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SEC staff announces guidance for SPACs

Last week the Staff of the Division of Corporation Finance issued a statement addressing a variety of accounting, financial reporting and governance issues that a private operating company should consider before undertaking a business combination with a special purpose acquisition company (a “SPAC”), shortly followed by one by the Acting Chief Accountant addressing financial reporting and auditing considerations for companies considering merging with SPACs.

The Corporation Finance statement addressed:

  • Ineligibility for
    • The 71-day extension for target company financials, which must be filed on Form 8-K within four business days of closing the de-SPAC transaction
    • Incorporation of 1934 Act filings on Form S-1 until three years after closing 
    • Use of Form S-8 to register equity plans until 60 days after filing the “Super 8-K” containing required “Form 10 information” 
    • WKSI status, use of free writing prospectuses and certain other less strict requirements for public offerings 
  • Public company reporting requirements applicable to the SPAC before, and the combined company after, closing including
    • Books and records requirements
    • SEC reporting and disclosure requirements 
    • The Staff noted that in the limited circumstances described in S-K CDI 215.02, it would not object if the combined company were to exclude management’s assessment of internal control over financial reporting in the Form 10-K covering the fiscal year in which the transaction was consummated 
    • New accounting requirements
  • Stock exchange listing standards, including quantitative as well as corporate governance

Be Aware – SEC Implements Holding Foreign Companies Accountable Act (HFCA) Requirements

The SEC recently announced its adoption of interim final amendments to certain forms, including Form 10-K and Form 20-F, to implement the congressionally mandated document submission and disclosure requirements of the Holding Foreign Companies Accountable Act (the “HFCA Act”) that became effective in December 2020.  The amendments will become effective 30 days after publication in the Federal Register.  They apply to public companies (each, a “Commission-Identified Issuer”) that are identified by the SEC as having filed an annual report that includes an audit report issued by a registered public accounting firm that (1) has a branch or office located in a foreign jurisdiction and (2) the PCAOB has determined it is unable to inspect or investigate completely because of a position taken by an authority in that jurisdiction.  The SEC will be responsible for identifying such companies, and the PCAOB will be required to identify audit firms that have a location in such a foreign jurisdiction.

Annual Report Amendments.  The new requirements will be implemented (1) with respect to Form 10-K, by the addition of Part II, Item 9C, and (2) with respect to Form 20-F, by the addition of Part II, Item 161.  Each new item will be captioned “Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.”

New Submission Requirement – Commission-Identified Issuers.  The new rules refer to any year in which the SEC identifies a company as a Commission-Identified Issuer as a “non-inspection year.”  The interim final amendments will require that each Commission-Identified Issuer submit, on or

Don’t Delay: SEC Wants Your Two Cents on Climate Change Disclosure

The SEC recently issued a public statement asking investors, companies and other market participants to share their views on climate change disclosure.  Comments are due by June 13, 2021 and can be submitted via the SEC webform or email.  In addition to, or in lieu of, written submissions, the SEC staff is also willing to meet with members of the public to discuss their feedback.

The SEC generally will post submissions on www.sec.gov, so personal identifying information should not be included in written feedback. The SEC encouraged commenters to include empirical data and other information in support of their comments. Original data may assist the SEC in assessing the materiality of climate-related disclosures, and the costs and benefits of different regulatory approaches to climate disclosure.

The public statement contains 15 multipart questions for consideration, including the key excerpts set out below.  Please refer to the public statement for the full text of the questions.

  • How can the Commission best regulate, monitor, review, and guide climate change disclosures in order to provide more consistent, comparable, and reliable information for investors while also providing greater clarity to companies as to what is expected of them? Where and how should such disclosures be provided?
  • What information related to climate risks can be quantified and measured?  Are there specific metrics on which all companies should report? How have companies or investors analyzed risks and costs associated with climate change? What are companies doing internally to evaluate or project climate scenarios,
  • SEC Acting Chair Announces Sweeping Climate and ESG Initiatives, New Regulatory Priorities and Potential Rollback of Recent Rule Changes

    In a speech on March 15, 2021, Allison Herren Lee, Acting Chair of the SEC, reported on the steps the SEC is taking to meet investors’ growing demand for climate and ESG information, stating that “no single issue has been more pressing for me” and that “climate and ESG are front and center for the SEC.”  She observed that there has been a shift in capital towards ESG and sustainable investment strategies, and that ESG risks and metrics increasingly affect investment decision-making.

    Lee indicated that the SEC will devote substantial resources to investor protection initiatives that extend beyond, but are mutually reinforcing of, the SEC’s climate and ESG initiatives.  She noted that these other initiatives include, among others, ensuring strong and clear standards for broker-dealers, taking a “hard look” at the effects of the continuing flow of capital away from the public markets and proceeding with equity market structure reforms.  Reflecting the change in administration and SEC leadership, she noted that this may result in undoing some recently adopted rules and/or guidance.

    Highlights of Acting Chair Lee’s speech follow:

    Improving Climate and ESG Disclosures.  Lee noted that the SEC’s fundamental role with respect to climate and ESG is helping ensure that material information gets into the market in a timely manner.  She believes the SEC’s current voluntary framework for climate and ESG disclosures neither ensures that result nor meets investor demands; as a result, the SEC has begun taking steps to create a mandatory and comprehensive ESG disclosure framework

    Climate-Related Disclosure in the Hot Seat

    SEC Commissioners: Are Recent Announcements Changes from Status Quo or New PR Twist?

    SEC Commissioners Hester M. Peirce and Elad L. Roisman today issued a statement providing their perspectives on the recent wave of climate-related announcements by the Divisions of Enforcement, Examinations and Corporation Finance.  Emphasizing that in their view the recent announcements raise more questions than they answer, the commissioners note their impact is not yet clear and query whether the announcements “represent a change from current Commission practices or a continuation of the status quo with a new public relations twist.”  Recent SEC ESG developments include:

    • On March 4, 2021, the SEC announced the creation of a Climate and ESG Task Force in the Division of Enforcement to, among other things, develop initiatives to proactively identify ESG-related misconduct.
    • On March 3, 2021, the SEC’s Division of Examinations announced its 2021 examination priorities, which include a greater focus on climate-related risks.
    • On March 2, 2021, Gary Gensler, President Biden’s nominee to serve as SEC Chair, noted in a Senate confirmation hearing that investors increasingly want to see climate risk disclosures. He indicated that, if confirmed, he would support the SEC’s focus on more climate-related disclosures.
    • On March 2, 2021, the House Committee on Energy & Commerce announced the Climate Leadership and Environmental Action for our Nation’s (CLEAN) Future Act which, if adopted as proposed, would direct the SEC to adopt climate risk disclosure rules within two years.
    • On February 24, 2021, Allison Herren Lee,

    Don’t Forget! Refresher on Glass Lewis COVID-19-Related Guidance and ISS Compensation-Related FAQs

    For companies knee deep in proxy statement drafting and 2021 executive compensation decisions, we recommend a quick refresher on Glass Lewis’ December 2020 Approach to Executive Compensation in the Context of the COVID-19 Pandemic and ISS’ October 2020 COVID-19-related compensation FAQs, as well as ISS’ more general December 2020 compensation-related FAQs and equity plan-related FAQs.  Highlights include:

    Glass Lewis Approach to Executive Compensation in the Context of the COVID-19 Pandemic

    Glass Lewis released this December 2020 guidance to illustrate how it will apply its executive compensation policies in 2021 in the wake of COVID-19.  Glass Lewis noted that the pandemic has not changed its approach to executive pay, which is a “pragmatic, contextual approach that applies in good times and bad.”  Some of the key topics covered are:

    Pay-for-Performance Analysis.  Glass Lewis does not expect the macroeconomic climate to have a drastic impact on its pay-for-performance model and will continue to take a holistic approach when evaluating the alignment between executive pay and company performance within the context of the pay-for-performance model and the pandemic.

    Say-on-Pay Proposals.  Glass Lewis notes that how companies respond to changing macroeconomic conditions resulting from the pandemic will dominate say-on-pay votes.  Given that an executive’s base salary represents a relatively low portion of his or her total compensation, Glass Lewis will view temporary base salary reductions in the face of the pandemic to be token gestures.  Glass Lewis will instead look closely at overall pay levels, including scrutinizing mid-cycle pay

    SEC guidance targets disclosures during “meme stock” volatility

    February 9, 2021

    Categories

    Yesterday, the SEC’s Division of Corporation Finance issued guidance on securities offering disclosure during times of extreme price volatility, which it viewed as characterized by:

    • recent stock run-ups or recent divergences in valuation ratios relative to those seen during traditional markets,
    • high short interest or reported short squeezes, and
    • reports of strong and atypical retail investor interest (whether on social media or otherwise)

    The guidance was issued in the form of a sample comment letter to address topics such as:

    • On the prospectus cover page
      • recent price volatility and any known risks of investing under these circumstances
      • comparative market prices before and after the volatility
      • whether any recent changes in financial condition or results of operations are consistent with the stock price changes
    • Risk factors that address
      • recent extreme volatility
      • the effects of a potential short squeeze, including on purchasers in the offering
      • the effect of the number of shares being offered relative to the number outstanding, including on stock prices and investors
      • the potential dilutive effect of future offerings, if contemplated
    • Priorities for use of proceeds, insofar as the targeted proceeds are based on a current stock price that significantly exceeds the company’s historic average price per share, in the event the actual proceeds are less than expected

    The staff noted that the sample comments do not constitute an exhaustive list of the issues that companies should consider.

    Lessons from GameStop: Small Investors “100% Don’t Care” About Risk

    Like KC Chiefs quarterback Patrick Mahomes eating green beans in a recent commercial, even though he “100% [doesn’t] like them,” it appeared the Reddit r/WallStreetBets group that banded together to buy GameStop shares “100% don’t care” about market risk and potential investment losses.  

    Inspired by social media cheerleaders, thousands of small investors acted with irrational exuberance, driving the share price from less than $20 on January 15, 2021 to $483 on January 28, 2021 before it closed that day below $200, and plummeted more than 40% to $53 on February 4.  

    Average investors watched in disbelief as trading markets were turned upside down by investors who appeared to ignore financial and other disclosures, disregarding the risks of possible complete loss of their investments.

    Understandably, the executives of GameStop and some players on the social media investor radar screen have so far declined to comment.  The social media blitz was completely outside control of the issuer’s management and they likely don’t have sufficient information to attempt to explain it.  To wit, one of GameStop’s reactions to the inexplicable volatility was to restrict trading in its shares.

    Regardless of how this saga ultimately ends for GameStop, it has raised important questions like whether a company should keep its trading window closed even after earnings are announced and the company has disclosed all material nonpublic information.  Normally, there “ought not” be any liability concerns for an issuer in such a situation, but that could be risky when judged in hindsight.  Large

    Modernizing Regulation S-K Amendments – Transitional FAQs from the SEC

    As covered in our blog post dated August 26, 2020, the SEC recently adopted amendments to Regulation S-K Items 101 (business description), 103 (legal proceedings), and 105 (risk factors) aimed at modernizing disclosure requirements.  The amended rules became effective on November 9, 2020.

    The SEC Staff (the “Staff”) recently published three transitional FAQs addressing questions that have arisen regarding the amendments:

    FAQ (1) – Applicability of Amended Items 101, 103 and 105 to Form S-3 Prospectus Supplements Filed on or after November 9, 2020.

    • The Staff confirmed that because Form S-3 requires only incorporation by reference – and not express disclosure – under Items 101 and 103, a registrant is not required to comply with amended Items 101 and 103 when, on or after November 9, 2020, it files a prospectus supplement to a Form S-3 registration statement that became effective prior to November 9, 2020. The registrant also is not required to amend the Form 10-K that is incorporated by reference into the Form S-3 to comply with amended Items 101 and 103.
    • The Staff noted that because Form S-3 requires that Item 105 disclosure be expressly included (i.e., the disclosure cannot be incorporated by reference), Securities Act Rule 401(a) would ordinarily require that the prospectus supplement comply with amended Item 105. The Staff indicated that it will not object, however, if the prospectus supplement is filed without amending the Form S-3 to comply with amended Item 105.  The registrant will, however, be required to comply with amended

    Key issues for upcoming Q3 10-Q filings

    As public companies prepare their Q3 releases and filings, some of the key issues they should consider include:

    • MD&A – as we reported last quarter, the SEC Staff issued COVID-19 guidance in June calling for companies to disclose the impact of the pandemic through the eyes of management, including, to the extent material:
      • The effects of the pandemic on a company’s operations, liquidity and capital resources; the short- and long-term impact of any federal relief received under the CARES Act; and the company’s ability to continue as a going concern
      • Operational changes as a result of the pandemic – from converting to telework to modifying supply chain and customer contracts, and now converting to the return to the workplace and business reopenings
      • Trends, events or uncertainties (such as possible events of default, breach of covenants, etc.), unless a company can conclude either that it is not reasonably likely that the trend, uncertainty or other event will occur, or that a material effect on the company’s liquidity, capital resources or results of operations is not reasonably likely to occur
    • Non-GAAP Financial Measures – as we recently noted, it appears few companies are jumping on the EBITDAC bandwagon; however, the SEC staff has issued comments on such measures that include adjustments for COVID-19, as in Comment 6 here. Accordingly, companies should be prepared to explain the quantification of any such adjustments and their rationale, consistent with the guidance described in our earlier
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