SEC Issues Additional C&DI On Use Of Non-GAAP Measures
On December 13, 2022, the SEC issued seven new Compliance & Disclosure Interpretations (C&DI) related to the use of non-GAAP financial measures, the first new C&DI on the subject since 2018. Several of the new C&DI update or replace the language of prior existing C&DI. The C&DI cover revenue recognition, misleading information and GAAP reconciliation, in some cases replacing a principles-based response with a more prescriptive approach.
The SEC permits companies to present non-GAAP financial measures in their public disclosures subject to compliance with Regulation G and Item 10(e) of Regulation S-K. Regulation G and Item 10(e) require reconciliation to comparable GAAP numbers, the reasons for presenting the non-GAAP numbers, and govern the presentation format itself including requiring equal or greater prominence to the GAAP financial information.
GAAP continues to be and has consistently been criticized by the marketplace in general, with many institutional investors publicly denouncing the usefulness of the accounting standard. Approximately 90% of companies provide
SEC Continues It’s Crypto Focus
In the year and a half since Gary Gensler made it clear to the world that he intends to focus on the crypto “wild west” (see HERE) things have gone from bad to worse for the industry. Of course, it is not all the SEC’s extreme crypto scrutiny that is causing problems, but the very real crypto winter including the collapse of the FTX exchange and its FTX Future Fund, and the realization that the metaverse of tomorrow, will actually not be here until… tomorrow have all added to industry problems. Not to mention a slew of bankruptcy filings (FTX, Blockfi, Celsius and Voyager) and several other precarious financial positions (Blockchain.com, Coinbase, Crypto.com and Genesis, to name a few).
However, putting aside the crypto industry financial crisis, the U.S. regulators, including the SEC, FINRA and national exchanges, are scrutinizing any business with even a modicum of crypto focus to the point where it is almost impossible to move
Guidance On Executive Compensation Clawback Rules; NYSE And Nasdaq Issue Proposed Rules
On October 26, 2022, the SEC adopted final rules on listing standards for the recovery of erroneously awarded incentive-based executive compensation (“Clawback Rules”) (see HERE). The Clawback Rules implement Section 954 of the Dodd-Frank Act and require that national securities exchanges require disclosure of policies regarding and mandating clawback of compensation under certain circumstances as a listing qualification. The proposed rules were first published in July 2015 (see HERE) and have moved around on the SEC semiannual regulatory agenda from proposed to long-term and back again for years.
The Clawback Rules add a check box to Forms 10-K, 20-F and 40-F to indicate whether the form includes the correction of an error in previously issued financial statements and a related recovery analysis. Although the check box has already been added to the Forms, the new Clawback Rules are not effective until November 28, 2023. As such, the SEC has issued guidance regarding compliance with the check box in
SEC Issues Additional Guidance Through New C&DI On The Use Of Universal Proxy Cards
On November 17, 2021, the SEC adopted final rules requiring parties in a contested election to use universal proxy cards that include all director nominees presented for election at a shareholder meeting (see HERE). The original rules were proposed on October 16, 2016 (see HERE) with no activity until April, 2021, when the SEC re-opened a comment period (see HERE).
The rule adoption came with a flurry of rule amendments, proposals and guidance related to the proxy process, some of which reverses recent rules on the same subject, including amendments to the rules governing proxy advisory firms (see HERE) and additional proposed amendments to Rule 14a-8 governing shareholder proposals (see HERE).
The final rules require dissident shareholders and registrants to provide shareholders with a proxy card that includes the names of all registrant and dissident nominees. The rules apply to all non-exempt solicitations for contested elections other than those involving registered investment companies and business
M&A Broker Dealer Registration
On December 29, 2022, President Biden signed H.R. 2617, the Consolidated Appropriations Act, 2023 (“Appropriations Act”) into law. As sometimes happens in these voluminous bills, a nugget affecting our industry is buried. After about 2,600 pages of text we get to Title V – Small Business Mergers, Acquisitions, Sales and Brokerage Simplification. This short provision codifies into law the broker-dealer registration requirements for entities effecting securities transactions in connection with the sale of equity control in private operating businesses (“M&A Broker”). Previously the industry has been relying on a no-action letter issued by the SEC Division of Trading and Markets on January 31, 2014, for liability protection involving these transactions (see HERE).
Background
Section 15(a) of the Securities Exchange Act of 1934 (“Exchange Act”) requires securities brokers to register with the SEC and Section 15(b) prescribes the manner of registration. Section 3(a)(4) of the Exchange Act defines a “broker” as “any person engaged in the business
SEC Fall 2022 Regulatory Agenda
On January 4, 2023, the SEC published its semiannual Fall 2022 regulatory agenda (“Agenda”) and plans for rulemaking. The Unified Agenda of Regulatory and Deregulatory Actions contains the Regulatory Plans of 28 federal agencies and 68 federal agency regulatory agendas. My favorite Commissioner, Hester M. Peirce, was quiet about the agenda, not issuing a public statement this time. Upon publication of the Spring 2022 Agenda, Commissioner Peirce ripped the Agenda as being disconnected with the SEC’s core mission and as being focused on special interest groups instead of a broad range of market participants. The Agenda is published twice a year, and for several years I have blogged about each publication.
The Agenda is broken down by (i) “Pre-rule Stage”; (ii) Proposed Rule Stage; (iii) Final Rule Stage; and (iv) Long-term Actions. The Proposed and Final Rule Stages are intended to be completed within the next 12 months and Long-term Actions are anything beyond that. The number of items to
SEC Adopts Amendments To Rule 10b5-1 Insider Trading Plans
On December 14, 2022, the SEC adopted amendments to Rule 10b5-1 under the Securities Exchange Act of 1934 (“Exchange Act”) to enhance disclosure requirements and investor protections against insider trading. The amendments include updates to Rule 10b5-1(c)(1), which provides an affirmative defense to insider trading liability under Section 10(b) and Rule 10b-5. The proposed rules were published in HERE. Although there is a statutory framework, the laws surrounding insider trading are largely based on judicial precedence and are difficult to navigate. The rule amendments are intended to provide clarity to the marketplace.
Since the adoption of Rule 10b5-1, courts, commentators, and members of Congress have expressed concern that the affirmative defense under Rule 10b5-1(c)(1)(i) has allowed traders to take advantage of the liability protections provided by the rule to opportunistically trade securities on the basis of material nonpublic information. Furthermore, some academic studies of Rule 10b5-1 trading arrangements have shown that corporate insiders trading pursuant to
2022 Annual Report Of The Office Of The Advocate For Small Business Capital Formation
The Office of the Advocate for Small Business Capital Formation (“Office”) has published its Annual Report for fiscal year 2022 (“Report”). The Report is delivered to the Committee on Banking, Housing, and Urban Affairs of the U.S. Senate and the Committee on Financial Services of the U.S. House of Representatives directly by the Office, without review or input from the SEC at large.
Background
The SEC’s Office of the Advocate for Small Business Capital Formation launched in January 2019 after being created by Congress pursuant to the Small Business Advocate Act of 2016 (see HERE). The mission of the Office is to advocate for pragmatic solutions to accessing capital markets and business growth.
The Office has the following functions: (i) assist small businesses (privately held or public with a market cap of less than $250 million) and their investors in resolving problems with the SEC or self-regulatory organizations; (ii) identify and propose regulatory changes that would benefit small businesses
Report On The 41st Annual Small Business Forum
The Office of the Advocate for Small Business Capital Formation (“Office”) has delivered a report to Congress following the 41st annual small business forum (“Report”). The Report includes recommendations of the Office and its annual forum participants. The forum itself featured panelists and discussions on (i) empowering entrepreneurs, including tools for capital raising; (ii) hometown entrepreneurship including how entrepreneurs can thrive outside of capital raising hubs; (iii) new investor voices including how emerging fund managers are diversifying capital; and (iv) small-cap world including what to know and how to think ahead.
I’ve been writing about the forum for many years and have even attended a few times. Each year the topics are similar, but the recommendations tend to transform over time. Last year the topics included (i) navigating ways to raise early rounds; (ii) diligence including how savvy early-stage investors build diversified portfolios; (iii) tools for emerging and smaller funds and their managers; and (iv) perspectives on smaller public companies.
Compliance Deadlines For Nasdaq Board Diversity Rules
On August 6, 2021, the SEC approved Nasdaq’s board diversity listing standards proposal. Nasdaq Rule 5605(f) requires Nasdaq listed companies, subject to certain exceptions, to: (i) to have at least one director who self-identifies as a female, and (ii) have at least one director who self-identifies as Black or African American, Hispanic or Latino, Asian, Native American or Alaska Native, Native Hawaiian or Pacific Islander, two or more races or ethnicities, or as LGBTQ+, or (iii) explain why the company does not have at least two directors on its board who self-identify in the categories listed above. The rule changes also made headlines in most major publications. One of the most common themes in the press was the lack of inclusion of people with disabilities in the definition of an “underrepresented minority” for purposes of complying with the new rules.
The original rules had tiered compliance deadlines which Nasdaq (and practitioners) found confusing and unnecessarily complicated. On December 14,
