September 20, 2006

SEC’s Chief Accountant Issues Guidance on Option Backdating

Yesterday, the SEC’s Chief Accountant issued guidance – in the form of this letter – on determining measurement dates for option grants under APB 25. As stated in the SEC’s press release, the letter discusses the accounting consequences under APB 25 of dating an option award to predate the actual award date; option grants with administrative delays; uncertainty as to the validity of prior grants; among other related circumstances.

Here is one member’s reaction to the new guidance: Is it my imagination, or is this letter incredibly helpful and long overdue? If only we could get the IRS to give similar guidance for ISO/409A/162(m) purposes. I think these two excerpts from the SEC Staff’s letter alone resolve 90% of the options nonsense problems (without whitewashing the true back-dating situations):

“Where a company’s facts, circumstances, and pattern of conduct evidence that the terms and recipients of a stock option award were determined with finality on an earlier date prior to the completion of all required granting actions, it may be appropriate to conclude that a measurement date under Opinion 25 occurred prior to the completion of these actions. This would only be the case, however, when a company’s facts, circumstances, and pattern of conduct make clear that the company considered the terms and recipients of the awards to be fixed and unchangeable at the earlier date. The practices described in the preceding paragraph would, of course, preclude a company from concluding that a measurement date occurred prior to the completion of all required granting actions.


The staff does not believe that the lack of complete documentation being available several years after the activities occurred should necessarily result in a “default” to variable accounting or to treating the awards as if they had never been granted. Rather, a company must use all available relevant information to form a reasonable conclusion as to the most likely option granting actions that occurred and the dates on which such actions occurred in determining what to account for.”

Shiver Me Timbers!

Woke up humming “Rhinestone Cowboy” and knew it was gonna be an odd day – but at least it wasn’t “The Year of the Cat“! Then found out it was “Talk Like a Pirate” Day – and that my pirate name is “Iron Tom Vane.”

Notwithstanding the foregoing, I have decided to make a difference in the world by starting my own new holiday! Please join me on November 14th for “Talk Like Lawyers Write” Day. Yes, that’s the best I could come up with – but it beats the alternative: “I Love Practicing Law (No, I Really Really Do)” Day…

“I See Rich People”

Here is the latest observation from Keith Bishop: “One of the unintended consequences of federal and state private placement exemptions has been that they can favor people who know rich people. A start-up whose founders don’t have rich relations or friends is often caught between the prohibition on general solicitation and the practical difficulty of finding investors without incurring the expense of filing a registration statement.

This has forced many issuers to turn to so-called finders. Finders are not registered broker-dealers. They rely on judicial and administrative exceptions from the broker-dealer registration requirement. At the SEC level, the Paul Anka no-action letter is often cited, but the SEC staff’s position on finders may have narrowed in the ensuing years. The result is a less than desirable situation with issuers and their finders operating in an area without a lot of clear guidelines. Sometimes, issuers are themselves victimized by the activities of finders.

In recent years, some states have stepped up enforcement over unlicensed finders (usually by scrutinizing Form D filings for commission payments). As mentioned in the release, both the ABA Section on Business Law and the SEC’s advisory committee on smaller public companies have addressed the question of finder regulation. I’m pleased to see that the new California Commissioner is willing to put these issues on the table in this new proposal.” We have posted a copy of the California Commissioner’s proposal in our “Private Placements” Practice Area.