|SEC Streamlines Procedure for Confidential Treatment Extensions|
On April 16, 2019, the Division of Corporation Finance (the “Division") of the Securities and Exchange Commission (“SEC") announced streamlined procedures for confidential treatment extensions for material contracts where the Division has previously granted confidential treatment (available here). These procedures were announced in light of the recently adopted redacted exhibit rules that permit registrants to redact confidential information from certain exhibits without filing a confidential treatment request (for more on the redacted exhibit rules, see our related prior client alert and blog post). Under the SEC's rules, a registrant that has previously obtained a confidential treatment order for a material contract must file an extension application under Securities Act Rule 406 or Exchange Act Rule 24b-2 to continue to protect such confidential information from public release prior to the expiration of the existing order. Of note, a registrant cannot use the SEC's recently adopted redacted exhibit rules to refile a redacted material contract that was granted confidential treatment under the old rules, but instead must rely on the confidential treatment extension process.
To streamline the extension process, the Division has developed a non-exclusive new short form application (available here) that applies only to contracts where a confidential treatment order has previously been granted. The short form application, which is a one page document that should be emailed to CTExtensions@sec.gov, requires an applicant to affirm that the most recently considered application for a confidential treatment order continues to be true, complete and accurate and to indicate its request to extend the order for either three, five or 10 years. An applicant generally is not required to refile the unredacted material contract or provide supporting analysis; however, if the application reduces the redactions in the contract, it must publicly file the revised redacted version of the contract when it submits the short form application.
If the Division grants t...
|SEC Issues Guidance Relating to New Rules and Procedures for Redacting Confidential Information |
On April 1, 2019, the Division of Corporation Finance (the “Division") of the Securities and Exchange Commission (the “SEC") issued guidance relating to the recently adopted rules and procedures that permit registrants to redact confidential information from certain exhibits without filing a confidential treatment request (available here). The guidance provides additional information on the Division's process for reviewing redacted information and certain matters relating to the transition to the new rules and procedures.
As discussed in our prior client alert (available here), the SEC adopted final rules on March 20, 2019 to modernize and simplify disclosure requirements (the “Final Rules"). As part of the Final Rules, Item 601(b) of Regulation S-K was amended to permit registrants to file redacted material contracts and plans of acquisition, reorganization, arrangement, liquidation, or succession without applying for confidential treatment of the redacted information provided the redacted information (i) is not material and (ii) would likely cause competitive harm to the registrant if publicly disclosed. Under the new rules and procedures, registrants must identify where information has been omitted from a filed exhibit by (1) marking the exhibit index to indicate that portions of the exhibit have been omitted, (2) including 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, and (3) indicating with brackets where the information has been omitted from the filed version of the exhibit. These amendments to Item 601(b) became effective on April 2, 2019.
This aspect of the Final Rules has received significant attention since its adoption. On March 26, 2019, Commissioner Robert J. Jackson Jr. issued a dissent to the Final Rules (available here), criticizing the provisions that permit registrants to redact confidential information without filing a...
|SEC Proposes Offering Reforms for BDCs and Registered Closed-End Funds|
The Securities and Exchange Commission (the “Commission") on March 20 proposed rule amendments (collectively, the “Proposal") to improve access to capital and facilitate investor communications by business development companies (“BDCs") and registered closed-end funds (collectively, the “affected funds").
Under the Proposal, the affected funds could avail themselves of certain registration, communications, and offering processes currently available to operating companies. Certain of these processes have been in effect since Securities Offering Reform took effect in 2005. At the time, the Commission excluded all investment companies, including the affected funds, from the reforms.
Among other changes, the Proposal includes:
- Shelf Offering Process and New Short-Form Registration Statement
- Certain affected funds would be able to use a shelf registration process. A short-form registration statement would generally be available to an affected fund if it meets certain filing and reporting history requirements and has a public float of $75 million or more, similar to the current standard for operating companies. Funds using short-form registration statements would be required to include certain prospectus disclosure in their annual reports, as well as disclosure regarding material unresolved staff comments. Affected funds wou...
|SEC Continues to Modernize and Simplify Disclosure Requirements|
On March 20, 2019, the Securities and Exchange Commission (SEC) adopted amendments (available here) to modernize and simplify disclosure requirements for public companies, investment advisors, and investment companies (the Final Rules). The Final Rules form part of the SEC's ongoing efforts to simplify disclosure requirements. The Final Rules are largely consistent with the proposed amendments outlined in the SEC's October 11, 2017 proposing release (available here, and discussed in our client alert available here).
Among other things, the Final Rules:
- increase flexibility with respect to the discussion of historical periods in MD&A disclosure;
- permit redaction of certain immaterial information from material contracts without submitting an application for confidential treatment; and
- permit omission of schedules and attachments to exhibits provided that they do not contain material information.
The Final Rules relating to the redaction of confidential information in certain exhibits will become effective upon publication in the Federal Register. The remainder of the Final Rules will become effective 30 days after they are published in the Federal Register (with a few exceptions).
In light of these changes, registrants should take a fresh look at the disclosure in their Exchange Act reports, starting with the first quarter Form 10-Q. Registrants should review and update their compliance checklists.
We discuss the Final Rules in greater detail in our client alert (available here).
Our thanks to David Korvin in Washington D.C., Rob Kelley in New York and Jordan Rex in Houston for their assistance in preparing this summary and the related client alert.
|NYSE Amends Shareholder Approval Rule|
On March 20, 2019, the SEC approved changes to the NYSE's shareholder approval rule. The changes amend the price requirements that companies must meet to qualify for exceptions to the shareholder approval requirements under NYSE's rule 312.03(b) (related party issuances) and 312.03(c) (the 20% rule). The NYSE changes are comparable to changes made to Nasdaq's 20% shareholder approval rule in September 2018. Our prior post on the Nasdaq amendment can be found here.
The new rules replace the concept of “market value" with a “Minimum Price" for purposes of determining whether exceptions to the shareholder approval requirements apply. The Minimum Price is defined as the lower of (i) the official closing price on the NYSE as reported immediately preceding the signing of a binding agreement to issue securities, and (ii) the average of the official closing price for the five trading days immediately preceding the signing of a binding agreement to issue securities.
The NYSE amendment also eliminates the prior requirement that the price paid be no less than book value per share to qualify for the shareholder approval exceptions in Sections 312.03(b) and (c). The book value requirement has now been eliminated, leaving in place the requirement that price be at least equal to the Minimum Price. Note that all other requirements for shareholder approval under NYSE's rules remain unchanged.
A link to the NYSE rule 312.03 and 312.04 as amended can be found here.
A link to the SEC release approving the rule change can be found here.
A link to Nasdaq Rule 5635 as amended can be found here.
A special thank you to Blessing Havana and Eric Scarazzo in the New York office for their assistance with this post.
|SEC Proposes Long-Awaited Expansion of “Test-the-Waters” to All Issuers - Use With Caution|
On February 19, 2019, the Securities and Exchange Commission (the “SEC") proposed a new rule that would allow all issuers to engage in “testing the waters." Specifically, the SEC proposed an exemption (the “Proposed Rule") to certain provisions of Section 5 of the Securities Act of 1933 (the “Securities Act") commonly referred to as “gun-jumping" provisions. This exemption would permit any issuer or authorized person (e.g., an underwriter) to engage in oral or written communications with potential investors that the issuer reasonably believes are qualified institutional buyers (“QIBs") or institutional accredited investors (“IAIs"). Currently, this exemption to the gun-jumping provisions is only available to emerging growth companies (“EGCs"). The SEC believes that the Proposed Rule may “help issuers better assess the demand for and valuation of their securities," which may in turn “enhance the ability of issuers to conduct successful offerings and lower their cost of capital." This goal is consistent with the SEC's overall effort to increase the number of public companies and reduce the regulatory burden of capital raising.
The SEC'S press release announcing the Proposed Rule is available here, and the proposing release is available here.
EGCs have been permitted to provide information through test-the-waters communications since adoption of the JOBS Act in 2012, which dramatically changed the way in which IPOs and certain other securities offerings are conducted. The Proposed Rule would expand this option to all issuers, including larger companies planning an IPO or seasoned public companies that do not have a shelf registration statement on file, and would also extend to investment companies (including registered investment companies and business development companies). It may be particularly attractive to issuers who are interested in assessing market interest for their securities prior to creating any market disruption by publicly filing a registration statement that could signal a coming offering or investing considerable resources into conducting a formal roadshow against an uncertain market backdrop.
If approved, the Proposed Rule would permit all issuers to provide information to QIBs and IAIs (but only QIBs and IAIs). The Proposed Rule would not require that the issuer file such information or communication with the SEC or include any special legend on the communicatio...
|Developments on Public Company Disclosures Regarding Board and Executive Diversity |
On February 6, 2019, the staff (Staff) of the Division of Corporation Finance of the Securities and Exchange Commission (SEC) issued two new identical Compliance and Disclosure Interpretations (C&DIs). The C&DIs address disclosure that the Staff expects public companies to include in their proxy statements and other SEC filings regarding “self-identified diversity characteristics" with respect to their directors and director nominees. In addition, legislation was introduced in both the U.S. House of Representatives and the U.S. Senate that would require public companies to annually disclose the gender, race, ethnicity and veteran status of their directors, director nominees, and senior executive officers.
The SEC already has rules requiring board diversity-related disclosure. Item 407(c)(2)(vi) of Regulation S-K requires companies to disclose “whether, and if so how, the nominating committee (or the board) considers diversity in identifying nominees for director." It further requires that, “[i]f the nominating committee (or the board) has a policy with regard to the consideration of diversity in identifying director nominees, [the company must] describe how this policy is implemented, as well as how the nominating committee (or the board) assesses the effectiveness of its policy." Historically, it has been our understanding that the Staff takes a broad view of what qualifies as a “policy," and that if a company considers diversity in identifying director candidates, the company has a “policy" for purposes of this requirement and is expected to provide disclosure about the implementation and effectiveness of its policy. This disclosure requirement therefore can influence what companies report under Item 401(e) of Regulation S-K, which requires directors' and nominees' biographical information to “briefly discuss the specific experience, qualifications, attributes or skills that led to the conclusion that the person should serve as a director for the registrant at the time that the disclosure is made, in light of the registrant's business and structure."
These rules have “been subject to some criticism" that they don't provide “enough useful disclosure," as noted by Bill Hinman, the head of the SEC's Division of Corporation Finance, in testimony before the House Committee on Financial Services Subcommittee on Capital Markets, Securities and Investment in April 2018. Hinman added that the Staff had been reviewing company disclosures regarding directors' diversity and considering concerns raised about directors' privacy issues. As a result, the SEC's regulatory agenda states on the long-term agenda...
|As Government Shutdown Continues, SEC Updates Guidance and Capital Markets Are Hindered|
As we are all aware, the SEC has been closed since December 27th as a result of the ongoing partial shutdown of the federal government. While there are staff members available to respond to emergency situations involving market integrity and investor protection, including law enforcement, and the SEC continues to operate certain systems such as the EDGAR system, most activities are currently suspended. The SEC does not have staff in place to review registration statements and other filings, acceleration requests, Rule 3-13 waiver requests, and no-action letter requests, including with respect to shareholder proposal exclusions. As discussed in our previous post available here, the Staff has provided an FAQ page regarding operations during the shutdown. These FAQs were updated and supplemented recently. You should continue to visit the SEC's website, including the FAQs, for any additional updates both during and shortly after the shutdown.
Significant to capital markets and M&A activity, the staff advised that new eligible registration statements may be filed without a delaying amendment in order to automatically go effective after 20 days, and previously filed registration statements may also be amended to remove delaying amendments in order to allow for automatic effectiveness. In the past three weeks, several companies have removed the delaying amendment on their registration statements, including Forms S-4 for public company mergers. In order to allow for automatic effectiveness after 20 days, such amendments must (1) remove the delaying amendment, (2) include all information required by the relevant form, including information typically excluded from preliminary filings with delaying amendments such as the price of securities to be sold, and (3) include the following language required under Rule 473(b) under the Securities Act of 1933: “This registration statement shall hereafter become effective in accordance with the provisions of Section 8(a) of the Securities Act of 1933." We note you should also update other references to the registration statement being “declared effective," such as in the “approximate date of commencement of proposed sale of the securities to the public" field on the cover page. If you amend your filing to remove the delaying amendment and the SEC's operating status changes prior to the effective date of your registration statement, the staff may ask you to amend your filing to include the delaying amendment so that the staff may work with you to res...
|SEC Expands Regulation A to Allow Offerings by Reporting Companies|
On December 19, 2018, the Securities and Exchange Commission (the “SEC") adopted amendments to Regulation A allowing U.S. and Canadian companies that file reports under Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act"), to conduct securities offerings using Regulation A. The amendments were mandated by the Economic Growth, Regulatory Relief, and Consumer Protection Act, which was signed into law in May 2018.
Regulation A is available to companies organized in and with their principal place of business in the United States or Canada. Regulation A provides an exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act"), for offers and sales of securities up to $20 million, for Tier 1 offerings, or up to $50 million, for Tier 2 offerings, in a twelve-month period. Prior to the newly adopted amendments, Regulation A was not available to SEC reporting companies.
As discussed in more detail below, the amendments may be particularly attractive to certain types of reporting companies, including reporting companies that are not listed on a national securities exchange (such as companies that trade on OTC markets), reporting companies that are unable to, or are limited in their ability to, use Form S-3 or F-3 shelf registration, and reporting companies that became reporting companies in connection with a Regulation A offering.
The adopting release relating to the amendments is available here. The SEC press release announcing adoption of the amendments is available here. The amendments will become effective immediately upon publication of the adopting release in the Federal Register, and will not be subject to a public comment period.
Summary of the Rule Amendments
The amendments revise Rule 251 of Regulation A to delete Rule 251(b)(2) and allow eligible Exchange Act reporting companies to use the exemption provided by Regulation A. Conforming changes are made to Item 2 of Part I of Form 1-A, which lists the issuer eligibility criteria to use the form.
Additionally, the amendments add a new paragraph to Rule 257(b) of Regulation A, with respect to Tier 2 offerings, to deem an Exchange Act reporting company issuer as having met its periodic and current reporting requirements under Rule 257 if the issuer meets the reporting requirements of Section 13 of the Exchange Act. The amendments use a twelv...
|Changes and Considerations for the 2018 Form 10-K|
Below are select developments to keep in mind when preparing the Annual Report on Form 10-K this year. Registrants will need to update their disclosure in the upcoming 2018 Form 10-K as a result of recent rulemaking by the Securities and Exchange Commission (the "SEC") and new SEC guidance and accounting rule changes, as well as to reflect new and developing risk areas that the SEC or investors have identified.
SEC Disclosure Update and Simplification
The table below highlights changes to keep in mind when preparing the 2018 Form 10-K as compared to the 2017 Form 10-K as a result of certain changes to Regulation S-K adopted by the SEC effective November 5, 2018. For more details, please read our client alert dated August 27, 2018 (available here) and the SEC final rules release (available here).
Item 1. Business
Segment Financial Information — S-K 101(b)*
- No longer required to disclose three years of segment level financial information (for example, revenues from external customers, a measure of profit or loss and total assets)
R&D — S-K 101(c)(1)(ix)*
- No longer required to disclose amounts spent on research and development activities
Financial Data by Geography — S-K 101(d)*
- No longer required to disclose financial information by geographic area
- No longer required to disclose risks associated with foreign operations and a segment's dependence on foreign operations
- No longer required to discuss facts indicating why performance in certain geographic areas may not be indicative of current or future operations (but see Item 7 below)
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
- Stock Prices — S-K 201(a)
- Must now disclose trading symbols for each class of common equity traded
- No longer required to state the high and low sales prices for the equity over the last two fiscal years, so long as common equity trades on an established trading market such as NYSE or Nasdaq
- Dividend History — S-K 201(c)(1)*
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