This is the shortest post you’ll ever read here. Click here to download our 2015 SEC filing calendar.
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This is the shortest post you’ll ever read here. Click here to download our 2015 SEC filing calendar.
You don’t need to log-in, but if you are so inclined, there is a sign-in to receive news and updates from us.
In plain English, a capital markets transaction is an extremely important contract. For a soon-to-be public company, an S-1 is thee most important contract. However, as discussed last week, (read here) there are many types of transactions – across all three main exchanges: OTC Markets, Nasdaq and NYSE.
Total transactions count for the first two-thirds of 2014 is 1,858… and all of these transactions needed a law firm – if not two or more. In fact, the 1,858 transactions counted listed 450 different law firms. Below is a graph of the top twelve, by transaction count.
We carefully track all capital markets transactions as Vintage executes the drafting sessions for law firms. We have become the intelligent value for transactions: in-house, at a corporate or law office and now more increasing, 100% virtual. You can see an in-house drafting session in this video.
Top twelve, in order of Q3 ranking. Click to enlarge.
If you are interested in this topic, please click here and opt-in to receive a weekly (Monday) update of transactions and law firms via email.
We also have a whitepaper that explains the ping-pong match an S-1 file plays between an issuer and the SEC. Click here to download it.
Have a great week
Confidential IPO filings have become the new normal for a large percentage of our S-1 clients in 2014. The JOBS Act gave this “elbow room” to any company defined as an Emerging Growth Company. Recently, we had a client that was not actually sure IF they qualified as an EGC.
A corporate issuer qualifies as an emerging growth company if its total gross revenues were less than $1 billion (or the foreign currency equivalent, calculated on the basis of U.S. GAAP or IFRS) during its most recently completed fiscal year. Qualification as an emerging growth company is available to both U.S. issuers and foreign private issuers.
An issuer will maintain its emerging growth company status until the earliest of:
Accommodations for Emerging Growth Companies
The JOBS Act provides emerging growth companies with various accommodations, including relaxed disclosure, corporate governance, accounting and auditing requirements. The following summarizes the key JOBS Act accommodations for emerging growth companies.
In an IPO, an emerging growth company is only required to present two years (instead of three years) of audited financial statements in its IPO registration statement. Furthermore, for later registration statements or periodic reports filed under the Exchange Act, an emerging growth company will not be required to present selected financial data as required by Item 301 of Regulation S-K for any period prior to the earliest audited period presented in its IPO registration statement.
Significantly, emerging growth companies are only required to comply with the scaled executive compensation disclosure requirements that apply to smaller reporting companies under Item 402 of Regulation S-K. For example, an emerging growth company is not required to include a Compensation Discussion and Analysis in its proxy statements. In addition, emerging growth companies will not have to comply with the “pay-for-performance” and “CEO pay ratio” disclosure rules required to be adopted by the SEC under Section 953 of the Dodd-Frank Act.
Although the JOBS Act exempts emerging growth companies from providing the disclosures listed above, emerging growth companies may nevertheless wish to include such disclosures for commercial or competitive reasons, or to ensure that the absence of such disclosures does not render existing disclosure misleading.
An emerging growth company is not required to have its independent registered public accounting firm provide an attestation report on the company’s internal control over financial reporting, as required by Section 404(b) of the Sarbanes-Oxley Act. Emerging growth companies are also exempt from the requirement to hold a shareholder advisory vote on executive compensation (say-on-pay) or shareholder advisory vote on golden parachute compensation at any shareholders’ meeting to approve a merger or similar transaction.
Accounting and Auditing Requirements
Emerging growth companies are not required to comply with any new or revised financial accounting standard until a private company would be required to comply with the standard. Emerging growth companies also will not be required to comply with PCAOB rules adopted after the enactment of the JOBS Act, unless the SEC determines otherwise.
On December 17, 2012, the SEC determined that new PCAOB rules for improving communications between auditors and audit committees should apply to emerging growth companies. In its approval order, the first to address application of new PCAOB rules to emerging growth companies, the SEC stressed that the JOBS Act did not establish a “presumption” that new PCAOB rules should not apply to emerging growth companies. Rather, the SEC may require an emerging growth company to comply with a new PCAOB rule whenever the SEC finds that compliance is necessary or appropriate in the public interest, after considering the protection of investors and whether the rule will promote efficiency, competition and capital formation.
The JOBS Act softens restrictions on communications between securities analysts and potential investors and between securities analysts and the management of an emerging growth company. Emerging growth companies are allowed greater flexibility to communicate with potential institutional investors about a securities offering both before and after the filing of the registration statement so that the company can “test the waters” to determine investor interest in the securities offering. These “test the waters” communications must be limited to institutional investors that are either “qualified institutional buyers” or “accredited investors.” Qualified institutional buyers or “QIBs” are defined generally as institutions that own and invest at least $100 million in securities on a discretionary basis. In general, for an entity to be considered an accredited investor, it must have total assets in excess of $5 million.
The JOBS Act makes it easier for brokers and dealers to provide research coverage of an emerging growth company, even if participating in the company’s registered equity offering, by allowing the broker or dealer to publish and distribute research reports about the emerging growth company and its securities both before and after the filing of the registration statement without violating the gun-jumping rules under Section 5 of the Securities Act.
In an IPO, an emerging growth company is permitted to submit drafts of its IPO registration statement and amendments confidentially to the SEC so long as they are filed publicly 21 days before the company conducts a road show. Confidential treatment extends to all correspondence related to the SEC’s review of the IPO registration statement and amendments.
In addition to the emerging growth company accommodations described above, Title I of the JOBS Act directs the SEC to review Regulation S-K to determine how to modernize and simplify the registration process and reduce the burdens on emerging growth companies. The JOBS Act directs the SEC to provide a report to Congress by October 2, 2012 containing its specific recommendations on improving the registration process. As this handbook goes to publication, the SEC had not yet provided this report to Congress.
Have a great day.
With all the attention on High Frequency Trading and some pundit viewpoints that they are insider trading, here is a review of insider trading from an issuer perspective.
There are three types of corporate insiders for purposes of Section 16: officers, directors and greater than 10% shareholders. We refer to these three types of corporate insiders collectively as Section 16 insiders.
The company officers subject to Section 16 are:
Section 16 insiders must file reports with the SEC disclosing their beneficial ownership of and transactions in a public company’s equity securities. The three forms on which Section 16 insiders must make these reports – Forms 3, 4 and 5.
Section 16 insiders must file an initial report on Form 3 with the SEC within 10 days of becoming subject to Section 16. For a person who is elected an officer or director of a company that already has a class of equity securities registered under Section 12, the 10-day period begins when the person becomes an officer or director. Section 929R of the Dodd-Frank Act amended Section 16 of the Exchange Act to authorize the SEC to establish by rule a shorter time period within which a new Section 16 insider would be required to file a Form 3. As this handbook goes to publication, the SEC has not proposed any rule change that would shorten the current 10-day reporting window.
Persons who are officers, directors or greater than 10% shareholders of a company that registers a class of equity securities (and did not previously have a class of registered equity securities) are required to file a Form 3 on the effective date of the company’s registration statement. In any case, the Form 3 must disclose all equity securities of the company that the Section 16 insider beneficially owned on the date the person became subject to Section 16. Even if a director or officer owns no securities on the date he or she becomes a Section 16 insider, he or she is still required to file a Form 3.
In certain circumstances, the Section 16 insider should file an initial Form 3 earlier than is required. As discussed below, a Section 16 insider generally must report changes in his or her beneficial ownership of the company’s equity securities on Form 4 within two business days. If the Section 16 insider’s beneficial ownership of the company’s equity securities changes during the 10-day period before he or she must file a Form 3 (e.g., where a new director is granted restricted stock upon his or her appointment), the SEC recommends that the Section 16 insider file an initial Form 3 concurrently with a Form 4 reporting the change, notwithstanding that the rules permit the Form 3 to be filed at a later date.
Form 4: Statement of Changes in Beneficial Ownership.
After filing a Form 3, a Section 16 insider must report any subsequent change in beneficial ownership of the company’s equity securities by filing a Form 4 within two business days, unless the transaction is exempt from reporting or is eligible for deferred reporting.
Transactions that must be reported on Form 4 include, but are not limited to:
Following an IPO, the directors and officers of the company before it became public may be required to report certain pre-IPO transactions in the company’s equity securities. Such a filing obligation may arise if the director or officer engages in a reportable transaction less than six months after the date that the company’s registration statement becomes effective. In such event, the director or officer is required to “look back” for a period of six months from the date of the reportable transaction and report on its first required Form 4 any transactions in the company’s equity securities that occurred during that period. Persons who are Section 16 insiders by virtue of being greater than 10% shareholders are not subject to six-month look-back periods. Likewise, a covered officer or director may be required to report transactions that occur after the company ceases to be a public company (i.e., because of termination of its Section 12 registration and reporting obligations). An otherwise reportable transaction occurring after the company is no longer public will be reportable on Form 4 if (and only if) the transaction is not exempt from Section 16(b) and occurs within six months of an “opposite way” transaction that was also subject to Section 16(b) and occurred while the company was public. For purposes of this rule, an acquisition and subsequent disposition (or vice versa) are considered “opposite way” transactions.
A covered officer or director may also be required to report transactions that occur after the termination of that person’s officer or director status. An otherwise reportable transaction occurring after the cessation of a person’s officer or director status will be reportable on Form 4 in the same circumstance as a transaction that occurs after a company ceases to be public (i.e., if (and only if) the transaction is not exempt from Section 16(b) and occurs within six months of an “opposite way” transaction that was also subject to Section 16(b) and occurred while the person was still a director or officer). A person who is a Section 16 insider solely by virtue of being a greater than 10% shareholder ceases to be subject to Section 16 reporting requirements once the person ceases to be a greater than 10% shareholder.
The SEC has adopted a variety of exemptions from the reporting requirements of Section 16(a) based upon the nature of the transaction. These exemptions apply to the following types of transactions:
In addition to the above exemptions, the SEC has adopted a number of exemptions based upon the status of the Section 16 insider. Depending on the circumstances, certain of these exemptions may be available to executors and other fiduciaries, odd-lot dealers, market makers, arbitrageurs, underwriters and other persons who participate in a distribution of the company’s equity securities.
Form 5: Annual Statement of Changes in Beneficial Ownership
A Section 16 insider must report certain transactions on a year-end report on Form 5 within 45 days after the end of the company’s fiscal year. Some transactions, most notably gifts, are not required to be reported on Form 4, but must be reported on Form 5. A Section 16 insider is required to file a year-end Form 5 to report any transaction that the person should have reported during the fiscal year on Form 3 or Form 4, but did not. Transactions reportable on Form 5 are limited to the following:
Disclosure of Reporting Delinquencies; Compliance Programs. Item 405 of Regulation S-K requires a company to disclose in its annual proxy statement and annual report on Form 10-K certain information regarding the failure of any Section 16 insider to timely file a Section 16 report during the previous fiscal year or prior fiscal years. For each such delinquent Section 16 insider, the company is required to set forth the number of late reports, the number of transactions that were not reported on a timely basis, and any known failure to file a required Form 3, 4 or 5. Although there is no official sanction placed upon the company as a result of the filing delinquencies of its insiders, such disclosures are potentially embarrassing.
Accordingly, every public company should develop and implement a strong compliance program to ensure that its directors and officers timely file all required reports. In addition to minimizing the potential for embarrassing disclosures of the type described above, a strong compliance program will assist the company’s directors and officers in avoiding both short-swing liability under Section 16(b) and SEC enforcement actions to enforce Section 16(a)’s reporting requirements.
Filing Procedures and Website Posting.
All Section 16(a) reports must be filed with the SEC electronically using the SEC’s EDGAR filing system, and all reports become publicly available immediately upon filing.
With today’s one year anniversary of the SEC’s social media guidance added to RegFD, it seems a good a time as any to refresh the details of RegFD.
Issuers have considerable flexibility in determining how to satisfy the public disclosure requirements of RegFD. The public disclosure requirement can be satisfied by filing the information in a Form 8-K or by any other non-exclusionary method of disclosure that is reasonably designed to provide broad public access to the information.
RegFD was implemented October 2000 to address perceived abuses involving the selective disclosure of material nonpublic information to analysts, institutional shareholders and others with the opportunity to profit from such information. Prior to the adoption of RegFD, a number of public companies were disclosing earnings results and other nonpublic information to analysts and institutional investors before broadly disseminating that information to the general public. The SEC believed this informational disparity undermined the investing public’s confidence in the fairness and integrity of securities markets, since those who were privy to such information had the opportunity to profit at the expense of the uninformed.
At the time RegFD was adopted, the SEC recognized the potential for using website disclosure as an acceptable means of satisfying the “public disclosure” requirement of RegFD, but stopped short of concluding that such disclosure would, by itself, suffice.
In August 2008, the SEC issued an Interpretative Release – Commission Guidance on the Use of Company Websites – in which it concluded that certain issuers could, subject to certain conditions, satisfy the public disclosure requirement under RegFD by posting information to their websites. To take advantage of this means of satisfying the disclosure requirement, an issuer must that its website is a recognized channel of distribution and that the disclosed information is posted and accessible on the website and has been “disseminated” for purposes of the regulation.
In this regard, the release noted that whether a company’s website is a “recognized channel of distribution” will depend on the steps the company has taken to alert the market to its website and its disclosure practices, as well as the use by investors and the market of the company’s website. Similarly, one of the factors to be considered in determining whether information on the website has been “disseminated” for purposes of RegFD is whether the company has made investors and the markets aware that it will post information on its website. While the release did not provide “bright-line” guidance as to when the public disclosure requirements of RegFD could be satisfied by an issuer’s website posting, it did provide a non-exclusive list of considerations that an issuer could use to make such a determination.
Questions regarding the legality and propriety of public disclosure through websites resurfaced when Netflix and its CEO, Reed Hastings, received Wells notices from the SEC staff communicating the staff’s intent to recommend an enforcement action against them for violation of RegFD. The staff’s action was in response to a July 2012 post on Mr. Hastings’ Facebook page, stating that in June 2012 monthly viewing of Netflix had exceeded a billion hours for the first time ever. Within two trading days of Mr. Hastings’ post, Netflix’s stock price had risen by nearly 20%, although it is not clear whether this rise was due to the Facebook post or other factors. The SEC ultimately determined not to bring an enforcement action against Netflix or Mr. Hastings. However, it released a 21A report of investigation to provide guidance to issuers regarding how RegFD and the earlier guidance in its 2008 Interpretive Release on the use of company websites apply to disclosures made through social media channels.
The April 3, 2013 report noted that in light of the direct and immediate communication made possible by social media channels, the SEC expected issuers to rigorously examine whether a particular channel is a “recognized channel of distribution” prior to disclosing any material information through it. To this end, the SEC emphasized that, as outlined in its 2008 Interpretive Release, the investing public should be alerted to the channels of distribution a company will use to disseminate material nonpublic information. The SEC suggested that a company could provide appropriate notice to the investing public by disclosing on its website the specific social media channels the company intends to use for the dissemination of material nonpublic information. The SEC cautioned that the disclosure of material nonpublic information on the personal social media site of an individual corporate officer – without advance notice to investors that the site could be used for such purpose – would likely be a violation of RegFD.
What is Material Information? RegFD only prohibits the selective disclosure of material information. RegFD does not define materiality, but instead relies on the definition that has developed through case law. Based on the general principles established by the courts, information would be considered material if:
Given the fact-dependent nature of the analysis, there is no bright-line rule as to what should be considered material for purposes of RegFD. In the adopting release for RegFD, however, the SEC provided a non-exclusive list of the types of information and events that issuers should carefully review to assess materiality:
The SEC has made clear that any communication between an issuer and analysts regarding earnings involves a high degree of risk under RegFD. As a result, any information that an issuer plans to disclose to an analyst should be carefully scrutinized to confirm that it is not material or has already been publicly disseminated. If those determinations cannot be made with certainty, the issuer should consider the information material and comply with the public disclosure requirements of RegFD.
In concert with the recent posts about printing annual reports and 10-Ks, an overall review of what is required in a 10-K seems appropriate.
All public companies other than foreign private issuers must file an Annual Report on Form 10-K following the end of each fiscal year. The Form 10-K includes four parts, the items of which are described below.
Part I of Form 10-K provides a general description of the business of the company and its properties along with the risk factors that investors should consider when investing in the company.
Part I also includes:
Part II of Form 10-K includes a comparative presentation of selected financial data for the last five fiscal years, management’s discussion and analysis of the company’s operating results and its liquidity and capital resources, and the audited consolidated financial statements of the company (which may also be filed in Part IV), along with certain supplementary quarterly financial data.
Part II also includes:
Companies need not comply with disclosure requirements relating to disclosure controls and procedures and internal control over financial reporting until after they have filed an Annual Report on Form 10-K for a prior fiscal year. In addition, as codified in Section 989G of the Dodd-Frank Act, smaller reporting companies and non-accelerated filers are exempt from the requirement to include the attestation report of the independent auditors on the company’s internal control over financial reporting.
Part III of the Form 10-K includes disclosures relating to directors, executive officers, corporate governance, executive compensation, the beneficial ownership of management and certain large shareholders, related person transactions, director independence and accountant fees and services. Part III items may only be incorporated by reference if such proxy statement is filed within 120 days of the company’s fiscal year end. If the proxy statement is not filed within such 120-day period, the company must file an amendment to its Form 10-K prior to the end of such period that includes the Part III information.
Companies should list under Part IV of the Form 10-K their financial statements and the schedules required to be filed in Part II, along with all exhibits required to be filed by Item 601 of Regulation S-K.
The exhibits to the Form 10-K will generally include:
Summary of Selected Items
Risk Factors. Item 503(c) of Regulation S-K requires public companies to disclose under the caption “Risk Factors” a discussion of the most significant factors that make investing in the securities of the company risky or speculative. The factors should be those risks that are specific to the company and should not include risks that apply to every public company. As a general rule, any fact or circumstance that could pose a risk to the company’s financial condition, results of operations or potential growth, or which could otherwise materially affect the performance of the company’s securities, may be a risk factor. In addition to identifying the risk factors, the company must discuss how each factor could affect the company or its securities. Companies should not include mitigating language in their risk factor disclosures.
In addition, the discussion of risk factors must be written in plain English. Smaller reporting companies are not required to provide the information required under this item. Many smaller reporting companies, however, will include risk factors in their Annual Reports to take advantage of a safe harbor defense for forward-looking statements.
Section 21E of the Exchange Act provides a safe harbor defense for companies in securities litigation for forward-looking statements that are made by the company in its Exchange Act reports. This defense is similar to the defense in Section 27A of the Securities Act and the “bespeaks caution” defense developed in securities case law. Forward-looking statements, which are commonly found in a company’s MD&A (defined below), are statements not of historical fact but of the expectations of the company with respect to its future performance or other predictions or expectations regarding future events.
To qualify for the safe harbor, companies must identify the forward-looking statements in the report with sufficient particularity and accompany the statements by cautionary language that identifies the significant factors that could cause actual results to materially differ from those contained in the forward-looking statements. The risk factors identified in the Form 10-K and other filings can provide the meaningful cautionary language required by the safe harbor.
Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations.
Item 303 of Regulation S-K requires a discussion and analysis of the company’s operating results and its liquidity and capital resources. As articulated by the SEC, the purpose of this disclosure is to present the company’s financial condition and results of operations “through the eyes of management” and to provide the context for analysis of the financial information presented in the periodic report. A critical requirement of the Management’s Discussion and Analysis of Financial Condition and Results of Operations (better known as the MD&A) is to disclose any known trends, commitments, events or uncertainties that have had or are reasonably likely to have a material effect (positive or negative) on the company’s operating results or liquidity.
The MD&A should identify and discuss the principal drivers that have impacted and will continue to impact the company’s operating results and financial condition, as well as key performance measures, including non-financial performance indicators, which are used by management and which would be material to investors, particularly where management refers to these measures in its earnings releases. In general, the MD&A should emphasize material information and de-emphasize or omit immaterial or duplicative information.
Among other material items, the MD&A should include an analysis of the following matters relating to the company:
The MD&A should include a liquidity and capital resources section that provides a clear picture of the company’s ability to generate cash and to meet existing and known or likely future cash requirements. The discussion should focus on material changes and trends in operating, investing and financing cash flows and the reasons underlying those changes. The MD&A also must include quantitative tabular disclosure regarding the company’s contractual obligations.
The Sarbanes-Oxley Act created two certification requirements for the principal executive and principal financial officers of public companies. Section 302 of the Sarbanes-Oxley Act requires a certification that is filed with each quarterly and annual report and which states that the reports are accurate and complete and that the company has in place adequate disclosure controls and procedures and internal control over financial reporting. Section 906 of the Sarbanes-Oxley Act requires a certification that is furnished with any report containing financial statements and which states that the report fully complies with Section 13(a) or 15(d) of the Exchange Act and fairly presents, in all material respects, the financial condition and results of operations of the company. Although paragraph 3 of the Section 302 certification may be omitted in certain circumstances, and plural references to “certifying officers” in paragraphs 4 and 5 can be made singular, the certifications must otherwise strictly follow the language provided in SEC rules.The SEC has said that it will not accept an altered certification even if the alteration would appear to be inconsequential. If a filed certification is not correct and complete, the accompanying report may be considered by the SEC to be materially incomplete and deemed not filed (thus potentially affecting Form S-3 eligibility, among other things).
The Form 10-K must be signed on behalf of the company by a duly authorized officer as well as by its principal executive officer(s), its principal financial officer(s), its controller or principal accounting officer, and by at least a majority of the members of the board of directors. When the form is filed by a limited partnership, it must be signed by at least a majority of the members of the board of directors of any corporate general partner that signs the report.
Quite a bit of interest from last week’s discussion regarding the forensic trail highlighted in the blog post DIY an S-1 filing? Brides should not bake their own wedding cake.
The prevailing question was why did the soon-to-be-public company restart their S-1 with a traditional IPO filing process (like Vintage Filings’ drafting sessions) from its humble DIY origin? More to the point, why is an XBRL self-filing portal OK to use for 10-Qs, but not for the S-1?
The simple answer is scale of task. Look at the video below.
This is a typical prospectus.
Although the ink and paper may look blasé, this is a major publication for a company. Without exaggeration, their future depends on this document. That fact moves its creation from WYSIWYG word processing into professional typesetting and document composition. Compound this tactical task with the legal and contractual precision that an S-1 requires and… well, you get the idea. It is not a simple typing task for a generic (and often unfamiliar) word processing program like Google Docs.
Our advice is the right tool for the right job: Use professional** typesetting and document composition for transactions. These documents are really really really large contracts. You must have the precision. If you want to tag and submit your own XBRL files with the SEC, use our MS Word and MS Excel based DIY platform (via fleXBRL).
Our sales pitch: all our solutions are perfectly priced, a key driver for our continuing success working with mid to microcap issuers. Our forensic speculation is that the DIY mis-start doubled the fee… not to mention the serious time wasted fussing around with tabs, margins, page numbers and financial tables.
Have a great day.
*What You See Is What You Get
** preferably ours at Vintage Filings