So here's a nugget that is buried in the SEC's new adopting release on harmonization of the private offering exemptions (see this PubCo post): amendments to Reg S-K Item 601 to "adjust" the exhibit filing requirements related to confidential treatment by removing the competitive harm requirement in light of the SCOTUS decision in Food Marketing Institute v. Argus Leader Media. (See this PubCo post.) What in the world does that have to do with harmonizing private offering exemptions, you ask?
You might recall that, under the SEC's streamlined approach to confidential treatment adopted in March 2019 as part of FAST Act Modernization and Simplification of Regulation S-K, under Reg S-K Item 601(b)(2)(ii) and (b)(10)(iv), companies are now able to redact information from material contracts and plans of acquisition without the need to submit in advance formal confidential treatment requests, so long as the redacted information (i) is not material and (ii) would be competitively harmful if publicly disclosed. Under those rules, companies were required, among other things, to "include a prominent statement on the first page of the redacted exhibit that certain identified information has been excluded from the exhibit because it is both (i) not material and (ii) would be competitively harmful if publicly disclosed." Upon request by the staff, companies are required to submit, on a supplemental basis, an unredacted paper copy and supporting analyses regarding materiality and competitive harm. Because it is streamlined and much more convenient, this process is preferred by most companies. (See this PubCo post.)
In June 2019, SCOTUS decided Food Marketing Institute, which involved an effort by a South Dakota newspaper to obtain from the Department of Agriculture, under the Freedom of Information Act, the names and addresses of retail stores participating in SNAP, the national food-stamp program. The result in the case broadened the definition of "confidentiality" under FOIA Exemption 4, tossing out the "substantial com¬petitive harm" test. (See this PubCo post.)
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Exemption 4-probably familiar to anyone who has submitted a CTR to the SEC- shields from disclosure "trade secrets and commercial or financial information obtained from a person and priv¬ileged or confidential." In National Parks & Conservation Association v. Morton, which was considered the leading case on the issue since it was decided in 1974, the D.C. Circuit held that information was "confidential" within the meaning of Exemption 4 if its disclosure was likely "(1) to impair the Government's ability to obtain necessary information in the future; or (2) to cause substantial harm to the competitive position of the person from whom the information was obtained." Accordingly, in a CTR, companies could redact information only if it was not material, had not been previously disclosed and was commercially sensitive information the disclosure of which would likely cause competitive harm. The cases since, while sometimes critical of National Parks, have focused largely on the "competitive harm" prong of the test. In 1992, Critical Mass Energy Project v. NRC, with the D.C. Circuit sitting en banc, established a different test for confidentiality of information submitted voluntarily, but importantly, reaffirmed the National Parks test for "confidentiality" for information that "the person was obliged to furnish the Government."
But the SEC's new streamlined process for confidentiality no longer requires submission of a CTR and, importantly, no longer directly adverts to FOIA Exemption 4. Instead of just referring to Exemption 4, the new rules expressly recite certain requirements for claims of confidentiality drawn from Exemption 4, including the one that was tossed out by SCOTUS in the decision, the competitive harm requirement. (See this PubCo post.) Only the cumbersome process under Rules 406 and 24b-2, which requires submission of a CTR, refers to FOIA exemption 4.
In December 2019, Corp Fin posted new CF Disclosure Guidance Topic No. 7, Confidential Treatment Applications Submitted Pursuant to Rules 406 and 24b-2, which provided staff guidance on the old stodgy alternative approach that still lives but is now rarely used. In that guidance, with regard to the requirement to identify and analyze in the CTR the FOIA exemption on which the company is relying, typically Exemption 4, the staff referred to Food Marketing Institute, which, the staff suggested, "may be helpful in providing this analysis." Accordingly, it became substantially easier for parties to claim "confidentiality" under FOIA when filing a CTR under the old approach to seeking confidentiality. As a result, however, there was a substantial inconsistency between the two approaches that went beyond mere procedure. As I noted in this PubCo post, whether Food Marketing Institute would have any significant impact on the SEC's streamlined process for seeking confidentiality would necessarily depend on whether the SEC elected to take up the issue affirmatively at some point.
Well, the SEC elected to take it up in the adopting release for harmonization of the private offering exemptions. The adopting release observes that, in Food Marketing Institute, SCOTUS "rejected the Circuit Court's longstanding test for determining what information was confidential under Exemption 4 and adopted a new definition of 'confidential' that does not include a competitive harm requirement. The Supreme Court stated that '[a]t least where commercial or financial information is both customarily and actually treated as private by its owner and provided to the government under an assurance of privacy, the information is "confidential" within the meaning of Exemption 4.'"
As adopted, the amendments "adjust the exhibit filing requirements by removing the competitive harm requirement and replacing it with a standard that permits information to be redacted from material contracts if it is the type of information that the issuer both customarily and actually treats as private and confidential, and which is also not material." The amendments also modify the prominent statement required on the first page of the redacted exhibit to now provide that "certain identified information has been excluded from the exhibit because it is both not material and is the type that the registrant treats as private or confidential."
Generally, the amendments will become effective 60 days after publication in the Federal Register.
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But how did this change end up in a release on private offerings? My speculation is that, as part of its review of the exempt offering framework, the SEC determined that, in light of the streamlined process available for obtaining confidentiality in material contracts under Item 601 of Reg S-K, compliance with Reg A was actually more difficult than for registered offerings in that context. Accordingly, the SEC decided to adopt amendments to revise Form 1-A to generally conform the procedures for filing redacted material contracts or plans of acquisition to the streamlined process under Item 601, with the exception of inclusion of a confidentiality standard patterned after Food Marketing Institute. And from there, it only makes sense to make the parallel change in Item 601.
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