United States: Capital Markets & Public Companies Quarterly: Catching Up On The SEC's Active Second Quarter


In the second quarter of 2016, the US Securities and Exchange Commission (SEC) has been very active, adopting new rules and interpretations, issuing proposed rules and publishing a comprehensive concept release aimed at modernizing the disclosure requirements set forth under Regulation S-K.

In Depth

New SEC C&DIs Regarding Non-GAAP Financial Measures

On May 17, 2016, the SEC issued several new Compliance & Disclosure Interpretations (C&DIs) and modified existing C&DIs to provide additional guidance on the use of non-GAAP financial measures. The new guidance reflects concerns recently voiced by the SEC about the proliferation of the use of non-GAAP financial measures, including the types of adjustments taken, the prominence of such adjustments and the focus given to these non-GAAP financial measures by the financial news media who often report the non-GAAP measure without reference to the related GAAP measure. For more information, please refer to our May 23 publication on the topic.

Regulation S-K Concept Release: SEC Seeks Public Comments Regarding Financial and Business Disclosure Requirements

On April 13, 2016, the SEC published a concept release in anticipation of future efforts to modernize certain business and financial disclosure requirements of Regulation S-K. Regulation S-K is the central repository for the SEC's rules requiring disclosure of certain business and financial information outside of the financial statements that companies must provide in their filings under the Securities Act of 1933 (Securities Act) and the Securities Exchange Act of 1934 (Exchange Act). The concept release is part of an initiative by the SEC to seek feedback from reporting companies and investors regarding ways to improve the current disclosure requirements in SEC periodic reports. The concept release includes a wide-ranging series of questions for reporting companies and investors intended to help the SEC assess whether the business and financial disclosure requirements in Regulation S-K (many of which have remained unchanged since they were first adopted decades ago) continue to provide the information that investors need to make informed investment and voting decisions. Because it is a concept release, no changes were mandated, but it suggests there may be changes to the Regulation S-K disclosure framework in the future.

Amendments to Form 10-K: SEC Formalizes Framework for Form 10-K Summaries

On June 1, 2016, the SEC continued to implement the Fixing America's Surface Transportation Act (FAST Act) with the adoption of an interim final rule, which states that a reporting company may, at its option, include in its Form 10-K a summary of the information provided in that Form 10-K filing. Each item in the summary must include a cross‑reference by hyperlink to the material in the Form 10-K to which such summary item relates and the new rule permits reporting companies to summarize information included in Form 10-K through incorporation by reference to an exhibit (such as the annual report to security holders), so long as the summary includes a hyperlink to the exhibit. The summary is not required to be any specific length or in any specific location in the Form 10-K filing, but the new rule indicates that any such summary should be brief.

The new rule is principles-based and affords a reporting company the flexibility to decide which items to summarize, so long as the information is presented fairly and accurately. Reporting companies should weigh the potential increased liability considerations against the potential benefits of including a summary.

JOBS and FAST Act Rule Changes Become Effective

On May 3, 2016, the SEC adopted final rule amendments (Changes to Exchange Act Registration Requirements to Implement Title V and Title VI of the JOBS Act), required by the JOBS Act and the FAST Act, to several SEC rules promulgated under Sections 12(g) and 15(d) of the Exchange Act. The amendments align the affected rules to certain provisions of the JOBS Act and FAST Act that became effective upon enactment. These amendments represent the completion of the SEC's mandated rulemaking in connection with the JOBS Act.

The final rule amends Exchange Act Rules 12g-1 through 12g-4 as well as Exchange Act Rule 12h-3 to reflect the new thresholds for Exchange Act registration established by the JOBS Act.

  • Prior to passage of the JOBS Act, an issuer was required to register under the Exchange Act if, at the end of its fiscal year, it had more than $10 million in total assets and a class of equity securities held of record by more than 500 persons. The JOBS Act amended Section 12(g)(1) of the Exchange Act to increase the holders of record component of the registration threshold to either 2,000 holders of record or 500 holders of record that are not accredited investors and, in the case of a bank, a savings and loan holding company (as defined in Section 10 of the Home Owners' Loan Act) or a bank holding company (as defined in Section 2 of the Bank Holding Company Act of 1956), the threshold has been increased to 2,000 holders of record. Exchange Act Rule 12g-1 has been amended to reflect these changes.
  • In addition, a bank, bank holding company or savings and loan holding company may terminate or suspend the registration of a class of securities under the Exchange Act if the securities are held of record by fewer than 1,200 persons, which is an increase from the 300-person threshold generally applicable to other companies.

The final rule also clarifies that an "accredited investor" for purposes of Exchange Act Section 12(g)(1) is determined by reference to the definition of "accredited investor" in Rule 501(a) of Regulation D.

  • Pursuant to the amended Exchange Act Rule 12g-1, an issuer must make the determination of whether or not an investor is an "accredited investor" as of the end of the issuer's fiscal year, rather than at the time the securities are sold to that investor.
  • The SEC did not use this opportunity to provide issuers with a safe harbor for determining an equity holder's accredited investor status, but did note that it was concerned that relying on old information could result in issuers making unreliable determinations regarding the status of their equity holders.
  • For private companies with large equity holder bases, this reinforces the need to regularly solicit information from investors with respect to their accredited investor status to avoid accidentally becoming a reporting company. A robust internal governance and record keeping function could help issuers mitigate such risk.

The final rule also includes an amendment to Rule 12g5-1's definition of "held of record." The new definition permits issuers to exclude securities held by persons who received them in connection with employee compensation plans in transactions exempt from registration under the Securities Act.

  • In addition, the SEC provided a non-exclusive safe harbor under Rule 12g5-1(a)(8) that allows an issuer to deem a person to have acquired the securities pursuant to an employee compensation plan if the plan and person receiving such securities met the conditions of Securities Act Rule 701(c). The amended rule incorporates the definition of "compensatory benefit plan" provided in Securities Act Rule 701.
  • The exclusion provided in the amended Rule 12g5-1 applies only while the shares are held by the person who received them under the compensatory plan. Issuers that permit employees to sell securities acquired pursuant to a compensatory plan should ensure they have systems to track such resales in order to avoid crossing the registration requirement threshold.

Inline XBRL

On June 13, 2016, the SEC issued a press release announcing that it will now permit companies to voluntarily file financial statement data in Inline XBRL format. According to McDermott's Gary Emmanuel, the adoption of Inline XBRL formatting by the SEC represents "an important step forward in the evolution of XBRL" and "should be embraced by industry stakeholders" as it could potentially make the EDGAR conversion process much more efficient for reporting companies.

SEC Announces Proposed Amendments to "Smaller Reporting Company" Definition

On June 27, 2016, the SEC published a notice of proposed rulemaking that, if adopted, will expand the number of "smaller reporting companies" that can avail themselves of the SEC's scaled disclosure accommodations. The proposed amendments would increase the smaller reporting company threshold to include companies with less than $250 million in public float from the current threshold of $75 million. In addition, the proposed rule amendments would permit a company without a public float to provide scaled disclosures so long as its annual revenues are less than $100 million—in contrast to the current threshold of $50 million.

Capital Markets & Public Companies Quarterly: Catching Up On The SEC's Active Second Quarter

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