Disclosure Requirements

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]

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.

November 8-10, 2017

The Roosevelt Hotel
45 East 45th Street
New York, NY 10017

PLI’s 49th Annual Institute on Securities Regulation will be composed of seasoned individuals from private practice, investment banking, accounting firms, corporations, and government agencies. These experts will put the developments of the past year into proper perspective, and prepare you for 2018 and beyond.

Partner Anna Pinedo will participate in a panel discussion entitled “Private Offerings and Public Offerings by Smaller Reporting Companies” on day one of the program. Topics will include:

  • General solicitation and private offerings under Rule 506;
  • Integration of private to private and private to public offerings – what will it take to fix the uncertainty?;
  • Regulation A and Crowdfunding – are they working and where do they work the best?; and
  • Public capital raising by smaller reporting companies – what’s on the reform agenda?

Senior Of Counsel Marty Dunn will participate in a panel discussion entitled “Securities Law Grab Bag: Your Frequent Questions Answered” on day two of the program. Topics will include:

  • Our answers and analysis for important securities and compliance questions;
  • Avoiding the pitfalls in the offering process;
  • Making the right disclosure decisions under common (and not so common) scenarios;
  • Approaching the compliance function: our best practice answers;
  • Frequent governance considerations and the best ways to handle them; and
  • Do we have to close the trading window?

PLI will provide CLE credit.

For more information, or to register, please click 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.

In recent months, there has been an active dialogue regarding the regulatory burdens for public companies and whether these burdens have contributed to the decline in the number of U.S. initial public offerings (“IPOs”) and companies listed on U.S. securities exchanges. One of the burdens cited by commentators relates to the extensive disclosures required under the rules and regulations of the Securities and Exchange Commission (the “Commission” or the “SEC”) for companies seeking to register IPOs under the Securities Act of 1933 and also for public-reporting companies in their filings made pursuant to the Securities Exchange Act of 1934 (the “Exchange Act”). Long before the days of the recent presidential order seeking to limit new regulations and eliminate existing regulations, the Commission had already embarked on its own disclosure effectiveness initiative; however, in recent months, the “push” for regulatory burden relief has become a shove.

Yesterday’s release by the Commission of proposed amendments to certain Regulation S-K requirements, which we summarize in this alert, are likely just the first of several disclosure-related amendments to be issued.

Read our client alert.

 

 

 

 

 

 

 

 

Practising Law Institute’s Exempt and Hybrid Securities Offerings is the first practical, accessible resource to provide you with comprehensive legal, regulatory, and procedural guidance regarding these increasingly popular offering methodologies.

Authored by Morrison & Foerster Partners Anna Pinedo and James Tanenbaum, the third edition of Exempt and Hybrid Securities Offerings gives you a useful understanding of the applicable regulations and legal framework for these transactions, as well as the implications of these regulations for structuring transactions.

The treatise provides a detailed analysis of the regulations and guidance affecting exempt and hybrid securities offerings, as well as offers market context and practical structuring advice. Packed with checklists, transactional timelines, SEC guidance, and a wealth of labor-saving sample documents, Exempt and Hybrid Securities Offerings offers the relative advantages and drawbacks of the most commonly used forms of exempt and hybrid offerings. It clearly explains:

  • conducting venture private placements;
  • traditional and structured PIPE transactions;
  • institutional (debt) private placements;
  • Rule 144A offerings;
  • Regulation S offerings;
  • Regulation A offerings and crowdfunding;
  • shelf takedowns;
  • registered direct and ATM offerings;
  • confidentially marketed public offerings; and
  • continuous issuance programs, including MTN and CP programs.

This comprehensive three-volume treatise, with useful forms, has been updated to reflect changes brought about by the Dodd-Frank Act, the JOBS Act, the FAST Act, and other recent regulatory changes.

For more information, please click here.

On September 21, 2017, the Securities and Exchange Commission (the “SEC”) published interpretive guidance (the “SEC Guidance”) to assist public companies in their preparation of the pay ratio disclosure required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of [2010] (the “Act”). The staff of the SEC’s Division of Corporation Finance (the “Staff”) separately published interpretive guidance (the “Staff Guidance) relating to the use of sampling and other reasonable methodologies. This Staff guidance is intended to assist registrants in determining how to use statistical sampling methodologies and other reasonable methods in complying with the pay ratio disclosure obligation. The Staff has further supplemented its guidance with new and revised Compliance and Disclosure Interpretations.

Read our client alert.

On September 13, 2017, the SEC Advisory Committee on Small and Emerging Companies held an open meeting to discuss the Sarbanes-Oxley (“SOX”) auditor attestation requirement, the final report that will be issued prior to the expiration of the Committee’s current charter and whether updates are needed to Securities Act Rule 701.  In its discussion of the SOX auditor attestation requirement, the Committee considered the associated compliance costs and a proposal to change the “smaller reporting company” (“SRC”) and “non-accelerated filer” definitions to a company with either (1) a public float of less than $250 million or annual revenues of less than $100 million.  The SEC’s proposed amendments to the SRC definition from June 2016 did not cover non-accelerated filers.  The Committee then discussed its draft report to the SEC, which emphasized a number of recommendations it has made in the past, including the following:

  • Providing regulatory certainty for finders, private placement brokers and platforms that are not registered as broker-dealers and are involved in primary and secondary offerings of unregistered securities in order to help smaller businesses raise capital.
  • Supporting an expansion of the “accredited investor” definition to take into account measures of sophistication, regardless of income or net worth, thereby expanding rather than contracting the pool of accredited investors.
  • Extending to SRCs the same accommodations made to EGCs with respect to disclosure requirements, and finalizing the proposed amendments to increase the financial thresholds in the SRC definition and revising the definition of “accelerated filer” to include companies with a public float of $250 million or more, but less than $700 million.
  • Amending Item 407(c)(2) of Regulation S-K to require issuers to describe, in addition to their policy with respect to diversity, if any, the extent to which their boards are in fact diverse, by including disclosure regarding race, gender and ethnicity of each board member.
  • Preempting state regulation of secondary trading in securities of Tier 2 Regulation A issuers that are current in their ongoing reports in order to improve secondary market liquidity.
  • Allowing smaller exchange-listed companies to voluntary choose trading increments or tick-sizes greater than the one penny in order to help small and mid-cap companies raise capital.

The Committee then turned to a discussion of various proposed changes to Securities Act Rule 701, including, among others, removing the requirement that consultants be “natural persons,” removing the $5 million aggregate limitation (the “hard cap limit”), clarifying that material amendments to any security previously issued under Rule 701 does not result in a new grant or sale, clarifying the application of Rule 701 to RSUs, clarifying that expanded disclosure is only required to be provided for sales that occur after the hard cap limit is exceeded, and clarifying the timing and delivery requirements for expanded disclosure.

A copy of the Committee’s draft report is available here.

The IPO Task Force seems to have come together again.  The Center for Capital Markets released a letter dated August 22, 2017 addressed to the Treasury Secretary setting out a few suggestions, which are quite similar to those that had been advanced a few years ago, and that have as their objective increasing the number of public companies.  The suggestions include:

  • Extending the Title I JOBS Act on-ramp accommodations from five to ten years for EGCs and reviewing the EGC definition;
  • Making the JOBS Act accommodations available to all issuers, not just EGCs;
  • Modernizing the Sarbanes-Oxley internal control over financial reporting requirements;
  • Modernizing securities disclosure requirements;
  • Addressing the rules related to shareholder proposals and regulating proxy advisory firms;
  • Promoting equity market structure changes that enhance liquidity for EGC and small cap stocks; and
  • Incentivizing research coverage.

A bit of additional commentary on these suggestions is offered in the letter, which may be found here: http://www.centerforcapitalmarkets.com/wp-content/uploads/2017/08/Follow-Up-Letter-to-July-28-Roundtable-on-Access-to-Capital.pdf?x48633

On Tuesday, July 25, 2017, SEC Chairman Jay Clayton spoke at the U.S. Chamber of Commerce Center for Capital Markets Competitiveness (CCMC). During the panel, Chairman Clayton discussed the Commission’s priorities on a variety of issues.

Bad Actors/Retail Fraud. Chair Clayton noted the substantial costs of the effects of a bad actor and the costs of restoring faith in our capital markets. He also made it clear that there would be no tolerance for retail fraud under his tenure.

Enforcement. Chair Clayton noted that the Commission has increased the use of data to determine more effective ways to target exams, taking into consideration to whom to issue an exam, how to conduct the exam and whether the Commission is being effective in these examinations.

Proxy Reports/Disclosure Effectiveness. Chairman Clayton noted that adding disclosure does not signal better disclosure. The Chairman stressed that disclosure should be written to protect the investor rather than be written in case of a court appearance.

Reduction in Number of Public Companies. The Chairman stressed that the Commission would not do anything to inhibit private capital formation. He cited a recent meeting with a number of small- and mid-cap companies where they discussed the timing of their respective IPOs. Chairman Clayton noted that having both a healthy public capital market and a private equity market provides companies with financing options, facilitates capital formation and provides healthy and necessary market competition.

Lifecycle of a Company. Chairman Clayton referenced that, in the past, the general public used to be able to participate in the growth of a company, but in our current environment, Main Street has a limited ability to participate. He noted that it is difficult to offer private investment opportunities to individual investors in a cost effective way.

Effectiveness of the U.S. Capital Markets. The Chairman noted that the U.S. capital markets are efficient for large-cap companies, but Chairman Clayton noted that there is room for improvement for mid- and small-cap companies. The Chairman outlined a number of factors affecting the effectiveness of the U.S. capital markets for smaller companies, including liquidity in the secondary trading markets and the costs of being a public company.

Costs of Compliance. Chairman Clayton acknowledged the Commission’s need to keep in mind the costs of compliance when writing rules, given that compliance can be very costly depending on how the rule is written.

Pay Ratio Rule. The Chairman noted that the Commission will be reviewing the rule but recognizes that the compliance date is coming.

Best Interest Standard. The Chairman directly stated that he would be disappointed if there were any reductions in choices for the individual investor relating to the best interest standard. The Chairman noted that, with the DOL’s Fiduciary Rule on the books, having differing standards for individual investors would not make sense. He then noted that the market would benefit from greater clarity on this issue. Chairman Clayton stressed that the Commission wants the best for the main street investor and is hopeful that common ground exists between the DOL and the Commission’s mandates.

Coordination Among Domestic Regulators. Chairman Clayton acknowledged the cooperative nature between the Commission and other domestic regulators such as FSOC and the CFTC. The Chairman stressed, however, that there should be no gaps between the various regulatory rules, no duplication and that regulators should not be asking for the same information in different ways. He noted that his colleagues at the other regulators share this view. Specifically, the Chairman confirmed that the Commission is engaged with the CFTC on this issue, given that these two entities oversight sometimes overlaps.

Cyber Security. The Chairman stressed that coordination among regulators is very important when it comes to cyber security and that regulators should be developing standards in order to effectively respond to these incidents. He acknowledged that fellow regulators are very open to cooperation and indeed see the need for this cooperation. The Chairman also addressed the issue of punishing victims of a cyber attack. He noted that if a company was acting responsibly in terms of protections and disclosures, regulators should not be punishing them for being victims.

International Harmonization. Chairman Clayton noted that it is part of the Commission’s mission to handle international coordination of regulation as more U.S.-based companies become global companies and participants. The Chairman specifically acknowledged the Commission’s preparation for the implementation of MiFIID II and for any issues that might arise from the rule.

Materiality. Chairman Clayton also touched on the issue of materiality during the Q&A portion. The Chairman noted that having a flexible materiality standard is useful given that, when a court is determining materiality, the determination is reflective of the substantial difference between certain projects.  In this instance, the Chairman was referencing the municipal bond space when discussing materiality.

In closing, the Chairman thanked former Chairman of the Commission Mary Joe White and Commissioner Michael Piwowar for their service.