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It should come as no surprise to readers of our blog that public companies often expend significant resources each year on managing litigation matters.  As a result, perhaps it is natural that some companies might want to convey financial results that exclude (or adjust out) these litigation expenses from their GAAP results as they arguably do not relate to the core performance of the company’s business.

When considering whether to include an adjustment for litigation expenses in non-GAAP measures, companies should be mindful of how they identify and disclose such expenses (e.g., outside of the ordinary course of business (non-recurring)).  In monitoring recent Securities and Exchange Commission (SEC) comment letters, we found a letter exchange that we believe demonstrates the principal disclosure considerations at issue.

Background

As background, Item 10(e) of Regulation S-K provides that a registrant must not “adjust a non-GAAP performance measure to eliminate or smooth items identified as non-recurring, infrequent or unusual, when the nature of the charge or gain is such that it is reasonably likely to recur within two years or there was a similar charge or gain within the prior two years.” (Emphasis added.)Continue Reading Adjusting for Litigation Expenses in a Non-GAAP Financial Measure

Growing in popularity, special purpose acquisition companies (SPACs) continue to pique investor interest as an attractive mechanism through which a private company can raise growth capital and become a publicly traded entity. In 2020, the number of SPAC IPOs quadrupled from 2019 and 2021 is currently outpacing 2020 activity.

Please join Bass, Berry & Sims and Perella Weinberg Partners for a complimentary webinar exploring the ins and outs of the SPAC and de-SPAC process. Speakers cover the following topics:

  • Overview of the SPAC market structure and trends.
  • Advantages and disadvantages compared to a traditional IPO.
  • Factors involved in the SPAC lifecycle.
  • Potential PIPE considerations.
  • De-SPAC transaction considerations.

Who Should Attend?

  • Private company executives and directors considering capital raising and IPO alternatives.
  • Private equity fund managers and portfolio company executives considering whether to become a SPAC sponsor and/or engage in a de-SPAC transaction as an exit strategy.
  • In-house counsel at the above institutions.
  • M&A advisors.
  • Other interested professionals and advisors.

Continue Reading WEBINAR: Raising Capital through a SPAC Combination: Nuts and Bolts of the “De-SPAC”

You have undoubtedly read about the continuing popularity of special purpose acquisition companies (SPACs).  According to SPACInsider, year-to-date there have been 242 SPAC IPOs, with an average IPO size of $334.9 million. This is remarkable as the next highest year was 2019 when there were 59 SPAC IPOs with an average size of $230.5 million.  See the chart below to show the 2020 spike.

As a refresher, SPACs are public shell companies (i.e., blank check companies) formed to use their IPO proceeds to acquire a private company via merger, share exchange, asset acquisition, reorganization or similar business combination within a specific timeframe, usually 18-24 months.  A SPAC structure essentially creates another mechanism through which a private company can go public, along with a traditional firm commitment underwritten offerings, direct listings (becoming more popular), and others.

SPAC Mergers with Private Companies

The focus of this post is on the back half of the SPAC life: the SPAC merger with the private company.  SPACInsider reports there are approximately 228 SPACs that have completed their IPO and are currently searching for private acquisition targets to take public.  Since most of these SPACs will need to find a target in the next 18-24 months (or less), there will be high demand for private companies that have the maturity, growth prospects, experienced management and operations in place to function as a public company.Continue Reading Recent SEC Comment Letter Looks Under the Hood at SPAC Merger Diligence

On November 19, the Securities and Exchange Commission (SEC) continued its brisk pace of end-of-year rulemaking by approving amendments to Items 301, 302 and 303 of Regulation S-K, which collectively govern the disclosures of Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) as well as other selected financial data.  These amendments were initially proposed in January 2020 as part of the SEC’s ongoing effort to improve and modernize the current disclosure regime for both investors and companies.

The amendments will become effective 30 days after they are published in the Federal Register, which means they will probably be effective around the end of January assuming the typical timing for rule publication. At that time voluntary compliance is permitted, so long as registrants provide disclosure responsive to an amended item in its entirety. Compliance is not mandatory until a registrant reports on its first fiscal year ending on or after 210 days following publication, which means that for a calendar year-end filer, the Form 10-K filed in 2022 with respect to the fiscal year ended December 31, 2021.  However, we expect that many companies will welcome the new rules (particularly the elimination of the contractual obligations table and five-year selected financial table, among others) and begin complying sooner.Continue Reading SEC Adopts Amendments to MD&A and Other Financial Disclosures

On November 2, the Securities and Exchange Commission (SEC) approved amendments, originally proposed in the SEC’s June 2019 concept release and March 2020 proposing release, to its “patchwork” exempt offering framework. The amendments represent important changes for private and public companies that rely on private offerings as part of their strategies to raise capital. Largely, these changes reflect the reality of current capital markets as the amount of capital raised in exempt offerings in the United States greatly exceeds the amount raised in registered offerings. In the March 2020 proposing release, the SEC noted that exempt offerings accounted for more than double the new capital raised by registered offerings in 2019, with exempt offerings accounting for $2.7 trillion compared to $1.2 trillion in registered offerings.

Emerging companies increasingly rely on exempt offerings as the most viable source of capital to fund growth in lieu of IPOs, and as a result exempt offerings have become an integral part of capital markets. The adopted amendments attempt to streamline and eliminate complexity within the exempt offering regulatory framework, which has been pieced together over years of tweaks through the adoption of various safeharbors.

Amendment Highlights

Highlights of the amendments include:

  • Establishing a new integration framework that provides a general principle that looks to the particular facts and circumstances of two or more offerings, and focuses the analysis on whether the issuer can establish that each offering either complies with the registration requirements of the Securities Act, or that an exemption from registration is available for the particular offering.
  • Increasing the offering limits for Regulation A (to $75 million), Regulation Crowdfunding (to $5 million), and Rule 504 offerings (to $10 million), and revise certain individual investment limits.
  • Relaxing pre-offering communications by permitting certain “test-the-waters” and “demo day” activities.

Additional analysis of these and other meaningful changes is outlined below.Continue Reading SEC Raises Threshold for Reg A+ Offerings to $75 Million; Improves “Patchwork” Exempt Offering Framework

Over the past eight months of this pandemic, we have all seen the rise of e-commerce as a vital necessity for most companies.  For many companies, e-commerce has significantly outperformed their existing sales channels and consumers have now become acclimated to a seamless “omnichannel” shopping experience where they can purchase online and wait for delivery or pick-up curbside or in the store. A recent WSJ article proclaims that the embrace of digital commerce is here to stay even after the pandemic.

In light of the surge in e-commerce activity, it makes sense that many companies are separately calling out their e-commerce sales and growth performance in their quarterly earnings calls, SEC filings and investor presentations.

Disaggregated Revenue Disclosure Requirement

As companies continue to focus on their sales channel disclosures, one potential sleeper issue could be the new revenue recognition standard’s requirement on disclosure of disaggregated revenues.  Under ASC 606-10-50-5, a public company must “disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.”Continue Reading How a Surge in E-Commerce Sales Could Impact Financial Reporting; A Look at ASC 606 and Disaggregated Revenue

As we have previously discussed, on August 26, the Securities and Exchange Commission (SEC) voted to adopt amendments to modernize the description of business (Item 101), legal proceedings (Item 103), and risk factor (Item 105) disclosures that registrants are required to make according to Regulation S-K. For a summary of the rules and practical takeaways, see our prior blog post here. The new rules will be effective on November 9, 2020. The amendments, particularly the revisions to Item 101 (description of business), reflect the SEC’s continued movement to a principles-based, registrant-specific approach to disclosure.

As stated in the SEC’s economic analysis in its adopting release, prescriptive requirements employ bright-line, quantitative or other thresholds to identify when disclosure is required or require registrants to disclose the same types of information. Principles-based requirements, on the other hand, provide registrants with the flexibility to determine (1) whether certain information is material, and (2) how to disclose such information.

As registrants transition to a more principles-based disclosure regime under new Item 101, it will be interesting to see how disclosures change, if at all. However, a recent SEC comment letter exchange may reveal one example of how companies that were previously required to include sensitive disclosures as a result of the prescriptive requirements (e.g., the names of material customers), might now be able to modify their disclosures in order to remove these sensitive areas, to the extent they deem such information immaterial to investors.Continue Reading Recent SEC Comment Letter Reveals the Difference Between Prescriptive-Based and Principles-Based Rules

Subscribers to our blog know that we monitor EDGAR for new SEC comment letters and enjoy bringing attention to the more interesting ones.  In today’s blog post, we bring you three new SEC comment letter exchanges.

  • In the first, the SEC asks the registrant for more information related to a COVID-19-related adjustment in its non-GAAP financial measure.
  • The second involves the SEC questioning, and eventually disagreeing with, the registrant’s materiality analysis under Staff Accounting Bulletin No. 99 (SAB 99).
  • The third letter involves an offering document produced by South Korea.

SEC Staff Wants More Information about a COVID-19 Adjustment in Non-GAAP Net Income

We’ve previously blogged about COVID-19-related adjustments in connection with the presentation of non-GAAP financial measures, including the difficulty that some public companies may have in reasonably quantifying the extent to which incremental expenses were driven by the COVID-19 pandemic as opposed to other factors.
Continue Reading Recent SEC Comment Letters of Interest Regarding COVID-19 Adjustments, SAB 99 and South Korea

On August 26, the SEC voted to adopt amendments to modernize the description of business (Item 101), legal proceedings (Item 103), and risk factor disclosures (Item 105) that registrants are required to make pursuant to Regulation S-K.  The amendments reflect the SEC’s continued movement to a principles-based, registrant-specific approach to disclosure.

As detailed below, some of the changes are rather significant, particularly the changes to the business disclosures and the requirement to have a new risk factor summary section of no more than two pages if the risk factors exceed 15 pages.  As a result, we expect most companies will need to make revisions and updates to their existing disclosures, specifically in connection with their Annual Report on Form 10-K where Items 101 and 105 of S-K are triggered. The rules are effective 30 days after their publication in the Federal Register.

The following table briefly summarizes the final amendments.  We have presented some practical takeaways following the table.Continue Reading Practical Takeaways on SEC Amended Disclosure Requirements for Business Description, Legal Proceedings and Risk Factors under Regulation S-K

Public companies designated as accelerated filers who are preparing their periodic reports for fiscal periods ending on or after June 15, 2020 (i.e., upcoming second quarter 10-Qs for many companies) will be required to comply with the SEC’s previously adopted Inline eXtensible Business Reporting Language (iXBRL) digital reporting guidelines. Per the SEC’s phase-in guidelines, filers will be required to comply beginning with their first Form 10-Q filed for a fiscal period ending on or after the applicable compliance date. Therefore, accelerated filers will need to comply with the new iXBRL rules in their next 10-Q, including cover page tagging and the new Exhibit 104 requirement. (These rules already took effect last year for large accelerated filers and except for accelerated filers as mentioned here, go into effect for all other filers for fiscal periods ending on or after June 15, 2021.)
Continue Reading Reminder for Accelerated Filers – Inline XBRL Rules Now Effective

From the Bass, Berry & Sims Blog Network
From the Bass, Berry & Sims Blog Network

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