how the exemption is working?; Regulation Crowdfunding; C&DIs on Regulation Crowdfunding; FINRA crowdfunding enforcement matter; Rule 147/Rule 504; Integration C&DI; C&DIs on Rule 701; and Guidance on Rule 144.

Speakers:

Session Two
Thursday, February 9, 2017
11:00 a.m. – 12:00 p.m. ET

During our second session, we will review C&DIs on Rule 144A, FPIs, and Regulation S.  We also will discuss guidance on Exxon Capital exchange offer representations; guidance on shortened tenders; and recent Trust Indenture Act related court cases.

Speakers:

CLE credit is pending for California and New York.

To register for this teleconference series, or for more information, please click here.

On December 8, 2016, the Securities and Exchange Commission’s (“SEC”) Division of Corporation Finance (the “Staff”) released several new compliance and disclosure interpretations (“C&DIs”) clarifying the definition of “foreign private issuer” (an “FPI”) under Rule 405 (“Rule 405”) under the Securities Act of 1933, as amended (the “Securities Act”), and Rule 3b-4(c) (“Rule 3b-4(c)”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). On the same day, the Staff issued additional C&DIs, which provide explanations on the permitted use of an F-Series registration statement and Form 20-F by an FPI (and its subsidiaries) in certain contexts. This alert provides a brief summary of these C&DIs.

Read our client alert.