The Securities and Exchange Commission took the long-awaited step of proposing rules for comment that would extend the ability to test the waters beyond emerging growth companies, or EGCs.  This topic, of extending the test the waters communications, had been the subject of proposed legislation in the last session of Congress and had made its way into the package of legislative reforms that were referred to as “JOBS Act 3.0.”

As proposed, test the waters would be available to all prospective issuers, not just EGCs. Proposed Securities Act Rule 163B would permit any issuer, or any person authorized to act on its behalf, to engage in oral or written communications with potential investors that are, or are reasonably believed to be, QIBs or IAIs, either prior to or following the filing of a registration statement, to determine whether such investors might have an interest in a contemplated registered securities offering. The proposed rule would be non-exclusive and an issuer could rely on other Securities Act communications rules or exemptions when determining how, when, and what to communicate related to a contemplated securities offering.  Under the proposed rule there would be no filing or legending requirements; test-the-waters communications may not conflict with material information in the related registration statement; and issuers subject to Regulation FD would need to consider whether any information in a test-the-waters communication would trigger disclosure obligations under Regulation FD or whether an exemption under Regulation FD would apply.

The proposal will have a 60-day public comment period following its publication in the Federal Register.  A Mayer Brown Legal Update will follow shortly.

The Staff of the Securities and Exchange Commission (“SEC”) released a question and answer guide relating to the recently adopted rule amendments requiring disclosure of company policies on hedging transactions by officers and directors in the company’s securities.  The guidance is available here:

US reporting companies that are planning or have completed a significant acquisition of a business may need to file separate target financial statements and related pro forma financial statements under Rule 3-05 and Article 11 of Regulation S-X.  The specific SEC rules and financial reporting obligations triggered by a significant acquisition can be quite complex and challenging, requiring careful evaluation by an acquiring company.  These rules may also impact the ability of registrants to access the capital markets in a timely fashion, affecting their ability to register or offer securities, including conducting a securities offering, the proceeds of which would be used to fund a significant acquisition or registering securities to be used as consideration for the acquisition.

This note discusses the SEC’s financial reporting and disclosure requirements triggered by a company’s significant business acquisition.  We outline key concepts and practice pointers to determine if and at what level an acquisition is significant, what and how many years of historical financial statements of the target are required to be included in the registrant’s SEC filing or offering document, what related pro forma financial information is required, when and how these target and pro forma financial statements are to be filed or updated, and relevant market practice considerations.

Read our On point.

Thursday, March 7, 2019
1:00 p.m. – 2:00 p.m. ET

During this webcast, we will review the overall areas of focus identified by the SEC Staff for public companies, the disclosure issues that members of the SEC Staff have highlighted as important for upcoming annual reports on Form 10-K and Form 20-F, and discuss the particular hot button issues for life sciences companies.

During our session, partners Anna Pinedo and David Bakst, and Polia Nair (Ernst & Young) will focus on:

  • SEC comments letter trends;
  • Brexit, Libor and cyber disclosures;
  • Recent accounting pronouncements;
  • Milestones and collaboration and license agreement related disclosures;
  • Revenue recognition and contingent consideration;
  • Other MD&A disclosures.

To register, please click here.


On February 6, 2019, the staff of the US Securities and Exchange Commission issued two identical Regulation S-K compliance and disclosure interpretations (C&DIs), which address the extent to which a director’s self-identified diversity characteristics need to be disclosed as director background or in connection with the discussion of a company’s policy with regard to the consideration of diversity in identifying director nominees. This Legal Update discusses the text of these C&DIs, along with related practical considerations.

To learn more, read our Legal Update.

In a recently published white paper Andrew Kroculick and Julia Brezing of Nasdaq Private Market provide an overview of the auction processes supported by the Nasdaq Private Market.  Auctions may be a useful alternative to the more traditional private tender offer.  Particularly given concerns related to information asymmetries, an auction or an auction-based component to a tender may offer some advantages.

Access the white paper here.

CBInsights recently held a webcast that offered a recap of 2018 events affecting the fintech sector. Global fintech investment reached a record at $39 billion in 2018. Venture-backed fintech deals declined in the fourth quarter of 2018 but remain high compared to historic levels. Early stage fintech deal share declined compared to 2017. There are now 39 fintech unicorns globally, valued in aggregate $147.37 billion. There were 16 fintech companies that joined the unicorn ranks in 2018. There were 52 fintech financing rounds that each raised in excess of $100 million. Only three fintech unicorns undertook IPOs in 2018. CBInsights identified ten fintech trends to watch in 2019. Outside of the United States, fintech startups are applying for bank charters. Fintech companies are continuing to strengthen their regulatory compliance efforts as regulatory scrutiny has increased. Fintech startups are providing access to new asset classes and fintech companies are becoming more entrenched in the real estate and mortgage markets. CBInsights predicts that mega-rounds will delay IPOs.

In a recent paper titled “Damage Control: Changes in Disclosure Tone After Financial Misconduct,” authors Rebecca L. Files, Alex Holcomb, Gerald S. Martin, and Paul Mason assess how companies change the tone of their required disclosures in order to mitigate the effect of financial misconduct. In evaluating tone, the study focuses on the percentage of negative, litigious, and uncertain words in corporate disclosures of 232 companies that were sanctioned by the US Securities and Exchange Commission or the Department of Justice. Following a review of disclosures, the authors found a substantial increase in the use of additional negative words in the periods during which the companies were facing regulatory inquiries or investigations and in the period following the announcement of an enforcement action. The authors also found that companies ultimately subject to an SEC or DOJ order generally used more negative words in their disclosures during the investigative phase. The authors posit that drafters of disclosure modify disclosure preemptively ahead of bad news in part as damage control. The paper also finds some evidence that increasing the use of negative language in disclosures mitigates lost reputation during the enforcement process.

In a paper titled “The Effect of Enforcement Transparency: Evidence from SEC Comment-Letter Reviews,” authors Miguel Euro, Jonas Hesse and Gaizka Ormazabal study the effects of the change in policy by the Securities and Exchange Commission (SEC) in 2004 to make comment letters publicly available. The disclosure of comment letters allows market participants to impose market discipline. Institutional investors in particular are attentive to comment letters, especially those related to financial reporting matters. The authors test their thesis by reviewing changes in financial reporting in the earnings periods following the publication of comment letters. The authors look at all comment letter reviews from 1998 to 2013. Following receipt of comment letters that are subsequently publicly disclosed, earnings reports are more informative (for example, contain longer narratives), more transparent and have a lower likelihood of restatements. Also, interestingly, when comment letters were available only by FOIA request, the effect of comment letters was less pronounced. This suggests that market discipline results from companies knowing that institutional investors will monitor comment letters and ask questions, and, as a result, companies improve the quality of their reports. In effect, market discipline reinforces the regulatory scrutiny. The authors also comment in passing on the fact that following the change in policy by the SEC the number of comment letters and number of comments declined. The authors attribute this to the adoption of the Sarbanes-Oxley Act at around the same time. However, it may be attributable in part to the fact that preparers of SEC reports may be better informed by reviewing publicly available comment letters and considering the applicability of such comments to the filings they are preparing. Access to the full paper can be found here:

The Office of the Investor Advocate released its “Report on Activities for the Fiscal Year 2018” (the “Report”). During the 2018 fiscal year, the Investor Advocate focused significant attention on proposed Regulation Best Interest and on the standard of conduct applicable to broker-dealers and investment advisers. In the Investor Testing section of the Report, the Office summarized some of the key findings from its survey, “Research on the Market for Investment Advice.” These findings, which are summarized below, should help inform the Commission’s consideration of proposed Regulation Best Interest:

Most investors do not currently receive financial advice regarding their assets. Consumers were asked whether they are currently consulting a financial professional regarding their investment strategies, the type of account to open, or specific financial investments. The aim of these questions was to determine the percentage of investors that receive financial advice from professionals. Only 38.7% of consumers responded “yes” to one or more of these questions. This research shows that the majority of investment decisions are not informed by professional advice. The cost associated with finding and screening an investment professional was among the leading reasons that investors cited for not seeking professional advice. The finding that the majority of investment decisions are not professionally informed may be a cause of concern for regulators.

Most consumers of investment advice turn to “dual-hatted” professionals. The majority of financial advice consumers receive is delivered by a dual registered broker-dealer and investment adviser. Only 3.8% of advice seekers work with a professional that is exclusively registered as a broker-dealer. The majority of consumers were unable to identify the correct legal status of their financial professional.

The general public does not understand the obligations arising from the requirement to act in the customer’s “best-interest.” A survey of investor understandings of the term “best interest” found that 73% of investors believe that the reference to “best interest” requires financial professionals to help them choose the lowest cost product; all else being equal, 6.1% thought that it required professionals to avoid taking higher compensation for selling one product when similar but less costly products are available, and 86% thought that it required professionals to monitor their account on an ongoing basis. However, the proposed best interest standard applies to broker-dealers who are generally not required to actively monitor accounts as part of their service offerings. Furthermore, it is unclear whether the best interest standard would require professionals to choose the lowest cost product.