Last week we reminded folks that our IPO program will be held on October 25, 2019.  In a timely IPO related development, on September 26, 2019 the SEC finalized a rule to allow all issuers, not just EGC’s, to “test the waters” in the IPO process.  We explored this proposal in this post from last June and discussed the implications of extending this JOB’s Act provisions to all companies.  You can read the details of the final rule in this press release and accompanying Fact Sheet and learn all about its implications in our IPO program.

The IPO market has been in the news the last several months with deals including Uber, Lyft and now WeWork in the headlines.  Interestingly, along with all these high-profile deals there have been several successful deals that have not attracted headlines.  If you are on the offering path now or may be in the future you can learn this process “from start to finish” at our Public Offering program on October 25, 2019.  The program will be presented live in New York and also via webcast.  Details include:

• Focus on drafting key securities offering documentation
• Learn to work effectively with the SEC – including registration, disclosure and publicity restrictions
• Earn up to 2 hours Ethics CLE credit learning the importance of ethics in due diligence in the offering process – comfort letters, 10b-5 statements and in-house counsel considerations

You can get more information and register here.

As always, your thoughts and comments are welcome!

As the debate surrounding the impact of quarterly reporting on company management and investor behavior continues, CFA Institutehas completed a survey of its global membership in a report titled “The Case for Quarterly and Environmental, Social, and Governance Reporting,”  which provides valuable data and insights for this discussion.CFA Institute has more than 164,000 members worldwide and is the not-for-profit organization that awards the Chartered Financial Analyst® (CFA) credential (as well as several others).

The report’s executive summary provides an overview of the survey results:

“Respondents, however, indicate that quarterly reports remain more important to investors than earnings releases. These quarterly reports provide a structured information set that follows accounting standards and regulatory guidelines and include incremental financial statement disclosures and management discussion and analysis. In addition, quarterly reports offer greater investor protections as they are certified by the officers of the company, subject companies to greater legal liability, and are reviewed by company auditors.”

The report also provides a discussion of CFA’s position about long-term versus short-term thinking:

“CFA Institute has long contended that when companies focus on long-term strategy, they are looking at a time horizon of three to five years or longer, not six months. Accordingly, extending the reporting period from three to six months would have little impact. We believe that a better approach to deterring short-termism would be to focus on companies’ incentive structures. Companies interested in encouraging a long-term view should consider adopting five-year performance periods in their incentive plans. In addition to incentives, general corporate leadership, tone at the top, and company culture are important contributors to long- vs. short-termism.”

And, as an interesting final note, the survey respondents also weighed in on ESG reporting issues with this overall summary of the results:

“…survey respondents and roundtable participants say that they incorporate governance factors into their investment analysis to a greater extent than they incorporate environmental and social factors. Investors, however, note that ESG means different things to different people. Hence, clear definitions of the terms and related metrics are needed. They also believe that specific ESG and sustainability disclosures should be a regulatory requirement for public companies and that securities regulators should either develop ESG disclosure standards or support an independent standards setter (i.e., a single, global standards setter in this field) to develop such standards.

You can read all the details here, and out thanks to CFA Institute for providing this valuable report and permission to pass it on to you in this post.

As always, your thoughts and comments are welcome!

Without going back into a lot of history, the “scandal” in the early 2000’s surrounding several banks manipulating LIBOR has resulted in a very real likelihood that when the obligation banks have to provide information to determine LIBOR expires, this index rate may “disappear”.  Given the number of instruments and number of markets that use LIBOR, the transition from this rate to some other reference rate has the potential to create significant risks and cause significant disruption.

Both the SEC and the FASB have been working on guidance to assist companies in their disclosure and reporting obligations before, during, and after this potential transition.

On July 12, 2019, the SEC published a “Staff Statement on LIBOR Transition”.  The Staff Statement addresses several issues companies may want to consider in managing this transition including addressing risks in existing contracts, processes for new contracts, IT considerations, and impact on risk management practices.  The Staff Statement also reviews disclosure considerations for companies before, during, and after a transition.

In addition, the FASB has undertaken a project and on September 5, 2029 issued a proposed ASU to provide accounting and reporting relief will be appropriate for this transition.  The project summary is available here, and the proposed ASU is available here.  While no decisions are final, the Board is considering relief for hedging relationships and whether such a change in reference rate could be a debt modification.

In case you are not familiar with one of the likely new reference rates, “SOFR” or Secured Overnight Financing Rate, here is information about this rate from the Federal Reserve Bank of New York.

As we approach third quarter-end and year-end, these resources hopefully  provide helpful information as we evaluate the impact of this risk of change.

As always, your thoughts and comments are welcome!

On August 8, 2019 the SEC issued a proposed rule to continue its disclosure modernization, update and simplification process.  Interestingly, this rule was issued without an open meeting for discussion.  Continuing the work of the SEC’s 2018 Disclosure Update and Simplification Final Rule and the March 2019 Disclosure Modernization and Simplification Final Rule, this proposed rule would update disclosures in three parts of Regulation S-K:

            S-K Item 101 – Description of the Business

            S-K Item 103 – Legal Proceedings

            S-K Item 105 – Risk Factors

According to the proposed rule release:

“The proposed amendments are intended to update our rules to account for developments since their adoption or last amendment, to improve these disclosures for investors, and to simplify compliance efforts for registrants. Specifically, the proposed amendments are intended to improve the readability of disclosure documents, as well as discourage repetition and disclosure of information that is not material.”

Here is a list of details from the proposed rule organized by S-K Item.  You can read more about each proposed change starting at page 10 of the release.

Revise Item 101(a) to be largely principles-based, requiring:

Disclosure of information material to an understanding of the general development of the business and eliminating a prescribed timeframe for this disclosure; and

In filings made after a registrant’s initial filing, only an update of the general development of the business with a focus on material developments in the reporting period with a hyperlink to the registrant’s most recent filing (e.g., initial registration statement or more recent filing if one exists) that, together with the update, would contain the full discussion of the general development of the registrant’s business.

Revise Item 101(c) to:

Clarify and expand its principles-based approach, with disclosure topics drawn from a subset of the topics currently contained in Item 101(c);

Include, as a disclosure topic, human capital resources, including any human capital measures or objectives that management focuses on in managing the business, to the extent such disclosures would be material to an understanding of the registrant’s business; and

Refocus the regulatory compliance requirement by including material government regulations, not just environmental laws, as a topic.

Revise Item 103 to:

Expressly state that the required information may be provided by including hyperlinksor cross-references to legal proceedings disclosure located elsewhere in the document in an effort to encourage registrants to avoid duplicative disclosure; and

Revise the $100,000 threshold for disclosure of environmental proceedings to which the government is a party to $300,000 to adjust for inflation.

Revise Item 105 to:

Require summary risk factor disclosure if the risk factor section exceeds 15 pages;

Refine the principles-based approach of Item 105 by changing the disclosure standard from the “most significant” factors to the “material” factors; and

Require risk factors to be organized under relevant headings, with any risk factors that may generally apply to an investment in securities disclosed at the end of the risk factor section under a separate caption.

It is interesting to note that may of the changes emphasize the principles-based nature of the SEC’s disclosure requirements, and the proposed rule contains an interesting discussion about using this principles-based model.

As a last note, if you want to dig deeply into the proposed revised wording in Regulation S-K, you can find the proposed changes beginning at page 108 of the proposed rule.

As always, your thoughts and comments are welcome!

This is the last of our posts reviewing the changes made by the SEC’s March 20, 2019 Disclosure Modernization and Simplification Final Rule.  In this post we review the changes made to the exhibit requirements, including confidential treatment and incorporation by reference.  Changes in these areas are fairly detailed.  The changes for confidential treatment were effective for filings made after the date the rule was published in the Federal Register, which was April 2, 2019, and the other changes are effective for filings made after May 2, 2019.

Confidential Treatment Streamlining

Prior to the Disclosure Modernization and Simplification rule, confidential treatment processes were spelled out in Exchange Act Rule 24b-2 and Securities Act Rule 406.  These rules contained procedures which required submission of a request to obtain confidential treatment for exhibits filed under the Exchange Act and Securities Act.  With a goal of “Substantially reduc(ing) the burden borne by registrants in preparing and responding to confidential treatment requests while still providing all material information to investors,” the SEC replaced the existing procedures with a process for companies to make decisions to redact information without advance SEC approval.  To redact information the company must conclude that the information:

 (i) is not material and

(ii) would be competitively harmful if publicly disclosed.

If a company chooses to redact information in an exhibit it must:

1. Mark the exhibit index to indicate that portions of the exhibit or exhibits have been omitted;
2. Include a prominent statement on the first page of the redacted exhibit that certain identified information has been excluded from the exhibit because it is both (i) not material and (ii) would be competitively harmful if publicly disclosed; and
3. Indicate with brackets where the information has been omitted from the filed version of the exhibit.

To make this change the SEC has added this language to S-K 601(b)(10):

(iv) The registrant may redact provisions or terms of exhibits required to be filed by this paragraph (b)(10) if those provisions or terms are both not material and would likely cause competitive harm to the registrant if publicly disclosed. If it does so, the registrant should mark the exhibit index to indicate that portions of the exhibit or exhibits have been omitted and include a prominent statement on the first page of the redacted exhibit that certain identified information has been excluded from the exhibit because it is both not material and would likely cause competitive harm to the registrant if publicly disclosed. The registrant also must indicate by brackets where the information is omitted from the filed version of the exhibit. If requested by the Commission or its staff, the registrant must promptly provide an unredacted copy of the exhibit on a supplemental basis. The Commission or its staff also may request the registrant to provide its materiality and competitive harm analyses on a supplemental basis. Upon evaluation of the registrant’s supplemental materials, the Commission or its staff may request the registrant to amend its filing to include in the exhibit any previously redacted information that is not adequately supported by the registrant’s materiality and competitive harm analyses. The registrant may request confidential treatment of the supplemental material submitted under this paragraph (b)(10)(iv) pursuant to Rule 83 (§ 200.83 of this chapter) while it is in the possession of the Commission or its staff. After completing its review of the supplemental information, the Commission or its staff will return or destroy it at the request of the registrant if the registrant complies with the procedures outlined in Rules 418 or 12b-4 (§ 230.418 or § 240.12b-4 of this chapter).

In this Announcement from Corp Fin, the Division provides guidance about the provisions in the March 20, 2019 Disclosure Modernization and Update Final Rule, including discussion of how they will perform compliance reviews (see the bolded text in the preceding paragraph) dealing with how companies use these provision to redact information.

Changes for Schedules and Attachments to Exhibits

Along the same lines as the changes for redacting information in exhibits discussed in the previous section, the Final Rule also makes changes to the requirements for exhibits that include schedules and attachments.  The revised language is in new S-K Item 601(a)(5):

(5) Schedules (or similar attachments) to the exhibits required by this Item are not required to be filed provided that they do not contain information material to an investment or voting decision and that information is not otherwise disclosed in the exhibit or the disclosure document. Each exhibit filed must contain a list briefly identifying the contents of all omitted schedules. Registrants need not prepare a separate list of omitted information if such information is already included within the exhibit in a manner that conveys the subject matter of the omitted schedules and attachments. In addition, the registrant must provide a copy of any omitted schedule to the Commission or its staff upon request.

Personally Identifiable Information

In a change that essentially codifies the Commission’s existing practice, the Final Rule adds a provision that companies may remove personally identifiable information from exhibits without a confidential treatment request.  This is in S-K Item 601(a)(6):

(6) The registrant may redact information from exhibits required to be filed by this Item if disclosure of such information would constitute a clearly unwarranted invasion of personal privacy (e.g., disclosure of bank account numbers, social security numbers, home addresses, and similar information).

Hyperlinks for Information Incorporated by Reference

In an extension of hyperlinking, the Final Rule includes a provision that if information that is on the EDGAR System (for example a previously filed Form 10-K) is incorporated by reference into another filing, a hyperlink to that information is required.  This is  accomplished via the following addition to Rule 12b-23:

(d) Hyperlinks. You must include an active hyperlink to information incorporated into a registration statement or report by reference if such information is publicly available on the Commission’s Electronic Data Gathering, Analysis and Retrieval System (“EDGAR”) at the time the registration statement or form is filed. For hyperlinking to exhibits, please refer to Item 601 of Regulation S-K (§ 229.601 of this chapter) or the appropriate form.

This is viewed by the Commission as a part of the FAST Act requirements:

“By requiring an active hyperlink to information on EDGAR if it has been incorporated by reference into a registration statement or prospectus, we believe these amendments will improve the readability and navigability of disclosure documents and discourage repetition, consistent with our FAST Act mandate.”

There are a variety of other non-substantive changes in the exhibit provisions, which you can find in the Final Rule, with page 80 as a starting point.

Two Year Look-Back for Material Contracts

Another change in S-K Item 601(b)(10) relates to the two-year “look-back” for material contracts.  This requirement has been removed for companies other than “newly reporting” companies with this new language:

(10) Material contracts. (i)(A) Every contract not made in the ordinary course of business that is material to the registrant and is to be performed in whole or in part at or after the filing of the registration statement or report. In addition, for newly reporting registrants, every contract not made in the ordinary course of business that is material to the registrant and that was entered into not more than two years before the date on which such registrant:

(1) First files a registration statement or report; or

(2) Completes a transaction that had the effect of causing it to cease being a public shell company.

The definition of a “newly reporting company” is fairly detailed and is in the same section of S-K 601(b)(10).

Incorporation by Reference

As part of the “modernization” provisions of the Final Rule the SEC fixed a pre-EDGAR incorporation by reference issue.  In the days before EDGAR, the SEC did not retain paper filings forever, and so some exhibits would have to be re-filed after five years.  This is clearly no longer relevant in the EDGAR world.  To “modernize” incorporation by reference this paragraph was removed from S-K Item 10:

(d) Incorporation by Reference. Where rules, regulations, or instructions to forms of the Commission permit incorporation by reference, a document may be so incorporated by reference to the specific document and to the prior filing or submission in which such document was physically filed or submitted. Except where a registrant or issuer is expressly required to incorporate a document or documents by reference (or for purposes of Item 1100(c) of Regulation AB (§229.1100(c)) with respect to an asset-backed issuer, as that term is defined in Item 1101 of Regulation AB (§229.1101), reference may not be made to any document which incorporates another document by reference if the pertinent portion of the document containing the information or financial statements to be incorporated by reference includes an incorporation by reference to another document. No document on file with the Commission for more than five years may be incorporated by reference except:

(1) Documents contained in registration statements, which may be incorporated by reference as long as the registrant has a reporting requirement with the Commission; or

(2) Documents that the registrant specifically identifies by physical location by SEC file number reference, provided such materials have not been disposed of by the Commission pursuant to its Records Control Schedule (17 CFR 200.80f).

Cross-Referencing in the Financial Statements

While for most of us this is not a major issue, the SEC has “formalized” the position that it is not appropriate to incorporate information by reference into the financial statements from other parts of a report or registration statement.  The 1934 Act part of this change is this revised paragraph in Rule 12b-23:

(b) Financial information. Except as provided in the Commission’s rules, financial information required to be given in comparative form for two or more fiscal years or periods must not be incorporated by reference unless the information incorporated by reference includes the entire period for which the comparative data is given. In the financial statements, incorporating by reference, or cross-referencing to, information outside of the financial statements is not permitted unless otherwise specifically permitted or required by the Commission’s rules or by U.S. Generally Accepted Accounting Principles or International Financial Reporting Standards as issued by the International Accounting Standards Board, whichever is applicable.

The rational for this change, as explained in the Final Rule, is to reduce confusion about what information is covered by the auditor’s report:

“By generally prohibiting this practice, with certain exceptions as noted above, the amendments address concerns that referencing information outside the audited financial statements to satisfy financial statement disclosure requirements could create confusion about which financial information has been audited or reviewed by the independent auditor.”

There is a wealth of details in these changes, but hopefully none will be that challenging to implement.

As always, your thoughts and comments are welcome!