United States: Updates To The Public Company Disclosure Rulebook

Last Updated: October 16 2019
Article by Hillary H. Holmes and Jordan Rex

The Securities and Exchange Commission and Congress are taking steps to reduce the burdens and costs of being a public company. In this six-part article, the authors address this effort, describing the state of the SEC, new amendments to simplify disclosure requirements, and proposed rule changes to promote capital raising and increase the number of public companies. The authors then turn to the SEC's requests for comments on possible elimination of quarterly reporting and revisions to the rules governing private capital markets and pending legislation in Congress.

The Securities and Exchange Commission and the Congress have recently shown a concerted effort to encourage capital formation and lessen the burden of reporting requirements for both public and private companies. Current SEC Chairman Jay Clayton outlined his views on this point, saying, "[i]t is important for the SEC to review our regulations to ensure that they are consistent with our ever-evolving capital markets."1 The primary purpose of this article is to provide an overview of the SEC's recent efforts to follow through with that statement.2

Part I of this article begins by providing an overview of the current state of the SEC, including a brief discussion of the current SEC commissioners and the political climate surrounding the recent activity. Part II considers new amendments that simplify certain disclosure requirements found in Regulation S-K and Regulation S-X, as well as other rules and forms. Part III outlines the SEC's new and expanded definition of a "smaller reporting company" (or "SRC"), which is expected to include almost half of all public companies. Part IV follows with a discussion of amendments to Rule 701 of the Securities Act of 1933, which permit more public companies to issue equity-based compensation without disclosing it to investors. Part V reviews the SEC's pending requests for public comment, including the possible elimination of quarterly reporting. Part VI concludes with a discussion of the proposed legislation called the JOBS and Investor Confidence Act of 2018 and other proposed bills. Each part will be addressed in turn.

PART I – STATE OF THE SEC

Before diving into a discussion regarding the recent and proposed changes to the regulations, it is important to understand the background surrounding these changes and ask why they are happening. The short answer is — the federal government is focused on the promotion of capital-raising and increasing the overall number of public companies in the United States.

Throughout the modern era, the publicly traded corporation has been a cornerstone of our nation's economy. It enables enterprises to raise money from the broadest possible group of investors and it allows almost anyone — from my 95-year-old grandmother in rural Colorado to the most sophisticated institutional investment fund on Wall Street — to invest in, and earn a profit from, the ventures of others. In the last few years, however, the universe of these "cornerstone" companies in the United States has been shrinking and, as of late, more capital is being raised privately than publicly. For example, new businesses have been offering shares to the public at less than half the rate of the 1980s and 1990s.3 At the end of 2017, there were about 3,600 firms listed on U.S. stock exchanges, which is less than half the number of similar firms in 1997. The big tech companies that would have gone public in eras past are staying private, dramatically limiting which investors have the opportunity to profit from their rapid growth and success.

The SEC has flagged this as a problem. Jay Clayton, Chairman of the SEC, has called the seeming decline of the traditional U.S.-listed public company as "a serious issue for our markets and the country more generally," and said that the "potential lasting effects [to] the economy and society are, in two words, not good."4 The SEC and Congress have attacked this problem on two fronts: first, by adopting specific changes to the securities offering process itself (such as allowing testing the waters before an initial public offering ("IPO") and confidential submission of registration statements); and second, by reducing the burdens and costs of being a public company. It is the latter of these methods that this article will address.

Current State of the Commission

The SEC has five commissioners who are appointed by the President with the advice and consent of the Senate. Because each commissioner serves a five-year, staggered term, one of each of the five commissioners' terms ends on June 5th of each year. No more than three commissioners may belong to the same political party. The President designates one of the five commissioners to serve as Chairman. Chairman Clayton (a former corporate partner at a large firm) is an Independent who was sworn in on May 4, 2017 and whose term expires in 2021. The last chair, Mary Jo White, was a former prosecutor who seemed focused on the SEC's enforcement program, with an eye to policing minor technical violations of the law (commonly referred to as "broken windows"). However, each chair adds his or her own focus to the SEC, and Chairman Clayton is focused on protection of the capital markets, technology, and enforcement actions against those who prey on retail investors.

The other commissioners currently serving are Robert J. Jackson, Jr., Hester M. Peirce, Elad L. Roisman, and Allison H. Lee. Commissioner Jackson (a former Professor of Law at NYU School of Law) is a Democrat who was sworn in on January 11, 2018 and whose term expired on June 5, 20195 ; Commissioner Peirce (a former Senior Research Fellow and Director of the Financial Markets Working Group at the Mercatus Center at George Mason University) is a Republican who was sworn in on January 11, 2018 and whose term expires in 2020; and Commissioner Roisman (a former Chief Counsel of the U.S. Senate Committee on Banking, Housing, and Urban Affairs) is a Republican who was sworn in on September 11, 2018, and whose term expires in 2023. Most recently, on July 8, 2019, Commissioner Lee (a former securities partner and SEC staff member from 2005 to 2018) was sworn into office filling the vacancy opened since Kara Stein's 18-month tail period expired on December 31, 2018 and finally bringing the SEC back to full strength.

There have also been changes to the Staff of the SEC over the last several years. Perhaps most significant to this discussion, the Division of Corporation Finance got a new Director, William H. Hinman, in May 2017. Chairman Clayton noted in the SEC's announcing release that "[Mr. Hinman] understands the SEC's mission to promote capital formation while ensuring that investors have the information necessary to make informed decisions."6

In his spring 2018 testimony before the House Financial Services Committee, Mr. Hinman articulated a consistent view:

Against the backdrop of a declining number of U.S. public reporting companies, the Division has been looking at ways to make the public company alternative more attractive. While there are many reasons why companies may choose not to go public, to go public at a later stage, or to exit the public markets, to the extent we are able to attract more companies to join our public companies reporting system and do so at an earlier stage, it will ultimately benefit companies, our markets and investors. Although initial public offerings ("IPOs") and developing public companies may not be suitable for all investors, more IPOs occurring at an earlier stage means a wider range of investors are able to more fully participate in the growth of companies. It is far more efficient for retail investors to invest in companies through our public markets than our private markets. Increasing the number of public companies is becoming more and more important as Americans are increasingly relying upon their own investments for retirement.7

Other notable changes include: Robert Stebbins being named General Counsel of the SEC in May 2017, Stephanie Avakian and Steve Peikin being named CoDirectors of the Division of Enforcement in June 2017, Kyle Moffatt being named Chief Accountant of the Division of Corporation Finance in February 2018, Valerie Szczepanik being named Senior Advisor for Digital Assets and Innovations in June 2018, and S.P. Kothari being named Chief Economist and Director of the Division of Economic Risk Analysis in February 2019.

Beyond the SEC, we also have a political climate that is volatile and eager for change. From each of the SEC, the White House, and Congress, we have repeatedly heard since early 2017 that it is a priority for this country to increase capital raising and to have a larger number of publicly traded companies. For example, as further discussed in Part V below, President Trump called for the SEC to study the possibility of eliminating quarterly reporting for public companies. And in December 2018, the Division published a request for public comment on ways to ease a public company's quarterly reporting requirements, while still maintaining appropriate levels of disclosure and investor protection. Likewise, in May 2018, the Securities Industry and Financial Markets Association — the main industry trade group representing securities firms, banks, and asset management companies — issued a report encouraging Congress to reduce high regulatory costs and SEC rules that may discourage companies from going or staying public. The report provided specific and concrete suggestions.

Many of the commissioners' speeches over the last 18 months have been consistent with this theme of trying to strike a balance between lessening the burden of being a public company and investor protection. For example, in early November 2018, at Case Western Reserve University School of Law, Commissioner Peirce discussed proposed changes to certain disclosure requirements and noted, "[o]ur financial reporting and corporate disclosure system is essential to wellfunctioning markets, which are, in turn, essential to the ongoing provision of the goods and services that make modern lives so safe and comfortable."8

Footnotes

1. Jay Clayton, Remarks on Capital Formation at the Nashville 36/86 Entrepreneurship Festival, August 29, 2018, available at https://www.sec.gov/news/speech/speech-clayton-082918.

2. This article is current as of July 31, 2019.

3. Jay R. Ritter, Initial Public Offerings: Updated Statistics, available at https://site.warrington.ufl.edu/ritter/files/ 2018/01/IPOs2017Statistics_January17_2018.pdf.

4. Jay Clayton, Remarks at the Economic Club of New York, available at https://www.sec.gov/news/speech/remarkseconomic-club-new-york.

5. Commissioner Jackson has not indicated when he plans to officially step down from his post, but he is permitted by law to continue serving through the end of 2020.

6. William Hinman Named Director of Division of Corporate Finance, available at https://www.sec.gov/news/pressrelease/2017-97.

7. William H. Hinman, Testimony on "Oversight of the SEC's Division of Corporation Finance," before the U.S. House of Representatives Committee on Financial Services Subcommittee on Capital Markets, Securities, and Investment, available at https://www.sec.gov/news/testimony/testimony-oversight-secsdivision-corporation-finance.

8. Hester M. Pierce, Pondering Financial Reporting: Remarks before the 2018 Leet Business Law Symposium, available at https://www.sec.gov/news/speech/speech-peirce-110218.

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