May 18, 2018

“Going Concerns”: Going. . . Going. . . But Not Gone

This “Audit Analytics” blog reviews its recent survey of 17 years of auditor opinions containing “going concern” qualifications.  Not surprisingly, going concern opinions peaked in 2009 – a total of 3,551 were issued for financial statements covering that year.  But since then, they’ve been on a steady decline, with only 1,970 issued for 2016 financials.

That seems like good news, but it’s complicated by the fact that attrition played a large role in the decline between 2015 and 2016.  However, the number of first time going concerns is estimated to be 467, which would be the 6th consecutive year in which that number was under 600.

The survey’s most troubling conclusion is that once a company finds itself slapped with a going concern opinion,it’s becoming increasingly difficult for them to dig out from under it:

The number of companies that improved well enough to shed their going concern status is tied for the second lowest population of companies that recovered during the 16 years analyzed. This very low number of improving companies indicates that many companies with going concerns are still experiencing difficulties and are unable to improve enough to rid the going concern status.

Crowdfunding: More Bang for Your Buck

One of the problems with crowdfunding under Regulation CF is that you don’t get a lot of bang for your buck – issuers can only raise $1 million per year. But this recent blog from Andrew Abramowitz highlights a potential workaround for companies looking to raise more money – a simultaneous Regulation CF & Rule 506(c) offering. Here’s an excerpt:

One might think that a way to do this would be to conduct a traditional private placement under Rule 506(b), which has no dollar limit, alongside the Regulation CF offering. However, this is a poor fit because of so-called “integration” issues. Regulation CF permits general solicitation, subject to limits, while Rule 506(b) by definition prohibits the “blast-it-out” approach, so efforts to spread the word on the Regulation CF offering could be deemed to be improper promotion of the Rule 506(b) offering.

A better fit would be another exemption arising out of the JOBS Act: a Rule 506(c) offering to all accredited investors, with no dollar limitation, which can be offered through the same portals that are required for Regulation CF offerings. Because general solicitation is permitted under both exemptions, there is not the same integration issue as with Rule 506(b).

By combining Regulation CF and Rule 506(c) in an offering via a web portal, companies can raise essentially any amount needed. The portal would steer non-accredited investors to the Regulation CF bucket, and accredited investors would invest under Rule 506(c). This allows companies to allow for small increment investments in situations where it doesn’t want to limit its shareholder base to accredited investors, while not being constrained meaningfully by the offering dollar limit.

Companies opting for this approach need to pay close attention to the respective rules for each exemption – particularly those imposing restrictions on communications outside the portal during a Regulation CF offering.

Yahoo! & Loss Contingencies: The Shoe That Didn’t Drop

As a follow-up to last month’s blog about the Yahoo! enforcement proceeding, here’s a recent memo from Locke Lord’s Stan Keller discussing an issue that the SEC didn’t raise in the Yahoo! case:

The SEC’s Yahoo enforcement action did not address the failure of Yahoo’s financial statements to include disclosure (and possibly an accrual) under Accounting Standards Codification 450-20 for the potential loss contingencies resulting from the 2014 data breach. Not much imagination typically is required to foresee the potential for significant liabilities arising from a massive cyberbreach and therefore the importance of considering the financial statement implications of that breach among other required disclosures.

Stan contrasts the Yahoo! proceeding with the SEC’s 2017 enforcement action against General Motors – where ASC 450 was specifically referenced. In both cases, the loss contingencies involved unasserted claims that, under ASC 450-20, required an assessment concerning whether claims were “probable” and, if so, whether a material loss was “reasonably possible.” If this test is met, disclosure is required, and the estimated range of loss must be quantified if an estimate can be made. Any loss that is probable and can be estimated must also be accrued as a charge to the income statement.

The SEC may not have brought ASC 450 up in the Yahoo! case, but let’s face it – that seems to have been a pretty target rich environment, so we probably shouldn’t read too much into that. Companies considering disclosure issues around data breaches would be smart to keep ASC 450’s requirements in mind.

John Jenkins