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Confidential Treatment In SEC Filings

Earlier this year the SEC adopted amendments to Regulation S-K as required by the Fixing America’s Surface Transportation Act (“FAST Act”) (see HERE).  Among other changes, the amendments allow companies to redact confidential information from most exhibits without filing a confidential treatment request (“CTR”), including omitting schedules and exhibits to exhibits.  Likewise, the amendments allow a company to redact information that is both (i) not material, and (ii) competitively harmful if disclosed without the need for a confidential treatment request.  The enacted amendment only applies to material agreement exhibits under Item 601(b)(10) and not to other categories of exhibits, which would rarely contain competitively harmful information.

Since the rule change took effect, the SEC has streamlined its procedures for granting CTRs and for applying for extended confidential treatment on previously granted orders.  The amendments to the CTR process became effective April 2, 2019.

This blog begins with a discussion of the procedures for seeking confidential treatment, followed by a discussion of the legal basis supporting and substantiating the confidential treatment of information.  The CTR process and confidential treatment rules discussed herein are completely separate from the ability to file a registration statement on a confidential basis (see HERE) which would then be made public in its entirety before effectiveness.

Confidential Treatment Requests for Material Contracts

Amendments to Item 601(b)(10) of Regulation S-K allow a company to file redacted material contracts without applying for confidential treatment of the redacted information provided the redacted information (i) is not material and (ii) would be competitively harmful if publicly disclosed.  If it does so, the company should mark the exhibit index to indicate that portions of the exhibit or exhibits have been omitted and 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 not material and would likely cause competitive harm to the registrant if publicly disclosed. The company also must indicate by brackets where the information is omitted from the filed version of the exhibit.

If requested by the SEC, the company must promptly provide an un-redacted copy of the exhibit on a supplemental basis. The SEC also may request the company to provide its materiality and competitive harm analyses on a supplemental basis.  Any requested supplemental information must be provided in paper format and only to the designated email address provided by the SEC to protect and preserve its confidential nature.  If the SEC does not agree with the analysis, it could request that the company amend its filing to include any previously redacted information. If a redacted exhibit is included with a registration statement, any questions regarding the confidential treatment will need to be fully resolved before the SEC will declare the registration statement effective.

The company may request confidential treatment of the supplemental material submitted to the SEC pursuant to Rule 83 while it is in the possession of the SEC.  After completing its review of the supplemental information, the SEC will return or destroy the information at the request of the company if the company complies with the procedures outlined in Rules 418 or 12b-4. Rules 418 or 12b-4 require that a company request that the SEC either return or destroy the supplemental information, at the same time as it is first furnished to the SEC and that returning or destroying the information (i) is consistent with the protection of investors and (ii) is consistent with the Freedom of Information Act.  Also, if information is electronically provided to the SEC, the SEC has no obligation to return or destroy same.

Although the letter requesting additional information, and the closing of the review letter, will both be made public on the EDGAR system, the SEC will not make public its comments regarding redacted exhibits, nor the company’s responses thereto.

The amendments are not meant to alter what information is deemed confidential or can be omitted, but rather to streamline the process by allowing a company to redact without the confidentiality treatment process.  The SEC may still randomly review company filings and “scrutinize the appropriateness of a registrant’s omissions of information from its exhibits.”

Confidential Treatment Requests Under Rule 83

Rule 83 provides a procedure for requesting that information be kept confidential from Freedom of Information Act (“FOIA”) requests where no other procedure, such as Rules 406 or 24b-2, are available.  Generally, Rule 83 is used in the context of requests for supplemental information, examinations, inspections and investigations.  Under Rule 83, the submitter of information must mark each page with “Confidential Treatment Requested by [name]” and an identifying number and code, such as a Bates-stamped number. Also, the words “FOIA Confidential Treatment Request” must appear on the top of the first page of the request. Like all other CTR’s, the request must be via paper and not electronically.  The SEC has provided a specific fax line and office (the FOIA Office) to receive Rule 83 CTR’s to maintain their confidentiality, even among SEC staff.  A confidential treatment request will expire 10 years from the date the FOIA Office receives it unless that office receives a renewal request before it expires.

The requester may claim personal or business confidentiality, but need not substantiate his or her request until the FOIA Office notifies him or her of a FOIA request for the records.  If a FOIA request is received for the records, the person that requested confidential treatment will be notified and given an opportunity to provide a legal and factual analysis supporting confidential treatment.  A substantiation submittal must include: (i) the reasons that the information can be withheld under FOIA and referring to the specific provisions of FOIA supporting same; (ii) any other statutes or regulatory provisions that may govern the information; (iii) the existence and applicability of any prior determinations by the SEC, other federal agency or court relating to the confidential treatment of the information; (iv) the adverse consequences to a business enterprise, financial or otherwise, that would result from disclosure of confidential commercial or financial information, including any adverse effect on the business’ competitive position; (v) the measures taken to protect the confidentiality prior to and after submission to the SEC; (vi) the ease or difficulty of a competitor’s obtaining or compiling the commercial or financial information; (vii) whether the information was voluntarily submitted to the SEC; (viii) if the substantiation argument document itself should be kept confidential; and (ix) such additional facts and legal analysis as appropriate to support the request.

Where a Rule 83 CTR is being made in the course of live testimony or oral discussions, the request for confidential treatment must be made contemporaneously with providing the information and followed with a written request no later than 30 days later.

Rule 83 provides for an appeal process where an initial determination that confidential treatment is not warranted.  Rule 83 appeals are reviewed and decided by the SEC’s Office of General Counsel.  If the General Counsel decides the information does not need to be kept confidential, it will give the person 10 days’ notice during which time a person could file an action in federal court to continue to fight to maintain the confidentiality of the information.  Likewise, if the SEC determines that information should be kept confidential, the person seeking the information can appeal by filing suit in federal court.

Rule 83 cannot be relied upon to request confidential treatment for information that would otherwise be required to be disclosed in SEC registration statements or reports.  In that case, the person making the CTR would have to rely on the new procedures for redacting information in material contracts or make a CTR under Rules 406 or 24b-2.

Confidential Treatment Requests Under Rule 406 or 24b-2

Rule 406 of the Securities Act of 1933 and Rule 24b-2 of the Securities Exchange Act of 1934 set forth the exclusive procedures for seeking confidential treatment for any information that may be required to be publicly filed under either Act and for which the streamlined procedures for confidential treatment of material contracts and their exhibits is not available.  Like all CTR’s, requests under these rules must be made in paper format and not electronic.  Also, like all CTR’s, if a redacted exhibit is included with a registration statement, any questions regarding the confidential treatment will need to be fully resolved before the SEC will declare the registration statement effective.

To make a CTR under Rule 406 or 24b-2, a person omits the confidential information from the relevant EDGAR filing, noting that information has been omitted based on a CTR, and concurrently files the confidential information with the SEC using the specific fax number and designated person for receiving such information.  All documents and information must be marked “Confidential Treatment.”

The CTR must include a cover letter or memo containing (i) identification of the information sought to be kept confidential; (ii) a statement of the grounds for keeping the information confidential, including reference to particular provisions under FOIA and other SEC rules and regulations; (iii) specific time period for which confidentiality is sought (year, month and date) and a justification for such period; (iv) a detailed explanation of why, based on the facts and circumstances of the particular case, disclosure of the information is unnecessary for the protection of investors; (v) a written consent to the furnishing of the confidential information to other government agencies, offices, or bodies and to the Congress; and (vi) the name, address and telephone number of the person to whom all notices and orders should be directed.

For an Exchange Act Rule 24b-2 CTR, the name of each exchange upon which the materials would be filed (or omitted) must also be included.  Furthermore, the submission must include a statement that: (i) none of the confidential information has been disclosed to the public; (ii) disclosure of the information will cause substantial competitive harm to the company; and (iii) disclosure of the confidential information is not necessary for protection of investors.

If confidential treatment is granted, an order will be entered and filed on EDGAR.  If confidential treatment is denied, the company will have an opportunity to withdraw the filing with the confidential information if withdrawal is otherwise allowable (such as a voluntary S-1 filing or Exchange Act report by a voluntary filer). A denial may also be appealed.

Application for Extension of Confidential Treatment

Companies that have previously obtained a confidential treatment order for a material contract must continue to file extension applications under Rules 406 or 24b-2 if they want to protect the confidential information from public release pursuant to a Freedom of Information Act request after the original order expires.  The SEC has created a simple one-page form to apply for an extension of time for which a confidential treatment order had previously been granted.  Rather than submitting a whole new application, with the confidential information included, a company seeking to extend a confidential treatment order previously granted can simply affirm that the facts and circumstances that supported the prior application continue to be true, complete and accurate.

The short-form application allows for an extension of confidential treatment for a period of three, five or ten years and requires a brief explanation to support the request.  The request for extension must be filed prior to the original order’s expiration.  If the applicant reduces the redactions from the previous version, the revised redacted version of the contract must be publicly filed when the short-form extension application is submitted.  The short-form application cannot be used to add new exhibits to the application or make additional redactions.  In that case, a full application under Rules 406 or 24b-2 would still be required.

The SEC has provided an email address (CTExtensions@sec.gov) for submittal of the new short-form application.  The email address is exclusive to these short-form applications and, as such, should not be used in connection with any other type of confidential treatment or extension request.  Upon approval, the SEC will post the order granting CTR on the applicant’s EDGAR page.

What Information Qualifies for Confidential Treatment

Generally speaking, a company can seek confidential treatment for information which could adversely affect the company’s business and financial condition, usually because of competitive harm, if disclosed.  Interestingly, in adopting its various CTR rules, the SEC included a requirement that the disclosure of information would result in “competitive harm” to track the judicial interpretations for FOIA protection which, in turn, required “competitive harm.” However, in October 2018 the U.S. Supreme Court rejected and overruled the requirement that a competitive harm requirement be added to the plain language of the FOIA statute.  As of now, the SEC has not amended any of its rules and it is unclear if it will do so in light of the U.S. Supreme Court ruling.

In addition, as mentioned under each of the procedures outlined above, a CTR must include specific citations to an exemption from disclosure under FOIA.  The FOIA specifies nine categories of information that may be exempted from the FOIA’s general requirement to make information available to the general public. The most commonly used exemption for public companies allows for confidential treatment for “trade secrets and commercial or financial information obtained from a person and privileged or confidential.”

Although FOIA may generally exempt trade secrets, not all trade secrets may be kept confidential by public companies.  In essence, when a company determines to go public and files a registration statement under either the Securities Act or Exchange Act, and thus agrees to file reports with the SEC, the company is agreeing to make public the information required by Regulation S-K and S-X.  A company cannot avoid these specific requirements by claiming confidentiality.  Examples of information that a private company may deem confidential, but for which a public company will need to disclose, include: (i) the identity of 10% or greater customers; (ii) the identity of 5% or greater shareholders; (iii) the dollar amount of firm backlog orders; (iv) the duration and effect of all patents, trademarks, licenses and concessions held; (v) related party transactions; and (vi) executive compensation.

Assuming that information is not specifically required to be disclosed under the Securities Act or Exchange Act, a “trade secret” is “a secret, commercially valuable plan, formula, process or device that is used for the making, preparing, compounding or processing of trade commodities and that can be said to be the end product of either innovation or substantial effort.”  Under FOIA, information is confidential if disclosure is likely to: (i) impair the government’s ability to obtain necessary information in the future; or (ii) to cause substantial harm to the competitive position of the person from whom the information was obtained.

Examples of information that a public company could successfully complete a CTR for include (i) pricing terms; (ii) technical specifications; (iii) payment terms; (iv) sensitive information regarding business strategy, or timing of research, development and commercialization efforts; (v) details of intellectual property (that isn’t already public, such as in a filed patent); (vi) details of cybersecurity procedures; and (vii) customer databases.

A company can never obtain confidential treatment for information that is already in the public domain or has been publicly disclosed, even if inadvertently.  Accordingly, it is important that a company be very careful to ensure that any information for which it seeks confidential treatment is kept strictly confidential, including by third parties.  For example, care should be given that a counterparty to a contract does not issue a press release or otherwise make provisions public.

The Author

Laura Anthony, Esq.
Founding Partner
Anthony L.G., PLLC
A Corporate Law Firm

Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including sitting on the board of directors of the American Red Cross for Palm Beach and Martin Counties, and providing financial support to the Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others. She is also a financial and hands-on supporter of Palm Beach Day Academy, one of Palm Beach’s oldest and most respected educational institutions. She currently resides in Palm Beach with her husband and daughter.

Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.

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