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.
On July 2, the SEC announced that The Dow Chemical Company agreed to settle charges related to the company’s inadequate perquisites disclosure in SEC filings by paying a civil penalty in the amount of $1.75 million, hiring an independent consultant to evaluate and recommend changes to the company’s policies and procedures relating to perquisites disclosure, and implementing such changes.
The SEC’s order finds that from 2011 through 2015, Dow did not ensure that approximately $3 million in executive perquisites were adequately evaluated and disclosed as “other compensation” in the Compensation Discussion & Analysis (CD&A) section of its annual proxy statements. These authorized but undisclosed perquisites included personal use of the Dow aircraft and other expenses.
On May 29, 2018, President Trump signed the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Act”) into law. While much of the Act centers on regulatory relief for smaller financial institutions and community banks, Section 508 of the Act adopts a major change to Regulation A+. Prior to the Act, Regulation A+ was not available to an existing public company (i.e., a company reporting under Section 13 or 15(d) of the Securities Exchange Act of 1934). Section 508 of the Act directs the SEC to amend Regulation A+ to allow a public company to use Regulation A+ to offer its securities. However, Section 508 of the Act is not self-effecting, which means that, until the SEC adopts rules implementing Section 508, only non-public companies may use Regulation A+. In addition to allowing public companies to use Regulation A+, the Act also directs the SEC to amend its rules to say that a public company that conducts a Tier 2 offering will satisfy its Regulation A+’s periodic reporting obligations by complying with its existing reporting obligations under Section 13 or Section 15(d).
Public companies that engage in capital raising activities from time to time must consider whether it is advisable to have an effective shelf registration statement on Form S-3 on file in advance of raising capital, or whether to simply wait to file a Form S-3 until such time that the company desires to raise capital.
As background, shelf registration statements may be utilized by public companies eligible to use Form S-3 (which generally requires, among other things, that an issuer have at least $75 million in non-affiliate common equity public float and have filed all required SEC reports over the last 12 months), to register the issuance of various classes of the company’s securities on a delayed or continuous basis, to be issued in public offerings from time to time, either by the issuer or selling security holders. At the time of an offering, these securities are then sold in a “take down” off the shelf utilizing a prospectus supplement describing (among other things) the terms of the offering and incorporating by reference information about the issuer. Shelf registration statements generally only remain effective for three years.
I recently presented to the Corporate & Securities Law Committee of the Association of Corporate Counsel (ACC) on the topic entitled “Behind the SEC Curtain: Practical Tips for Interacting with the SEC Staff.”
The presentation offered practical tips from me, a former SEC staffer, on the following topics:
- How to interact with the SEC staff
- The screening and review process for registration statements
- Periodic reports and proxies
- Recent areas of focus
- Current developments at the Commission and staff
I appreciated the positive feedback on the presentation and have posted the PowerPoint for our readers’ benefit.
On March 23, 2018, President Trump signed into legislation the Consolidated Appropriations Act of 2018, also known as the “omnibus spending package.” Included in Title VIII therein is legislation titled the Small Business Credit Availability Act (SBCAA) that includes certain regulations under the federal securities laws impacting business development companies (BDCs). Among other items, the SBCAA allows BDCs to incur significantly more debt and rely on relaxed SEC communication and offering rules that were previously available to operating companies.
Bass, Berry & Sims attorneys Britt Latham and Brian Irving authored an article that was published in The D&O Diary that outlined and discussed the most important trends and developments related to SEC investigations and enforcement proceedings impacting the industry this past year and likely to impact the industry in the coming year. The article includes a discussion of lessons learned from the first year of the Trump administration.
The authors also point to disgorgement as another topic with a changing landscape, with the Supreme Court ruling in Kokesh v. SEC that disgorgement claims are subject to a five-year statute of limitations for enforcing fines, penalties or forfeitures.