Category Archives: SEC Regulations

Non-GAAP is not a non-issue at the SEC

This week, two SEC officials took to the pulpit at the American Institute of Certified Public Accountants Conference in Washington, DC – both discussing the mis-use of Non-GAAP reporting.

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Michael Maloney, chief accountant of the SEC’s enforcement division is looking into violations of rules governing non-GAAP metrics. “It is a focus in within the division, we are looking closely at it. If we think there’s enough there to open an investigation, we will. It’s going to be the fact and circumstances that we will look at, and that will lead to the enforcement action.”

Maloney’s talk was a clear warning to issuers that use non-GAAP metrics in their financial reporting will come under greater scrutiny. The SEC offered new compliance guidelines back in May.

Another chief accountant, Wesley R. Bricker, was less Draconian is his presentation to audit committee members – identifying them as the “critical gatekeepers” to certify credible, reliable financial reporting and compliance with the C&DIs.  He reminded the audience that board members sitting on the audit committees should not underestimate the importance of their role overseeing the external auditor as these third-party auditors are 100% accountable to the audit committee…not to management.

Bricker also suggested auditors are critical for shareholder protection and asked board members to use these fours questions as a directional “do-the-right-thing” guide:

  • If you as the auditor were in management’s shoes and solely responsible for preparation of the company’s financial statements, would they have in any way been prepared differently?
  • If you as the auditor were in an investor’s shoes, would you believe that you have received the information essential to understanding the company’s financial position and performance?
  • If the company following the same internal control over financial reporting and internal audit procedures that would be followed if you were in the CEO’s shoes?
  • Are there any recommendations that you as the auditor have made and management has not followed?

Lastly, he emphasized that good reporting practices place a premium on audit committee member understanding of the company’s non-GAAP policies, procedures, and controls and that audit committee members should seek to understand management’s judgments in the design, preparation and presentation of non-GAAP measures and how those measures might differ from approaches followed by other companies.

This comparison is another area where investor relations can bring their sector expertise into the boardroom – as we discussed earlier this week here.

Pre-order your 2017 SEC Reporting Rules guidebooks

We are pleased to provide you with the annual updated editions of the SEC Reporting Rules for Forms 10-K, 10-Q, 8-K & SD and for Proxy Statements.

request

FREE! Ships late December!

These books are incredible resources to have on your bookshelf. Yes, tangible books you can hold, yellow highlight mark-up, dog-ear the corners and write annotations in. You can also throw them at your CEO* when he suggests changes to the 10-Q twenty minutes before the filing deadline.

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In addition to outlining the applicable laws, regulations and rules, these guidebooks seek to provide practical guidance reflecting, among other things, interpretive guidance issued by the Securities and Exchange Commission, general industry practice and the authors’ experience. In addition, we eliminate many cumbersome citations and provide “plain English” rule references.

  • 680 pages
  • Up-to-date for 2017
  • Detailed table-of-contents for quick reference

*Not an official recommendation.

SEC universal proxy card proposal allows voters to cross the aisle

btonLast week, the SEC voted 2-1 regarding new (proposed) amendments to the proxy rules that would require the conflicting players in contested director elections to use a single, universal proxy card.

Currently, in contested “proxy fights” the issuer and the activist (dissident) separately mail proxy card to shareholders – and those individual cards list only their own director nominees.

And that’s the root of this underlying concern. Voting shareholders can only use either the issuer-provided proxy card or the activist-provided proxy card… but not both. They can’t split their vote between the two cards. They cannot vote for Director A on the issuer card and Director B on the dissident card.

Shareholders who physically attended the annual shareholder meeting can (in most cases) cross “party lines” and vote for candidates from either side of a contested election. In context to THIS November think #TrumpKaine or #ClintonPence. This proposal levels the ballot box.

The areas of the new proposal of most practical interest to Vintage (as a proxy production/printer) is the mailing deadlines of the cards and the design points. Per the SEC…”To help ensure that universal proxies clearly and fairly present information so that shareholders can effectively exercise their voting rights, the proposed rule would include the following presentation and formatting requirements for all universal proxy cards used in contested elections:

  • The proxy card must clearly distinguish between registrant nominees, dissident nominees, and any proxy access nominees
  • Within each group of nominees, the nominees must be listed in alphabetical order by last name on the proxy card
  • The same font type, style and size must be used to present all nominees on the proxy card
  • The proxy card must prominently disclose the maximum number of nominees for which authority to vote can be granted
  • The proxy card must indicate in bold-face type whether or not it is solicited on behalf of the registrant’s board of directors or, if solicited on behalf of some other person, the identity of such person”

Click here to read the SEC’s full proposed amendments. As with most SEC proposals, the amendment is now open for a 60-day comment period. As you will read, the SEC has 105 question units ranging from the tactical vocabulary to presentation format

Currently, there is no consensus among lawmakers or proxy pundits as to whether this will increase or decrease the possibility of proxy fights or favor the issuer or the activist in those fights.

Mini-IPOs out number conventional IPOs, YTD

Today, the WSJ published a piece headlined Wall Street’s IPO Business: The Worst in 20 Years that chirpily reminded us that 2016 has been a dour year for IPOs.

“As of last Friday, just 68 companies had gone public on U.S. exchanges this year, raising $13.7 billion, according to Dealogic. At this point in 2015, 138 companies had listed on U.S. exchanges, raising $27.3 billion—a 62% drop from the same period in 2014.”

I propose another headline. Wall Street’s Mini-IPO Business: The Best in 20 Years.

68 companies via conventional IPOs… compared to 81 mini-IPOs via the Regulation A+ process. Agreeably, from the perspective of the WSJ article (impact on investment banks), it’s an apples to orange comparison, however from corporate quest for capital perspective – as well as the tangible “filing paperwork” perspective… a comparison can be made. (We know a lot about Reg A+)

In fact, many comparisons can be made.

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As you see, above, Reg A+ is not without costs.   

  • Expense: Upfront legal and accounting costs to prepare filings and secure SEC approval and infrastructure for ongoing SEC reporting obligations.
  • Time consuming: Process of preparing (SEC estimates 750 hours) to prep Form 1-A and offering circular; SEC review and approval may take several months.
  • Disclosure tasks of being public company: Under Reg A+ Tier 2, issuer is a quasi-public company and required to publicly disclose its financial results on a semi-annual basis and file current reports to disclose material events. Under Tier 1 offering, financial statements must be publicly available on SEC website at offering.

Also, the SEC is watching the filings carefully. Just last week the SEC, in the first action of its kind, has temporarily suspended a Tier 2 Regulation A+ offering because the registrant had not filed its annual report.

We held an expert’s webinar that details out the differences, both pro and con. You can watch it here.

 

PS: Yes, I know, Reg A+ has only been with us since June 2015, well within my 20-year data-point.

Video webinar: Using Regulation A+ to list on a stock exchange

As detailed in our Bloomberg / Vintage educational webcast on the similarities and differences between the Reg A+ and time-tested IPO processes, Reg A+ can be a vehicle (Elio Motors pun intended) to list onto a national exchange.

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So far, Elio Motors is the only Reg A+ issuers to execute that. It’s also interesting to learn of how an underwriter can participate in the process. 

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Our experts on the webinar:

GARY EMMANUEL, PARTNER, MCDERMOTT WILL & EMERY

Mr.Gary Emmanuel focuses his practice on corporate securities matters.  With over 15 years of experience, Mr. Emmanuel represents both domestic and foreign companies that are navigating the process of capital raising, including initial public offerings, registered direct offerings, follow-on offerings, private placements, private investment in public equities (PIPEs) and bridge financings. He has worked extensively with biotechnology and other life science companies, both as company counsel and as underwriter’s counsel.  He advises companies on issues relating to disclosure, periodic reporting, corporate governance, American Depositary Receipt (ADR) programs, and the rules of the NYSE MKT, NYSE and NASDAQ. He also counsels companies in a wide variety of corporate transactions including licensing, reverse mergers, acquisitions and joint ventures.  Mr. Emmanuel previously served in the Military Court of Appeals of the Israel Defense Forces during his army service and holds the military rank of legal officer.

Mr.Emmanuel is admitted to practice in New York and Israel.  He earned his LLB, with honors, from Queen Mary University of London and his LLM from Yeshiva University – Benjamin N. Cardozo School of Law.

DAVID ETHRIDGE, MANAGING DIRECTOR, DEALS & U.S. IPO SERVICES LEADER, PWC

Mr.David Ethridge is the Managing Director in the firm’s Deals practice and U.S. IPO Services leader. He helps PwC clients prepare for accessing the equity capital markets through an IPO, advising them throughout the life of the IPO process, from pre-IPO readiness assessment to planning, the offering process, potential pitfalls and challenges and beyond.

Mr.Ethridge is a veteran IPO professional with more than 25 years of experience built around the equity capital markets, advising clients to globally on their plans to access the U.S. equity markets via IPOs, follow-on offerings, Convertibles, registered direct, and PIPEs. Prior to his role at PwC, he led the New York Stock Exchange (NYSE) Capital Markets practice for five years, a role which follows 20 years of experience in investment banking. Under his leadership, the NYSE became the overall leader both in the U.S. and globally for IPOs, most notably in the technology sector. Throughout his career, he has advised and executed over 100 IPOs; including helping execute the largest IPO in history when he was leading the NYSE team.

Mr.Ethridge received a M.B.A from Harvard Business School and a B.A. in economics from Davidson College.

GORDON RUCKDESCHEL, VICE PRESIDENT, OPERATIONS,  VINTAGE, A DIVISION OF PR NEWSWIRE

Mr. Gordon Ruckdeschel has over twenty years of experience in the mutual fund and EDGAR/financial services industry.  He currently manages Operations for Vintage (a division of PR Newswire), including the full service EDGAR, XBRL, typesetting and print capabilities across Vintage’s three practice areas (Capital Markets, Corporate Services and Funds & Institutional Services).  Previously, Mr. Ruckdeschel headed up the organization’s Investment and Structured Finance account team.  He is continually learning and managing new projects, most recently working with staff and clients on Regulation A+ filings.

The success of the Confidential S-1 filing process is not confidential

On July 21, we celebrated the sixth birthday (anniversary?) of Dodd-Frank, and although some of the ruling’s initiatives are less than beloved by many, aka Volcker Rule, the “confidential IPO” bucketed under the JOBS Act has been an undisputed success.

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I was reminded of this when reviewing last week’s list of companies who officially became “issuers.” All three were Emerging Growth Companies (EGC) and all three filed as a confidential IPO.

  • Airgain (wireless telecommunication equipment) filed confidentially as an EGC in Aug 2014, filed publicly in Jul 2016, raised $12m – priced below the range – traded on the NASDAQ on Aug 12
  • Protagonist Therapeutics (biopharmaceuticals) filed confidentially as an EGC in May 2016, filed publicly in Jul 2016, raised $90m – priced within the range – traded on the NASDAQ on Aug 11 and finished the day down 3%
  • Medpace (clinical contract research company) filed confidentially as an EGC in Mar 2016, filed publicly in Jun 2016, raised $161m – priced within the range – traded on the NASDAQ on Aug 11 and finished the day up 21%

What is: Emerging Growth Company 

An Emerging Growth Company (EGC) is an issuer that has total annual gross revenues of less than $1 billion during its most recently completed fiscal year. 

What is: Confidential filing process 

An Emerging Growth Company can submit a confidential draft IPO registration to the SEC for review in advance of its initial public offering. This allows the company to hone their message and offering – especially with the SEC.It allows the company to change their mind about going public without anyone knowing. Publicly “pulling their IPO” is often viewed as a failure.

DOWNLOAD THE WORKFLOW WHITEPAPER HERE

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The EGC and SEC are prohibited from publicly disclosing the confidential filing, comments, and amendments during this review process. As the EGC moves closer toward its IPO, the JOBS Act requires that these filings be made available to the public.

The EGC would be required to publicly file their draft registration and amendments, with the SEC no later than 15 days before its roadshow. Plus the SEC staff will publicly release its comment letter and responses to staff comment letters on confidential draft submissions after the registration statement for the IPO becomes effective but no sooner than 20 days after the effective date.

As you see in the three companies above, confidential does not equate to simple. Airgain needed two years to get into position.

What is: IPO Compliance Requirements

IPO requirement Traditional IPO registrant ECG JOBS Act
Registration process Public Confidential
Audited financial statements 3 Years 2 Years
Selected financial data 5 Years 2 Years
Executive compensation disclosures Full Equal to smaller reporting companies disclosures

 What about: XBRL

The JOBS Act does not exempt EGCs from complying with the tagging requirements established by the XBRL requirements applicable to SEC registrants.

 

 

 

 

The SEC suggests redefining “smaller” to reduce filing burden for some issuers

alpahabetThe SEC has proposed an updated change regarding the definition and subsequent qualification of a SRC: smaller reporting company. 

Today, US issuers qualify as a SRC if they either 1.) have a public float of less than $75 million or 2.) for issuers without a public float, annual revenues of less than $50 million.

The benefit of being a SRC company is a lighter disclosure burden under Regulation S-K and Regulation S-X including only having to disclose two years of audited financial statements and zero Compensation Discussion & Analysis reporting responsibility.

The new update would allow issuers to be re-classified as a SRC if they have 1.) a public float of less than $250 million or 2.) for companies without a public float, annual revenues of less than $100 million.

The updates are projected to reduce the work burden and costs for reporting (while still protecting investors) for close to 800 current non-SRC issuers… about 11% of all SEC reporting issuers.

One point: issuers with more than $75 million in public float, even if reclassified as a SRC, are still accelerated filers. Their 10-Q and 10-K filings deadlines do not change nor does their Sarbanes-Oxley 404 auditor verification reporting. Also, a SDC is still required to file XBRL our team will assist in keep those fees low and accuracy high.

If all that is not confusing enough, a SRC can also be an EGC which may be not have SOX responsibilities. For sure, talk to your SEC lawyer, PDQ. You know… CYA.

Comments on the proposed rules are due August 30, 2016.

Video webinar: Testing the waters with Regulation A+ is similar to conventional IPO

Our Bloomberg / Vintage educational webcast on the similarities and differences between the RegA+ and time-tested IPO processes was extremely well attended – and rightly so. Our experts brought their best.This video snippet is an example.

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Their insight and counsel is very straight-forward which is extremely useful in context to the semi-undefined Reg A+ atmosphere we’re current breathing.

“Testing the waters is really one of the great, great feature of Regulation A+ It allows an issuer to reach out to its potential base of investors to solicit interest in the offering at any time before you go effective with the SEC. And that includes before filing any offering circular with the SEC.”

~ Gary Emmanuel, Partner, McDermott Will & Emery

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Reg A+’s Testing the Waters provision allows a Tier II issuer to first canvas the capital market to see whether there is satisfactory investor interest prior the deep dive and full commitment of a securities offering.

It can be a very flexible program, however there are strict guidelines in place to protect investors:

  • Issuers can Test the Waters by oral or written communications discussing potential the offering with potential investors, both before and after filing Form 1-A with all supporting materials filed as exhibits to Form 1-A.
  • All solicitation materials must include a legend (see below), and must be preceded or accompanied by the Offering Circular after public filing.
  • Testing the Waters communications are considered offers of securities and are subject to anti-fraud provisions of securities laws.
  • Solicitation materials must be included in the Offering Circular and be publicly available to the entire population of prospective investors: nonaccredited as well as accredited investors (note: Tier II offerings have protective limits on nonaccredited investors).
  • Issuers may solicit interest via social media like Twitter by including an active hyperlink to the Offering Circular to satisfy the requirements of applicable securities laws.
  • Issuers may advertise on their own, without a broker/dealer and may target selective investors: ie sector-based based, etc.

All Testing the Waters communications must include a Legend stating that:

  • No money or other consideration is being solicited or accepted.
  • Offers to buy the securities cannot be accepted, and no part of the purchase price can be received until the Form 1-A is qualified and any offer can be withdrawn or revoked at any time before notice of its acceptance is given after the qualification date.
  • That an indication of interest involves no obligation or commitment of any kind.
  • Contacts of a person from whom the preliminary OC can be obtained, a preliminary URL to access the Offering Circular, or copy of the document (only required in Testing the Waters communications made after a Form 1-A has been filed).

Our experts:

GARY EMMANUEL, PARTNER, MCDERMOTT WILL & EMERY

Mr.Gary Emmanuel focuses his practice on corporate securities matters.  With over 15 years of experience, Mr. Emmanuel represents both domestic and foreign companies that are navigating the process of capital raising, including initial public offerings, registered direct offerings, follow-on offerings, private placements, private investment in public equities (PIPEs) and bridge financings. He has worked extensively with biotechnology and other life science companies, both as company counsel and as underwriter’s counsel.  He advises companies on issues relating to disclosure, periodic reporting, corporate governance, American Depositary Receipt (ADR) programs, and the rules of the NYSE MKT, NYSE and NASDAQ. He also counsels companies in a wide variety of corporate transactions including licensing, reverse mergers, acquisitions and joint ventures.  Mr. Emmanuel previously served in the Military Court of Appeals of the Israel Defense Forces during his army service and holds the military rank of legal officer.

Mr.Emmanuel is admitted to practice in New York and Israel.  He earned his LLB, with honors, from Queen Mary University of London and his LLM from Yeshiva University – Benjamin N. Cardozo School of Law.

DAVID ETHRIDGE, MANAGING DIRECTOR, DEALS & U.S. IPO SERVICES LEADER, PWC

Mr.David Ethridge is the Managing Director in the firm’s Deals practice and U.S. IPO Services leader. He helps PwC clients prepare for accessing the equity capital markets through an IPO, advising them throughout the life of the IPO process, from pre-IPO readiness assessment to planning, the offering process, potential pitfalls and challenges and beyond.

Mr.Ethridge is a veteran IPO professional with more than 25 years of experience built around the equity capital markets, advising clients to globally on their plans to access the U.S. equity markets via IPOs, follow-on offerings, Convertibles, registered direct, and PIPEs. Prior to his role at PwC, he led the New York Stock Exchange (NYSE) Capital Markets practice for five years, a role which follows 20 years of experience in investment banking. Under his leadership, the NYSE became the overall leader both in the U.S. and globally for IPOs, most notably in the technology sector. Throughout his career, he has advised and executed over 100 IPOs; including helping execute the largest IPO in history when he was leading the NYSE team.

Mr.Ethridge received a M.B.A from Harvard Business School and a B.A. in economics from Davidson College.

GORDON RUCKDESCHEL, VICE PRESIDENT, OPERATIONS,  VINTAGE, A DIVISION OF PR NEWSWIRE

Mr. Gordon Ruckdeschel has over twenty years of experience in the mutual fund and EDGAR/financial services industry.  He currently manages Operations for Vintage (a division of PR Newswire), including the full service EDGAR, XBRL, typesetting and print capabilities across Vintage’s three practice areas (Capital Markets, Corporate Services and Funds & Institutional Services).  Previously, Mr. Ruckdeschel headed up the organization’s Investment and Structured Finance account team.  He is continually learning and managing new projects, most recently working with staff and clients on Regulation A+ filings.

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Reg A+ it and they will come. Kinda sorta.

Excellent recap of Reg A+ in the WSJ.

“According to the Securities and Exchange Commission, 94 companies had filed to raise a total of $1.7 billion under Reg A+ as of early June. Of those, 45 offerings seeking to raise a total of $785 million have qualified to raise funds, and just a few have actually completed their offerings.

The low tally highlights some of the challenges that small companies continue to face, as well as the JOBS Act’s limited progress in achieving its objectives. But the weak market for initial public offerings hasn’t helped.

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dreams

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Among the biggest problems for the companies trying to raise funds is that they aren’t prepared for the amount of marketing needed to attract a big enough pool of potential investors.”

That last paragraph is the most germane to this blog. Vintage is the #1 Reg A+ filing agent, by far. We’ve seen our share of companies file their 1-A… and many have yet to meet their expectations. And that word – expectations – is certainly where the problem may lay. RegA+ is just a year old. To imagine seasoned “players” to walk out of the corn is not the expectation to set. RegA+ is NOT the new shell or reverse merger… there is no “get-rich-quick” path here. It’s called a mini-IPO for a simple reason – it requires the same business fortitude found with traditional IPO (form S-1) event.

That said, let’s look at a year by the numbers:

  • 94 companies
  • $1.7 billion
  • 5 offerings qualified
  • A few have actually completed their offerings

94 companies is one every 2.75 business days! $6,500,000 raised every business day! That seems like great progress for a one-year-old!   It’s much too soon to judge a “completion” rate – as he vast amount of variables that propel any company’s success is vast: marketing, management, products and promise. But the top of the funnel is strong.

Coincidentally, (ahem) one company that is the poster child for Reg A+ success is presenting live today to an audience of live, online investors at virtualinvestorconferences.com.

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Elio Motors has put all the right pieces in place for a successful Reg A+ IPO, but most essentially, marketing. One example is they reached into their database of enthusiastic motor-fans to create “investomers.” Learn more, free. Their CEO is presenting live at 1:00 PM ET.

Following in Elios’ marketing footprint (but presenting 45 minutes earlier ) is ShiftPixy. You can read their offering prospectus here.

To close out using more baseball metaphors, a Reg A+ filing was not built to be a home run. At best, it’s a base hit – and management needs to work diligently to bring the “mini-IPO” runner home, base by base, communication by communication. Reg A+ is less expensive than a normal IPO, but NOT less effort.

Interested in the Reg A+ process? DOWNLOAD our worksheet here.

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SEC proposes new S-K regulation for mining companies’ disclosures

The SEC offered rules to reform Regulation S-K in regard to the property disclosure requirements for mining companies.

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On June 16, 2016, the SEC announced the proposed rules will support global mining disclosure standards and “give investors more comprehensive information of a registrant’s mining properties that they can use to make informed investment decisions.”

PER THE SEC, the new ruling will:

  • Provide one standard that requires registrants to disclose mining operations that are material to the company’s business or financial condition
  • Require a registrant to disclose mineral resources and material exploration results in addition to its mineral reserves
  • Permit disclosure of mineral reserves to be based on a preliminary feasibility study or a final feasibility study
  • Provide updated definitions of mineral reserves and mineral resources
  • Require, in tabular format, summary disclosure for a registrant’s mining operations as a whole as well as more detailed disclosure for material individual properties
  • Require that every disclosure of mineral resources, mineral reserves and material exploration results reported in a registrant’s filed registration statements and reports be based on, and accurately reflect information and supporting documentation prepared by, a “qualified person”
  • Require a registrant to obtain a technical report summary from the qualified person, which identifies and summarizes for each material property the information reviewed and conclusions reached by the qualified person about the registrant’s exploration results, mineral resources or mineral reserves

Investors, lawyers and corporations are invites to comment over the next 60 days. To submit comments, use the SEC’s Internet submission form or send an e-mail to rule-comments@sec.gov

The complete text of the Proposed Rules is available here.