Anna T. Pinedo

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Anna Pinedo is a partner in Mayer Brown’s New York office and a member of the Corporate & Securities practice. She concentrates her practice on securities and derivatives. Anna represents issuers, investment banks/financial intermediaries and investors in financing transactions, including public offerings and private placements of equity and debt securities, as well as structured notes and other hybrid and structured products.

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Even before the Trump tweet, discussions regarding interim reporting requirements for U.S. public companies had been ongoing for several years.  In fact, going back to 2015, the Securities and Exchange Commission’s Advisory Committee on Small and Emerging Companies considered the advantages and disadvantages associated with discontinuing quarterly reporting.  In 2016, the Director of the Commission’s Division of Corporation Finance addressed the issue in a speech in Europe, noting that, “The United Kingdom has stopped mandating that companies provide quarterly financial reports to investors. Lately, some commentators have asked the Commission to re-think the need for quarterly reporting by U.S. issuers, which has been a staple of the U.S. regulatory system since 1970, advocating that this frequency leads to short-term thinking by investors and company management. These commentators note that financial reporting that focuses on short-term performance is not conducive to building sustainable businesses because it steers management to focus on short-term goals and performance.”  Flash forward a few years, and Title XXII Section 2201 of the JOBS Act 3.0 requires that the Securities and Exchange Commission conduct an analysis regarding the costs and benefits of quarterly reporting on Form 10-Q, especially for emerging growth companies.  This provision may have been influenced by a report published by various trade groups, including SIFMA, about which we recently blogged.  In that trade group report, a recommendation is made that emerging growth companies be given the option to issue a press release with their quarterly results rather than be required to file a quarterly report on Form 10-Q.  The trade group report states that quarterly reports have become longer and more detailed, and therefore producing such reports has become more expensive.  In the trade group report, the focus was on costs and reporting burdens.

At the same time, the debate relating to quarterly earnings guidance has been reinvigorated.  Some have argued that quarterly reporting distracts managers from focusing on long-term goals and observe that public companies are all too concerned with short-term gains at the expense of long-term investments. The same commentators have focused in particular on the potential detrimental effects of providing quarterly earnings guidance.  Perhaps these concerns are overstated.  It seems that over time, fewer and fewer companies continue to provide quarterly earnings guidance.  According to a recent study, approximately one-third of public companies issue quarterly earnings guidance.  Nonetheless, in a piece titled “Short-Termism is Harming the Economy,” Jamie Dimon and Warren Buffett joined the Business Roundtable in calling for companies to refrain from giving quarterly guidance. The National Association of Corporate Directors and the National Investor Relations Institute joined in the call to eliminate earnings guidance. However, the Business Roundtable report does not advocate terminating the filing of quarterly reports on Form 10-Q.  Regardless of whether quarterly reports on Form 10-Q are mandated or not, it would still be the case that companies would report quarterly results.  The two issues—quarterly filings and quarterly guidance—appear to have been conflated making it more difficult to parse the real issues.

As we previously blogged, a Trump tweet called on the Securities and Exchange Commission to undertake a study regarding the costs and benefits of quarterly versus semi-annual filings.  Though no particular connection was drawn in the tweet between semi-annual periodic reports and a focus on long-term investment, the Commission responded with a statement from Chair Clayton titled, “Statement on Investing in America for the Long Term,” that refocuses the discussion and is reprinted below in its entirety:

“The President has highlighted a key consideration for American companies and, importantly, American investors and their families — encouraging long-term investment in our country. Many investors and market participants share this perspective on the importance of long-term investing. Recently, the SEC has implemented — and continues to consider — a variety of regulatory changes that encourage long-term capital formation while preserving and, in many instances, enhancing key investor protections. In addition, the SEC’s Division of Corporation Finance continues to study public company reporting requirements, including the frequency of reporting. As always, the SEC welcomes input from companies, investors, and other market participants as our staff considers these important matters.”

Today, the Securities and Exchange Commission adopted amendments to certain disclosure requirements that have become duplicative, overlapping, or outdated. In July 2016, the Commission proposed amendments for this purpose and also solicited comments on disclosure requirements that overlap with, but require information incremental to, U.S. GAAP. The Commission also was required pursuant to title LXXII, section 72002(2) of the Fixing America’s Surface Transportation (FAST) Act to undertake a review and make certain recommendations to addressed outdated disclosure requirements. In its adopting release, the Commission notes that it is adopting most of the proposed amendments substantially as proposed in 2016. The adopting release notes that in certain instances the Commission is making modifications to the 2016 proposed amendments, and in other cases, the Commission is not adopting the proposed amendments. In a few instances, the Commission is adopting additional changes to make technical corrections. The amendments will be effective 30 days from publication in the Federal Register. The full text of the adopting release is available here. The fact sheet is available here.

In a very early morning tweet, the President chose to comment on the requirement to file quarterly reports on Form 10-Q. (See the tweet here.)  We noted in a prior post that the House JOBS Act 3.0 bill already included a requirement that the Securities and Exchange Commission conduct a study regarding the costs and benefits associated with quarterly filing requirements, especially for emerging growth companies. Not clear whether a tweet asking the Commission to study this will change the dynamic.

The Ninth Circuit recently decided a case, Automotive Industries Pension Trust Fund v. Toshiba Corp., in which the Circuit court considered the application of the Supreme Court’s territoriality standard in the Morrison v. National Australia Bank Ltd. case.  The court considered whether purchasers of Toshiba unsponsored ADRs on the over-the-counter market were precluded from bringing Section 10(b) and 10b-5 claims under the Securities Exchange Act of 1934.  The Ninth Circuit concluded that the Morrison standard did not preclude the claims.  Finding that the OTC market does not constitute an exchange, the Circuit court nonetheless concluded that under Morrison one would look to where purchasers incurred the liability to take and pay for the securities and where the sellers incurred the liability to deliver the securities to the purchasers.  To the extent that these elements took place in the United States, the transaction would be deemed to be a domestic transaction and Exchange Act claims arising in connection with the transaction can be brought in the United States.  Although, in this particular instance, the Ninth Circuit determined that plaintiffs failed to show that the relevant transactions were “domestic” and remanded to the district court on this matter, the Circuit court decision stands for the proposition that concluding that a transaction is “domestic” is enough to bring a securities claim in the United States.  For issuers that have unsponsored ADR programs and had no role in setting up the ADR program and derive no benefit from the unsponsored ADR program, the decision may raise serious concerns.  So, at least in the Ninth Circuit, there no longer seems to be a difference between a sponsored and an unsponsored ADR program for purposes of liability.

Recently, in connection with the Securities and Exchange Commission’s consideration of proposed amendments to the definition of “smaller reporting company,” the Commission had an opportunity to consider including in the adopting release an exemption from the Section 404(b) auditor attestation.  The Commission deferred a decision on the Section 404(b) auditor attestation.  A number of the Commissioners noted that it would be helpful to have the benefit of statistical data regarding the costs associated with the Section 404(b) process and observed that the commenters on the SRC amendments proposed a few years ago included anecdotal commentary on the burdens imposed by Section 404(b) auditor attestation requirements.  Congress also has considered a number of legislative measures that would provide for exemptions for different issuers from the Section 404(b) auditor attestation requirement.  For example, one measure would provide an exemption for low revenue issuers.  A different legislative proposal would extend the period during which emerging growth issuers are exempt from the requirement from five years to ten years.  Against this backdrop, authors Weili Ge, Allison Koester, and Sarah McVay attempt to quantify the benefits and costs of exempting smaller firms from the auditor attestation requirements and under Section 404(b).  In a paper titled “Benefits and Costs of Sarbanes-Oxley Section 404(b) Exemption:  Evidence from Small Firms’ Internal Control Disclosures,” the authors compare the relative increase in audit fees of exempt firms and non-exempt firms from 2003 to 2014.  The authors quantify the benefit of the exemption as a savings of $388 million in Section 404(b)-related audit fee savings for the 5,302 exempt firms sampled.  The authors then consider internal control misreporting, which critics of the exemption point to as the principal concern.  The authors conclude approximately 9.3 percent of the exempt firms that disclose effective internal controls actually have ineffective internal controls.  These are, according the authors, evidence of misreporting.  Section 404(b) compliance lowers misreporting of internal controls from 9.3 percent to 5.8 percent.  The authors also assess the costs of internal control misreporting attributed to the Section 404(b) exemption, lower operating performance due to non-remediation and market values that fail to reflect a firm’s underlying internal control status by looking at changes in future earnings and future stock returns for suspected internal control misreporting.  The authors estimate that the costs of a Section 404(b) exemption for suspected internal control misreporting as $719 million in lower operating performance due to non-remediation and $935 million delay in aggregate market value decline due to the failure to disclose ineffective internal controls.

The Securities and Exchange Commission recently published guidance providing some useful clarifications related to the Commission’s recent changes to the definition of “smaller reporting company” (see our prior posts, here and here).  In the guidance, the Commission confirms that foreign issuers can qualify as SRCs; however, investment companies (including BDCs), ABS issuers and majority-owned subsidiaries of non-SRC parent companies cannot. The new definition of SRC becomes effective on September 10, 2018.

Assessing SRC Status.  A company assesses whether it qualifies as an SRC annually as of the last business day of its second fiscal quarter.  If it qualifies as an SRC on that date, it may elect to use the SRC scaled disclosure accommodations in its subsequent filings, beginning with its second quarter Form 10-Q.  A company must reflect its SRC status in its Form 10-Q for the first fiscal quarter of the next year.  Reporting companies calculate their public float annually as of the last business day of their second fiscal quarter. A reporting company that does not qualify under the “public float” test would determine whether it qualifies as an SRC based on its annual revenues in its most recent fiscal year completed before the last business day of the second fiscal quarter.

Assessing SRC Status in connection with Initial Registration Statement.  A company filing its initial registration statement for shares of common equity will make its initial SRC determination in connection with the filing of its registration statement.  Public float is measured as of a date within 30 days of the date of the filing of the registration statement and is computed by multiplying the aggregate worldwide number of shares of voting and non-voting common equity held by non-affiliates before the registration plus, in the case of a Securities Act registration statement, the number of shares of voting and non-voting common equity included in the registration statement by the estimated public offering price of the shares.  In the case of a determination based on an initial Securities Act registration statement, a company that determined it was not an SRC has the option to re-determine its status under the “public float” test at the conclusion of the offering covered by the registration statement based on the actual offering price and number of shares sold.  A company filing its initial registration statement for common equity that does not qualify under the “public float” test would determine whether it qualifies as an SRC based on its annual revenues in its most recent audited financial statements available on the initial public float calculation date.

Changes in Float/Revenue and Qualification as an SRC.  The Commission provides a chart showing how a company can transition and qualify as an SRC depending on changes in its float and/or revenues.

Transitioning to the Amended SRC Definition.  For purposes of the first determination of SRC status after September 10, 2018, a company will qualify as an SRC if it meets the initial qualification thresholds in the revised definition as of the date it is required to measure its public float and, if applicable, had annual revenues of less than $100 million in its most recently completed fiscal year, even if such company previously did not qualify as an SRC.  A company that completed its initial public offering since the end of its most recent second fiscal quarter may elect to determine whether it qualifies as an SRC based on its public float as of the date it estimated its public float prior to filing or as of the conclusion of the offering based on the actual offering price and number of shares sold.  A company newly qualifying as an SRC under the amended definition after September 10, 2018, regardless of whether it qualified under the previous definition, has the option to use the SRC scaled disclosure accommodations in its next periodic or current report due after September 10, 2018, or, for transactional filings without a due date, in filings or amended filings made on or after September 10, 2018.

See the full guidance, including the charts, here.

Neal Newman assesses the success of Regulation A in a paper titled, “Regulation A+:  New and Improved after the JOBS Act or a Failed Revival?”  The author reviews the 267 Regulation A filings made between August 13, 2012 and May 24, 2016 and samples a subset of 48 filings from this period.  Of the sample, 19 were Tier 1 filings (39.6 percent) and 29 were Tier 2 filings (60.4 percent).  For the Tier 1 filings in the sample set, the average minimum offering amount was $829,861 and the average maximum amount was $17,677,397.  Average total assets over the sample were $6,215,061.  Based on the Tier 1 offerings in the sample, the author concludes that very few of the filers sought to raise the maximum $20 million permitted under Tier 1 and few of the Tier 1 issuers were of a size to need $20 million in capital.  It took, on average, 375 days to get qualified.  By contrast, for the Tier 2 offerings in the sample set, the average maximum was just over $23 million.  On average, these Tier 2 offerings took 120 days to be qualified.  Based on the author’s assessment, he notes that the only persuasive rationale for relying on Regulation A rather than on Regulation D would be the ability to sell securities to non-accredited investors.  The author supplemented his quantitative analysis with interviews of issuers that undertook Regulation A offerings.  Contrary to the author’s expectations, the companies that undertook Regulation A offerings were pleased with their financing approach despite the ongoing reporting requirements and the time (and expense) associated with the Regulation A offerings.  The author concludes with a cautionary example, citing an early Regulation A issuer that since has failed to achieve profitability.

Yesterday the Securities and Exchange Commission announced that it would convene a roundtable in order to gather information regarding whether the Commission’s rules on the proxy process should be refined. The announcement outlines a number of areas for possible consideration, including the proxy voting process, proxy voting and the low retail participation rate, the shareholder proposal process and shareholder engagement, the role of proxy advisory firms, the use of technology throughout the proxy process, and other related matters.  The announcement and the submission form for comments are available here.

Large, late stage private capital raises for privately held companies continue to be the preferred method of financing growth for many new companies, particularly those in the tech sector.  A recent analysis conducted by data provider CB Insights examined what the industry calls “mega-deals” or “private-IPOs,” which are private placements raising over $100 million in proceeds.  These deals, which have a median deal size of $160 million, have largely contributed to the emergence of unicorns, or private companies valued at over $1 billion.  This trend in private capital raising has become more prevalent since the enactment of the JOBS Act in 2012, which has made it easier for companies to remain private longer.

A closer look at the data compiled by CB Insights shows that, over the last five years in the United States, over 90% of capital raises for private companies were later stage or mezzanine investments.  These deals have raised over $300 billion in capital for companies, with $151.7 billion of these deals fitting into the rubric of “private-IPOs.”  Based on the CB Insights analysis, it would appear that transaction volumes for 2018 are on pass to surpass those in 2017.  While legislators contemplate the capital formation-focused package of legislation that has been dubbed “JOBS Act 3.0,” and consider measures to make going public more compelling, it’s clear that there is no shortage of private capital to finance promising companies.