As we previously reported, the SEC has adopted amendments to the public company disclosure rules intended to further streamline and simplify the reporting process for public companies. The amendments also significantly change the process for requesting and renewing confidential treatment of exhibits to SEC filings. Most of these amendments became effective on May 2, 2019. Below is a brief summary of several of the significant changes that resulted from these amendments.

Amendments to Form 10-K, Form 10-Q, and Form 8-K Cover Pages

Companies must now list on the cover page of Form 10-Q and Form 8-K each class of securities registered under Section 12(b) of the Exchange Act, the trading symbol, and the exchange(s) on which the securities trade, similar to the current requirements for the Form 10-K cover page. The cover page of Form 10-K was also modified to require the inclusion of the trading symbol for each class of registered securities, which previously was not required to be provided. The new Form 10-K cover page will also no longer include the checkbox related to delinquent filers under Section 16.

Description of Material Properties

Item 102 of Regulation S-K was revised to encourage disclosure regarding only material properties, plants and mines. The new rules make clear that it is acceptable for a company to determine that none of its properties are material for purposes of Item 102. However, the amendments do not alter disclosure requirements for companies engaged in the real estate, mining, and oil and gas industries, in which physical properties may be of particular importance. Companies in these industries must continue to comply with the existing instructions to Item 102 and applicable SEC industry guides governing their industries. Continue Reading Streamlined and modernized: new FAST Act rules become effective

Four years ago, I commented on the then-recent announcement that Jamie Dimon, Chairman and CEO of JP Morgan Chase, was battling cancer.  At the time, Dimon noted that he had struggled with whether the company should disclose his illness.

It’s a struggle that executives, companies, and their securities lawyers face when a CEO is diagnosed with a serious illness, or when there is some other arguably personal news about the CEO.  With apologies for quoting myself, here is an excerpt from my 2015 posting:

“It’s a very challenging issue for several reasons.  First, there isn’t any rule – or even any literature (at least to my knowledge) – that tells us whether and what to disclose in this situation.  So when a client says, “show me the rule that says we have to disclose this,” there’s nothing to show.  Second, and more important, the issue pits the need to disclose against information that is quintessentially personal.  It’s also not just an issue between the executive and the company; often, the executive’s family and, possibly, his/her medical team and others are equally involved.  And even when there’s agreement to disclose, it’s very difficult to know what to say about the prognosis, if and when the executive can return to work, and so on.”

Continue Reading In sickness and in health 2.0

There probably aren’t too many subjects nerdier than corporate minutes.  Lawyers (among others) tend to focus on exciting (dare I say sexy?) matters like M&A, activism, and bet-the-company litigation. Those and other topics are surely exciting, but failing to pay attention to minutes can cost big time. Like it or not, minutes are among the few pieces of evidence – sometimes the only evidence – that boards and committees have properly executed their fiduciary duties.  Did the board give a matter due consideration? Did the directors ask the right questions?  Any questions? Did they consider the risks as well as the benefits of an action or of inaction?  If these and other questions are not answered by reading the minutes, they may not be answerable at all.

Failing to have good minutes can have serious adverse consequences.  Aside from the potential liability and reputational damage associated with a failure to fulfill fiduciary obligations, transactions can be voided, and so on. And in one recent case, the Delaware Supreme Court found that in the absence of minutes, plaintiffs making a “books and records” demand on a company would be able to see emails between directors, among other things.  (You can find my prior posting on that case here.)  If that doesn’t put butterflies in your stomach, nothing will. Continue Reading Goldilocks and the three sets of minutes

As our readers know, I am irritated by Congress’s penchant for naming bills so as to create nifty acronyms. And for including provisions that have nothing to do with the name or the acronym.  However, I can better put up with these irritants when the legislation – and SEC regulations implementing the legislation – create a good result.

Such is the case with the FAST Act. It stands for “Fixing America’s Surface Transportation Act,” and despite its acronymic name and its questionable connection to securities law, it contained some provisions to make disclosures more effective and the process by which disclosures are made somewhat easier.

These benefits were engraved in stone by the SEC on March 20, when it adopted a series of rules under the FAST Act. The rules provide for the following types of relief: Continue Reading Disclosure effectiveness on a FAST track (get it?)

SEC Rule 701 exempts non-reporting companies from registering securities offered or sold to employees, officers, directors, partners, trustees, consultants, and advisors under compensatory benefit plans or other compensation agreements. As discussed in an earlier post, under the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) passed by Congress in 2018, the threshold for the aggregate sales price of securities sold during any consecutive 12-month period that triggers additional disclosure requirements under Rule 701 was increased from $5 million to $10 million.   What may have gone unnoticed was that the SEC has adopted final rules to implement EGRRCPA and has published a concept release “soliciting comment on possible ways to modernize rules related to compensatory arrangements in light of the significant evolution in both the types of compensatory offerings and the composition of the workforce since the Commission last substantively amended these rules in 1999.”

Continue Reading The SEC modernizes exempt compensatory offerings (with more changes in the works)

On February 19, 2019, the Securities and Exchange Commission voted to propose a new rule that would expand the availability of the “testing-the-waters” provisions that enable eligible companies to engage in certain communications to gauge institutional investor interest in a proposed IPO. Currently, only companies that qualify as “emerging growth companies” or “EGCs” are eligible to test the water. The new rule and related amendments would expand the availability of the provisions to all types of issuers, including investment companies.

The purpose of the testing-the-waters provisions is to allow potential issuers to gauge market interest in a possible initial public offering or other registered securities offering by discussing the offering with certain investors, including qualified institutional buyers (“QIBs”) and institutional accredited investors (“IAIs”), prior to filing a registration statement. SEC Chairman Jay Clayton said that “[t]he proposed rules would allow companies to more effectively consult with investors and better identify information that is important to them in advance of a public offering.” The proposed rules and related amendments are intended to give more issuers a cost-effective and flexible means of communicating with institutional investors regarding contemplated offerings and evaluating market interest.

Continue Reading Testing-the-waters provisions to be available to bigger fish

As securities lawyers know, disclosure is generally regarded as the best disinfectant.  However, in a recent enforcement action, the SEC determined that disclosure is not always enough.  Specifically, when it comes to internal controls over financial reporting, or ICFR, companies need to actually fix the problems they disclose.

In the action, the SEC cited four companies for failing to maintain ICFR for periods ranging from seven to 10 consecutive annual reporting periods.  While each of the companies disclosed material weaknesses in ICFR, it took them months or years to remediate the weaknesses – even after being contacted by the SEC!  (I don’t usually use exclamation points in my postings, but this calls for an exception to my usual policy.)  As noted in the SEC’s press release on the action, “[c]ompanies cannot hide behind disclosures as a way to meet their ICFR obligations. Disclosure of material weaknesses is not enough without meaningful remediation.”

Others have noted that the cases in question are outliers.  That’s undoubtedly true — at least I hope so, because it’s hard to imagine hearing from the SEC and doing nothing about it, much less over a period of years).  However, the moral of the story remains unchanged: if you’re going to disclose an ICFR problem, you better fix it, too.

In case you think that corporate minutes and other corporate formalities are for sissies, think again.  And read the opinion in the case of KT4 Partners vs. Palantir, decided by the Delaware Supreme Court in January 2019.

KT4 had submitted a demand under Section 220 of the Delaware General Corporation Law, seeking to inspect Palantir’s books and records.  Because such an inspection must be for a “proper purpose,” KT4 noted that, among other things, Palantir had failed to hold stockholder meetings and to give proper notice under stockholder agreements.

The demand ended up in the Delaware Court of Chancery, which granted some of KT4’s demands but rejected demands for emails exchanged among directors and officers relating to an investor rights agreement.  KT4 appealed to the Delaware Supreme Court, which reversed that rejection.

Continue Reading Minutes count (as do other formalities)

On December 19, 2018, the SEC adopted final rules allowing reporting companies to rely on the Regulation A exemption.

How did we get here?

The SEC adopted a new – and greatly improved – Regulation A, known as Reg A+, in 2015.  As noted in previous posts (see here and here) Reg A, provides an exemption from registration under the Securities Act for smaller public offerings, but for many years was seldom used due to cost restraints and small financing caps.  The 2015 amendments, adopted in response to the JOBS Act, remedied these shortcomings, updating Reg A to make it a more viable capital-raising tool.

The main benefits of Reg A+ include the following:

  • Companies can raise up to $50 million every 12 months via two overlapping tiers.
    • Tier 1: offerings of up to $20 million in a 12-month period.
    • Tier 2: offerings of up to $50 million in a 12-month period.
  • Insiders can sell their shares in a Reg A+ offering.
  • Investors in a Reg A+ offering have immediate liquidity – they can sell their shares once the offering is completed and don’t have to hold them for a period of time.
  • Some Reg A+ offerings are exempt from state securities or “blue sky” laws.
  • Some Reg A+ offerings are easier to list on an exchange.
  • Reg A+ can be used for merger and acquisition transactions.

What’s new? Continue Reading Hip, hip, Reg A! — Reporting companies can now use Reg A+ and may find it a viable capital raising alternative

Each January, I depart from my admittedly nerdy focus on SEC and governance matters to communicate with you on one of my other admittedly nerdy pursuits – reading – by providing a list of my 10 favorite books of the prior year, five works of fiction and five of non-fiction.  As always, the list is comprised of books I read during the year gone by, rather than books published during the year.

By way of an overview, much of the fiction I read last year was just so-so, and while I really liked the works of fiction listed below, it was an easier choice than has been the case for the last couple of years (e.g., The Underground Railroad or A Gentleman in Moscow).  In the non-fiction category, I seem to have focused on biographies and memoirs even more than last year, as four of my five non-fiction works were in this category.

Here goes: Continue Reading My 10 Best Books of 2018