C&DIs

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On September 25, 2018, the Securities and Exchange Commission’s (“SEC”) Division of Trading and Markets released Compliance and Disclosure Interpretations (“C&DIs”) to frequently-asked questions regarding Regulation Crowdfunding. Specifically, the SEC provided C&DIs related to the Rule 300 series of Regulation Crowdfunding which applies to requirements for intermediaries, including broker-dealers and funding portals. Additionally, the SEC Staff provided C&DIs related to the Rule 400 series of Regulation Crowdfunding, which contains rules specifically applicable to funding portals.

These address, among other things, the financial interests of an intermediary in the issuer, due diligence requirements for intermediaries, requirements for the delivery of educational materials by intermediaries, intermediary requirements with respect to transactions, changes and cancellation of an offering, and intermediary payments to third parties for directing investors to their platform. The SEC Staff notes that an intermediary is permitted to have a financial interest in the issuer.

Additionally, the C&DIs provide instructions on how to register as a funding portal and notes amendments to Form Funding Portal must be made within 30 days after information previously submitted becomes inaccurate. Moreover, interpretation was given regarding the Rule 402 conditional safe harbor for funding portals and recordkeeping requirements for funding portals.

The C&DIs can be found in full on the SEC’s website.

On August 17, 2018, the US Securities and Exchange Commission (SEC) adopted disclosure update and simplification amendments to certain of its disclosure requirements. These amendments become effective 30 days after publication in the Federal Register. (As of today, the amendments have not been published.)

One of the amendments requires the presentation of changes in shareholders’ equity in the interim financial statements (either in a separate statement or footnote) in quarterly reports on Form 10-Q. Recognizing that the anticipated effective date of the amendment may be close to filing dates for most filers’ quarterly reports, the staff of the SEC’s Division of Corporation Finance (Staff) issued compliance and disclosure interpretation 105.09 on September 25, 2018. While reiterating that the amendments apply to all filings made after the effective date, the Staff said that it “would not object if the filer’s first presentation of the changes in shareholders’ equity is included in its Form 10-Q for the quarter that begins after the effective date of the amendments.” (Emphasis added.) As an example, the Staff indicated that if the effective date of the amendments were October 25, a calendar-year filer could omit the changes in shareholders’ equity disclosure from its September 30, 2018 Form 10-Q. The Staff also stated that a June 30 fiscal year-end filer could omit this disclosure from its September 30, 2018 and December 31, 2018 Forms 10-Q but not from its March 31, 2019 Form 10-Q.

Additional interpretations of the amendments could be coming. Interested persons should continue to look for such developments as they revise their disclosures and procedures to comply with the revised requirements.

For further information on the disclosure simplification amendments, see our Legal Update, “Capital Markets Implications of Amendments to Simplify and Update SEC Disclosure Rules,” dated August 29, 2018.

It is already that time of year when public companies should be thinking about the 2019 proxy and annual reporting season. Advance planning greatly contributes to a successful proxy season, culminating with the annual meeting of shareholders. This Legal Update highlights issues of importance to the upcoming 2019 proxy season.

We discuss the following topics:

  • Pay Ratio
  • Say-on-Pay
  • Compensation Litigation and Compensation Disclosure
  • Board Diversity
  • Investor Stewardship Group
  • Voluntary Proxy Statement Disclosure
  • Shareholder Proposal Guidance
  • ESG Shareholder Proposals
  • Notice of Exempt Solicitations
  • Proxy C&DIs
  • Examination of Proxy Process
  • Virtual Meetings
  • Disclosure Update and Simplification
  • Cybersecurity Disclosure
  • Risk Factors
  • Accounting Impact of Tax Reform
  • Auditor Report Requirements
  • Iran Disclosures
  • Changes to Form 10-K Cover Page
  • Exhibit Hyperlinks

Speaking at a session at the American Bar Association’s annual meeting, a representative of the Securities and Exchange Commission’s Division of Corporation Finance (Michael Seaman) provided guidance for attendees regarding areas of focus in the coming months.  After reviewing some of the Commission’s recent rulemaking initiatives, including the Concept Release regarding Rule 701 and Form S-8, the recent changes to Regulation S-K to address outdated, duplicative and other similar rules, and the proposed amendments to the disclosures required by Regulation S-X Rule 3-10 and Rule 3-16, Mr. Seaman commented on ongoing and upcoming priorities.  He noted that the staff is working on proposed rules that would address the statutory change that permits Exchange Act-reporting companies to undertake Regulation A offerings.  There appears to be significant interest on the part of smaller public companies in relying on the exemption.  Mr. Seaman cautioned that the exemption is not available to such companies until the Commission adopts final rules.  He noted that the staff continues its work on proposed changes to Industry Guide 3 for financial services companies.  Guide 3 requirements may be simplified in light of the disclosures required of regulated financial institutions as a result of Basel III and other standards, as well as disclosures otherwise already contained in financial statements and the accompanying notes.  Consistent with remarks made by other Commission representatives, Mr. Seaman noted that the staff also is working on a concept release related to private offering exemptions intended to harmonize conditions for such exemptions.  When asked whether there would be additional rulemaking in furtherance of the Commission’s disclosure-effectiveness initiative, Mr. Seaman noted that the staff continues to review other aspects of the Regulation S-K requirements, including those on which comment was sought in the Concept Release on Business and Financial Disclosure required by Regulation S-K.

As far as areas of staff comment, Mr. Seaman noted that the staff was reviewing issuer disclosure related to cyber breaches and cybersecurity and commenting on risks that were generic and did not address issuer-specific facts and circumstances, as well as on disclosures related to incidents of breaches.  He also noted that the staff was reviewing dispute-resolution provisions in governing documents that may have the effect of limiting investors’ rights, such as provisions requiring mandatory arbitration, waiver of jury trial provisions, provisions related to class-action waivers, and provisions requiring a minimum ownership threshold in order to bring certain claims.  In this regard, the staff was commenting on issuer disclosures related to the inclusion of such provisions in the governing documents with a focus on ensuring that such provisions are clearly explained and investors understand the risks associated with such provisions, including the limitations on remedies, as well as ensuring that issuers are addressing in their disclosures whether such provisions are enforceable and comply with the securities laws.

Mr. Seaman also mentioned a new initiative, led by the Chief Counsel’s office, with the support and involvement of other groups, to review all of the Compliance & Disclosure Interpretations for any required updates, as well as to eliminate any C&DIs that may no longer be relevant or applicable.  He encouraged practitioners to provide their views regarding any C&DIs that may be confusing or problematic, as well as any areas or topics that may be appropriate to address in new C&DIs.

On May 11, 2018, the staff of the Division of Corporation Finance of the US Securities and Exchange Commission issued compliance and disclosure interpretations (C&DIs) on proxy rules and related Schedules 14A and 14C. These C&DIs replace the interpretations published in the Proxy Rules and Schedule 14A Manual of Publicly Available Telephone Interpretations and the March 1999 Supplement to the Manual of Publicly Available Telephone Interpretations (collectively, Telephone Interpretations). Generally, the new C&DIs are consistent with the Telephone Interpretations, although several reflect substantive or technical changes from the Telephone Interpretations. Our Legal Update discusses those changes as well as practical considerations for companies.

 

On April 4, 2018, the staff of the SEC’s Division of Corporation Finance (Staff) updated its Compliance & Disclosure Interpretations on the use of non-GAAP financial measures (C&DIs), by issuing two new C&DIs (C&DI 101.02 and C&DI 101.03).  These new C&DIs provide that, under certain conditions, financial measures included in forecasts used in business combination transactions are excluded from the definition of non-GAAP financial measures.

To recall, in October 2017, the Staff clarified in C&DI 101.01 that financial measures provided to a financial advisor would be excluded from the definition of non-GAAP financial measures, and therefore not subject to Item 10(e) of Regulation S-K and Regulation G, if and to the extent: (1) the financial measures are included in forecasts provided to the financial advisor for the purpose of rendering an opinion that is materially related to the business combination transaction; and (2) the forecasts are being disclosed in order to comply with Item 1015 of Regulation M-A or requirements under state or foreign law, including case law, regarding disclosure of the financial advisor’s analyses or substantive work.

New C&DI 101.02 now provides that a registrant can rely on the exemption provided by C&DI 101.01 if the same forecasts provided to its financial advisor are also provided to its board of directors or a board committee.  In addition, new C&DI 101.03 clarifies that financial measures in forecasts provided by a registrant to bidders in business combinations would also be excluded from the definition of non-GAAP financial measures, if a registrant determines that such forecasts are material and that disclosure of such forecasts is required to comply with the anti-fraud and other liability provisions of the federal securities laws.

A copy of the updated C&DIs is available here.