The SEC announced an upcoming roundtable (date and details to come) that will focus on the causes of short-termism, including the role of quarterly disclosures.  At the end of 2018, the SEC had published a request for comment regarding the timing of earnings releases and quarterly reports by public companies.  The statement regarding the roundtable identifies potential topics for discussion, including the following:

  • The role, if any, that short-termism plays in the declining number of public companies. In particular, examining how the pressure on public companies to take a short-term focus in our markets may discourage private companies from going public could provide valuable insight into how to make our public markets more attractive and increase investment options for Main Street investors.
  • The SEC’s ability to reduce burdens for companies while facilitating better disclosure for long-term Main Street investors. For example, SEC Chair Clayton noted he was interested in exploring whether the information typically included by companies in earnings releases could be allowed to satisfy certain quarterly reporting obligations and whether there are ways that quarterly disclosures could be streamlined. This is particularly the case in the first fiscal quarter when the the quarterly report often comes closely on the heels of the annual report.
  • The potential for certain categories of reporting companies, such as smaller reporting companies, to be given flexibility to determine the frequency of their periodic reporting.
  • Market practices that could be oriented to encourage longer-term thinking and investment at public companies. For example, it would be informative to explore the extent to which certain activist practices, such as “empty voting” (e.g., acquiring voting rights over shares but having little or no economic interest in the shares), are factors that drive short-term focus.

A recent research piece published by UBS Financial Services discusses the significant variations in IPO winners and losers.  The report notes that after five years about 60% of all IPOs had negative returns.  Variation in long-term performance appears to be correlated with specific IPO characteristics.  Companies with revenues in excess of $1 billion and those backed by growth capital performed better over a three-year period than smaller and venture-backed companies. First-day IPO returns are not a good predictor of long-term returns.  The average first-day return for IPOs in the United States has been 18% over the past 40 years.  First-day returns also vary in statistically significant ways based on certain attributes.  Returns are lower for larger companies based on revenues in the pre-IPO year–8.6% if revenues were greater, and 18.6% otherwise.  Larger companies require less underpricing.  Similarly, the first-day returns for companies that received growth capital were lower than those with venture funding, which are generally smaller and earlier stage companies.  Recent IPOs have performed well.  According to the report, an index of recent IPOs is up 33% year to date versus the S&P 500, and the average first-day return for IPOs in 2019 to date is 14.7%.

A partnership (or LLC) can go public in a highly tax-efficient manner by using an “Up-C” structure.  An Up-C structure is composed of two entities: (1) a parent company, a C corporation (“PubCo”) which will be organized as a holding company, and (2) PubCo’s subsidiary, which is the partnership or LLC.  The Up-C structure makes it possible for the partnership/LLC to undertake an IPO while maintaining its partnership status, principal assets and operating business.  It also allows the founders and the new public shareholders to save future taxes.  Our latest On point discusses the Up-C structure and its benefits.  It also discusses what is needed to achieve a successful IPO of an Up-C business.

In May, the Public Company Accounting Oversight Board (“PCAOB”) posted a preview of its staff’s observations made in relation to audits conducted in 2018. The PCAOB highlighted several common deficiency areas that auditors should focus on improving, including Internal Control over Financial Reporting, Risk Assessment and Revenue, and Accounting Estimates. The PCAOB focused on instances where it believes auditors should use more “professional skepticism,” such as evaluating bias in the data reported by managers and identifying potential material misstatements or fraud.

The PCAOB also outlined “good practices” for improving the quality of audits. Among the tips included are revising training programs, establishing a network of auditors to address emerging risks, and expanding accountability to those in leadership positions.

The text of the preview is available on the PCAOB’s website.

On May 9, 2019, the US Securities and Exchange Commission (SEC) proposed revisions to the accelerated filer and large accelerated filer definitions in 17 CFR 12b-2 (Rule 12b-2). These proposed changes would reduce the number of issuers that qualify as accelerated filers and reduce compliance costs for smaller reporting companies.

If the proposal is adopted, certain low-revenue issuers would not be subject to the Sarbanes-Oxley Act (SOX) Section 404(b) auditor attestation requirements regarding internal control over financial reporting (ICFR).  In addition, these low-revenue issuers would not need to comply with the shorter SEC reporting deadlines that apply to accelerated and large accelerated filers.

Continue reading our Legal Update.

In recent years, the Staff of the Securities and Exchange Commission (the “SEC”) has been providing comments regarding companies’ presentations of non-GAAP financial measures in public filings.  Working with Audit Analytics, we surveyed SEC Staff comment letters provided to mortgage real estate investment trusts (“REITs”) in 2018 and 2017 and observed a significant increase in the Staff’s focus on the use of non-GAAP financial measures by mortgage REITs.  The comments issued relate largely to the improper labeling of non-GAAP financial measures (such as core earnings) and the failure to reconcile a non-GAAP financial measure used with its GAAP counterpart.  See an illustration of the survey’s findings below.

The Securities and Exchange Commission proposed amendments to the accelerated filer and large accelerated filer definitions, which have been highly anticipated.  As noted in prior blog posts, at the time that the SEC adopted amended definitions of smaller reporting company, market participants had expected that the SEC would address the thresholds that trigger a requirement for auditor attestation.  If the proposed amendments were to be adopted, smaller reporting companies with less than $100 million in revenues would not be required to obtain an attestation of their internal control over financial reporting (ICFR) from an independent outside auditor.  The proposed amendments to Exchange Act Rule 12b-2 that would revise the “accelerated filer” and “large accelerated filer” definitions.  The proposed amendments would:

  • Exclude from the accelerated and large accelerated filer definitions an issuer that is eligible to be an SRC and had no revenues or annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available
  • Increase the transition thresholds for accelerated and large accelerated filers becoming a non-accelerated filer from $50 million to $60 million and for exiting large accelerated filer status from $500 million to $560 million
  • Add a revenue test to the transition thresholds for exiting both accelerated and large accelerated filer status

The approach of adding a revenue test is consistent with legislation that has been proposed in various recent sessions of Congress.

A Legal Update will follow shortly.

On May 3, 2019, the US Securities and Exchange Commission (SEC) proposed revisions to financial statement disclosures with respect to business acquisitions and dispositions required by Regulation S-X’s Rule 3-05 (Financial Statements of Businesses Acquired or to be Acquired (Rule 3-05)), Rule 3-14 (Special Instructions for Real Estate Operations to be Acquired (Rule 3-14)), Article 11 on Pro Forma Financial Information (Article 11), and other related rules and forms. Through these proposed changes, the SEC aims not only to improve the quality of information being made available to investors as to the potential effects of significant acquisitions and dispositions, but also to promote capital formation.

Read our Legal Update.

Following the inaugural sovereign blue bond issuance by the Republic of Seychelles last October, there have been two recent blue bond announcements. First, The Nature Conservancy recently announced its ambitious “Blue Bonds for Conservation,” aiming for $1.6 billion by 2025. Second, Morgan Stanley, working with the World Bank, sold $10 million of blue bonds aiming to solve plastic pollution in the ocean.

Joining green, social and sustainability bonds; green and sustainability loans; and other forms of sustainability finance, blue bonds add to an increasingly diverse array of alternative financing for sustainability investing. According to FTSE Russell, the total amount of sustainability investment assets under management now exceeds $31 trillion.

The World Bank defines a “blue bond” as a debt instrument issued by governments, development banks or others to raise capital from impact investors to finance marine- and ocean-based projects that have positive environmental, economic and climate benefits and states that the blue bond is inspired by the green bond concept, which people are more familiar with.

In April, the Securities and Exchange Commission (the “SEC”) announced that it is soliciting comments on a proposed rule change submitted by The Nasdaq Stock Market LLC (the “Nasdaq”) that will impose additional requirements for companies listing in connection with offerings under Tier 2 of Regulation A under the Securities Act of 1933 (the “Securities Act”). The rule would require any company listing on the Nasdaq in connection with a Regulation A offering to have a minimum operating history of two years at the time of the approval of its listing application.

The SEC has previously expressed concern that companies seeking to list in conjunction with Regulation A offerings have less developed business plans and may not be as prepared to operate as public companies when compared with other companies seeking to list on the Nasdaq. Additionally, the SEC has raised concerns that investors may be exposed to greater risk of fraud from less mature companies. In response to these concerns, the Nasdaq has proposed the rule change, stating that it believes the two-year minimum operating history requirement will help ensure that companies seeking to list under Regulation A have an established business plan and history of operations that investors can more predictably rely on.

The text of the proposed rule change is available on the SEC’s website. Those interested in submitting comments should do so within 45 days of the SEC’s announcement.