Governance & Compliance Insider

In light of the COVID-19 pandemic, SEC Chair Clayton and Director William Hinman have issued a joint statement urging public companies to provide as much information as is practicable regarding their current financial and operating status, as well as their future operational and financial planning, in upcoming earnings releases and analyst and investor calls. The joint statement is summarized here.  In the joint statement, companies are encouraged to avail themselves of the safe-harbors for forward-looking statements.  Chair Clayton and Director Hinman would not expect good faith attempts to provide appropriately framed forward-looking information to be second guessed by the SEC. Subject to certain statutory exemptions, the Private Securities Litigation Reform Act of 1995 (PSLRA) enacted safe harbor provisions for forward-looking statements, whether written or oral: That are identified as forward-looking statements, and accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statements; or That are immaterial; or Where the plaintiff fails to prove that the forward-looking statements (1) if made by a natural person, were made with actual knowledge by that person that the statements were false or misleading; or (2) if made by a business entity, were (a) made by or with the approval of an executive officer of that entity; and (b) made or approved by such officer with actual knowledge by that officer that the statements were false or misleading. There is extensive case law interpreting the scope and conditions of the safe harbor for forward-looking statements.  Companies should continue to take precautions against private securities claims based on forward-looking disclosure: In written communications, clearly identify forward-looking statements using expressions of expectation or belief, combined with an explanatory description of the company’s intention to thereby designate the statements as forward-looking. In oral communications, such as conference calls, announce at the beginning of the call that (1) the company can or will provide forward-looking information; (2) actual results could differ materially from the information provided; and (3) the factors that can cause the difference are explained in the risk factors contained in the company’s SEC filings. Tailor and update the cautionary language that accompanies forward-looking statements, based on the specific risks and uncertainties. Courts have declined to apply the safe harbor where risk disclosures are boilerplate and are not updated or do not identify the appropriate risks (ie, the risks that ultimately caused the prediction to not come to pass). In the cautionary language, emphasize that the accuracy of the forward-looking statements depend on future events, and articulate assumptions supporting the forward-looking statements. Provide the cautionary language in close proximity to the forward-looking statements, or clearly indicate which sections contain forward-looking statements. Some, but not all, courts find that when a statement is “mixed” with forward- and non-forward looking statements, the part of the statement that refers to non-forward looking information is not entitled to the safe harbor protection.  Furthermore, a materially false statement of non-forward looking information may preclude application of the safe harbor to the forward-looking portion of the statement. The PSLRA and federal securities laws do not impose a duty to update a forward-looking statement.  However, companies have a duty to correct prior disclosure that the company determines was untrue at the time it was made, and certain courts have suggested that there is a duty to update a specific and material representation regarding a future event that, without updating, would mislead investors.  However, this duty has been very narrowly defined.

The Securities and Exchange Commission has extended an earlier order, so that subject to certain conditions that we reported on here, public companies may have an additional 45 days from the original due date to file their Exchange Act reports that are otherwise due between March 1 and July 1, 2020. Companies relying on this relief, in compliance with the conditions imposed by the order, will preserve their eligibility to use registration statements on Forms S-3, F-3 and S-8, as long as they were current and timely in their Exchange Act filing requirements as of the first day of the 45-day of the relief period, and they file their reports due during the relief period.  In addition, those companies will be permitted to rely on Rule 12b-25 if they are unable to file the required reports on or before the extended due date.  Rule 12b-25 provide an additional 15-calendar day grace period for annual reports, and a five-calendar day grace period for quarterly reports, under certain circumstances.

On March 25, the SEC issued CF Disclosure Guidance Topic No. 9 that provides the Division of Corporation Finance’s current views regarding disclosure and other securities law obligations that companies should consider with respect to COVID-19 and related business and market disruptions. In the guidance, the SEC recognizes that it may be difficult to assess or predict with precision the broad effects of COVID-19 on industries or individual companies. Never the less, the guidance is clear that the SEC considers COVID-19 developments to be material and that public companies have an obligation to address these risks even as the business risks are evolving and impacts on a specific company are uncertain. As a result, disclosure of these risks and COVID-19-related effects may be necessary or appropriate in management’s discussion and analysis, the business section, risk factors, legal proceedings, disclosure controls and procedures, internal control over financial reporting, and the financial statements. The guidance provides a checklist of topics related to COVID-19 to be considered by public companies as they prepare their periodic reports and other public disclosures: The impact of on the company’s financial condition and results of operations in the near term and longer term. The impact of on the company’s capital and financial resources, including liquidity, cost and access to capital (such as access to revolving credit facilities), sources and uses of cash, the company’s ability to meet financial covenants, new material expenditures in response to COVID-19 and other matters. The impact on the company’s balance sheet and assets, including any impairment charges. The impact on operations, including remote work, productivity, human resources, supply chain, product distribution and travel restrictions. The impact on demand for the company’s goods and services. The impact on internal controls, disclosure controls, accounting judgments or financial statements. The guidance highlights public companies’ obligations to address management’s expectations for future periods and to discuss trends and uncertainties. The guidance notes that these statements are likely to be forward looking information, based on assumptions and expectations regarding future events, which may be covered by the safe harbor protections. The guidance further notes that the disclosure should be tailored for the specific company and allow investors to see the impact of COVID-19 through the eyes of management. The guidance reminds companies that as they consider the impacts of COVID-19 on their financial condition and operations, their directors and officers, and other corporate insiders, who are aware that COVID-19 has affected their companies in ways that would be material to investors, should refrain from trading in the companies’ securities until such information is disclosed to the public. The guidance also reminds companies to take the necessary steps to avoid selective disclosures by disseminating material information related to the impacts of COVID-19 broadly to the public. In addition, the guidance addressed earnings releases and non-GAAP financial measures. As to earning releases the guidance is primarily a caution to prepare early to address novel issues and accounting judgments that may arise from COVID-19. To the extent a company presents a non-GAAP financial measure or performance metric to adjust for or explain the impact of COVID-19, the guidance is that the disclosure should highlight why management finds the measure or metric useful and how it helps investors assess the impact of COVID-19 on the company’s financial position and results of operations. The guidance also states that if a GAAP financial measure is not available at the time of the earnings release because the measure may be impacted by COVID-19-related adjustments, requiring additional information and analysis to complete, the staff would not object to companies reconciling a non-GAAP financial measure to preliminary GAAP results that either include provisional amount(s) based on reasonable estimates, or a range of reasonably estimable GAAP results. The provisional amount or range should reflect a reasonable estimate of COVID-19 related charges not yet finalized, such as impairment charges. Under the guidance, a company presenting non-GAAP financial measures that are reconciled to provisional amount(s) or an estimated range of GAAP financial measures, should explain, to the extent practicable, why the line item(s) or accounting is incomplete, and what additional information or analysis may be needed to complete the accounting. The guidance is clear that the other rules for disclosure of non-GAAP financial measures continue to apply, including that companies should avoid “cherry-picking”. In addition, companies should limit the measures they present to those non-GAAP financial measures they are using to report financial results to their Boards of Directors.

On March 4, 2020, the Securities and Exchange Commission (the “Commission”) proposed amendments to the private offering exemptive framework under the Securities Act of 1933, as amended (the “Securities Act”) to “simplify, harmonize, and improve certain aspects of the framework” with the goal of promoting capital formation while maintaining investor protections. The current private offering framework is a set of exemptions and safe harbors which permit issuers to raise capital through various, differing rules which don’t require the filing of a registration statement with the Commission under the Securities Act. These rules are meant to provide issuers with a less expensive and more efficient alternative to a registered public offering in exchange for certain limitations and requirements being placed on the offering, typically regarding the number and type of investors, the type and context of solicitations, the size of the offering and individual investments and certain limited information requirements. The conflicting requirements of the current, differing rules and the potential integration (determination of whether multiple transactions are part of the same offering) of offerings conducted under this “patchwork system” has resulted in a complex and sometimes confusing regulatory framework where the interaction of offerings conducted under the various exemptions and safe harbors is often uncertain, leading to potential violations of the Securities Act. As Chairman Clayton stated in relation to the proposed amendments, “[t]he complexity of the current framework is confusing for many involved in the process, particularly for those smaller companies whose limited resources spent on navigating our overly complex rules are diverted from direct investments in the companies’ growth.” As noted in the Commission’s press release, “[t]he Commission’s proposed amendments are intended to reduce potential friction points to make the capital raising process more effective and efficient to meet evolving market needs.” The proposed amendments would: address, in one broadly applicable rule, the ability of issuers to move from one exemption to another, and ultimately to a registered offering; increase the offering limits for Regulation A, Regulation Crowdfunding, and Rule 504 offerings, and revise certain individual investment limits; provide greater certainty to issuers and protection to investors by setting clear and consistent rules governing offering communications between investors and issuers, including permitting certain “demo day” activity without running afoul of the prohibition on general solicitation; and harmonize certain disclosure and eligibility requirements and bad actor disqualification provisions to reduce differences between exemptions. For more information on the proposed rules, see our recent eUpdate here.

On March 12, 2020, the Securities and Exchange Commission (the “Commission”) adopted amendments to the “accelerated filer” and “large accelerated filer” definitions in the Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The amendments would exclude from the definition of “accelerated filer” and “large accelerated filer” issuers that are eligible to be smaller reporting companies and that have less than $100 million in revenues in their most recent fiscal year for which audited financial statements are available.  This exclusion permits these issuers to forego an auditor attestation report on the issuers’ internal control over financial reporting (“ICFR”) in their annual reports on Form 10-K.  The following table from the adopting release sets forth the relationship between smaller reporting companies, non-accelerated filers, accelerated filers and large accelerated filers following the new amendments. Relationships between SRCs and Non-Accelerated, Accelerated, and Large Accelerated Filers under the Final Amendments Status Public Float Annual Revenues SRC and Non-Accelerated Filer Less than $75 million $75 million to less than $700 million N/A Less than $100 million SRC and Accelerated Filer $75 million to less than $250 million $100 million or more Accelerated Filer (not SRC) $250 million to less than $700 million $100 million or more Large Accelerated Filer (not SRC) $700 million or more N/A Note: This table addresses initial determinations of filer status and does not consider requirements for transitions between filer status. Transition thresholds have also been amended, as discussed below. More specifically, the amendments: Exclude from the “accelerated filer” and “large accelerated filer” definitions an issuer that is eligible to be a smaller reporting company and had annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available. The amendments also allow business development companies to qualify for this exclusion if they meet the requirements of the smaller reporting company revenue tests using their annual investment income as the measure of annual revenue, although business development companies would continue to be ineligible to be smaller reporting companies; Increase the public float transition thresholds for an accelerated and a large accelerated filer becoming a non-accelerated filer from $50 million to $60 million and for exiting large accelerated filer status from $500 million to $560 million; Provide that an issuer may exit reporting as an accelerated filer or large accelerated filer by either falling below the adjusted public float thresholds or by falling below the smaller reporting company revenue test thresholds, as applicable; and Add a check box to the cover pages of annual reports on Forms 10-K, 20-F, and 40-F to indicate whether an ICFR auditor attestation is included in the filing. The amendments do not impact the most significant exemption from the ICFR auditor attestation requirement, which is the exemption provided to an emerging growth company (“EGC”) pursuant to Title I of the JOBS Act. Generally, an EGC is company that has total annual gross revenues of less than $1.07 billion during its most recently completed fiscal year end and that has not sold common equity securities under a registration statement. The JOBS Act provides EGCs with a five-year exemption from the ICFR auditor attestation requirement. The following are two examples of the implementation of the new definitions and transition thresholds taken from the adopting release: An issuer with a December 31 fiscal year end that did not exceed the public float threshold for a smaller reporting company in the prior year and that has a public float, as of June 30, 2020, of $230 million and annual revenues for the fiscal year ended December 31, 2019 of $101 million will be eligible to be a smaller reporting company under the public float test; however, because the issuer would not be eligible to be a smaller reporting company under the smaller reporting company revenue test, it will be an accelerated filer (assuming the other conditions for accelerated filer are also met). At the next determination date (June 30, 2021), if its public float, as of June 30, 2020, remains at $230 million and its annual revenues for the fiscal year ended December 31, 2019 are less than $100 million, the issuer will be eligible to be a smaller reporting company under the smaller reporting company revenue test (in addition to the public float test) and thus it will become a non-accelerated filer. On the other hand, an issuer with a December 31 fiscal year end that has a public float, as of June 30, 2020, of $400 million and annual revenues for the fiscal year ended December 31, 2019 of $101 million will not be eligible to be a smaller reporting company under either the public float test or the smaller reporting company revenue test and will be an accelerated filer (assuming the other conditions for accelerated filer also are met). At the next determination date (June 30, 2021), if its public float, as of June 30, 2021, remains at $400 million, that issuer will not be eligible to be a smaller reporting company under the smaller reporting company revenue test unless its annual revenues for the fiscal year ended December 31, 2020 are less than $80 million, at which point it will be eligible to be a smaller reporting company under the smaller reporting company revenue test and to become a non-accelerated filer. The amendments will become effective 30 days after publication in the Federal Register. The final amendments will apply to annual report filings due on or after the effective date.

On March 2, the Securities and Exchange Commission adopted amendments to the financial disclosure requirements applicable to registered debt offerings that include credit enhancements, such as subsidiary guarantees. The final amendments amend Rule 3-10 of Regulation S-X and partially relocate its provisions to new Rule 13-01 and completely relocate Rule 3-16 into new Rule 13-02 (Rule 3-16 will continue to exist during the transition period). The Commission stated that the amendments are intended to: Improve existing Rules 3-10 and 3-16 by requiring disclosures that focus investors on the information that is material given the specific facts and circumstances and by making the disclosures easier to understand; Reduce the cost of compliance for registrants and encourage potential issuers to offer guaranteed or collateralized securities on a registered basis, thereby affording investors protections they may not be provided in offerings conducted on an unregistered basis; and Facilitate, through lower costs and burdens of compliance, issuers' flexibility to include guarantees or pledges of affiliate securities as collateral when they structure debt offerings, which may increase the number of registered offerings that include these credit enhancements and could result in a lower cost of capital and an increased level of investor protection. The amendments as adopted are substantially similar to the amendments proposed by the Commission on July 24, 2018. The amendments will be effective on January 4, 2021, but voluntary compliance will be permitted in advance of the effective date. Amendments to Rule 3-10 and New Rule 13-01 Prior to the amendments, Rule 3-10 required financial statements to be filed for all issuers and guarantors of securities that are registered or being registered, subject to several exceptions. Under the amendments, Rule 3-10 will continue to permit the omission of separate financial statements of subsidiary issuers and guarantors when certain conditions are met and the parent company provides supplemental financial and non-financial disclosure about the subsidiary issuers and/or guarantors and the guarantees. Similar to the existing rule, the amended rule will provide the conditions that must be met in order to omit separate subsidiary issuer or guarantor financial statements. New Rule 13-01 sets forth the accompanying amended disclosure requirements, as follows: The condition that a subsidiary issuer or guarantor be 100%-owned by the parent company is replaced with a condition that it be consolidated in the parent company's consolidated financial statements; The condensed consolidating financial information, as specified in existing Rule 3-10, is replaced with certain new financial and non-financial disclosures. The amended financial disclosures will consist of summarized financial information of the issuers and guarantors, which may be presented on a combined basis, and reduce the number of periods presented. The amended non-financial disclosures, among other matters, will expand the qualitative disclosures about the guarantees and the issuers and guarantors. Consistent with the existing rule, disclosure of additional information about each guarantor will be required if it would be material for investors to evaluate the sufficiency of the guarantee; The amended disclosures may be provided outside the footnotes to the parent company’s audited annual and unaudited interim consolidated financial statements in all filings; and The amended financial and non-financial disclosures are required for as long as an issuer or guarantor has an Exchange Act reporting obligation with respect to the guaranteed securities rather than for as long as the guaranteed securities are outstanding. Amendments to Rule 3-16 and New Rule 13-02 Rule 3-16 requires a registrant to provide separate financial statements for each affiliate whose securities constitute a substantial portion of the collateral, based on a numerical threshold, for any class of registered securities as if the affiliate were a separate registrant. Under the amendments, the requirements in Rule 3-16 will be replaced with the disclosure requirements in new Rule 13-02 (although existing Rule 3-16 will remain in place for transitional purposes). Among other things, the amendments will: Replace the existing requirement to provide separate financial statements for each affiliate whose securities are pledged as collateral with amended financial and non-financial disclosures about the affiliate(s) and the collateral arrangement as a supplement to the consolidated financial statements of the registrant that issues the collateralized security. The registrant will be permitted to provide the amended financial and non-financial disclosures outside the footnotes to its audited annual and unaudited interim consolidated financial statements in all filings; and Replace the requirement to provide disclosure only when the pledged securities meet or exceed a numerical threshold relative to the registered securities with a requirement to provide the proposed financial and non-financial disclosures in all cases, unless they are immaterial.

In connection with the order issued by the Securities and Exchange Commission yesterday providing filing relief for companies that are affected by the coronavirus, the Commission reminded all companies to be vigilant regarding their disclosure obligations related to the evolving coronavirus scenario. A company’s assessment of, and plans for addressing, material risks to its business and operations resulting from the coronavirus can be material to investors, and companies are encouraged, to the fullest extent practicable, to keep investors and markets informed of material developments. As a reminder, under the federal securities laws: When a company has become aware of a risk related to the coronavirus that would be material to its investors, it should refrain from engaging in securities transactions with the public and take steps to prevent its directors, officers and other corporate insiders who are aware of these matters from initiating such transactions until investors have been appropriately informed about the risk. When a company does disclose material information related to the impacts of the coronavirus, it should take the necessary steps to avoid selective disclosures and to disseminate such information broadly in compliance with Regulation FD. Companies should consider whether they may need to revisit, refresh or update previous disclosure to the extent that such information becomes materially inaccurate. Companies providing forward-looking information in an effort to keep investors informed about material developments, including known trends or uncertainties regarding the coronavirus, should take steps to avail themselves of the safe harbor in Section 21E of the Securities Exchange Act of 1934 for this information. While the need to seek filing relief due to the coronavirus will hopefully be limited to very few companies, these disclosure obligations are likely to impact most companies.

At the Securities and Exchange Commission’s (the “Commission”) open meeting on December 18, 2019, the Commissioners approved proposed amendments to the definition of “accredited investor” under Regulation D under the United States Securities Act of 1933, as amended (the “U.S. Securities Act”) and the definition of a “qualified institutional buyer” in Rule 144A under the U.S. Securities Act. Commissioners Robert Jackson and Allison Lee both dissented on the proposal. The statements of the commissioners on the proposed rules showcased significant disagreement between them on the role of the Commission and the fundamental purposes of the federal securities laws. Commissioner Jackson’s public statement was titled Statement on Reducing Investor Protections around Private Markets and highlighted his belief that the new release does not take the Commission’s role in protecting investors seriously. Commissioner Lee also noted her concern regarding the one-sided nature of the proposed rules which seek to expand the pool of available investors without adequately considering an adjustment in the income and wealth thresholds. The amendments to the definition of “accredited investor” are meant to provide more opportunity for main street investors to participate in private capital markets by including a greater number of institutional and individual investors that have the knowledge and expertise to participate in private capital markets. The proposed amendments add new categories of natural persons and entities that qualify as accredited investors. Specifically, the proposed amendments would: add new categories of natural persons that may qualify as accredited investors based on certain professional certifications or designations or other credentials or their status as a private fund’s “knowledgeable employee;” expand the list of entities that may qualify as accredited investors and allow entities meeting an investments test to qualify; add family offices with at least $5 million in assets under management and their family clients; and add the term “spousal equivalent” to the definition. Changes are also proposed to the “qualified institutional buyer” definition to include limited liability companies, RBICs, and any institutional accredited investor not already listed in Rule 144A when they meet the existing threshold of $100 million in securities owned and invested. For more information on the proposed amendments, see our recent eUpdate here.

At the SEC's open meeting yesterday (November 5, 2019), the Commissioners approved two new proposed rules in their ongoing efforts to modernize proxy solicitation and shareholder proxy access, as follows: (1) amendments to certain procedural requirements, including ownership requirements, documentation requirements, meetings to discuss proposals and limitations on the number of proposals submitted, and resubmission thresholds for shareholder proposals, and (2) amendments to proxy rules conditioning the availability of certain existing exemptions from the information and filing requirements of the proxy rules for proxy voting advice businesses upon compliance with additional disclosure and procedural requirements. Comments on the proposals are due on or before 60 days after publication in the Federal Register. For more information on the proposed rules, see our recent eUpdate available here: dorsey.com/newsresources/publications/client-alerts/2019/11/sec-adopts-proposed-rules-requirements.

Yesterday the SEC announced the agenda for its upcoming open meeting to be held on Tuesday, November 5 at 10:00 a.m. EST. All SEC open meetings are webcast and a hyperlink to the webcast will be posted to www.sec.gov shortly before the start of a meeting. The SEC has indicated that the agenda, in part, will focus on “continued efforts to facilitate constructive shareholder engagement and enhance transparency, improve disclosures, and increase confidence in the proxy process.” We expect to provide further analysis following the open meeting and on any proposals once they are published. More information about the specific agenda items for the open meeting can be found in our eUpdate here:  dorsey.com/newsresources/publications/client-alerts/2019/10/sec-to-discuss-proxy-adviser-regulation.

The SEC has proposed rule amendments to automate filing fee calculations and payment processing.  If the rules are adopted, filing fees would be paid via Automated Clearing House (ACH) and would no longer be payable via checks and money order.  Each fee table and the accompanying notes would include all information required for the fee calculation tagged in inline XBRL.  Currently, information required for the fee calculation is optional but often footnoted by companies, and filers manually calculate the fee, which may then be subject to review by the SEC staff.  The new system is intended to reduce errors and provide certainty to filers on the correctness of the fee paid, since EDGAR would compute the filing fee from inputs and validate information provided by the filer.   In the event of incorrectly submitted information, filers would receive a warning and the staff would follow up, but the filing would not be suspended. The SEC is soliciting comments on the proposed rule amendments, due within 60 days after the amendments' publication in the Federal Register.    

In connection with its efforts to modernize the regulatory framework, the SEC announced a new rule that provides all issuers with the flexibility provided by the JOBS Act to use "test-the-waters" communications with institutional investors about potential IPOs and other registered offering to better gauge market interest.  Previously, test-the-waters communications were only available to emerging growth companies. Securities Act Rule 163B will permit any issuer to engage in oral or written communications with potential investors that are, or that they reasonably believed to be, qualified institutional buyers ("QIBs") and institutional accredited investors ("IAIs") either prior to or following the filing of a registration statement, to determine whether such investors might have an interest in a contemplated registered securities offering. A QIB generally is a specified institution that, acting for its own account or the accounts of other QIBs, in the aggregate, owns and invests on a discretionary basis at least $100 million in securities of unaffiliated issuers.  An IAI is any institutional investor that is also an accredited investor, as defined in paragraph (a) of Rule 501 of Regulation D. The staff intentionally does not specify the steps that an issuer could or must take to establish a reasonable belief that the intended recipients of test-the-water communications are QIBs or IAIs, with the stated goal of providing issuers with the flexibility to use methods that are cost-effective but appropriate in light of the facts and circumstances of each contemplated offering and each potential investor.  In the adopting release, the staff states that issuers should continue to rely on the methods that they currently use to establish a reasonable belief with respect to an investor’s status as a QIB or IAI pursuant to Rule 144A and Rule 501(a) of the Securities Act.   Under the rule: There are no filing or legending requirements.  A written communication would not constitute a free writing prospectus, which is subject to filing requirements. The communications are deemed “offers” subject to Section 12(a)(2) liability in addition to the anti-fraud provisions of the federal securities laws.  The information provided must not conflict with material information in the related registration statement, and furthermore, the staff may request that the issuer furnish any test-the-waters communication. Issuers subject to Regulation FD will need to consider whether any information in a test-the-waters communication would trigger disclosure obligations under Regulation FD or whether an exemption under Regulation FD would apply.  Regulation FD requires public disclosure of any material nonpublic information that has been selectively disclosed to certain securities market professionals or shareholders. Where an issuer wishes to pursue a private placement in lieu of a registered offering immediately after engaging in test-the-waters communications, the issuer should consider whether the test-the-waters communication was conducted in such a way as to constitute a general solicitation that could disqualify the issuer from completing a private placement   The staff noted that limiting communications to financially sophisticated investors, the applicability of anti-fraud provisions and Regulation FD, and the investors' ultimate receipt of a prospectus will mitigate investor protection concerns. The rule will become effective 60 days after publication in the Federal Register.

Last week, the SEC issued a reminder that Regulation FD remains a vital element of the federal securities regulations. In the first enforcement action regarding Regulation FD since 2013, the SEC charged TherapeuticsMD Inc., a pharmaceutical company, with violations of Regulation FD based on its sharing of material, nonpublic information with sell-side research analysts without also disclosing the same information to the public. The SEC’s order found that on two separate occasions in 2017, TherapeuticsMD selectively shared material information with analysts about the company’s interactions with the U.S. Food and Drug Administration (FDA). One day after a publicly-announced meeting with the FDA about a new drug approval, TherapeuticsMD sent private messages to sell-side analysts describing the meeting as “very positive and productive.” TherapeuticsMD’s stock price closed up 19.4 percent on heavy trading volume the next day. At that time, the company had not issued a press release or made any other market-wide disclosure about the meeting. On the morning of July 17, 2017, TherapeuticsMD issued a press release announcing that it had submitted additional information to the FDA, but did not yet have a timeline for its new drug approval. TherapeuticsMD’s stock price declined approximately 16 percent in pre-market trading following the issuance of the press release. TherapeuticsMD held a call with and emailed sell-side analysts after the press release was issued and selectively shared previously undisclosed details about the June FDA meeting. All of the analysts published research notes containing these details, and the stock rebounded to close down only 6.6 percent for the day. The SEC order found that TherapeuticsMD, at the time of the violations, did not have policies or procedures relating to compliance with Regulation FD. Regulation FD prohibits public companies, or persons acting on their behalf, from selectively disclosing material, nonpublic information to certain persons outside the company, including institutional investors, securities analysts, and other securities professionals. Whenever a public company discloses material, nonpublic information to any such person, Regulation FD requires that the company also disclose the information to the public simultaneously. TherapeuticsMD consented to the SEC’s order without admitting or denying the findings and was ordered to cease and desist from future violations of Regulation FD and Section 13(a) of the Securities Exchange Act of 1934. The company agreed to pay a $200,000 penalty. In addition, TherapeuticsMD implemented policies and procedures which, among other things, (a) require public disclosure of material, nonpublic information in connection with Regulation FD, (b) provide examples of types of material, nonpublic information that may arise in light of TherapeuticsMD’s business model, and (c) establish specific review protocols for all external communications, including earnings calls, analyst meetings, and press releases. TherapeuticsMD also now requires Regulation FD training for employees. The TherapeuticsMD order is a good reminder that public companies should establish and follow guidelines for complying with Regulation FD when interacting with market participants, including stockholders, institutional investors, securities analysts, and other securities professionals.

As we previously noted, in February, the SEC proposed expanding its “test-the-waters” accommodation from emerging growth companies (EGCs) only to all issuers via a new Rule 163B and related amendments. This accommodation would enable all issuers to engage in “test-the-waters” communications with certain institutional investors regarding a contemplated registered securities offering prior to, or following the filing of a registration statement related to such offering. These communications would be exempt from restrictions under Section 5 of the Securities Act on written and oral offers before or after filing a registration statement. The accommodation would be limited to communications with qualified institutional buyers (QIBs) and institutional accredited investors (IAIs). The proposal is part of SEC Chairman Jay Clayton’s well-publicized initiative to encourage more issuers to consider entering the public equity markets. The proposal builds on a popular similar provision of the Jumpstart Our Business Startups Act (JOBS Act) that had also previously been limited to EGCs but now allows all issuers to make non-public filings with the SEC during their initial stages of becoming a public company. The “test-the-waters” reform is intended to provide a broader range of issuers with the “[enhanced] ability to conduct successful public securities offerings and lower their cost of capital, and ultimately to provide investors with more opportunities to invest in public companies,” according to Chairman Clayton. The overwhelming majority of the comment letters received during the 60-day comment period agreed that the new proposal would accomplish this intention, with a common theme being that it provided a good balance of encouraging greater participation in the public markets while still adequately protecting investors. One comment letter, however, sounded some ominous warning bells. Better Markets argued that this reform would create “a dangerous loophole” through which unsophisticated investors could slip, since the proposed rule would allow self-certification of QIB or IAI status by a simple check of a box. In addition, the rule would allow issuers to communicate with QIBs and IAIs of their own choosing. Better Markets worries that this would create further information asymmetry between a “selected subset of investors that are in the know” and other investors who may be similarly qualified but only learn about the offering once it is made public because they can’t afford the underwriters and other intermediaries of the former group.

The SEC proposed amendments that would revise the definitions of “accelerated filer” and “large accelerated filer.” These proposed revisions follow amendments adopted by the SEC on June 28, 2018, that expanded the smaller reporting company (SRC) definition and so brought some issuers under both the definitions of an accelerated filer and an SRC. As a result of last year’s amendments, some SRCs must have an independent outside auditor attest to their internal control over financial reporting. See our previous discussion of the prior amendments here. The new proposed amendments seek to realign the definitions of accelerated filers and SRCs and would eliminate the requirement of smaller issuers to obtain such independent attestation. In this way, the SEC aims to reduce the cost of compliance of lower-revenue reporting companies and impose upon them more efficient, tailored regulatory requirements without significantly affecting the ability of investors to make informed investment decisions. Under the proposed amendments: an issuer that is eligible to be an SRC and had no revenues or annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available would be excluded from the accelerated and large accelerated filer definitions; the transition thresholds for accelerated and large accelerated filers becoming a non-accelerated filer would be increased from $50 million to $60 million and for exiting large accelerated filer status from $500 million to $560 million; and a revenue test would be added to the transition thresholds for exiting both accelerated and large accelerated filer status. The proposal is subject to a 60-day public comment period. Additional information is available in the SEC’s press release regarding the proposed new amendments here: sec.gov/news/press-release/2019-68.

The London Interbank Overnight Rate (“LIBOR”) is an interest rate calculation that is used globally for purposes of debt capital market transactions including bond issuances, loans, and derivatives. In particular, LIBOR underpins many Floating Rate Notes (“FRNs”), which use the rate as a reference for purposes of calculating coupon. The intention is that LIBOR reflects the overall health of the financial system, which in turn is reflected in the coupon rate to be paid/received with regards to FRNs. LIBOR is calculated by taking a cross-section of the average interest rate at which one bank can borrow from another bank. In the last several years, however, LIBOR has been subject to a scandal of rigging, fraud, and collusion amongst these banks. As a result, the UK Financial Conduct Authority (“FCA”) has urged banks and institutions to move to other benchmarks by 2021, and will no longer require or encourage banks to publish these rates following 2021. LIBOR underpins over $300 trillion of global loans and its phase-out presents issues for all debt instruments that use LIBOR as a reference rate. Any issuers of FRNs or other debt instruments should be aware of this development and should take a closer look at their debt. Subsequent action may be required in light of the imminent discontinuation of LIBOR. Issuers thinking about issuing debt in the future should also be aware that the FCA has urged firms to start thinking about using alternative benchmarks and treat the LIBOR discontinuation event “as something that will happen and which they must be prepared for.” For more information about the phase-out and what it means for participants who are U.S. public companies, see our recent eUpdate here: dorsey.com/newsresources/publications/client-alerts/2019/04/the-libor-phase-out.

The SEC proposed a new rule and related amendments that would expand the "test-the-waters" accommodation—currently available to emerging growth companies—to all issuers, including investment company issuers. Proposed Securities Act Rule 163B, if adopted, would significantly enhance an issuer’s ability to cost-effectively assess the demand for and valuation of its securities, and also provide insights into the structural components for the offering that are important to investors. The proposed Rule 163B would permit any issuer, or any person authorized to act on its behalf, to engage in oral or written communications with potential investors that are, or are reasonably believed to be, qualified institutional buyers (QIBs) or institutional accredited investors (IAIs), either prior to or following the filing of a registration statement, to determine whether such investors might have an interest in a contemplated registered securities offering. The proposed rule would be non-exclusive and an issuer could rely on other Securities Act communications rules or exemptions when determining what to communicate regarding a contemplated securities offering. Under the proposed rule: there would be no filing or legending requirements for test-the-waters communications; test-the-waters communications may not conflict with material information in the related registration statement; issuers subject to Regulation FD would need to consider whether any information in a test-the-waters communication would trigger disclosure obligations under Regulation FD or whether an exemption under Regulation FD would apply; and although the new rule would exempt test-the-waters communications from the gun-jumping provisions of Section 5, such communications would still be considered “offers” under the Securities Act subject to Section 12(a)(2) liability and the anti-fraud provisions of the federal securities laws. The proposal is subject to a 60-day public comment period. Additional information is available in the SEC’s press release regarding the proposed new rule here: sec.gov/news/press-release/2019-14.

On January 10, 2019, the Division of Corporation Finance of the Securities and Exchange Commission updated its Frequently Asked Questions (FAQs) about how to handle certain filing matters during the U.S. government shutdown, which is now entering its fourth week. (See, sec.gov/page/corpfin-section-landing.) The staff revised questions 4 and 5 and added new questions 6 and 9. Question 4 was revised to emphasize that Rule 430A is only available to add pricing information to registration statements declared effective prior to the government shutdown (i.e., by December 26, 2018). Issuers whose registration statements were not declared effective before the shutdown are not eligible to use Rule 430A. Question 5 was revised to specify the “magic words” that must be included in an amendment to a registration statement to remove the delaying amendment language and start the 20-day clock to take the registration statement effective. The amendment must include the statement: “This registration statement shall hereafter become effective in accordance with the provisions of section 8(a) of the Securities Act of 1933.” Registrants who amended their registration statements to remove the delaying amendment without including the “magic words” will need to file amendments to add them. New question 6 adds clarity for registrants who have unresolved staff comments on their filings and wish to amend their registration statements to remove the delaying amendment. The staff stated that registrants could nevertheless remove the delaying amendment, but reiterated that responsibility for complete and accurate disclosure lies with the registrant and others involved in the preparation of the registration statement. Finally, new question 9 indicates that issuers may request relief under Rule 3-13 of Regulation S-X, which provides that the SEC may permit the omission of one or more of the financial statements required by Regulation S-X or the filing of appropriate substitute financial statements “where consistent with the protection of investors.” During the shutdown, however, such requests must relate to a demonstrable emergency and the protection of a significant property interest. Whether Rule 3-13 proves useful as a practical matter during the shutdown remains to be seen. Below are (1) the revised text of questions 4 and 5 with new language shown in blue text, and (2) the text of the new questions 6 and 9. Question Answer 4.  If my registration statement was declared effective prior to the shutdown (my effective date was December 26, 2018 or earlier) what happens if I don’t price my offering within the 15-day time period provided in Rule 430A?       Because your registration statement was declared effective prior to the shutdown, you are eligible to use Rule 430A and you may file post-effective amendments, as necessary, under Rule 462(c) to restart the 15-business-day period so that, at the time of pricing you will be able to include the pricing information in a 424(b) prospectus supplement. Post-effective amendments filed pursuant to Rule 462(c) are effective upon filing. Alternately, at the time of pricing, you could file a post-effective amendment under Rule 462(c), prior to the time confirmations are sent or given, to include the information omitted under Rule 430A. NOTE: You cannot rely on Rule 462(c), however, to include the pricing information if the post-effective amendment includes substantive changes from, or additions to, the prospectus in the effective registration statement. 5.  Now that the shutdown is in effect, can I file an amendment to my current registration statement to remove the delaying amendment so my registration statement will be effective in 20 days?                   Yes. If you choose to remove the delaying amendment, your registration statement will not become effective until 20 days have passed. If the SEC’s operational status does not change and you wish to further delay the effective date of your registration statement, you may file another pre-effective amendment during the 20-day period. The registration statement would not become effective until 20 days after the latest pre-effective amendment that does not include a delaying amendment. If the SEC’s operating status changes to operational and your registration statement is not yet effective, we would consider a request to accelerate to an earlier date. We may ask you to amend the registration statement to include the delaying amendment. NOTE: Simply omitting the delaying amendment from an amendment will not begin the 20-day period. [Emphasis added.] A company that intends to remove the delaying amendment must amend its registration statement to include the following language provided by Rule 473(b) - “This registration statement shall hereafter become effective in accordance with the provisions of section 8(a) of the Securities Act of 1933.” It must also amend to include all information required by the form, including the price of the securities it will sell. Rule 430A is not available in the absence of a delaying amendment because Rule 430A is only available with respect to registration statements that are declared effective by the Commission or the staff. 6.  Can I amend to remove the delaying amendment while I have outstanding, unresolved staff comments on my filings?   Yes. As in all situations, responsibility for complete and accurate disclosure lies with the company and others involved in the preparation of a company’s filings. If you amend your filing to remove the delaying amendment and our operating status changes prior to your effective date, we may ask you to amend your filing to include the delaying amendment so that we may work with you to resolve outstanding comments. 9.  Will the Division consider a request for emergency relief under Rule 3-13 of Regulation S-X?           During a lapse in appropriations, the Division’s activities are limited. The Anti-deficiency Act generally prohibits agencies from continued operation in the absence of appropriations, but contains exceptions, one of which is for emergencies involving the protection of property. Thus, an agency may act where there is some reasonable likelihood that the protection of property would be compromised, in some significant degree, by delay in the performance of the function in question. In an emergency where Rule 3-13 may provide relief for registrants, the Division may grant an application where consistent with the limitations discussed below [sic]. Submit requests to CFEmergency@sec.gov and describe the emergency and the significant property interest to be protected.   More information about the SEC's plan of operations and the effect on securities offerings, public company reporting, investment companies, and securities markets during the government shutdown can be found in our prior blog post here: governancecomplianceinsider.com/u-s-government-shutdown-impacts-sec-operations-edgar-and-other-filings-enforcement-and-regulatory-activities/, and also on Dorsey's website here: dorsey.com/newsresources/publications/client-alerts/2019/01/government-shutdown-limits-sec-operations.  

In response to the U.S. government shutdown that began on December 22, 2018, the U.S. Securities and Exchange Commission and its Divisions of Corporation Finance and Investment Management published public guidance regarding the impacts on their operations. Although electronic filings will continue to be accepted in many cases, as described below, nearly all SEC operations, including the review and processing of filings and enforcement and regulatory functions, will be curtailed. Issuers and practitioners should make contingency plans to address the effects upon ongoing or planned securities offerings, filings, and requests for interpretive guidance, among other things. SEC operational status: Government shutdown impact The SEC published its operations plan under a lapse in appropriations and government shutdown (Securities and Exchange Commission, Operations Plan Under a Lapse in Appropriations and Government Shutdown, https://www.sec.gov/files/sec-plan-of-operations-during-lapse-in-appropriations-2018.pdf), which went into effect on December 27, 2018. During the shutdown, the SEC will have limited operations and limited staff. The SEC will retain only an extremely limited number of excepted staff members available to respond to emergencies involving the safety of human life or the protection of property, including law enforcement. Of the approximately 4,400 staff employees, fewer than 300 excepted staff remain in service during the shutdown. In summary, during the shutdown, while SEC systems will continue to accept various electronic filings and submissions, the SEC staff will discontinue: processing and approvals of ‘33 Act filings and registrations, including review and acceleration of effectiveness of registration statements; ongoing enforcement litigation, except for emergency enforcement matters; all non-emergency rulemaking, interpretive advice, and no-action letters; processing new and pending exemptive relief applications; approving applications for registration by investment advisers; processing proposed self-regulatory organization (SRO) rule changes, including NYSE and Nasdaq rule changes; responding to requests for information under the Freedom of Information Act, absent compelling need; responding to tips, complaints, or referrals, although limited staff will attempt to respond to certain critical matters, including allegations of ongoing fraud and misconduct; and responding to complaints, questions, or requests for information. In addition, while the SEC will continue to accept comment letters, the SEC anticipates that there will be delays in posting them to the SEC website. The public reference room will be closed. EDGAR Filings and Rulemaking.  The shutdown will not affect the ability to submit EDGAR filings. Additionally, SEC personnel will be able to process requests for EDGAR access codes and password resets and answer questions about fee-bearing EDGAR filings and other emergency questions regarding EDGAR submissions. The Divisions of Corporation Finance, Investment Management, and Trading and Markets, and the Office of Compliance Inspections and Examinations, however, will not process filings, provide non-emergency interpretive advice, issue no-action letters, or conduct any other normal Division and Office activities. The SEC will discontinue all non-emergency rulemaking and processing new or pending applications for exemptive relief. New or pending registration statements and applications for exemptive relief will not be processed regardless of the status of any review of those filings. The Division of Corporation Finance also published a set of Frequently Asked Questions (FAQs), discussed below, regarding Issuers’ options with respect to new and ongoing securities offerings during the shutdown. Division of Corporation Finance FAQs.  The SEC’s Division of Corporation Finance (CorpFin) has posted on its website additional guidance regarding the impact of the shutdown (See, https://www.sec.gov/page/corpfin-section-landing). A limited number of CorpFin staff members are available during the shutdown to answer questions relating to fee calculations for EDGAR filings, but will not generally be available to respond to other questions. Issuers and their representatives seeking assistance in calculating a filing fee for a filing during the shutdown should submit their requests to CFEmergency@sec.gov. CorpFin also provided a series of FAQs containing guidance with respect to ongoing and new offerings of securities during the shutdown: If a company with an effective registration statement determines it must update the information in its prospectus before commencing its offering, it should not go forward with the offering without updating the prospectus. The company must decide whether it can update the prospectus without filing a post-effective amendment because the staff will not be in a position to declare that amendment effective. Similarly, a company with a previously qualified Form 1-A that must be updated should not go forward with its offering before updating its offering statement. The staff will not be in a position to qualify a post-qualification amendment filed on EDGAR. If a company does not price its offering within the 15-day time period provided in Rule 430A, the CorpFin FAQs indicate the company may file post-effective amendments under Rule 462(c), which are automatically effective upon filing, to restart the 15-business-day period so that, at the time of pricing, the registrant will be able to include pricing information in a 424(b) prospectus supplement. As an alternative, at the time of pricing, the registrant could file a post-effective amendment under Rule 462(c), prior to the time confirmations are sent or given, to include the information omitted under Rule 430A. Registrants should note, however, that a Rule 462(c) post-effective amendment may not include substantive changes or additions to the prospectus in the registration statement at the time it became effective. The CorpFin FAQs indicate that a registrant may file an amendment to a current registration statement to remove the delaying amendment, in which case the registration statement will be effective in 20 days. The CorpFin staff notes, however, that if the SEC’s operating status changes to operational and the registration statement is not yet effective, the staff will consider a request to accelerate to an earlier date or ask the registrant to amend the registration statement to include the delaying amendment. Companies considering this approach should be aware that Rule 430A is not available in the absence of a delaying amendment. As a result, when a company amends a registration statement to remove the delaying amendment, the registration statement and prospectus must also be amended to include all information required by the applicable form, including the price of the securities being offered. A registrant may also file a new registration statement without a delaying amendment during the shutdown. Again, however, the CorpFin staff notes that, if the SEC’s operating status changes during the 20-day period prior to effectiveness, the staff may ask the registrant to amend the document to include a delaying amendment. Investment Adviser Registration Depository (IARD) system.  The SEC’s IARD system will continue to accept filings, including amendments to Form ADV, Form ADV-W, and Form ADV-E filings, but the Office of Compliance Inspections and Examinations will not approve applications for registration by investment advisers and the Division of Investment Management will not provide interpretive advice regarding the Advisers Act, rules or forms or consider applications for exemptive relief under the Advisers Act. As a result, new or pending investment adviser applications will not be processed. Division of Investment Management FAQs.  The SEC’s Investment Management (IM) also posted additional guidance regarding the impact of the shutdown (See, https://www.sec.gov/investment-management). Investment companies can continue to make filings on EDGAR during the shutdown, but the IM staff will not be available to respond to any questions about pending matters, other than answering questions relating to fee calculations for EDGAR filings. The IM guidance notes that a significant percentage of investment companies’ filings, including post-effective amendments to registration statements, become effective automatically either immediately upon filing or following the passage of a certain number of days. These filings will continue to become effective automatically in accordance with the applicable rules. The IM staff will follow the procedures established by Corp Fin, described above, with regard to the acceleration of initial registration statements and other types of filings made by registered investment companies during the federal government shutdown. Questions relating to calculating filing fees should be directed to IMEmergency@sec.gov. Central Registration Depository (CRD) and Transfer Agent Registration Systems.  The CRD system, used for broker-dealer licensing and registration, will continue to accept filings, but the Division of Trading and Markets and the Office of Compliance Inspections and Examinations will not review pending filings, consider new or pending applications or registrations, provide interpretive advice, or issue no-action letters. In addition, the staff will not be available to conduct any other normal Division and Office activities. Electronic Form Filing System (EFFS).  The EFFS will continue to accept submissions by self-regulatory organizations (SROs), but any SRO proposed rule change submitted through EFFS during the shutdown will have as its filing date the next business day after the shutdown has ended and SEC opens for regular business. Days that the SEC is operating under its shutdown plan (i.e. while the lapse in appropriations continues) will not constitute “business days” under Section 19 of the Exchange Act and Rule 19b-4 thereunder. Enforcement/Litigation.  The Division of Enforcement will have only a limited staff, and ongoing litigation, examinations, and investigative work will be suspended, except for limited emergency enforcement matters, including temporary restraining orders and/or investigative steps necessary to protect public and private property, monitoring the SEC’s “tips, complaints, and referrals” system and web-based investor complaint system, and process referrals from SROs and others to identify matters that are emergencies and take follow-up steps relating to such emergencies. The SEC also will continue Market Watch activities and continue to monitor market technology operations and any broker-dealers reported as being in financial distress. Money market fund surveillance and monitoring will also continue. The staff will also continue monitoring any international market developments that might affect the United States. Emergency Contacts.  Page 16 of the SEC’s shutdown plan contains a list of emergency contact telephone numbers and email addresses to reach an extremely limited number of Commission staff members in each office and division who are available to respond to emergency situations.

The Securities and Exchange Commission (SEC) announced last Friday that it has adopted amendments to certain disclosure requirements that have become duplicative, overlapping, or outdated in light of other Commission disclosure requirements, US Generally Accepted Accounting Principles (GAAP), or changes in the information environment.   These amendments were originally proposed in 2016, in order to implement provisions of the Fixing America's Surface Transportation (FAST) Act.   While a more complete summary of the changes is provided below, notable amendments include: the elimination of requirements for pro forma information on business combinations in interim filings, because similar disclosure may be found in Form 8-K filings; and the elimination of requirements for financial information broken out by segment and geography in a business description contained in SEC reports and registration statements, because similar discussions may be found in the financial statement footnotes and/or the MD&A, when these topics are material to an understanding of the business. Overall, the amendments are not intended to alter the mix of information available to investors in SEC reports and registration statements.  As a result, companies should take care to cross-reference applicable overlapping disclosure and to continue to disclose segment and geographically-specific information in other parts of their filings, including in the risk factors and the MD&A, to the extent that the discussion is material to an understanding of the business. Where there are redundant and overlapping disclosure requirements from SEC rules and GAAP standards established by the Financial Accounting Standards Board (FASB), the amendments attempt to reduce issuers' compliance burden.  The SEC has referred certain proposed amendments to FASB for their consideration in making consistent changes to future GAAP standards, and commentators have encouraged both agencies  to continue to coordinate on their reporting standards. Multiple categories of issuers will be impacted by the amendments.  Specifically: Regulation S-K amendments relate to domestic issuers and foreign private issuers that choose to file on domestic forms. Regulation S-X amendments relate to domestic issuers and foreign private issuers that report under US GAAP or reconcile to US GAAP. Certain amendments affect asset-backed issuers, Regulation A issuers and companies regulated under the Investment Company Act. The amendments will be effective 30 days from publication in the Federal Register.  Furthermore, the SEC staff has been directed to review the amendments' impact on disclosure and capital formation within five years and to report back to the Commission.       Here are highlights of the SEC rules that have been eliminated or streamlined: Overlapping requirements, which are related to, but not the same as GAAP, IFRS, or other Commission disclosure requirements.  Disclosure requirements that convey similar information, or that are incremental but no longer useful, have been deleted, while incremental, overlapping requirements have been integrated with other SEC rules.  Notable disclosure requirements that have been deleted include: (1) derivative accounting policies under Rule 4-08(n) of Regulation S-X, which are already addressed in financial statement footnotes under US GAAP, except for the requirement to disclose where in the statement of cash flows the effect of derivative financial instruments is reported; (2) amounts spent on research and development activities in the business description, in accordance with Item 101(c) of Regulation S-K, since this information will remain in the financial statement footnotes and the MD&A, when material; (3) dilution from the amount of common equity subject to outstanding options, warrants, or convertible securities, when the class of common equity has no established US public trading market, which must be disclosed in Form S-1 or Form 10 under Item 201(a)(2)(i) of Regulation S-K; (4) historical and pro forma ratios of earnings to fixed charges for issuers that register debt securities or preference securities, and an exhibit setting forth the computation of any ratio of earnings to fixed charges disclosed in an SEC report, required by Regulation S-K; (5) pro forma financial information in interim filings for business combinations, in accordance with Rule 8-03 and Rule 10-01 of Regulation S-X, because US GAAP and Item 9.01 of Form 8-K result in similar disclosure; (6) financial information about segments in the business description, pursuant to Item 101(b) of Regulation S-K, which will continue to be available in the footnotes to the financial statements and the MD&A, when material; (7) financial information by geographic area, pursuant to Item 101(d) of Regulation S-K, which will continue to be available in the footnotes to the financial statements and the MD&A, when material; and (8) information on the seasonality of the business in interim reports, pursuant to Instruction 5 to Item 303(b) of Regulation S-K, which will continue to be available in the MD&A, when available. Outdated requirements, which have become obsolete as a result of the passage of time or changes in the regulatory, business, or technological environment.  In addition to eliminating outdated transition disclosure requirements, the Commission amended rules that have become outdated due to changes in the regulatory, business and technological environment.  These amendments are described in detail starting on page 101 of the adopting release.  (1) With regard to market price disclosure required under Item 201(a)(1) of Regulation S-K and Item 9.A.4 of Form 20-F, issuers whose common equity is traded in an established public trading market will only be required to disclose the trading symbol, instead of sale or bid prices, of their stock.  (2) Domestic and foreign private issuers may delete requirements to identify the Public Reference Room and its physical address and phone number in their reports and registration statements, since investors now use the Internet to access filings.  (3) Furthermore, all issuers will be required disclose their Internet address if they have one.  (4) Foreign private issuers will no longer be required to disclose exchange rate data when financial statements are prepared in a foreign currency in Form 20-F, since exchange rate information is readily available free on a number of websites. Redundant and duplicative requirements, which require substantially similar disclosures as GAAP, International Financial Reporting Standards (IFRS), or other Commission disclosure requirements.  These amendments are summarized in a series of tables starting on page 29 of the adopting release.  While they will not substantially change disclosure, they are intended to alleviate confusion and inconsistency by  eliminating redundant and duplicative disclosure requirements, including Regulation S-X requirements on: the consolidation of financial statements, disclosure of significant changes in debt obligations, income tax rate reconciliation, title and amount of securities subject to warrants, rights and convertible instruments, identification of related party transactions, material contingencies in interim financial statements, presentation and computation of earnings per share, disclosure specific to insurance companies and bank holding companies, reasons for changes in accounting principles in an interim period, examples of interim period adjustments, common control transactions disclosed in interim financial statements, the disclosure of discontinued operations in interim financial statements, and incorporation by reference into Form 10-Q of reports furnished to security holders. Superseded requirements, which are inconsistent with recent legislation, more recently updated Commission disclosure requirements, or more recently updated GAAP.  The SEC adopted a series of amendments to reflect more recently updated US GAAP requirements or more recently updated Commission disclosure requirements.  These amendments are described starting on page 108 of the adopting release and include: (1) elimination of a requirement under Rule 3-15(a)(1) of Regulation S-X that REITs separately present all gains and losses on the sale of properties outside of continuing operations in the income statement, which was inconsistent with a US GAAP requirement that only applies to discontinued operations; (2) elimination of certain Regulation S-X requirements related to consolidation of financial statements that were inconsistent with US GAAP provisions related to difference in fiscal periods, the Bank Holding Company Act of 1956 and intercompany transactions; (3) elimination of certain Regulation S-X requirements for development stage companies; (4) removal of certain Regulation S-X requirements for insurance companies that conflicted with US GAAP; (5) elimination of references to "extraordinary items" in SEC rules and forms, consistent with US GAAP; and (6) replacement of references to "generally accepted auditing standards" (GAAS) with PCAOB standards.      

The SEC announced that it has voted to amend the definition of "smaller reporting company," or "SRC," expanding the population of companies that qualify for a range of scaled (reduced) disclosure requirements. The rules will become effective 60 days after publication in the Federal Register. Examples of scaled disclosure include that SRCs, in their annual reports on Form 10-K, are not obligated to include risk factors, and selected and supplementary financial data. They may include only two years of income statements (vs three years) and a comparison of two years (vs three years) of financial results. In their proxy statements, SRCs are not required to include a CD&A, CEO pay ratio and certain executive compensation tables. They may include fewer NEOs, and only two years of compensation in the Summary Compensation Table. Under the new definition, companies with a public float of less than $250 million (vs $75 million) will qualify as SRCs. A company with no public float or with a public float of less than $700 million will also qualify as an SRC if it had annual revenues of less than $100 million (vs $50 million) during its most recently completed fiscal year. Commission staff estimates that 966 additional companies will be eligible for SRC status in the first year under the new definition. The SEC released the following summary of the amendments to the definition of an SRC:   Criteria Previous SRC Definition Revised SRC Definition Public Float Public float of less than $75 million Public float of less than $250 million Revenues Less than $50 million of annual revenues and no public float Less than $100 million of annual revenues and no public float, or public float of less than $700 million For purposes of determining whether or not it is an SRC, a reporting issuer (vs. a non-reporting issuer filing its first registration statement) must measure its public float annually, on the last trading day of the second fiscal quarter of the previous fiscal year. Qualifying issuers are then eligible to use scaled disclosure rules for the first quarterly report on Form 10-Q for the fiscal year following the determination. Newly eligible SRCs may "early adopt" those rules for the quarterly report immediately following the determination. Once a company fails to qualify as an SRC, it may continue to report under SRC disclosure requirements through the end of that fiscal year. However, in order to re-qualify as an SRC, the company must meet more stringent qualification thresholds. The subsequent qualification thresholds, set forth in the table below, are set at 80% of the initial qualification thresholds in the table above. Criteria Previous SRC Definition Revised SRC Definition Public Float Public float of less than $50 million Public float of less than $250 million Revenues Less than $40 million of annual revenues and no public float Less than $80 million of annual revenues, if it previously had $100 million or more of annual revenues; and Less than $560 million of public float, if it previously had $700 million or more of public float. It is worth noting that a company may qualify as an SRC, but still be an accelerated filer. The amendments do not change the threshold in the “accelerated filer” definition that requires, among other things, that filers provide the auditor’s attestation of management’s assessment of internal control over financial reporting. However, the SEC staff has begun to formulate recommendations to the Commission for possible additional changes to the “accelerated filer” definition to reduce the number of companies that qualify as accelerated filers. In addition to amendments to the definition of "smaller reporting company," the SEC also adopted amendments to Rule 3-05(b)(2)(iv) of Regulation S-X, in order to increase the net revenue threshold in that rule from $50 million to $100 million. As a result, companies may omit financial statements of businesses acquired or to be acquired for the earliest of the three fiscal years otherwise required by Rule 3-05 if the net revenues of that business are less than $100 million.

Earlier this week, Dorsey hosted a webinar panel presentation on the SEC’s recent guidance on cybersecurity disclosures and policies. The webinar provided a detailed walk-through of the SEC’s guidance, including issues related to enhanced disclosure, insider trading, and Reg FD policies. The panel also discussed the impact of the SEC’s guidance within the changing landscape of cybersecurity and current developments in shareholder litigation, SEC enforcement actions, and other regulatory and legislative initiatives such as the GDPR. The Equifax data breach is used as a case study to illustrate how the SEC’s guidance might play out in this broader context. The webinar recording and presentation materials are available on our website at www.dorsey.com/newsresources/events/videos/2018/06/seminar-playback-sec-guidance-on-cybersecurity.

The Securities and Exchange Commission (the "SEC") announced Tuesday that Altaba, the entity formerly known as Yahoo! Inc., has agreed to pay a $35 million penalty to settle charges that it misled investors by failing to disclose one of the world’s largest data breaches in which hackers stole personal data relating to hundreds of millions of user accounts. According to the SEC’s order, within days of the December 2014 intrusion, Yahoo’s information security team learned that Russian hackers had stolen what the security team referred to internally as the company’s “crown jewels”: usernames, email addresses, phone numbers, birthdates, encrypted passwords, and security questions and answers for hundreds of millions of user accounts.  Although information relating to the breach was reported to members of Yahoo’s senior management and legal department, Yahoo failed to properly investigate the circumstances of the breach and to adequately consider whether the breach needed to be disclosed to investors.  The fact of the breach was not disclosed to the investing public until more than two years later, when in 2016 Yahoo was in the process of closing the acquisition of its operating business by Verizon Communications, Inc. In the order, the SEC finds that Yahoo's post-breach disclosure in quarterly and annual reports was too general, stating that the company faced only the risk of, and negative effects that might flow from, data breaches.  The company failed to disclose the actual breach or its potential business impact and legal implications. In addition to deficiencies in Yahoo's disclosure to investors, the SEC’s order found that Yahoo did not share information regarding the breach with its auditors or outside counsel in order to assess the company’s disclosure obligations in its public filings. Finally, the SEC’s order found that Yahoo failed to maintain disclosure controls and procedures designed to ensure that reports from Yahoo’s information security team concerning cyber breaches, or the risk of such breaches, were properly and timely assessed for potential disclosure. In its Statement and Guidance on Public Company Cybersecurity Disclosures, released earlier this year, the SEC reiterates that public companies are required to disclose material risks and incidents, including those related to cybersecurity, in their current and periodic reports.  The SEC encourages companies to continue to use current reports to disclose material cybersecurity-related information promptly as this practice reduces the risk of selective disclosure.  Furthermore, beyond requirements explicitly found in SEC regulations, companies are also required to disclose material information and revisit previous disclosure, especially during a cybersecurity investigation, as may be necessary to ensure the company’s filings are not misleading.  Notably, perhaps in recognition of how rapidly the scope of a breach may evolve, the SEC provides that companies “have a duty to correct prior disclosures that the company determines were untrue at the time it was made, or a duty to update a disclosure that becomes materially inaccurate after it is made.”  See our earlier memo for a summary of the SEC's guidance. In evaluating the range of potential disclosure for quarterly and annual reports, companies should consider that cybersecurity breaches or the risk of such breaches may trigger disclosure in the Management's Discussion and Analysis, if the breach presents a material event, trend or uncertainty that has had or is reasonably likely to have a material effect on results of operations, liquidity or financial condition.  Furthermore, financial statements may need to reflect costs incurred, insurance proceeds and contingent liabilities resulting from claims.  A cybersecurity breach may also need to be addressed in the description of business, discussion of legal proceedings and effectiveness of internal controls and disclosure controls and procedures. Even before the next quarterly or annual report, companies should consider whether the information available on the cybersecurity breach is material and should be communicated to investors in a current report in order to reduce the risk of selective disclosure in violation of Regulation FD.  If material information on a cybersecurity breach is not publicly disclosed in a current report, companies should consider whether it is appropriate to impose an event-specific blackout on trading in the company's stock, in accordance with applicable insider trading policies.  Determining the population of employees and other individuals who know, or in hindsight should have known, about the breach, and who should be subject to the event-specific blackout, deserves careful consideration, as demonstrated by the Equifax experience, where high-ranking executives traded in the company's stock after a cybersecurity breach was discovered but before it was announced.