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SEC Requests Comment On Changes To Subpart 400 To Regulation S-K

Posted by Securities Attorney Laura Anthony | September 13, 2016 Tags: Fast Act, Regulation S-K, Regulation S-X, SEC, Smaller Reporting Company, Subpart 400, The Fast Act

On August 25, 2016, the SEC requested public comment on possible changes to the disclosure requirements in Subpart 400 of Regulation S-K. Subpart 400 encompasses disclosures related to management, certain security holders and corporate governance. The request for comment is part of the ongoing SEC Division of Corporation Finance’s Disclosure Effectiveness Initiative and as required by Section 72003 of the FAST Act.

Background

The topic of disclosure requirements under Regulations S-K and S-X as pertains to financial statements and disclosures made in reports and registration statements filed under the Exchange Act of 1934 (“Exchange Act”) and Securities Act of 1933 (“Securities Act”) has come to the forefront over the past couple of years. The purpose of the Disclosure Effectiveness Initiative is to assess whether the business and financial disclosure requirements continue to provide the information investors need to make informed investment and voting decisions.

Regulation S-K, as amended over the years, was adopted as part of a uniform disclosure initiative to provide a single regulatory source related to non-financial statement disclosures and information required to be included in registration statements and reports filed under the Exchange Act and the Securities Act. Regulation S-X contains specific financial statement preparation and disclosure requirements.

In addition to affecting companies filing registration statements (including on Form 1-A in a Regulation A/A+ offering) and those filing reports with the SEC, any changes to Regulations S-K or S-X will affect acquired entities, acquirees, investment advisers, investment companies, broker-dealers and nationally recognized statistical rating organizations.

In accordance with its mandate under Section 72003 of the FAST Act, the SEC is studying and seeking comment to:

Determine how to modernize and simplify disclosure requirements to reduce the costs and burdens to the company while still providing all material and necessary information to investors;

Further a principles-based approach whereby companies and their management can determine the relevancy and materiality of information provided instead of just including boilerplate language or filling space to meet a static requirement. Of course, this needs to be balanced with the need to ensure completeness and comparability of information among different companies; and

Evaluate information delivery methods and explore ways to eliminate repetition and the disclosure of immaterial information.

Request for Comment

Subpart 400 of Regulation S-K, including Items 401 through 407, require disclosures on directors, executive officers, control persons and promoters; executive compensation; security ownership of certain beneficial owners and management; transactions with related persons, promoters and control persons; ethics and corporate governance.

The SEC’s request for comment does not provide any commentary about particular concerns, thoughts, or questions by the SEC, but is a short general request on “existing requirements in these rules as well as on potential disclosure issues that commenters believe the rules should address.”

Overview of Subpart 400

Item 401 – Directors, Executive Officers, Promoters and Control Persons

Item 401 of Regulation S-K requires the disclosure of the identity and ages of all directors and persons nominated to become a director. In addition, Item 401 requires disclosure of all positions held at the company by that director or nominee, their term of office, and any arrangement or understanding between that person and another person “pursuant to which he was or is to be selected as a director or nominee.” The instructions provide some clarity. Compensation for service as a director is not included in arrangements with other persons. A person must consent to being included as a nominee. No information need be provided on an outgoing director.

Item 401 requires the disclosure of the identity and ages of all executive officers. In addition, Item 401 requires disclosure of all positions held at the company by that executive officer, their term of office, and any arrangement or understanding between that person and another person pursuant to which he was or is to be selected as an officer. A person must consent to being included as an executive officer.

For a first-time registration statement or a registration statement by a company not subject to the reporting requirements under the Securities Exchange Act, Item 401 requires the identification of certain significant employees – in particular, where a person is not an executive officer but otherwise makes a significant contribution to the company’s business. The same information required for executive officers is required for significant employees. Similarly, for a first-time registration statement or registration statement by a company that has not been subject to the reporting requirements for at least 12 months, the same information must be provided for promoters and control persons.

In addition, family relationships, business experience for the past five years, and disclosures of certain legal proceedings must be made for each director and executive officer. The legal proceeding disclosure is a scaled-down version of the bad-actor requirements found elsewhere in the rules, such as Rule 506 and Regulation A. Also, Item 401 requires disclosure of bankruptcy proceedings involving the person or a company for which they were an executive officer during the past five years.

Item 402 – Executive Compensation

An entire treatise could be written on Item 402. From a high level, Item 402 requires disclosure of all compensation awarded to, earned by, or paid to a company’s executive officers and directors. Item 402 also requires disclosures related to pay ratio and require “say on pay” advisory votes. See my blog HERE.

Compensation must be disclosed in tabular form and is meant to encompass any and all benefits received by an executive officer or director, including salary, bonuses, stock awards (including under a plan or not, qualified or non-qualified), option awards, non-equity incentive plans, pension value, benefits, perquisites and all other forms of compensation. Moreover, Item 402 requires a compensation discussion and analysis explaining the presented information.

Item 402 requires details of outstanding stock awards and options, including exercise dates and prices, the market value of underlying securities and vesting schedules. Detailed information is also required regarding pension benefits.

Emerging-growth and smaller reporting companies provide a scaled-down disclosure under Item 402. For details on the Item 402 scaled-down requirements related to emerging growth and smaller reporting companies, see my blog HERE.

Item 403 – Security Ownership of Certain Beneficial Owners and Management

Item 403 requires disclosure of the security ownership of officers, directors and 5% or greater shareholders, including the beneficial owner or natural person behind any entity ownership. Ownership is disclosed in tabular form and includes name, address, number of securities owned and percentage owned of that class. Item 403 requires disclosure of all classes of outstanding equity regardless of whether such class is registered or publicly trades.

Item 404 – Transactions with Related Persons, Promoters, and Certain Control Persons

Item 404 requires the disclosure of material related party transactions. For purposes of Item 404, related parties include officers or officer nominees, directors or director nominees, a family member of a director or executive office, 5% or greater shareholders, or any person that has a direct or indirect material interest in the company. Companies other than emerging-growth or smaller reporting companies must also disclose the company’s policy for the review, approval or ratification of related party transactions. Item 404 also requires the disclosure of compensations, assets or benefits to be received by promoters where the company is filing an S-1 or Form 10 registration statement.

A “promoter” has a specific definition in the securities laws and is not tied to stock promotion in the sense that many may think. A “promoter” is defined in Rule 405 of the Securities Act as including:

(1) Any person who, acting alone or in conjunction with one or more other persons, directly or indirectly takes initiative in founding and organizing the business or enterprise of an issuer; or

(2) Any person who, in connection with the founding and organizing of the business or enterprise of an issuer, directly or indirectly receives in consideration of services or property, or both services and property, 10 percent or more of any class of securities of the issuer or 10 percent or more of the proceeds from the sale of any class of such securities. However, a person who receives such securities or proceeds either solely as underwriting commissions or solely in consideration of property shall not be deemed a promoter within the meaning of this paragraph if such person does not otherwise take part in founding and organizing the enterprise.

(3) All persons coming within the definition of promoter in paragraph (1) of this definition may be referred to as founders or organizers or by another term provided that such term is reasonably descriptive of those persons’ activities with respect to the issuer.

Item 404 expands the definition of promoter to include “any person who acquired control of a registrant that is a shell company, or any person that is part of a group, consisting of two or more persons that agree to act together for the purpose of acquiring, holding, voting or disposing of equity securities of a registrant, that acquired control of a registrant that is a shell company.”

Item 405 – Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Exchange Act requires the filing of Forms 3 and 4 by officers, directors or 10%-or-greater shareholders. For a review of the Section 16 filing requirements, see my blog HERE. Item 405 requires a company to disclose failures to meet these filing requirements.

Item 406 – Code of Ethics

Item 406 requires a company to disclose whether it has adopted a code of ethics for the executive officers and accounting controller. A copy of the code of ethics must also be filed with the SEC and included on the company’s website.

Item 407 – Corporate Governance

Item 407 requires disclosure of corporate governance standards, including those related to director independence; board committees, including audit compensation, and nominating committees; and annual meeting attendance. Item 407 requires detailed information for each category of corporate governance as well as the policies and procedures of each board committee.

Further Background

The request for comment follows the July 13, 2016 proposed rule change on Regulation S-K and Regulation S-X to amend disclosures that are redundant, duplicative, overlapping, outdated or superseded (S-K and S-X Amendments). See my blog on the proposed rule change HERE. That proposed rule change followed the concept release and request for public comment on sweeping changes to certain business and financial disclosure requirements issued on April 15, 2016. See my two-part blog on the S-K Concept ReleaseHERE and HERE.

As part of the same initiative on June 27, 2016, the SEC issued proposed amendments to the definition of “Small Reporting Company” (see my blog HERE). The SEC also issued a release related to disclosure requirements for entities other than the reporting company itself, including subsidiaries, acquired businesses, issuers of guaranteed securities and affiliates. See my blog HERE.

Prior to the S-K Concept Release and current Regulation S-K and S-X proposed amendments, in September 2015 the SEC Advisory Committee on Small and Emerging Companies met and finalized its recommendation to the SEC regarding changes to the disclosure requirements for smaller publicly traded companies. For more information on that topic and for a discussion of the Reporting Requirements in general, see my blog HERE.

In March 2015 the American Bar Association submitted its second comment letter to the SEC making recommendations for changes to Regulation S-K. For more information on that topic, see my blog HERE.

In early December 2015 the FAST Act was passed into law. The FAST Act requires the SEC to adopt or amend rules to: (i) allow issuers to include a summary page to Form 10-K; and (ii) scale or eliminate duplicative, antiquated or unnecessary requirements for emerging-growth companies, accelerated filers, smaller reporting companies and other smaller issuers in Regulation S-K. The current Regulation S-K and S-X Amendments are part of this initiative. In addition, the SEC is required to conduct a study within one year on all Regulation S-K disclosure requirements to determine how best to amend and modernize the rules to reduce costs and burdens while still providing all material information. See my blog HERE.

The Author

Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys
LAnthony@LegalAndCompliance.com

Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the OTC Market’s top source for industry news, and the producer and host of LawCast.com, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

Contact Legal & Compliance LLC. Technical inquiries are always encouraged.

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Smaller Reporting Companies vs. Emerging Growth Companies

Posted by Securities Attorney Laura Anthony | August 23, 2016 Tags: Emerging Growth Companies, Emerging Growth Company, S-3 Eligible, Smaller Reporting Companies, Smaller Reporting Company, Test The Waters, The Fast Act

The topic of reporting requirements and distinctions between various categories of reporting companies has been prevalent over the past couple of years as regulators and industry insiders examine changes to the reporting requirements for all companies, and qualifications for the various categories of scaled disclosure requirements. As I’ve written about these developments, I have noticed inconsistencies in the treatment of smaller reporting companies and emerging growth companies in ways that are likely the result of poor drafting or unintended consequences. This blog summarizes two of these inconsistencies.

As a reminder, a smaller reporting company is currently defined as a company that has a public float of less than $75 million in common equity as of the last business day of its most recently completed second fiscal quarter, or if a public float of zero, has less than $50 million in annual revenues as of its most recently completed fiscal year-end. I note that on June 27, 2016, the SEC issued a proposed rule to change that definition. The SEC proposes to amend the definition of a smaller reporting company to include companies with less than a $250 million public float as compared to the $75 million threshold in the current definition. In addition, if a company does not have an ascertainable public float, a smaller reporting company would be one with less than $100 million in annual revenues, as compared to the current threshold of less than $50 million. Once considered a smaller reporting company, a company would maintain that status unless its float drops below $200 million or its annual revenues drop below $80 million.

An emerging growth company (“EGC”) is defined as a company with total annual gross revenues of less than $1 billion during its most recently completed fiscal year that first sells equity in a registered offering after December 8, 2011. An EGC loses its EGC status on the earlier of (i) the last day of the fiscal year in which it exceeds $1 billion in revenues; (ii) the last day of the fiscal year following the fifth year after its IPO (for example, if the issuer has a December 31 fiscal year-end and sells equity securities pursuant to an effective registration statement on May 2, 2016, it will cease to be an EGC on December 31, 2021); (iii) the date on which it has issued more than $1 billion in non-convertible debt during the prior three-year period; or (iv) the date it becomes a large accelerated filer (i.e., its non-affiliated public float is valued at $700 million or more). EGC status is not available to asset-backed securities issuers (“ABS”) reporting under Regulation AB or investment companies registered under the Investment Company Act of 1940, as amended. However, business development companies (BDC’s) do qualify.

The Fast Act

The FAST Act, passed into law on December 4, 2015, amended Form S-1 to allow for forward incorporation by reference by smaller reporting companies. A smaller reporting company may now incorporate any documents filed by the company, following the effective date of a registration statement, into such effective registration statement. In what was probably unintended in the drafting, the FAST Act changes only include smaller reporting companies and not emerging growth companies. Generally, forward incorporation by reference requires that the company be S-3 eligible. The FAST Act change has created an anomaly whereby a smaller reporting company can utilize forward incorporation by reference but an EGC could not unless it was also S-3 eligible.

Testing the Waters in an IPO

Test-the-waters communications involve solicitations of indications of interest for an offering prior to the effectiveness of a registration statement. Where Regulation A freely allows, and even encourages, test-the-waters communications, the standard IPO process using a Form S-1 still strictly limits pre-effectiveness solicitations of interest and offering communications overall. Section 5(a) of the Securities Act prohibits the sale of securities before the registration statement is deemed effective. Communications made by the company during an IPO process, depending on the mode and content, result in violations of Section 5 of the Securities Act of 1933 (the “Securities Act”). Communication-related violations of Section 5 during the pre-filing and pre-effectiveness periods are often referred to as “gun jumping.”

In April 2012, the Jumpstart Our Business Startups Act (the “JOBS Act”) was enacted, which, in part, established a new process and disclosures for public offerings by EGC’s.

Section 105(c) of the JOBS Act provides an EGC with the flexibility to “test the waters” by engaging in oral or written communications with qualified institutional buyers (“QIB’s”) and institutional accredited investors (“IAI’s”) in order to gauge their interest in a proposed offering, whether prior to (irrespective of the 30-day safe harbor) or following the first filing of any registration statement, subject to the requirement that no security may be sold unless accompanied or preceded by a Section 10(a) prospectus. Generally, in order to be considered a QIB, you must own and invest $100 million of securities, and in order to be considered an IAI, you must have a minimum of $5 million in assets. For a more complete discussion on the test-the-waters provisions available to EGC’s, see my blog HERE.

Section 105(c) is not available for smaller reporting companies. Where a smaller reporting company is not also an EGC, it cannot engage in Section 105(c) test-the-waters communications made available under the JOBS Act. This is clearly a legislative miss. The JOBS Act is intended to create capital-raising opportunities for small companies. Although I understand that the thought was to assist EGC’s in the IPO process, the fact is that many smaller reporting companies engage in a series of follow-on public offerings before reaching a size and level of maturity where they no longer need the assistance of rules and laws designed to encourage capital in smaller companies. Ironically, by that point, these companies will be able to engage in additional communications only available to eligible larger issues, such as free writing prospectus and Rule 163 communications.

Refresher on Regulation S-K and S-X Differences for Smaller Reporting Companies and EGC’s

The scaled-down disclosures for smaller reporting companies and emerging growth companies include, among other items: (i) only 3 years of business description as opposed to 5; (ii) 2 years of financial statements as opposed to 3; (iii) elimination of certain line item disclosures such as certain graphs and selected financial data; and (iv) relief from the 404(b) auditor attestation requirements. However, although similar, there are differences between the scaled disclosure requirements for an emerging growth company vs. a smaller reporting company. In particular, the following chart summarizes these differences:

Read More

The Author

Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys
LAnthony@LegalAndCompliance.com

Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the OTC Market’s top source for industry news, and the producer and host ofLawCast.com, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

Contact Legal & Compliance LLC. Technical inquiries are always encouraged.

Follow me on Facebook, LinkedIn, YouTube, Google+, Pinterest and Twitter.

Download our mobile app at iTunes.

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SEC Issues Final Rules Implementing The JOBS ACT And Rules On The FAST ACT

Posted by Securities Attorney Laura Anthony | May 10, 2016 Tags: Fast Act, JOBS ACT, The Fast Act, the jobs act

On May 3, 2016, the SEC issued final amendments to revise the rules related to the thresholds for registrations, termination of registration, and suspension of reporting under Section 12(g) of the Securities Exchange Act of 1934. The amendments mark the final rule making and implementation of all provisions under the JOBS Act, and implement further provisions under the FAST Act.

The amendments revise the Section 12(g) and 15(d) rules to reflect the new, higher shareholder thresholds for triggering registration requirements and for allowing the voluntary termination of registration or suspension of reporting obligations. The new rules also make similar changes related to banks, bank holding companies, and savings and loan companies.

Specifically, the SEC has amended Exchange Act Rules 12g-1 through 12g-4 and 12h-3 related to the procedures for termination of registration under Section 12(g) through the filing of a Form 15 and for suspension of reporting obligations under Section 15(d), to reflect the higher thresholds set by the JOBS Act. The SEC also made clarifying amendments to: (i) cross-reference the definition of “accredited investor” found in rule 501 of Regulation D, with the Section 12(g) registration requirements; (ii) add the date for making the registration determination (last day of fiscal year-end); and (iii) amend the definition of “held of record” to exclude persons who received shares under certain employee compensation plans.

The new rules were initially proposed on December 18, 2015. A few days before the proposed rules were issued, on December 4, 2015, the FAST Act was enacted into law, including provisions implementing the revised thresholds for savings and loan holding companies, effective immediately without further action by the SEC. Despite this overlap, the SEC has now cleaned up all the provisions, thus aligning the rules with the statutory requirements.

Following the final implementation of the relevant JOBS Act and FAST Act provisions, a company that is not a bank, bank holding company or savings and loan holding company is required to register under Section 12(g) of the Exchange Act if, as of the last day of its most recent fiscal year-end, it has more than $10 million in assets and securities that are held of record by more than 2,000 persons, or 500 persons that are not accredited. The same thresholds apply to termination of registration and suspension of reporting obligations. As discussed below, determining which shareholders are accredited as of the last day of a fiscal year-end can be difficult.

A company that is a bank, bank holding company or savings and loan holding company is required to register under Section 12(g) of the Exchange Act if it has more than $10 million in assets and securities that are held of record by more than 2,000 persons and is allowed to terminate or suspend registration if its securities are held of record by fewer than 1,200 persons.

Registration, Termination of Registration and Suspension of Reporting Obligations

The JOBS Act amended Sections 12(g) and 15(d) of the Exchange Act to adjust the thresholds for registration, termination of registration and suspension of reporting. Prior to enactment of the JOBS Act on April 5, 2012, the Exchange Act required companies with greater than $10 million in total assets and greater than 500 record holders of any class of equity security to register and file periodic reports with the SEC. This requirement was burdensome for companies aspiring to raise capital and grow but that were not yet ready to become publicly reporting.

Section 12(g) of the Exchange Act and the rules promulgated thereunder allowed a company to deregister and relieve itself of the reporting requirements of the Exchange Act if it has fewer than 300 shareholders, or fewer than 500 shareholders and less than $10 million of assets.

Non-bank, Bank Holding Company and Saving and Loan Holding Company Issuers

Title V and Title VI of The JOBS Act amended Section 12(g) and Section 15(d) of the Exchange Act. Section 501 of Title V amended Section 12(g) of the Exchange Act to increase the “holders of record” threshold for triggering Section 12(g) registration for issuers with total assets of more than $10 million (other than banks and bank holding companies) from 500 or more persons to either (i) 2,000 or more persons or (ii) 500 or more persons who are not accredited investors. Issuers are required to register within 120 days after its fiscal year-end, if on the day of such fiscal year-end, it meets these thresholds.

Although Section 501 went effective upon passage of the JOBS Act, the automatic amendments did not include a change to the deregistration provisions under Section 12(g). Accordingly, since April 2012, a company would not be required to register until it had 2,000 shareholders of record or 500 or more persons who are not accredited investors, but could not deregister unless it had fewer than 300 shareholders, or 500 shareholders for those companies with less than $10 million in assets.

The new rules have now aligned the right to terminate registration or suspend reporting obligations with the higher threshold amounts.

With the passage of the new rules, together with all the JOBS Act rules enacted previously, a company is not required to register a class of securities under Section 12(g) if, on the last day of its most recent fiscal year: (i) the company has total assets not exceeding $10 million; or (ii) the class of securities is held of record by fewer than 2,000 persons or 500 persons that are not accredited as defined in Securities Act rule 501.

Bank, Bank Holding Company and Saving and Loan Holding Company Issuers

Section 601 of the JOBS Act amended Section 12(g) to increase the total assets to $10 million and the holders of record threshold for triggering registration for banks and bank holding companies, as such term is defined in the Bank Holding Company Act of 1956, as of any fiscal year-end after April 5, 2012, from 300 or more persons to 2,000 or more persons. Similarly, Section 601 of the JOBS Act amended Sections 12 and 15 of the Exchange Act to increase the holders of record threshold for deregistration and suspension of reporting obligations for banks and bank holding companies from 300 to 1,200 persons.

Following enactment of the JOBS Act, regulators realized that the Section 601 provisions had inadvertently left out saving and loan holding companies from the new registration and deregistration threshold changes. Accordingly, both the SEC through rule making, and the legislature through the FAST Act, have implemented changes to correct the oversight and include saving and loan holding companies in these changes. Following implementation of the FAST Act, the SEC also issued guidance through Compliance and Disclosure Interpretations (C&DI) to help clarify the provisions. My blog on that guidance can be read HERE.

The new rules clean up the procedures and timing of termination of registration for banks, bank holding companies and savings and loan holding companies as well such that these entities may immediately terminate registration upon the filing of a Form 15 rather than the existing procedures, which required the entities to wait 90 days after filing the Form 15 to be relieved of their obligations. Similarly, the existing procedures only allowed for the suspension of reporting obligations at the beginning of a fiscal year. The new rules allow banks, bank holding companies and savings and loan holding companies to suspend reporting obligations, effective immediately, at any time during the year by filing a Form 15, as long as they meet the thresholds for such suspension.

Application of the Increased Threshold for Accredited Investors

Knowing whether an investor or shareholder is accredited has always been a basic premise in determining the availability of an exemption from the registration requirements and the disclosure delivery requirements applicable to such an exemption. The new registration and deregistration thresholds now extend the importance and timing of knowing the accredited status of shareholders beyond what was ever previously required.

Identifying accredited investors for purposes of the registration, and especially deregistration, requirements could be problematic. Suggestions in this regard included: (i) allowing issuers to rely on annual affirmations from record shareholders; (ii) reliance on information obtained at the time of an initial investment or most recent sale of securities to such investor; or (iii) third-party verification.

The new rules rely on the current definition of “accredited investor” enumerated in Securities Act Rule 501(a) and require that the “accredited investor” determination be made as of the last day of the fiscal year rather than at the time of the sale of securities. This provides a dramatic change for issuers who currently have no obligations to assess accredited status after a sale of securities is completed.

In rejecting the ability to unilaterally rely on representations made at the time of a sale of securities to a particular investor, the SEC expressed concern regarding the use of outdated, unreliable information. Instead, an issuer will need to determine, based on facts and circumstances, whether it can rely upon prior information to form a reasonable basis for believing that the security holder continues to be an accredited investor as of the last day of the fiscal year.

The new rule requires the company to have a reasonable belief as to whether a shareholder is accredited. The SEC is leaving it to the discretion of the company to determine, based on facts and circumstances, whether it has a reasonable belief that a shareholder is accredited or not. A company is not precluded from relying on prior information if it has a reasonable belief that such information is still accurate, such as based on the close proximity to the time of sale. The SEC notes that sale information can be years or even decades old, in which case the issuer could not, of course, rely on such prior information.

However, this begs the practicality question of how exactly that issue will gain the information. The SEC declined to offer guidance, establish a safe harbor, or otherwise provide any assistance to companies in this regard.

It seems to me that issuers will now need to obtain contractual agreements from investors to provide updated representations; however, determining fair and reasonable consequences for a breach of such an agreement is problematic. Direct damages will be hard to determine. I doubt an issuer could claim that the shareholders’ refusal to provide updated information results in the issuer having to register, or continue reporting, and seek damages in the amount of reporting costs. Likewise, investors will balk at consequences directed toward their share ownership, such as a restriction on voting or dividend rights, though remedies along these lines seem the most workable.

As the proliferation of rules centered on a distinction between accredited and non-accredited investors continues, the definition of accreditation has become the subject of much debate and the SEC is considering, and ultimately will implement, changes to the definition. For further reading on the definition of accredited investor, see my blog HERE.

Employee Compensation Plans; Determining Holders of Record

The new rules establish a non-exclusive safe harbor that companies may follow to exclude persons who received securities pursuant to employee compensation plans when calculating the shareholders of record for purposes of triggering the registration requirements under Section 12(g). Exchange Act Section 12(g)(5) as amended of the JOBS Act provides that the definition of “held of record” shall not include securities held by persons who received them pursuant to an “employee compensation plan” in exempt transactions. By its express terms, this new statutory exclusion applies solely for purposes of determining whether an issuer is required to register a class of equity securities under the Exchange Act and does not apply to a determination of whether such registration may be terminated or suspended.

The new rule implements the JOBS Act by establishing a statutory exclusion for security holders who received their stock in unregistered employee stock compensation plans, and provides a safe harbor for determining whether holders of their securities received them pursuant to an employee compensation plan in exempt transactions.

The SEC declines to add a new definition of “employee compensation plan”; rather, the SEC incorporates Rule 701(c) and the guidance under that rule for issuers to rely on in their Section 12(g) analysis. The proposed safe harbor allows an issuer to conclude that shares were issued pursuant to an employee compensation plan in an unregistered transaction as long as all the conditions of Rule 701(c) are met, even if other requirements of Rule 701, such as 701 (b) (volume limitations) or 701(d) (disclosure delivery requirements) are not met.

The new Rule amends the definition of “held of record” such that for purposes of Section 12(g), an issuer may exclude securities that are either:

held by persons who received the securities pursuant to an employee compensation plan in transactions exempt from, or not subject to, the registration requirements of Section 5 of the Securities Act or that did not involve a sale within the meaning of Section 2(a)(3) of the Securities Act; or

held by persons who received the securities in a transaction exempt from, or not subject to, the registration requirements of Section 5 from the issuer, a predecessor of the issuer or an acquired company, as long as the persons were eligible to receive securities pursuant to Rule 701(c) at the time the excludable securities were originally issued to them.

The SEC also excludes securities issued under the “no-sale” exemption to registration theory from the “held of record” definition, including shares issued as a dividend to employees. That is, the SEC is excluding securities that did not involve a sale within the meaning of Section 2(a)(3), as well as exempt securities issued under Section 3 of the Securities Act. Examples of securities issued under Section 3 include exchange securities under sections 3(a)(9) and 3(a)(10).

The new rules are meant to encompass securities issued in exchange for or related to business combination transactions, as long as the employee or former employee was eligible to receive the securities under Rule 701(c) at the time of original issuance.

The new rules related to determining securities “held of record,” including both determinations of accredited investors and shareholders that have received shares under employee compensation plans, are complicated and will require meticulous record keeping, chains of title, and follow-up. I imagine that either transfer agents or separate third-party service providers will need to offer tracing services to assist companies in maintaining these records and meeting their registration requirements.

The Author

Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys
LAnthony@LegalAndCompliance.com

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SEC Gives Insight On 2016 Initiatives

Posted by Securities Attorney Laura Anthony | March 8, 2016 Tags: dodd-frank act, mary jo white, SEC, The Fast Act, the jobs act

SEC Chair Mary Jo White gave a speech at the annual mid-February SEC Speaks program and, as usual, gave some insight into the SEC’s focus in the coming year. This blog summarized Chair White’s speech and provides further insight and information on the topics she addresses.

Consistent with her prior messages, Chair White focuses on enforcement, stating that the SEC “needs to go beyond disclosure” in carrying out its mission. That mission, as articulated by Chair White, is the protection of investors, maintaining fair, orderly and efficient markets, and facilitating capital formation. In 2015 the SEC brought a record number of enforcement proceedings and secured an all-time high for penalty and disgorgement orders. The primary areas of focus included cybersecurity, market structure requirements, dark pools, microcap fraud, financial reporting failures, insider trading, disclosure deficiencies in municipal offerings and protection of retail investors and retiree savings. In 2016 the SEC intends to focus enforcement on financial reporting, market structure, and the structuring, disclosure and sales of complex financial instruments.

2016 Disclosure Agenda

Chair White hit on the tremendous volume of regulatory changes and congressional mandates. Since 2010 Congress has given the SEC nearly 100 statutory mandates covering a multitude of complex rule requirements, with the FAST Act, JOBS Act, and the Dodd-Frank Act just being 3 examples. White confirms that the amount of recent rulemaking is of historic proportions, completing or overhauling many regulatory areas and providing dramatic changes to others. Again, 3 small examples are the FAST Act, JOBS Act and the Dodd-Frank Act, with the multitude of regulatory changes flowing from these 3 statutory directives.

In 2016 the SEC will continue implementing rules as directed by Congress. In addition to finalizing the remaining security swap and security-based swap dealer requirements under the Dodd-Frank Act, the SEC hopes to continue rulemaking related to the asset management industry, the structure of the equity markets and disclosure requirements (under Regulation S-K and Regulation S-X).

Related to the asset management industry, in May 2015 the SEC proposed increased reporting for investment advisers and mutual funds, including a requirement that funds report risk metrics, the use of derivatives, securities lending and liquidity of holdings.

Related to the structure of equity markets, the SEC has increased oversight over proprietary traders (see my blog HERE) and has proposed major revisions to regulations for alternative trading systems (this will be the subject of a future blog). Also related to equity markets, Chair White referenced the recent ANPR on new transfer agent rules (see my blog HERE) and the Tick Size Pilot program (see my blog HERE). Moreover, Chair White revealed that the SEC intends to shorten the clearing settlement life cycle from T+3 to T+2.

Disclosure effectiveness has been an ongoing central topic since the JOBS Act required the SEC to launch its Disclosure Effectiveness Initiative. The SEC intends to continue its focus in this arena and expects both additional rulemaking and industry guidance in 2016.

I have written several times on the SEC initiative and the subject of improving the disclosure requirements for reporting companies. Recently the SEC sought comment on financial disclosure requirements for subsidiaries and affiliate entities (see my blog HERE). Moreover, several of the provisions in the recent FAST Act were related to these initiatives. In particular, The FAST Act adopted many of the provisions of a bill titled the Disclosure Modernization and Simplification Act, including rules to: (i) allow issuers to include a summary page to Form 10-K (Section 72001); and (ii) scale or eliminate duplicative, antiquated or unnecessary requirements for EGCs, accelerated filers, smaller reporting companies and other smaller issuers in Regulation S-K (Section 72002). In addition, the SEC is required to conduct yet another study on all Regulation S-K disclosure requirements to determine how best to amend and modernize the rules to reduce costs and burdens while still providing all material information (Section 72003). See my blog on the FAST Act and these provisions HERE.

In September 2015, the SEC Advisory Committee on Small and Emerging Companies (the “Advisory Committee”) met and finalized its recommendation to the SEC regarding changes to the disclosure requirements for smaller publicly traded companies. My blog on these recommendations can be read HERE.

Prior to that, in March 2015, the American Bar Association submitted its second comment letter to the SEC making recommendations for changes to Regulation S-K. For a review of these recommendations, see my blog HERE.

Mission and Philosophy

Chair White made a point of conveying the message that the SEC is not just about disclosure. They have broad regulatory authority over trading markets, broker-dealers, SRO’s, the settlement and clearing process and the PCAOB. The SEC intends to continue to work in each of these areas, including additional regulations on the swaps markets, clearing agencies, transfer agents, and technology systems. In addition, the SEC has and will continue to seek public comment on proposed rules, ideas related to proposed rules, and concepts in general. As Chair White states, “[W]e are therefore increasingly considering using measures beyond disclosure to fulfill our mission of providing strong investor protection, safeguarding market integrity, and achieving other regulatory objectives.”

The Author

Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys
LAnthony@LegalAndCompliance.com

Contact Legal & Compliance LLC. Technical inquiries are always encouraged.

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SEC Issues Rules Implementing Certain Provisions Of The FAST Act

Posted by Securities Attorney Laura Anthony | February 2, 2016 Tags: Fast Act, SEC, The Fast Act

On December 4, 2015, President Obama signed the Fixing America’s Surface Transportation Act (the “FAST Act”) into law, which included many capital markets/securities-related bills. The FAST Act is being dubbed the JOBS Act 2.0 by many industry insiders. The FAST Act has an aggressive rulemaking timetable and some of its provisions became effective immediately upon signing the bill into law on December 4, 2015. Accordingly there has been a steady flow of new SEC guidance, and now implementing rules.

On January 13, 2016, the SEC issued interim final rules memorializing two provisions of the FAST Act. In particular, the SEC revised the instructions to Forms S-1 and F-1 to allow the omission of historical financial information and to allow smaller reporting companies to use forward incorporation by reference to update an effective S-1. This blog summarizes these rules.

On December 10, 2015, the SEC Division of Corporate Finance addressed the FAST Act by making an announcement with guidance and issuing two new Compliance & Disclosure Interpretations (C&DI). My blog on the FAST Act and the first two C&DI on the Act can be read HERE. On December 21, 2015, the SEC issued 4 additional C&DI on the FAST Act. Each of the new C&DI addresses the FAST Act’s impact on Section 12(g) and Section 15(d) of the Exchange Act as related to savings and loan companies. My blog on this guidance can be read HERE.

The Amendments – an Overview

Form S-1 is the general form for the registration of securities under the Securities Act of 1933, as amended (“Securities Act”) and Form F-1 is the corresponding form for foreign private issuers.

Section 71003 of the FAST Act

Section 71003 of the FAST Act allows an emerging growth company (“EGC”) that is filing a registration statement under either Form S-1 or F-1 to omit financial information for historical periods that would otherwise be required to be included, if it reasonably believes the omitted information will not be included in the final effective registration statement used in the offering, and if such final effective registration statement includes all up-to-date financial information that is required as of the offering date. This provision automatically went into effect 30 days after enactment of the FAST Act. As directed by the FAST Act, the SEC has now revised the instructions to Forms S-1 and F-1 to reflect the new law.

The Section 71003 provisions do not allow for the omission of stub period financial statements if that stub period will ultimately be included in a longer stub period or year-end audit before the registration statement goes effective. In a C&DI, the SEC clarified that the FAST Act only allows the exclusion of historical information that will no longer be included in the final effective offering. The C&DI clarifies that “Interim financial information ‘relates’ to both the interim period and to any longer period (either interim or annual) into which it has been or will be included.” For example, an issuer could not omit first-quarter financial information if that first quarter will ultimately be included as part of a second- or third-quarter stub period or year-end audit.

An SEC C&DI has clarified that Section 71003 allows for the exclusion of financial statements for entities other than the issuer if those financial statements will not be included in the final effective registration statement. For example, if the EGC has acquired a business, it may omit that acquired business’ historical financial information as well. In a C&DI, the SEC confirms that: “Section 71003 of the FAST Act is not by its terms limited to financial statements of the issuer. Thus, the issuer could omit financial statements of, for example, an acquired business required by Rule 3-05 of Regulation S-X if the issuer reasonably believes those financial statements will not be required at the time of the offering. This situation could occur when an issuer updates its registration statement to include its 2015 annual financial statements prior to the offering and, after that update, the acquired business has been part of the issuer’s financial statements for a sufficient amount of time to obviate the need for separate financial statements.”

As a reminder, an EGC is defined as an issuer with less than $1 billion in total annual gross revenues during its most recently completed fiscal year. If an issuer qualifies as an EGC on the first day of its fiscal year, it maintains that status until the earliest of the last day of the fiscal year of the issuer during which it has total annual gross revenues of $1 billion or more; the last day of its fiscal year following the fifth anniversary of the first sale of its common equity securities pursuant to an effective registration statement; the date on which the issuer has, during the previous 3-year period, issued more than $1 billion in non-convertible debt; or the date on which the issuer is deemed to be a “large accelerated filer.”

Section 84001 of the FAST Act

Section 84001 of the FAST Act requires the SEC to revise Form S-1 to permit smaller reporting companies to incorporate by reference, into an effective registration statement, any documents filed by the issuer following the effective date of such registration statement. That is, Section 84001 allows forward incorporation by reference. At first, I thought this would be a significant change, as currently smaller reporting companies are specifically prohibited from incorporating by reference and must prepare and file a post-effective amendment to keep a resale “shelf” registration current, which can be expensive. However, the SEC rule release includes eligibility requirements, including a prohibition for use by penny stock issuers, which will greatly limit the use of forward incorporation by reference, significantly reducing the overall impact of this change.

As a reminder, a “smaller reporting company” is defined as an issuer that had a public float of less than $75 million as of the last business day of its most recently completed second fiscal quarter or had annual revenues of less than $50 million during the most recently completed fiscal year for which audited financial statements are available.

As directed by the FAST Act, the SEC has now revised Item 12 of Form S-1 to reflect the changes and to include eligibility requirements for an issuer to be able to avail itself of the new provisions. That is, there are currently eligibility requirements for an issuer to be able to use historical incorporation by reference in a Form S-1. The new rules do not alter these existing eligibility requirements and rather attach the existing eligibility requirements related to historical incorporation by reference to the ability to be able to utilize the new provisions, allowing forward incorporation by reference.

The instructions to Form S-1 include the eligibility requirements to use historical, and now forward, incorporation by reference and include:

The company must be subject to the reporting requirements of the Exchange Act (not a voluntary filer);

The company must have filed all reports and other materials required by the Exchange Act during the prior 12 months (or such shorter period that such company was reporting);

The company must have filed an annual report for its most recently completed fiscal year;

The company may not currently be, and during the past 3 years neither the company nor any of its predecessors were, (i) a blank check company; (ii) a shell company; (iii) have offered a penny stock;

The company cannot be registering an offering for a business combination transaction; and

The company must make its reports filed under the Exchange Act that are incorporated by reference, available on its website, and include a disclosure of such availability that it will provide such document upon request.

The Author

Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys
LAnthony@LegalAndCompliance.com

Contact Legal & Compliance LLC. Technical inquiries are always encouraged.

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The SEC Issues Guidance On The FAST Act As It Relates To Savings And Loan Companies

Posted by Securities Attorney Laura Anthony | January 19, 2016 Tags: SEC, The Fast Act

On December 10, 2015, the SEC Division of Corporate Finance addressed the FAST Act by making an announcement with guidance and issuing two new Compliance & Disclosure Interpretations (C&DI). As the FAST Act is a transportation bill that rolled in securities law matters relatively quickly and then was signed into law even quicker, this was the first SEC acknowledgement and guidance on the subject.

My blog on the FAST Act and the first two C&DI on the Act can be read HERE.

On December 21, 2015, the SEC issued 4 additional C&DI on the FAST Act. Each of the new C&DI addresses the FAST Act’s impact on Section 12(g) and Section 15(d) of the Exchange Act.

Section 85001 of the FAST Act amends Section 12(g) and Section 15(d) of the Securities Exchange Act such that savings and loan holding companies are treated similar to banks for purposes of the registration, termination of registration and suspension of reporting obligations under the Exchange Act.

In particular, the FAST Act amends Section 12(g) and Section 15(d) of the Exchange Act as follows:

Savings and loan holding companies, as such term is defined in Section 10 of the Home Owners’ Loan Act, will have a Section 12(g) registration obligation as of any fiscal year-end after December 4, 2015, with respect to a class of equity security held of record by 2,000 or more persons.

The holders of record threshold for Section 12(g) deregistration for savings and loan holding companies has been increased from 300 to 1,200 persons.

The holders of record threshold for the suspension of reporting under Section 15(d) for savings and loan holding companies has been increased from 300 to 1,200 persons.

The new guidance explains the timing of the new provisions. The SEC clarifies:

Under Section 12(g)(1)(B), a savings and loan holding company will have a Section 12(g) registration obligation if, as of any fiscal year-end after December 4, 2015, it has total assets of more than $10 million and a class of equity security held of record by 2,000 or more persons. We consider that the effect of this provision is to eliminate, for savings and loan holding companies, any Section 12(g) registration obligation with respect to a class of equity security as of a fiscal year-end on or before December 4, 2015. Therefore, if a savings and loan holding company has filed an Exchange Act registration statement and the registration statement is not yet effective, then it may withdraw the registration statement. If a savings and loan holding company has registered a class of equity security under Section 12(g), it would need to continue that registration unless it is eligible to deregister under Section 12(g) or current rules.

Similarly as relates to the termination of registration:

If the class of equity security is held of record by less than 1,200 persons, the savings and loan holding company may file a Form 15 to terminate the Section 12(g) registration of that class. Until rule amendments are made to reflect the change to Section 12(g)(4), the savings and loan holding company should include an explanatory note in its Form 15 indicating that it is relying on Exchange Act Section 12(g)(4) to terminate its duty to file reports with respect to that class of equity security.

Pursuant to Section 12(g)(4), the Section 12(g) registration will be terminated 90 days after the savings and loan holding company files a Form 15. Until that date of termination, the savings and loan holding company is required to file all reports required by Exchange Act Sections 13(a), 14 and 16.

Alternatively, a savings and loan holding company could rely on Exchange Act Rule 12g-4, which permits the immediate suspension of Section 13(a) reporting obligations upon filing a Form 15, if it meets the requirements of that rule. Note that Rule 12g-4 has not yet been amended to incorporate the new 1,200 holder deregistration threshold.

Finally, as relates to the suspension of reporting obligations:

In general, the Section 15(d) reporting obligation is suspended if, and for so long as, the issuer has a class of security registered under Section 12. When an issuer terminates Section 12 registration, it must address any Section 15(d) obligation that would apply once the Section 15(d) suspension is lifted.

For the current fiscal year, a savings and loan holding company can suspend its obligation to file reports under Section 15(d) with respect to a class of security that was sold pursuant to a Securities Act registration statement and that was held of record by less than 1,200 persons as of the first day of the current fiscal year. Such suspension would be deemed to have occurred as of the beginning of the fiscal year in accordance with Section 15(d) (as amended by the FAST Act). If, during the current fiscal year, a savings and loan holding company has a registration statement that becomes effective or is updated pursuant to Securities Act Section 10(a)(3), then it will have a Section 15(d) reporting obligation for the current fiscal year.

If a savings and loan holding company with a class of security held of record by less than 1,200 persons as of the first day of the current fiscal year has a registration statement that was updated during the current fiscal year pursuant to Securities Act Section 10(a)(3), but under which no sales have been made during the current fiscal year, the savings and loan holding company may suspend its Section 15(d) reporting obligation consistent with the guidance in Staff Legal Bulletin No. 18 (March 20, 2010) and GlenRose Instruments Inc. (July 16, 2012).

The Author

Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys
LAnthony@LegalAndCompliance.com

Contact Legal & Compliance LLC. Technical inquiries are always encouraged.

Follow me on Facebook, LinkedIn, YouTube, Google+, Pinterest and Twitter.

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