In one of her first official actions as Acting Chair of the Securities and Exchange Commission (SEC or Commission), Allison Herren Lee reversed a major policy implemented by recently departed SEC Chairman Jay Clayton involving the SEC enforcement settlement process.  This decision could significantly impact the SEC settlement process by causing uncertainty for settling entities as to the business consequences of a settlement.  In a rare rebuke, two fellow SEC Commissioners promptly issued a statement decrying the Acting Chair’s decision.

Collateral Consequences of SEC Settlements

The federal securities laws contain provisions that impose restrictions on entities found to have violated certain statutes or regulations or that become subject to certain court-imposed injunctions or administrative orders.  These restrictions, commonly referred to as “collateral consequences,” range from prohibiting a settling entity (and possibly its affiliates) from taking advantage of certain exemptions under the federal securities laws to disqualifying an entity from engaging in specific business activities.  SEC settlements regularly trigger collateral consequences against settling SEC-regulated entities, like broker-dealers, hedge funds, investment advisers, and public companies.  For example, a public company issuer that settles with the SEC could be automatically disqualified from being considered a Well-Known Seasoned Issuer under Rule 405 of Regulation C.  Alternatively, a settlement could prohibit a settling investment adviser from providing advisory services to an investment company or from receiving cash fees for solicitations.

Given the serious collateral consequences an SEC settlement can trigger, and the fact that such consequences often are unrelated to the misconduct at issue in the corresponding SEC settlement, the SEC is authorized to grant disqualification waivers.  The SEC routinely grants waivers to prevent disproportionate and unintended consequences resulting from a settlement.

Continue Reading SEC Commissioners Square Off Over Enforcement Settlement Process

Following the Securities and Exchange Commission’s (SEC) issuance of interpretive guidance regarding the disclosure of key performance indicators and metrics (KPIs) early last year, we’ve been tracking SEC comments in this area as the SEC fully incorporates the guidance into its disclosure review program. We’ve highlighted a few of the comment letters previously, but several recently issued comment letters caught our attention.

Spotting a KPI

Under the SEC’s KPI guidance, a KPI is one of the key variables through which management evaluates a company’s performance or status, disclosure of which would be material to investors. The SEC guidance states as follows:

“Some companies also disclose non-financial and financial metrics when describing the performance or the status of their business. Those metrics can vary significantly from company to company and industry to industry, depending on various facts and circumstances. For example, some of these metrics relate to external or macro-economic matters, some are company or industry specific, and some are a combination of external and internal information. Some companies voluntarily disclose specialized, company-specific sales metrics, such as same store sales or revenue per subscriber. Some companies also voluntarily disclose environmental metrics, including metrics regarding the observed effect of prior events on their operations.”

The guidance reminds companies that when including metrics in their disclosure companies should consider existing MD&A requirements as well as the extent to which an existing regulatory framework applies, such as GAAP or, for non-GAAP financial measures, Regulation G or Item 10 of Regulation S-K.  Although the SEC guidance instructs companies to consider whether other regulatory disclosure frameworks apply, in practice the lines between a KPI metric and a non-GAAP financial measure can be blurred in some cases.  And because of the SEC Staff’s laser focus on non-GAAP financial measure disclosures the past several years, it is easy to see how some companies may choose to err on the side of categorizing a metric as a non-GAAP financial measure when the metric falls in this blurred area.

Continue Reading Are You Sure That Metric is a Non-GAAP Financial Measure? SEC’s Focus on Key Performance Indicators Continues

Following up on our prior blog post regarding 2020 first quarter COVID-19 adjustments in connection with the presentation of non-GAAP financial measures, we surveyed 102 S&P 500 companies who presented Adjusted EBITDA in their earnings release filed from October 1, 2020, to December 31, 2020.

We focused on Adjusted EBITDA in this survey (recognizing that such measure is utilized more frequently in some industries than others) because such measure is commonly utilized by public companies to measure their operational performance and frequently includes adjustments for items that are believed not to reflect the ongoing operational performance of the company.  While we limited our survey to S&P 500 companies that presented Adjusted EBITDA, we believe that the survey results have relevance for companies that present other types of non-GAAP performance measures that are adjusted for special items or items outside of the ordinary course of business.

Survey Results

Of the surveyed companies, 16 companies, or approximately 16%, included an adjustment in their calculation of Adjusted EBITDA related in some form to the COVID-19 pandemic, and 84% did not. The companies that included a COVID-19 adjustment in their Adjusted EBITDA calculation span across various industries, including, but not limited to, oil & gas, real estate, telecom services, lodging/hotel, and medical/scientific instruments. Continue Reading Adjusting for COVID-19 in Non-GAAP Financial Measures: A Survey of 2020 Fourth Quarter Disclosure Practices

On November 17, 2020, the Securities and Exchange Commission (SEC) adopted rules (which are now effective) permitting electronic signatures for SEC filings, provided that certain procedures are followed.   There are potential advantages to the utilization of e-signatures by public companies in SEC filings, including from a facilitation perspective (particularly for filings such as registration statements and 10-Ks which need to be signed by a significant number of individuals) and a record-keeping perspective.

Overview of E-Signature Rules

Before the adoption of the SEC’s e-signature rules which recently became effective, SEC filings needed to be manually signed by the signatories to such filings, and public companies were required to retain such manual signatures for a period of at least five years (and provide such signatures to the SEC upon request).  The amendments to Regulation S-T resulting from these new rules allow for e-signatures instead of manual signatures (manual signatures will continue to be permitted as well) for SEC filings, provided that the following conditions are met:

  • The signatory must present a physical, logical, or digital credential that authenticates the signatory’s identity (this may involve a driver’s license, passcode or a credential chip on a workplace ID).
  • The signature process must provide for non-repudiation, which is defined as “assurance that an individual cannot falsely deny having performing a particular action” (this may involve public-key encryption tools provided by commercially available e-signature platforms).
  • The e-signature must be attached, affixed, or otherwise logically associated with the signature page or document being signed.
  • There must be a timestamp to record the date and time of the signature.

Continue Reading SEC Adopts New E-Signature Rules

2020 marked Jim Cheek’s 50th year with Bass, Berry & Sims. I have been invited by our corporate and securities partners as a guest author on the Securities Law Exchange Blog to share and celebrate all that Jim has meant to our firm, and the Corporate and Securities Bar.

Jim shaped what Bass, Berry & Sims is today, and his influence is felt way beyond the Nashville borders by practitioners, executives, and many friends. Jim has been a lifelong member of the American Bar Association, serving in numerous capacities, including as the chair of the Section of Business Law. Additionally, he is a founding Fellow of the American College of Governance Counsel, a prestigious organization whose mission is to promote high professional standards and a better understanding and broader adoption of best governance practices within business organizations.

Jim’s career has and continues to include remarkable achievements, including his representation of HCA (NYSE:HCA), and notably leading it through the largest leverage buyout of a healthcare company at the time; his work in the boardroom with Genesco (NYSE:GCO); his service as regulatory auditor for the New York Stock Exchange and disclosure counsel for the Audit Committee of Bank of America (NYSE:BAC). Jim was also twice considered a leading candidate for the SEC Commissioner role: once during the Clinton administration and later in what would have been a Gore administration after the 2000 Presidential election. It is impossible for me to cover all of his phenomenal achievements. What is absolutely certain, is that his excellence, generosity and example continue to bless all of us who are at the firm, as well as those who have passed through it.

To help recognize and thank Jim for all of his contributions to Bass, Berry & Sims, we have named the boardroom on the top floor of our main office in Nashville the “James H. Cheek Boardroom” – an honor befitting one of the nation’s preeminent advisors to board members over several decades. We also asked a few of our partners to share their thoughts, a few memories, and even some funny antics about Jim. Their comments, as seen in the below video, are sure to bring a smile to your face. We invite you to share your thoughts and experiences with Jim too – please reach out. We’d love to hear from you. Happy New Year!

Jim Cheek Tribute

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

I was recently featured on the Deep Dive with Dave podcast hosted by Dave Lynn from TheCorporateCounsel.net. Dave and I discussed the following questions:

  • Has the SEC staff been commenting on disclosures about COVID-19 in public filings?
  • What areas of comment has the Staff raised regarding COVID-19?
  • What approach has the Staff taken with respect to non-GAAP financial measures in the COVID-19 era?
  • Do you think the Staff will focus on COVID-19 disclosures when it reviews 10-Ks filed in 2021?
  • Are there lessons to take away from the Staff’s comments as we prepare disclosures for the upcoming reporting season?

For more information and to listen to the podcast, click here.

About Bass, Berry & Sims’ Corporate & Securities Practice

Public and private companies of all sizes across a variety of industries turn to Bass, Berry & Sims for counsel on a wide range of corporate matters, including mergers, acquisitions and dispositions, capital markets transactions, executive compensation issues, corporate governance and shareholder activism. We serve as primary corporate and securities counsel to approximately 35 public companies and have counseled on 150 deals ranging in size from $20 million to more than $15 billion over the past two years. Click here to learn more about the Corporate & Securities Practice at Bass, Berry & Sims.

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

In a prelude of things to come for public companies, on December 4 the Securities and Exchange Commission (SEC) sued restaurant operator The Cheesecake Factory Incorporated for making misleading disclosures regarding the impact of the COVID-19 pandemic on its financial conditions and operations. After issuing warnings and guidance to public companies since the early stages of the pandemic, this is the SEC’s first time charging a public company for misleading disclosures relating to the pandemic.

Allegations Against The Cheesecake Factory

The allegations against The Cheesecake Factory are straight forward. Early in the pandemic, The Cheesecake Factory disclosed in SEC filings that its restaurants were “operating sustainably.” The SEC alleged this disclosure contradicted internal company documents, which showed that due to the pandemic the company was losing approximately $6 million in cash per week, was projected to run out of cash in 16 weeks, and had notified its landlords that it would not pay rent in April.

The inadequacy of The Cheesecake Factory’s SEC filings was further confirmed according to the SEC when the company later shared the undisclosed financial information with potential private equity investors and lenders in connection with an effort to seek additional liquidity.

Continue Reading SEC Files First Charges for Inadequate Public Company COVID-19 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