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.
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.
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.
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.
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.
Partial Shutdown: Potential Impact on SEC Operations
A partial shutdown of the federal government began at midnight on December 21, 2018. As a result, the SEC Division of Corporation Finance (the “Staff”) announced that the SEC would “remain fully operational for a limited number of days” from the beginning of the federal government shutdown. The SEC will be closed on December 24th and 25th in observance of the federal holiday. It is expected to have funding to remain in “open” status through the end of December 26th. Should the shutdown continue past the 26th, the SEC’s operating status is expected to change to “closed” and the SEC will begin to operate according to its Operations Plan under a Lapse in Appropriations and Government Shutdown. As currently envisaged, starting on December 27th the SEC “will have only an extremely limited number of staff members available to respond to emergency situations involving market integrity and investor protection, including law enforcement.” Regardless of the SEC’s operating status, the EDGAR filing system will continue to accept reports, registration statements and other filings. Accordingly, public companies must continue to file periodic and current reports when due on Forms 10-K, 10-Q and 8-K; however, from December 27th the SEC will not be able to declare registration statements effective nor qualify Form 1-A offering statements. A prolonged shutdown could create difficulties for the IPO market and for many public companies without an effective shelf registration statement and, in particular, would create a complex calculus for any company thinking about going public in January.
SEC to Reconsider Quarterly Reporting, Solicits Public Comment
On December 18, 2018, the Securities and Exchange Commission published a request for comment on earnings releases and quarterly reports, available here. The request was issued the day before, and in place of, the SEC’s previously scheduled open meeting to consider whether to issue such a request, as discussed here.
The Changes Keep Coming: SEC Updates C&DIs and NYSE Updates Rules for Revised “Smaller Reporting Company” Definition
On November 7, 2018, the Staff of the Division of Corporation Finance of the Securities and Exchange Commission (the “Staff") released four updated, and withdrew six, Compliance and Disclosure Interpretations (“C&DIs") in light of the June 2018 amendments to the definition of a smaller reporting company (“SRC"). We summarized the amendments to the SRC definition in our previous blog post here.
Desktop Calendar of SEC Deadlines for 2019 Now Available
November is a good time to confirm plans for SEC reporting and capital markets transactions in the next year. To assist public companies in keeping track of the various filing deadlines, we have prepared a desktop reference calendar that sets forth filing deadlines for many SEC reports. To assist companies with planning capital markets transactions, including IPOs, our calendar also provides the staleness dates for 2019 (i.e., the last date financial statements may be used in a prospectus or proxy statement without being updated).
Commonsense Principles 2.0 Released
On October 18, 2018, the Commonsense Principles 2.0 (the “Principles 2.0") were released. They are an update to the Commonsense Principles of Corporate Governance (the “Previous Principles") developed in 2016 by a group of 13 business and investment leaders, including representatives of Berkshire Hathaway, BlackRock and State Street and the chief executive officers of several large public companies, available here, and discussed in a previous client alert.