In a departure from prior practice, this year’s SEC Government-Business Forum, an annual event typically held at the SEC’s offices in Washington, DC, will be held in partnership with the Herb Kelleher Center for Entrepreneurship, Growth, and Renewal at the McCombs School of Business at The University of Texas at Austin. The Forum generally provides an opportunity for an engaged discussion on capital formation and other issues for smaller reporting companies. See the release: https://www.sec.gov/news/press-release/2017-197.
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 11, 2017, SEC Chief Accountant Wesley Bricker gave a speech at the AICPA National Conference on Banks & Savings Institutions titled “Advancing High-Quality Financial Reporting in Our Financial and Capital Markets.” Mr. Bricker dedicated a portion of the speech to discussing the importance of broker-dealer compliance, as well as regulatory and financial reporting requirements, relating to initial coin offerings (ICOs), also referred to as token sales. Mr. Bricker noted that in July 2017, the SEC issued a report on its investigation of an offering of digital tokens by The DAO, an unincorporated virtual organization. Mr. Bricker emphasized that, as stated in the SEC’s report, the federal securities laws apply to those who offer and sell securities in the United States, regardless of whether the issuing entity is a traditional company or a decentralized autonomous organization, whether those securities are purchased using U.S. dollars or virtual currencies, or whether they are distributed in certificated form or through distributed ledger technology. Mr. Bricker stated that an entity involved in initial coin or token offering activities must consider the necessary accounting, disclosure and reporting guidance based on the nature of its involvement, including the preparation of financial statements. Mr. Bricker noted that issuers involved in initial coin or token offerings should consider, for example, the application of SEC guidance in addressing the following questions:
- What are the necessary financial statement filing requirements?
- Are there liabilities requiring recognition or disclosure?
- Are there previously recognized assets that require de-recognition?
- Are there revenues or expenses requiring recognition or deferral?
- Is there a transaction with owners, resulting in debt or equity classification and possibly compensation expense?
- Are there implications for the provision for income taxes?
Mr. Bricker also noted that holders of coins or tokens should consider, for example, the application of SEC guidance in addressing the following questions:
- Does specialized accounting guidance (such as for investment companies) apply to the holder’s financial statement presentation?
- What are the characteristics of the coin or token in considering whether, how, and at what value the transaction should affect the holder’s financial statements?
- What is the nature of the holder’s involvement in considering whether the issuer’s activities should be consolidated or accounted for under the equity method?
A copy of the speech is available at: https://www.sec.gov/news/speech/speech-bricker-2017-09-011.
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.
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  (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 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.
The SEC’s Investor Advisory Committee announced its next meeting on October 12, beginning at 9.30 am. The agenda for the meeting includes remarks from Commissioners; a discussion regarding blockchain and other distributed ledger technology and implications for securities markets; an overview of law school clinic advocacy efforts on behalf of retail investors; a discussion regarding electronic delivery of information to retail investors (which may include a recommendation of the Investor as Purchaser Subcommittee); and subcommittee reports. The meeting will be webcast on the SEC’s site.
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.