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As Government Shutdown Continues, SEC Updates Guidance and Capital Markets Are Hindered

As we are all aware, the SEC has been closed since December 27th as a result of the ongoing partial shutdown of the federal government. While there are staff members available to respond to emergency situations involving market integrity and investor protection, including law enforcement, and the SEC continues to operate certain systems such as the EDGAR system, most activities are currently suspended. The SEC does not have staff in place to review registration statements and other filings, acceleration requests, Rule 3-13 waiver requests, and no-action letter requests, including with respect to shareholder proposal exclusions. As discussed in our previous post available here, the Staff has provided an FAQ page regarding operations during the shutdown. These FAQs were updated and supplemented recently. You should continue to visit the SEC's website, including the FAQs, for any additional updates both during and shortly after the shutdown.

Significant to capital markets and M&A activity, the staff advised that new eligible registration statements may be filed without a delaying amendment in order to automatically go effective after 20 days, and previously filed registration statements may also be amended to remove delaying amendments in order to allow for automatic effectiveness. In the past three weeks, several companies have removed the delaying amendment on their registration statements, including Forms S-4 for public company mergers. In order to allow for automatic effectiveness after 20 days, such amendments must (1) remove the delaying amendment, (2) include all information required by the relevant form, including information typically excluded  from preliminary filings with delaying amendments such as the price of securities to be sold, and (3) include the following language required under Rule 473(b) under the Securities Act of 1933: “This registration statement shall hereafter become effective in accordance with the provisions of Section 8(a) of the Securities Act of 1933." We note you should also update other references to the registration statement being “declared effective," such as in the “approximate date of commencement of proposed sale of the securities to the public" field on the cover page. If you amend your filing to remove the delaying amendment and the SEC's operating status changes prior to the effective date of your registration statement, the staff may ask you to amend your filing to include the delaying amendment so that the staff may work with you to res...

SEC Expands Regulation A to Allow Offerings by Reporting Companies

On December 19, 2018, the Securities and Exchange Commission (the “SEC") adopted amendments to Regulation A allowing U.S. and Canadian companies that file reports under Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act"), to conduct securities offerings using Regulation A.  The amendments were mandated by the Economic Growth, Regulatory Relief, and Consumer Protection Act, which was signed into law in May 2018.  

Regulation A is available to companies organized in and with their principal place of business in the United States or Canada.  Regulation A provides an exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act"), for offers and sales of securities up to $20 million, for Tier 1 offerings, or up to $50 million, for Tier 2 offerings, in a twelve-month period.  Prior to the newly adopted amendments, Regulation A was not available to SEC reporting companies.

As discussed in more detail below, the amendments may be particularly attractive to certain types of reporting companies, including reporting companies that are not listed on a national securities exchange (such as companies that trade on OTC markets), reporting companies that are unable to, or are limited in their ability to, use Form S-3 or F-3 shelf registration, and reporting companies that became reporting companies in connection with a Regulation A offering.

The adopting release relating to the amendments is available here.  The SEC press release announcing adoption of the amendments is available here.  The amendments will become effective immediately upon publication of the adopting release in the Federal Register, and will not be subject to a public comment period.[1]

Summary of the Rule Amendments

The amendments revise Rule 251 of Regulation A to delete Rule 251(b)(2) and allow eligible Exchange Act reporting companies to use the exemption provided by Regulation A.  Conforming changes are made to Item 2 of Part I of Form 1-A, which lists the issuer eligibility criteria to use the form.

Additionally, the amendments add a new paragraph to Rule 257(b) of Regulation A, with respect to Tier 2 offerings, to deem an Exchange Act reporting company issuer as having met its periodic and current reporting requirements under Rule 257 if the issuer meets the reporting requirements of Section 13 of the Exchange Act.  The amendments use a twelv...

Changes and Considerations for the 2018 Form 10-K

Below are select developments to keep in mind when preparing the Annual Report on Form 10-K this year. Registrants will need to update their disclosure in the upcoming 2018 Form 10-K as a result of recent rulemaking by the Securities and Exchange Commission (the “SEC") and new SEC guidance and accounting rule changes, as well as to reflect new and developing risk areas that the SEC or investors have identified. 

SEC Disclosure Update and Simplification

The table below highlights changes to keep in mind when preparing the 2018 Form 10-K as compared to the 2017 Form 10-K as a result of certain changes to Regulation S-K adopted by the SEC effective November 5, 2018.  For more details, please read our client alert dated August 27, 2018 (available h​ere) and the SEC final rules release (available here).

Item 1. Business
Segment Financial Information — S-K 101(b)*·         No longer required to disclose three years of segment level financial information (for example, revenues from external customers, a measure of profit or loss and total assets)
R&D — S-K 101(c)(1)(ix)*·         No longer required to disclose amounts spent on research and development activities

Financial Data by Geography — S-K 101(d)*

 

·         No longer required to disclose financial information by geographic area

·         No longer required to disclose risks associated with foreign operations and a segment's dependence on foreign operations

·         No longer required to discuss facts indicating why performance in certain geographic areas may not be indicative of current or future operations (but see Item 7 below)

SEC Contact Information — S-K 101(e) and (h)

 

 

·         Must now...

Partial Shutdown: Potential Impact on SEC Operations

A partial shutdown of the federal government began at midnight on December 21, 2018. As a result, the SEC Division of Corporation Finance (the “Staff”) announced that the SEC would “remain fully operational for a limited number of days” from the beginning of the federal government shutdown. The SEC will be closed on December 24th and 25th in observance of the federal holiday. It is expected to have funding to remain in “open” status through the end of December 26th. Should the shutdown continue past the 26th, the SEC’s operating status is expected to change to “closed” and the SEC will begin to operate according to its Operations Plan under a Lapse in Appropriations and Government Shutdown. As currently envisaged, starting on December 27th the SEC “will have only an extremely limited number of staff members available to respond to emergency situations involving market integrity and investor protection, including law enforcement.” Regardless of the SEC’s operating status, the EDGAR filing system will continue to accept reports, registration statements and other filings. Accordingly, public companies must continue to file periodic and current reports when due on Forms 10-K, 10-Q and 8-K; however, from December 27th the SEC will not be able to declare registration statements effective nor qualify Form 1-A offering statements. A prolonged shutdown could create difficulties for the IPO market and for many public companies without an effective shelf registration statement and, in particular, would create a complex calculus for any company thinking about going public in January.

 

The Staff has provided an FAQ page...

The SEC (Finally) Adopts Rules for Hedging Disclosure

​On December 18, 2018, the Securities and Exchange Commission adopted long-awaited rules that require disclosure of hedging practices or policies in any proxy statement or information statement relating to the election of directors. 

Background. Section 955 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law in 2010 in the wake of the financial crisis, added Section 14(j) to the Securities Exchange Act of 1934, which required the SEC to promulgate rules for disclosure of hedging policies. According to a report issued by the Senate Committee on Banking, Housing, and Urban Affairs, the purpose behind Section 14(j) was to “allow shareholders to know if executives are allowed to purchase financial instruments to effectively avoid compensation restrictions that they hold stock long-term, so that they will receive their compensation even in the case that their firm does not perform."

Subsequently, in February of 2015, the SEC proposed to implement Section 955 by adding  Item 407(i) to Regulation S-K and explained in its proposing release that the disclosure on hedging policies is “primarily corporate governance-related because it requires a company to provide in its proxy statement information giving shareholders insight into whether the company has policies affecting how the equity holdings and equity compensation of all of a company's employees and directors may or may not align with shareholders' interests." After soliciting comments on the proposed amendments until April of 2015, the SEC fell silent on the matter.

Final Rules Adopted. Over three years later, the SEC has finally adopted Item 407(i) of Regulation S-K and issued a press release on December 18th. Earlier today, on December 20th, the SEC posted the final adopting release, and we plan to update this blog post with a more detailed analysis based on today's posted release.

The new rule will require a company to describe in its annual proxy statement “any practices or policies it has adopted regarding the ability of its employees (including officers) or directors to purchase securities or other 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 dir...

SEC to Reconsider Quarterly Reporting, Solicits Public Comment

On December 18, 2018, the Securities and Exchange Commission published a request for comment on earnings releases and quarterly reports, available here.  The request was issued the day before, and in place of, the SEC's previously scheduled open meeting to consider whether to issue such a request, as discussed here

In April 2016, in connection with the SEC's concept release on the business and financial disclosure requirements of Regulation S-K, the SEC collected comments on the frequency of periodic reporting and the reporting process generally.  More recently, the topic of quarterly reporting by public companies gained widespread attention when President Trump tweeted that he had asked the SEC to study the possibility of changing the reporting requirements for public companies from quarterly to semi-annual.  Speaking at a Financial Executives International conference in November 2018, SEC Chairman Jay Clayton said that the SEC had been considering the matter even before the President brought up the idea in August.

The idea of moving from quarterly to semi-annual reporting is neither novel nor outrageous.  In fact, both the European Union and United Kingdom have eliminated the requirement for quarterly reporting.  Eliminating the requirement, however, does not automatically trigger change.  For example, the U.K. eliminated the quarterly reporting requirement in 2014; yet as of 2017 less than 10% of U.K. companies made the switch to semi-annual reporting (as reported by MarketWatch).  In a speech at the Bipartisan Policy Center in October 2018, Chairman Clayton said that the quarterly report is driven by investor demand, and he pointed out that even in countries that do not have a quarterly reporting requirement, companies will still produce the information.  He also observed that while the quarterly report does play a role in driving short-term thinking, it is not the only factor. In addition, we note that, in light of requirements under the Securities Act of 1933 and the demands of underwriters and investors, quarterly reporting may continue to be essential for any company that wants to access the capital m...

The Changes Keep Coming: SEC Updates C&DIs and NYSE Updates Rules for Revised “Smaller Reporting Company” Definition

On November 7, 2018, the Staff of the Division of Corporation Finance of the Securities and Exchange Commission (the “Staff") released four updated, and withdrew six, Compliance and Disclosure Interpretations (“C&DIs") in light of the June 2018 amendments to the definition of a smaller reporting company (“SRC").  We summarized the amendments to the SRC definition in our previous blog post here.

The updated C&DIs provide guidance regarding the implementation of the revised definition.  Similarly, the New York Stock Exchange (“NYSE") has proposed corresponding changes to Section 303A.00 of the Listed Company Manual to scale several of the NYSE listing requirements based on the revised definition of SRC. A summary of the new guidance and proposed rule changes follows.

Regulation S-K

Question 102.01

In this C&DI, the Staff confirmed that a company can be both a “smaller reporting company" and an “accelerated filer".  For example, if an issuer qualifies as both a SRC and an accelerated filer, such issuer may use the scaled disclosure requirements available to SRCs in its annual report on Form 10-K, but as an accelerated filer, must comply with the accelerated filer deadline and include the Sarbanes-Oxley Section 404 auditor attestation report. 

Question 102.02

This C&DI clarifies when a reporting company that initially fails to qualify as a SRC may subsequently be eligible for SRC status, assuming that its revenues or public float have sufficiently declined on the annual determination date (for example, in the case of a reporting company with a December 31 fiscal year that failed to meet the amended SRC definition criteria as of June 30, 2018 or thereafter ceases to qualify as a SRC as of a subsequent annual determination date).  For these reporting companies to qualify as a SRC, on the last day of the second fiscal quarter of the applicable year, the reporting company must either (1) have a public float of less than $200 million, or (2)(a) “for any threshold that it previously exceeded, [the reporting company] is below the subsequent annual determination threshold (public float of less than $560 million and annual revenues of less than $80 million)" and (b) “for any threshold that it previously met, it remains below the initial determination threshold (public float of less than $700 million or no public float and annual revenues of le...

Desktop Calendar of SEC Deadlines for 2019 Now Available

November is a good time to confirm plans for SEC reporting and capital markets transactions in the next year. To assist public companies in keeping track of the various filing deadlines, we have prepared a desktop reference calendar that sets forth filing deadlines for many SEC reports. To assist companies with planning capital markets transactions, including IPOs, our calendar also provides the staleness dates for 2019 (i.e., the last date financial statements may be used in a prospectus or proxy statement without being updated).

You can download a PDF of the 2019 SEC Filing Deadlines calendar at the link below.

https://www.gibsondunn.com/wp-content/uploads/2017/03/SEC-Filing-Deadline-Calendar-2019.pdf

Gibson Dunn provides a range of other helpful resources on our website, from a guidebook for companies considering their initial public offering to illustrative timelines for securities offerings by existing public companies. For access to these and other resources and publications, please see Gibson Dunn's Capital Markets Practice Center.

For more information about current developments and trends in securities regulation, corporate governance and executive compensation, sign up for Gibson Dunn's Securities Regulation and Corporate Governance Monitor.  

 

Commonsense Principles 2.0 Released

On October 18, 2018, the Commonsense Principles 2.0 (the “Principles 2.0") were released.  They are an update to the Commonsense Principles of Corporate Governance (the “Previous Principles") developed in 2016 by a group of 13 business and investment leaders, including representatives of Berkshire Hathaway, BlackRock and State Street and the chief executive officers of several large public companies, available here, and discussed in a previous client alert.

An Open Letter accompanying the Principles 2.0 observes that in recent years, a number of other groups have issued their own statements on corporate governance, including the Investor Stewardship Group and Business Roundtable.  These statements, which are aimed in part at addressing “unhealthy short-termism," are also part of a broader effort to foster engagement among companies, boards and investors.  The signatories to the Principles 2.0 express their hope that ultimately, the many sets of corporate governance principles currently in circulation can be harmonized and consolidated, and reflect the combined views of companies and investors.  The 21 signatories to the Principles 2.0 include representatives of additional public companies and institutional investors such as AT&T, Coca-Cola, IBM, Johnson &...

ISS Proposes and Opens Comment Period on Board Diversity and Pay-for-Performance Policy Changes

On October 18, 2018, Institutional Shareholder Services (“ISS") announced a proposed U.S. proxy voting policy change to address board gender diversity.  In particular, ISS is seeking comment on its proposal to recommend negative votes for certain directors on boards that lack gender diversity.  ISS is also seeking comment on a proposed change to one of the metrics used to assess company performance as part of its pay-for-performance model.  

The proposed U.S. policy updates are available here and are summarized below.  Comments on the proposed changes can be submitted via e-mail to policy@issgovernance.com until 5 p.m. ET on November 1, 2018.  ISS will take the comments into account as part of its policy review and expects to release its final 2019 U.S. benchmark policy/proxy voting guidelines updates in the middle of November 2018.  It is important to note that ISS's final 2019 proxy voting policies, which will apply to shareholder meetings held on or after February 1, 2019, likely will reflect additional changes beyond these on which ISS has solicited comments. 

Proposed Board Diversity Policy Change

Under the proposal, ISS policy would state that, effective for meetings of public companies in the Russell 3000 and S&P 1500 held on or after February 1, 2020, ISS would generally recommend votes “against" (or “withhold" from) nominating committee chairs at companies when there are no female directors on the board.  Other directors responsible for the board nomination process could also be impacted on a case-by-case basis.  ISS would take into account certain mitigating factors under the proposed policy, including “a firm commitment [disclosed by the company] to appoint at least one female director to the board in the near term (before the next annual general meeting)" and “the presence of at least one female director on the board at the immediately preceding annual meeting." 

By way of background, beginning in 2018, ISS proxy research reports began noting whether a company's board lacked gender diversity; however, no adverse recommendations were issued to companies based on that situation.  As part of its annual process for reviewing and updating its benchmark policies that guide its proxy voting recommendations for the coming year, ISS is soliciting comments on this proposed policy change.  Among other things, ISS is seeking comment on whether other mitigating factors should be considered by ISS and what circumstances should ISS consider when evaluating whether to recommend “against" directors other than the chair of the nominating committee.  

ISS's proposed policy r...

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Current thoughts on development and trends in securities regulation, corporate governance and executive compensation published by Gibson Dunn.

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