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SEC Amends Acquired Business Financial Statement Requirements

On May 21, 2020 the Securities and Exchange Commission adopted a number of amendments intended to reduce the complexity of financial disclosures required for business acquisitions and dispositions by U.S. public companies. These amendments will, among other things, (i) revise the requirements for financial statements and pro forma financial information for acquired businesses, (ii) revise the tests used to determine significance of acquisitions and dispositions, and (iii) for certain acquisitions of a component of a business, allow financial statements to omit certain expenses. The amendments are effective January 1, 2021, but registrants may voluntarily comply with the rules as amended prior to the effective date.

When a registrant acquires a business that is “significant,” other than a real estate operation, Rule 3-05 of Regulation S-X generally requires a registrant to provide separate audited financial statements of that business and pro forma financial information under Article 11 of Regulation S-X. The number of years of financial information that must be provided depends on the relative significance of the acquisition to the registrant. Similarly, Rule 3-14 of Regulation S-X addresses the unique nature of real estate operations and requires a registrant that has acquired a significant real estate operation to file financial statements with respect to such acquired operation.

The significance of an acquisition or disposition is based on an Investment Test, an Asset Test, and an Income Test. The amendments revise the Investment Test to compare a registrant’s investments in and advances to the acquired or disposed business to the

Registered U.S. Securities Offerings in the COVID-19 Pandemic

Despite the ongoing COVID-19 pandemic, companies continue to access the capital markets.  In fact, liquidity concerns have put even greater emphasis on securities offerings for some companies.  But there can be no question that COVID-19 has affected capital market transactions and companies should be mindful of the new environment.

Companies should consider a variety of offering issues that have been affected by the ongoing health crisis.  These include:

Access to the market.  Companies should consult with financial advisors as to the feasibility of offerings during this turbulent time.  Companies may need to be much more flexible in timing and pricing their offerings.

Disclosure.  As always, companies must evaluate the sufficiency of their disclosures.  The difference now is that there may be a higher risk than usual as to whether all material nonpublic information has been disclosed.  The SEC staff has encouraged disclosure to be as timely, accurate and as robust as practicable under the circumstances created by the COVID-19 pandemic.  The Chairman of the SEC and the Director of the Division of Corporation Finance have pressed publicly for these robust disclosures to include management’s expectations about the effects of the pandemic going forward as well as the effects thus far.  They suggested that detailed discussions of current liquidity positions and expected financial resource needs, as well as company actions to protect worker health and well-being and customer safety, could all be material to investors and encouraged disclosure.  As we have previously discussed, companies need to give special

Temporary SEC rules ease Regulation Crowdfunding to address urgent COVID-19 capital needs

The Securities and Exchange Commission (the “SEC”) recently adopted temporary final rules to Regulation Crowdfunding to address companies’ urgent COVID-19 capital needs.  The temporary rules provide tailored, conditional relief to established smaller companies from certain Regulation Crowdfunding requirements relating to the timing of the offering and the availability of financial statements required to be included in issuers’ offering materials.  For example, the temporary rules provide an exemption from certain financial statement review requirements for issuers offering $250,000 or less in securities in reliance on Regulation Crowdfunding within a 12-month period.

The SEC included the following table summarizing the existing Regulation Crowdfunding and changes resulting from the temporary rules:

  Regulation Crowdfunding Temporary Rule Amendments Eligibility The offering exemption is not available to:

·       Non-U.S. issuers;

·       Issuers that are required to file reports under Section 13(a) or 15(d) of the Securities Exchange Act of 1934;

·       Investment companies;

·       Blank check companies;

·       Issuers that are disqualified under Regulation Crowdfunding’s

disqualification rules;

·       Issuers that have failed to

file the annual reports

required under Regulation Crowdfunding during the

two years immediately

preceding the filing of the offering statement In addition to the existing eligibility criteria, issuers wishing to rely on the temporary rule amendments must also meeting the following criteria:

·       The issuer cannot have been organized and cannot have been operating less than six  months prior to the

commencement of the offering; and

·       An issuer that has sold

securities in a Regulation

Crowdfunding offering in the past,

U.S. SEC staff issues FAQs relating to extension of filing deadlines due to COVID-19

May 5, 2020

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Late Monday, the SEC Staff published FAQs addressing several questions relating to the SEC’s March 25th Order extending filing relief for public companies unable to meet a filing deadline because of circumstances related to COVID-19 and previously discussed in our April 1 blog post.

  • Disclosure Required to Utilize Filing Extension (FAQ 1). To utilize the filing extension, a reporting company must disclose in the Form 8-K (or 6-K):
    • that it is relying on the Order;
    • a brief description of the reasons why the company could not make the filing on a timely basis;
    • the estimated filing date;
    • a company-specific risk factor or factors explaining the impact, if material, of COVID-19 on its business; and
    • if the reason the report cannot be timely filed relates to the inability of a third party to provide any required opinion, report or certification, the filing should include as an exhibit a statement signed by the third party specifying the reasons they were unable to provide the document by the original due date.

When the delayed report is eventually filed, the company must disclose that it is relying on the Order and state the reasons why it could not file the report on a timely basis.

  • Shelf-Takedowns Permitted If Required Information Included in Prospectus (FAQ 2). A company that has utilized the Order to delay filing current or periodic reports can continue to complete shelf-takedowns from an effective shelf registration statement if it determines

SEC Approves Additional NYSE Continued Listing Compliance Relief

— New NYSE Relief Proposal Tracks SEC-Approved Nasdaq Temporary Rule

The SEC approved yet another temporary measure related to the continued listing rules of the New York Stock Exchange on April 21, 2020.  This time, the NYSE sought and received immediate effectiveness of a proposed rule change to assist listed companies who may fall out of compliance with the $50 million market capitalization and $1.00 price continued listing requirements by providing a tolling period through June 30, 2020.  The NYSE originally sought SEC approval to suspend these requirements until June 30, 2020, citing the unprecedented market declines resulting from the ongoing COVID-19 pandemic, but the proposal was rejected.

Companies that fail to maintain either of these NYSE continued listing standards are typically notified by the Exchange of their noncompliance and then must promptly issue a press release and file any required Form 8-K.  Listed companies have up to 18 months to regain compliance with the $50 million market capitalization requirement and up to 6 months to regain compliance with the $1.00 trading price standard under the existing rules.   Under the temporary rule, the Exchange will continue to notify listed companies of any noncompliance, companies will still be required to issue a press release and file the required Form 8-K, but the cure periods will be tolled until June 30, 2020, meaning that the 18-month or 6-month cure period will be calculated as beginning on July 1, 2020.

The Exchange still intends to attach a “.BC” indicator to those noncompliant

SEC continues 2020 whistleblower award surge; hotline vigilance is key during COVID-19 pandemic

Despite the challenges of the COVID-19 pandemic, the SEC continues its surge in whistleblower awards, announcing on April 20 a $5 million award to a whistleblower who provided critical evidence of wrongdoing that benefitted the SEC’s investigation, while also suffering unique hardship because of termination soon after raising concerns internally.  A few days earlier, on April 16, the SEC announced its largest award so far in 2020, more than $27 million to a whistleblower who objected to misconduct in an organization, after repeatedly and strenuously raising concerns internally.

Jane Norberg, Chief of the SEC Office of Whistleblower, noted that the April 20 award was the seventh announced by the SEC in the last month.  “These awards demonstrate the valuable contributions whistleblowers make to the protection of markets and investors and we encourage people to come forward with information about possible securities law violations,” Norberg said in the April 20 SEC press release.

The SEC has awarded approximately $430 million to 80 individuals since 2012.  All payments are made from an investor protection fund established by Congress that is funded entirely through monetary fines and penalties paid to the SEC by companies and individuals accused of securities law violations.

This noteworthy increase in awards reminds us that despite the unique communication and remote working challenges of COVID-19, companies must continue to promote access to hotlines or other avenues for employees, and potentially others, to report concerns and must maintain robust internal compliance programs.  Audit Committees and company management,

U.S. SEC: “This quarter, earnings statements and calls will not be routine”

Companies face unprecedented challenges as they grapple with earnings releases and analyst and investor calls, all while trying to understand the impact COVID-19 has had on their businesses in less than one month.  While many companies had strong first quarters before the nation’s full-mitigation response to COVID-19, it is likely that many experienced a very different end to the quarter and start of the next.  It is also likely that as a result, some companies will miss previous earnings projections.

The SEC and the exchanges (NYSE and Nasdaq) are clearly making an effort to help companies during this period of uncertainty. SEC Chairman Jay Clayton has been very vocal in encouraging public companies to provide prompt earnings information as well as information about past and future efforts to address the effects of COVID-19, regardless of whether they are in a position to file reports on time.

Most recently, Chairman Clayton was joined by William Hinman, the Director of the Division of Corporation Finance, in a joint statement detailing their observations and requests “[i]n an effort to facilitate robust disclosure and engagement.”  The NYSE then sent emails to its listed companies directing attention to the joint statement.  Here are some key takeaways:

  • This quarter, earnings statements and calls will not be routine. SEC staff encourages disclosure to be as timely, accurate and robust as practicable under the circumstances.
  • Companies are urged to provide as much information as practicable about their current operating status and future operating

US – COVID-19: Delaware Governor modifies emergency declaration to address virtual meeting matters

The Delaware Governor modified the state’s existing emergency declaration on April 6, 2020 to, among other things, allow stockholder meetings currently noticed for a physical meeting to pivot to virtual meetings to the extent permitted by law during the state of emergency, as well provide a method of adjournment of a meeting noticed for a physical location to a virtual meeting in case of public health threats and restrictions on personal travel.

The  declaration provides that if, because of COVID-19 pandemic public health threats, the board of directors wishes to change from a physical meeting location to a meeting conducted solely by remote communication, it may notify stockholders of the change solely by filing a document with the SEC and issuing a press release, which is then promptly posted on the corporation’s website. This addresses any potential uncertainty under the Delaware statute as to valid means of giving notice to stockholders.

In addition, if it is impracticable to convene a currently noticed stockholder meeting at the physical location because of COVID-19 public health threats, the corporation may adjourn the meeting to another date or time, to be held by remote communication, by providing notice of the date, time and means of remote communication by filing a document with the SEC and issuing a press release, which is then promptly posted on the corporation’s website. This addresses any potential uncertainty under the Delaware statute, which doesn’t address the method of adjournment under these circumstances.

While the guidance above is welcome

U.S.: SEC Chairman Urges “Prompt” Earnings Disclosure

April 6, 2020

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In remarks at a special meeting of the Investor Advisory Committee on April 2, Chairman Jay Clayton encouraged public companies to promptly provide as much information as possible about period-end earnings information, even if filings are delayed due to COVID-19.  He stated that the conditional relief afforded by the 45-day extension and the Staff’s guidance on COVID-19 disclosures should allow issuers to “provide prompt, period-end earnings information, and information regarding their past and expected future efforts to address the effects of COVID-19, regardless of whether they are able to comply with filing deadlines.”

Chairman Clayton stated that investors and markets “thirst for information as a general matter,” and that this is exacerbated in a period of economic uncertainty.  He stated plainly that an inability to file required reports on time due to COVID-19 challenges does not prevent public companies from issuing their earnings releases and filing current reports on Form 8-K.

While many companies typically release earnings and other financial results prior to filing the Form 10-Q or Form 10-K, for those issuers who cannot file timely due to the impacts of COVID-19, it may also not be possible to have sufficient certainty to go out with earnings releases.  It its earlier guidance (CF Disclosure Guidance: Topic No. 9), the staff stated that “timely, robust, and complete information is essential to functioning markets” and encouraged timely reporting if possible.  The staff also, however, acknowledged that the COVID-19 impacts might present “novel or complex accounting issues” and make it

U.S. SEC Grants Temporary Relief for Edgar Code Applicants Unable to Obtain Notarization

April 3, 2020

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The SEC recently adopted temporary relief for Edgar filers that face challenges obtaining notarization of signatures on Form ID applications, which are required to obtain Edgar access codes.

Applicants can now upload a signed copy of Form ID without the notarization by including a statement that they were unable to obtain notarization due to difficulties related to COVID-19. Within 90 days after  obtaining access to Edgar, applicants must obtain notarization of the authorized signature on a copy of the completed Form ID and upload it to their Edgar account.  Failure to do so may result in the SEC inactivating their Edgar access codes.

The relief expires after July 1, 2020.

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