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.

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  • 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.

Earlier in the week, SEC Chair Clayton provided testimony in Congress regarding the Commission’s agenda. In his testimony, Chair Clayton noted that the Commission remains focused on regulatory initiatives required by the FAST Act and the Dodd-Frank Act. Chair Clayton also noted that the new Regulatory Flexibility Act agenda will be released in a few weeks, which will reflect the Commission’s priorities. The prior agenda reflected interim Chair Piwowar’s priorities for the Commission.

Chair Clayton reiterated his concerns regarding the decline in the number of U.S. public companies. He noted that the regulatory burden needs to be reassessed so that private companies might consider IPOs. Chair Clayton observed that “A shrinking proportion of public companies, particularly smaller and medium-sized companies, has costs beyond investment choices, including that there will be less publicly available information about the operations and performance of companies that are important to our economy.” The Division of Corporation Finance is considering whether there are other areas (other than those addressed in the Division’s guidance this summer relating to extending the confidential review process and providing registrants with guidance regarding certain accounting questions in advance of a filing) in which interpretive guidance could assist companies without reducing investor protections, and whether enhancements can be made to staff processes to further benefit companies and investors. The Commission will soon also consider a rule proposal required by the FAST Act to modernize and simplify the disclosure requirements in Regulation S-K, and the Staff is considering recommendations on final rule amendments to the “smaller reporting company” definition. Chair Clayton mentioned a number of other initiatives, including changes to the rules in Regulation S-X related to requirements for financial statements for entities other than the issuer; and industry-specific disclosure requirements, such as the property disclosure requirements for mining companies and preparing recommendations for proposed rules to modernize bank holding company disclosures. The full text of the prepared testimony is available here: https://www.sec.gov/news/testimony/testimony-clayton-2017-09-26.

At today’s meeting of the American Bar Association, the Director of the Division of the SEC’s Corporation Finance provided some comments regarding the Division’s work and priorities.  Mr. Hinman reiterated the Division’s focus on capital formation related matters.  Mr. Hinman echoed concerns voiced by SEC Chair Clayton regarding the decline in the number of U.S. listed companies in recent years.  Mr. Hinman noted that there have been many reasons offered to explain the decline in the number of public companies and the increasing tendency of companies to remain private longer.  For example, he noted that there are many more types of investors in the private markets, private investors are being more innovative in how they provide capital, and there are new ways to provide liquidity for employees of private companies with stock-based compensation.  Mr. Hinman noted that there have been concerns expressed about valuations but that many articles, reports and studies noting the attractive private valuations (compared to IPO valuations) may fail to appropriately reflect the fact that valuations in private rounds relate to preferred stock with liquidation and other preferences, and not to common stock.  In any event, Mr. Hinman noted the Division’s interest in understanding the regulatory burdens placed on companies seeking to undertake IPOs and on public reporting companies.  He noted that a recent DERA report to Congress reiterated the difficulties associated with unwinding the effects of any particular regulatory requirement on capital raising.

Mr. Hinman discussed the Division’s policy of extending the confidential review process to non-EGCs and underscored the Division’s invitation to have companies and their counsel consult with the SEC on financial statement requirements.  He noted that the Staff would be responding very promptly to requests for waivers.

In a wide-ranging discussion, Mr. Hinman addressed a number of other topics, including the resource extraction rule.  He noted that the Congressional Review Act nullified the rule, but that the SEC still has a statutory mandate to act although there is a CRA requirement that the new rule cannot be substantially similar to the rule that was struck down.  The SEC will have to propose a new rule for comment in the near future.  Mr. Hinman also addressed other rules that had been proposed by the SEC, including proposed updates to Industry Guide 7 on mining disclosures, and amendments to the smaller reporting company definition.  While he noted that the there was a final rule under development regarding the SRC definition, there was ongoing discussion related to SOX 404 attestation requirements.  He noted that the SEC was seeking more information on the costs directly attributable to 404 attestation and was considering other tests, including revenue-based and market cap-based tests, as possible alternatives.  Mr. Hinman noted that there were very few comments submitted in response to the request for comment on Industry Guide 3 disclosures.  In response to questions, Mr. Hinman noted that the SEC expected to comply with the FAST Act-mandated timelines regarding the modernization of Regulation S-K and that the SEC’s changes to Regulation S-K are likely to be quite consistent with those discussed in the November 2016 report to Congress.  Again, in response to a question, Mr. Hinman noted that there may be some opportunity for clarifying guidance on integration issues.

On August 25, 2016, the SEC’s Division of Corporation Finance (“Corp Fin”) updated its Financial Reporting Manual by making the following changes:

  • Adding a new section describing communications with Corp Fin’s Office of Chief Accountant (“CF-OCA”).
  • Clarifying that questions regarding the application of guidance on abbreviated financial statements to a predecessor entity should be directed to the CF-OCA (Section 2065).
  • Making corresponding changes in light of the Compliance and Disclosure Interpretations (“C&DIs”) relating to the omission of financial information from draft and filed registration statements (Sections 10220.1 and 10220.5).
    • The updates to Section 10220.1 refer to recently issued Securities Act C&DI Question 101.4 and note that Securities Act C&DI Question 101.05 addresses similar matters for non-EGC issuers.  Question 101.04 clarifies that an EGC may omit from its draft registration statements interim financial information that it reasonably believes it will not be required to present separately at the time of the contemplated offering.  Question 101.05 clarifies that an issuer that is not an EGC may omit from its draft registration statements interim and annual financial information that it reasonably believes it will not be required to present separately at the time it files its registration statement publicly.  For more information regarding Questions 101.01 and 101.05, see our prior blog post.
    • The updates in Section 10220.5 refer to FAST Act C&DI Question 2, which clarifies that an EGC may omit financial statements of other entities from its filing or submission if it reasonably believes that those financial statements will not be required at the time of the offering.

The updates to the Financial Reporting Manual are available here.

The Staff of the Division of Corporation Finance recently posted additional guidance regarding the financial information that an EGC may omit from its draft registration statements, as well as guidance for non-EGC issuers.  See below the Staff’s guidance:

Question 1

Question: What financial information may an Emerging Growth Company omit from its draft and publicly filed registration statements?

Answer: Under Section 71003 of the FAST Act, an Emerging Growth Company may omit from its filed registration statements annual and interim financial information that “relates to a historical period that the issuer reasonably believes will not be required to be included…at the time of the contemplated offering.”  Interim financial information that will be included in a longer historical period relates to that period.  Accordingly, interim financial information that will be included in a historical period that the issuer reasonably believes will be required to be included at the time of the contemplated offering may not be omitted from its filed registration statements.   However, under staff policy, an Emerging Growth Company may omit from its draft registration statements interim financial information that it reasonably believes it will not be required to present separately at the time of the contemplated offering.

For example, consider a calendar year-end Emerging Growth Company that submits a draft registration statement in November 2017 and reasonably believes it will commence its offering in April 2018 when annual financial information for 2017 will be required.  This issuer may omit from its draft registration statements its 2015 annual financial information and interim financial information related to 2016 and 2017.  Assuming that this issuer were to first publicly file in April 2018 when its annual information for 2017 is required, it would not need to separately prepare or present interim information for 2016 and 2017.  If this issuer were to file publicly in January 2018, it may omit its 2015 annual financial information, but it must include its 2016 and 2017 interim financial information in that January filing because that interim information relates to historical periods that will be included at the time of the public offering.  See also Question 101.05 for guidance related to registration statements submitted or filed by non-EGCs. [Aug. 17, 2017]

Question 101.04

Question: What financial information may an Emerging Growth Company omit from its draft and publicly filed registration statements?

Answer: Under Section 71003 of the FAST Act, an Emerging Growth Company may omit from its filed registration statements annual and interim financial information that “relates to a historical period that the issuer reasonably believes will not be required to be included…at the time of the contemplated offering.”  Interim financial information that will be included in a longer historical period relates to that period.  Accordingly, interim financial information that will be included in a historical period that the issuer reasonably believes will be required to be included at the time of the contemplated offering may not be omitted from its filed registration statements.   However, under staff policy, an Emerging Growth Company may omit from its draft registration statements interim financial information that it reasonably believes it will not be required to present separately at the time of the contemplated offering.

For example, consider a calendar year-end Emerging Growth Company that submits a draft registration statement in November 2017 and reasonably believes it will commence its offering in April 2018 when annual financial information for 2017 will be required.  This issuer may omit from its draft registration statements its 2015 annual financial information and interim financial information related to 2016 and 2017.  Assuming that this issuer were to first publicly file in April 2018 when its annual information for 2017 is required, it would not need to separately prepare or present interim information for 2016 and 2017.  If this issuer were to file publicly in January 2018, it may omit its 2015 annual financial information, but it must include its 2016 and 2017 interim financial information in that January filing because that interim information relates to historical periods that will be included at the time of the public offering.  [Aug. 17, 2017]

Question 101.05

Question: What financial information may an issuer that is not an Emerging Growth Company omit from its draft and publicly filed registration statements?

Answer: The relief provided by Section 71003 of the FAST Act is not available to issuers other than Emerging Growth Companies. However, under staff policy, an issuer that is not an Emerging Growth Company may omit from its draft registration statements interim and annual financial information that it reasonably believes it will not be required to present separately at the time it files its registration statement publicly. The issuer may not omit any required financial information from its filed registration statements.

For example, consider a calendar year-end issuer that is not an Emerging Growth Company that submits a draft registration statement in November 2017 and reasonably believes it will first publicly file in April 2018 when annual financial information for 2017 will be required. This issuer may omit from its draft registration statements its 2014 annual financial information and interim financial information related to 2016 and 2017 because this information would not be required at the time of its first public filing in April 2018. [Aug. 17, 2017]

The FAST Act required the Securities and Exchange Commission to deliver to Congress a report detailing its recommendations regarding the modernization and simplification of the disclosure requirements contained in Regulation S-K.  Much of the work entailed by such a review of the Regulation S-K disclosure requirements already was reflected in the SEC’s Concept Release, as well as in the request for comment on the 400 rules, the proposed revised disclosures for mining registrations and the proposal regarding the definition of “smaller reporting company.”  Nonetheless the Report contains a few specific recommendations, including, among others, the following:

  • Permitting the incorporation by reference of documents filed more than five years prior on EDGAR,
  • Allowing hyperlinking of exhibits,
  • Consolidating the rules relating to incorporation by reference,
  • Revising the item 102 requirement relating to descriptions of properties,
  • Revising the MD&A disclosure requirements to eliminate repetition, and
  • Permitting the omission of attachments and schedules filed with exhibits (unless they contain material information that is not otherwise disclosed).

Here is a link to the Report:  https://www.sec.gov/reportspubs/sec-fast-act-report-2016.pdf.

To learn more, read our client alert:  https://media2.mofo.com/documents/161129-section-72003-fast-act.pdf.

At the American Bar Association’s Fall Meeting, Keith Higgins, Director of the SEC’s Division of Corporation Finance (the “Division”), gave his last “Dialogue with the Director” given the upcoming change in administration.  Mr. Higgins presented his views on a broad range of areas, including the following:

  • Amended Rule 147 and Rule 504 and new Rule 147A.  The Federal Register should be publishing soon the final rules adopting amended Rule 147 and Rule 504 and new Rule 147A so that the effective dates will be early in 2017.  We have commented on these rules in our client alert, available here.
  • The FAST Act.  All of the required rulemakings related to the Fixing America’s Surface Transportation (FAST) Act have been completed.  The SEC must deliver on November 28, 2016 its report to Congress on recommendations to simplify the Regulation S-K disclosure rules.  These recommendations are likely to take into account comments received with respect to the “400 Series” of Regulation S-K.
  • Diversity Disclosures.  The Division completed its disclosure recommendations relating to disclosures regarding board of director diversity.  However, SEC Chair Mary Jo White has noted she does not expect the SEC to act on the recommendations before January 2017.
  • At-the-Market Offerings.  Mr. Higgins noted the Division’s review relating to disclosures available to investors in connection with at-the-market (“ATM”) sales by issuers.  Mr. Higgins indicated that there has been continuing discussion with market participants regarding disclosure practices for plan of distribution sections of ATM prospectuses, including disclosures regarding “negotiated” sales and periodic sales.  Mr. Higgins noted that there may be SEC Staff guidance forthcoming on these types of disclosures.
  • Rule 701 and Form S-8.  Given that companies are staying private longer, the SEC Staff has been receiving more questions on Securities Act Rule 701 and the use of registration statements on Form S-8, and the SEC Staff has issued C&DIs in response.  For more information, see our blog post, available here.
  • Looking into the Future.  Mr. Higgins commented on the provisions of the proposed Financial CHOICE Act (the “CHOICE Act”), which may receive renewed interest and support by the new administration next year.  For a summary of the securities law related provisions of the CHOICE Act, see our client alert, available here.
  • Integration C&DI.  The SEC Staff issued new guidance on Rule 506(b) and Rule 506(c) of Regulation D that treats Rule 506(c) offerings as “public offerings” for purposes of analogizing to Securities Act Rule 152.
  • Shareholder Proposals.  Mr. Higgins also addressed a number of shareholder proposal matters and pay ratio guidance.

During the ABA Business Law Section Annual Meeting, at the Dialogue with the Director of the Division of Corporation Finance, hosted by the Federal Regulation of Securities Committee, Keith Higgins offered a comprehensive overview of developments.  Mr. Higgins provided a brief update of the proxy season.  He noted that the Staff is pretty far along in its thinking regarding recommendations for disclosures regarding diversity on public boards, consistent with statements made by Chair White (see our prior posts on this link). Mr. Higgins observed that the comment period had closed for the Regulation S-K Concept Release and noted that a significant number of the comments received focused on ESG issues with commenters advocating more disclosures on sustainability and related matters.  Significant comments were received as well on MD&A disclosures, generally favoring the consolidation in a single place of all MD&A related guidance and supporting the continued use of an executive summary.  Also, most commenters expressed concerns about limiting the number of risk factors, as well as concerns about any requirement to have issuers address their responses to risks. Mr. Higgins noted that consistent with the mandates in the FAST Act, the Commission recently requested comment on the 400 series (see our post).  Mr. Higgins also commented on the recent hyperlink release.

On the JOBS Act, Mr. Higgins provided an update through end of August.  There were 92 Regulation CF filings with issuers from diverse sectors, including biotech, brewery, and real estate.  Ten companies have filed Forms CU having raised an aggregate of $4 million.  There have been 128 Regulation A offering statements filed, and 60 qualified, with an almost even split between Tier 1 and Tier 2 offerings.

Mr. Higgins noted that the Staff is finalizing its recommendations to the Commission on the amendments to Rule 147 and Rule 504.  Also, the Staff is working on the disclosure report mandated by the FAST Act to be delivered to Congress by late November.