As equity valuations of public companies remain high in comparison to recent historical norms, the use of public company stock as an acquisition currency by SEC registrants in acquisitions of private companies will continue, particularly if interest rates continue to rise, thus increasing the costs associated with leveraged transactions. This blog explores legal considerations associated with the issuance of stock by a public company in connection with its acquisition of a private company. Continue Reading Complexities of Issuing Public Company Stock in Acquisitions of Private Companies
In monitoring SEC comment letters, we came across this SEC comment letter recently made public. While we acknowledge the term “pro forma” is often used by registrants when adjusting their GAAP results to provide additional meaningful information to investors, this comment by the Staff serves as a reminder to registrants that the Staff generally dislikes non-GAAP measures titled as “pro forma” when the information is not presented in compliance with the pro forma rules in Article 11 of Regulation S-X. In this situation, the registrant agreed to delete the words “pro forma” and instead use the words “as adjusted.”
We previously blogged here about the recent SEC disclosure simplification rules. As the rules have now been published in the Federal Register and are set to go effective on November 5, 2018, set forth below are some FAQs on the new rules to help answer some common questions.
On October 16, 2018, the SEC issued a 21(a) report announcing that it had investigated whether certain public companies that were victims of oftentimes unsophisticated, cyber-related frauds had violated federal securities laws by failing to have a sufficient system of internal accounting controls in place to detect these events.
Focus of SEC Report
The report focused on two common cyber frauds involving spoofed or otherwise compromised electronic communications. The first involved emails that purported to be from senior executives within the company (typically, the CEO) but in fact were from spoofed email domains. The second involved emails from fake vendors. This form of scam was more technologically sophisticated than the fake executive emails as in certain instances it involved intrusions into the email accounts of the companies’ foreign vendors. Each of the nine companies referenced in the report lost at least $1 million as a result of these scams and two lost more than $30 million. In total, the companies lost nearly $100 million to the thieves, almost all of which was never recovered.
We have previously blogged about recent SEC rule changes to the definition of “smaller reporting company” (SRC) (see here) and XBRL (see here). Our readers should know that a byproduct of these new rules include certain tweaks to the cover pages of most Securities Act and Exchange Act forms. The cover page changes related to the definition of SRC were effective September 10, 2018, while the XBRL-related cover page changes will be effective September 17, 2018.
For a discussion of the XBRL cover page changes, see our prior post here. The SRC cover page changes can be summarized from this excerpt from the SEC’s adopting release.
On August 17, the SEC adopted amendments intended to simplify and update the disclosure of information to investors and reduce compliance burdens for companies without significantly altering the total mix of information available to investors. The amendments are effective 30 days after their publication in the Federal Register.
The amendments eliminate certain:
- Redundant and duplicative requirements, which require substantially similar disclosures as GAAP, International Financial Reporting Standards (IFRS) or other SEC disclosure requirements.
- Overlapping requirements, which are related to, but not the same as GAAP, IFRS or other SEC disclosure requirements.
- Outdated requirements, which have become obsolete as a result of the passage of time or changes in the regulatory, business or technological environment.
- Superseded requirements, which are inconsistent with recent legislation, more recently updated SEC disclosure requirements, or more recently updated GAAP.
On July 24, the SEC proposed amendments to Rule 3-10 of Regulation S-X for guarantors and issuers of guaranteed securities registered or being registered, as well as the financial disclosure requirements in Rule 3-16 of Regulation S-X for affiliates whose securities collateralize securities registered or being registered. Here is the proposing release. The proposed changes are intended to provide investors with material information given the specific facts and circumstances, make the disclosures easier to understand, and reduce the costs and burdens to registrants. The proposal will be subject to a 60-day public comment period.
The most recent edition of The Business Lawyer, published by the ABA’s Business Law Section, includes its Annual Review of Federal Securities Regulation prepared by its Subcommittee on Annual Review from the Committee on Federal Regulation of Securities. The Review outlines significant developments in federal securities law and regulation in 2017. The Review is divided into three sections:
- Regulatory actions
- Accounting statements
- Case law developments
I currently chair the Subcommittee and wish to give special thanks to all of its distinguished authors that contributed content, including a special thanks to William Lay from Bass, Berry & Sims for helping draft and edit portions of the Review.
The Review is available here.
The SEC recently adopted Inline eXtensible Business Reporting Language (XBRL) rules for operating companies and funds, which are intended to improve the quality and accessibility of XBRL data. While more detail about the rules and the related phase-in period can be found here, our readers that prepare Form 10-Qs should know that the rules also updated the cover pages for certain forms, including Forms 10-Q and 10-K. The cover page update will be effective 30 days after the publication of the rules in the Federal Register (likely any day now). As a result, we expect many public companies will include these updates in their upcoming second quarter 10-Q.
For your reference, here is a link to a redline that reflects the 10-Q changes. (The 10-K was similar.)
On June 28, the SEC adopted regulations that could reduce the reporting burden on middle market public companies. In summary, the SEC adopted amendments to the smaller reporting company (SRC) definition to increase the thresholds for eligibility. Under the amendments, companies with a public float of less than $250 million will qualify as SRCs (up from $75 million). The SEC estimates that about 1,000 additional companies will now be eligible for scaled disclosure as a result of the rule amendments. We expect these amendments may also help companies that have undertaken their IPO in the last five years as they roll off emerging growth company eligibility because of the passage of time.