Over the past several months, the Securities and Exchange Commission has proposed and/or adopted new rules and regulations, and provided guidance, that impact the disclosure obligations of, and the financing opportunities available to, public companies. All directors, officers and key personnel of companies that file reports under the Securities Exchange Act of 1934 - and their advisors - should be aware of these updates as they prepare for Q2 2019. Pryor Cashman's Corporate Group summarizes five key items below.
Expansion of Smaller Reporting Company Eligibility
In June 2018, the SEC amended the definition of "smaller reporting company" (SRC) to expand the number of issuers that qualify for certain existing scaled disclosure accommodations under federal securities laws.
Under the prior rules, an issuer would qualify as an SRC if it had either a public float of less than $75 million, or less than $50 million of annual revenues and no public float. As a result of the new rules, an issuer can now qualify as an SRC if:
- It has a public float of less than $250 million; or
- It has annual revenues of less than $100 million and either (A) no public float (either because it has no public common equity outstanding or no market price for its common equity exists) or (B) a public float of less than $700 million.
Public companies that now qualify as SRCs may elect to comply with either the scaled SRC disclosure requirements or the larger company disclosure requirements on an item-by-item basis for each filing as long as disclosures are provided consistently and allow investors to make period-to-period comparisons. However, if a scaled item requirement is more rigorous than the same larger company item requirement, SRCs must comply with the more rigorous disclosure.
At the same time that the SEC amended the SRC definition, it also amended the "accelerated filer" and "large accelerated filer" definitions contained in Rule 12b-2 of the Exchange Act to preserve the application of the current public float thresholds in those definitions. As a result, issuers with $75 million or more of public float that qualify as SRCs as per the recent amendments will remain subject to the requirements that apply to accelerated filers, including the expedited deadline to file periodic reports and the requirement that accelerated filers provide the auditor's attestation of management's assessment of internal control over financial reporting as required by Section 404(b) of the Sarbanes-Oxley Act.
All reporting companies should evaluate their eligibility to utilize the scaled disclosure requirements applicable to SRCs, while remaining cognizant of the fact that, if they also continue to qualify as "accelerated filers" or "large accelerate filers", the deadline for filing their Exchange Act reports with the SEC may not be changed and they may continue to be subject to certain other disclosure requirements of larger companies.
More information on the expansion of SRC eligibility can be found in our July 2018 Legal Update.
Disclosure Update and Simplification Amendments
In August 2018, the SEC adopted disclosure update and simplification amendments, which took effect in November 2018. These revisions update and simplify reporting requirements that the SEC considered to be redundant, outdated or superseded by other disclosure requirements or the modern information environment in general.
Among the changes to be reflected in an Annual Report on Form 10-K are:
- The elimination of the requirement to provide segment or geographic-based financial information in the description of the issuer's business;
- The inclusion of changes in financial condition and results of operations based on geographic area in the MD&A section of the Form 10-K;
- The elimination of the requirement to provide the high and low sale price for the issuer's common stock over the last two fiscal years, as well as the amount and frequency of cash dividends;
- The elimination of the requirement to include disclosure of the ratio of earnings to fixed charges; and
- The elimination of the requirement to include the address of the SEC's public reference room in the business section of the Form 10-K.
Issuers should keep these changes in mind as they prepare their disclosure documents for 2019, and should be particularly mindful that certain of the eliminated disclosure items may now be required in the financial statements or in the MD&A.
New Rules on Hedging Disclosure
In December 2018, the SEC amended Item 407 of Regulation S-K to require public companies to describe any practices or policies (whether written or not) that they have adopted regarding the ability of their employees (including officers) or directors to purchase financial instruments, or otherwise engage in transactions, that hedge or offset, or are designed to hedge or offset, any decrease in the market value of equity securities granted as compensation, or held directly or indirectly by the employee or director. The summary must be fair and accurate, and must include the categories of persons covered. The new rule does not direct companies to have practices or policies regarding hedging, or dictate the content of any such practice or policy. However, if a company does not have any such practices or policies, it must disclose that fact or state that hedging transactions are generally permitted.
The new hedging disclosures will be required in proxy or information statements relating to an election of directors starting in fiscal years beginning on or after July 1, 2019 for companies that do not qualify as SRCs or emerging growth companies, with compliance by SRCs and emerging growth companies beginning in fiscal years beginning on or after July 1, 2020. Though the new disclosures are not required in the current proxy season, issuers should consider the need to adopt or update policies regarding hedging activities, in light of the need to publicly describe such policies in the very near future.
Over the past year, the SEC has notably increased its focus on disclosures related to cybersecurity risks and breaches. As part of these efforts, in February 2018 the SEC published interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents. In light of the SEC's focus on cybersecurity, public companies should review the cybersecurity risk disclosures contained in their public filings and update them so that they are sufficiently tailored to inform investors about the potential risks involved (and the likely impact of such risks) given the business operations of the issuer and the cybersecurity issues that it has previously experienced. To the extent necessary, issuers should also consider discussing cybersecurity issues in other sections of their disclosure documents, including the business, MD&A, disclosure controls and procedures, and corporate governance sections.
For more information on cybersecurity and how to comply with the SEC's guidance, please read this recent Bloomberg Law article written by our Corporate Group.
New Opportunities for Securities Offerings
Expansion of Regulation A to all Reporting Companies
On December 19, 2018, the SEC adopted amendments to Rules 251 and 257 under the Securities Act of 1933 to allow companies that file reports under the Exchange Act to rely on the Regulation A exemption from registration for their securities offerings. Regulation A provides an exemption from the registration requirements of the Securities Act for offers and sales of securities up to $20 million in a 12-month period for so-called Tier 1 offerings, or up to $50 million in a 12-month period for so-called Tier 2 offerings. Prior to the amendment, Regulation A was not available to public companies.
Some of the anticipated benefits of the amendments for public issuers include:
- Issuers that previously completed a Regulation A offering and are now reporting companies will now have the opportunity to seek follow-on Regulation A financing;
- Reporting companies that are offering securities that are not listed on a national securities exchange will now be able to enjoy federal blue sky preemption if they conduct a Tier 2 offering;
- Issuers conducting multiple securities offerings will benefit from the safe harbor from integration of Regulation A offerings with other offerings of securities (including registered offerings); and
- Issuers that either are not eligible to use a registration statement on Form S-3 or are subject to the one-third limitation on primary issuances pursuant to a Form S-3 registration statement will have another financing option at their disposal.
For more information about the expanded availability of Regulation A, please see our January 2019 Legal Update.
Expansion of "Test-the-Waters" Communications to all Issuers
In February 2019, the SEC proposed new Rule 163B under the Securities Act that would enable all issuers to engage in "test-the-waters" communications with certain institutional investors regarding a contemplated registered securities offering prior to, or following, the filing of a registration statement related to such offering. These communications would be exempt from restrictions imposed by Section 5 of the Securities Act on written and oral offers prior to or after filing a registration statement and would be limited to qualified institutional buyers and institutional accredited investors. The proposed rule, which is currently subject to a 60-day public comment period, will extend the "test-the-waters" provision to non-emerging growth companies, and thus is expected to encourage more issuers to consider entering the public equity markets.
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