Yesterday, the SEC proposed amendments to Rule 3-10 & Rule 3-16 of Regulation S-X, which address the financial information about subsidiary issuers, guarantors & affiliate pledgors required in registered debt offerings. Here’s the 213-page proposing release.
According to the SEC’s press release, the proposed changes are intended to “simplify and streamline the financial disclosure requirements” applicable to registered debt offerings for guarantors and issuers of guaranteed securities, as well as for affiliates whose securities collateralize a registrant’s securities. Highlights of the proposed amendments to Rule 3-10 include:
– replacing the condition that a subsidiary issuer or guarantor be 100% owned by the parent company with a condition that it be consolidated in the parent company’s consolidated financial statements;
– replacing the requirement to provide condensed consolidating financial information, as specified in existing Rule 3-10, with certain financial and non-financial disclosures;
– permitting the proposed disclosures to be provided outside the footnotes to the parent company’s audited annual and unaudited interim consolidated financial statements in the registration statement prior to the first sale of securities;
– requiring the proposed disclosures to be included in the footnotes to the parent’s financial statements beginning with the annual report for the first fiscal year during which sales of the debt securities were made.
In addition, the obligation to provide the required disclosures would terminate when the issuers and guarantors no longer had an Exchange Act reporting obligation with respect to the securities – instead of terminating only when the securities were no longer outstanding, as provided under current rules.
Proposed changes to Rule 3-16 include:
– replacing the requirement to provide separate financial statements for each affiliate whose securities are pledged as collateral with financial and non-financial disclosures about the affiliates & the collateral arrangement as a supplement to the consolidated financials for the entity issuing the collateralized security;
– permitting the proposed disclosures to be located in filings in the same manner as the proposed guarantor disclosures under Rule 3-10; and
– replacing the existing requirement to provide disclosure only when pledged securities meet a numerical threshold relative to the securities registered with a requirement to provide the proposed disclosures in all cases, unless they are immaterial to holders of the collateralized security.
By reducing the compliance burdens associated with existing financial statement requirements for these entities, the SEC hopes to encourage issuers to register debt offerings, & thus provide investors with greater protections than they receive in unregistered offerings.
The Weed Beat: Doing Business with Cannabis Companies
With the DOJ’s reversal of the Obama Administration’s policy that provided federal tolerance of any cannabis business conducted in compliance with state law, the risks of doing business with these companies have become a greater concern. This Perkins Coie memo provides an overview of those risks & some tips on how companies can protect themselves. Here’s an excerpt with some questions companies considering such a business relationship should ask themselves:
– To what extent will the cannabis-related activities occur in a jurisdiction where cannabis is legal? So long as key federal concerns, such as violent crime, are not in question, federal prosecutors are unlikely to seek charges against companies that are only indirectly involved in the cannabis industry in states that have legalized the substance.
Indeed, cannabis-related activities that are otherwise legal in such jurisdictions do not involve “victims,” and are unlikely to be viewed as “serious” by USDOJ. An important corollary to this consideration is that the company directly involved in the cannabis industry should fully comply with the drug laws of the states in which it operates. The due diligence factors listed below become even more significant if the cannabis-related activities will occur outside of a jurisdiction where cannabis is legal.
– What is the level of support and involvement that your company is contemplating with the company undertaking cannabis-related activities? Will your company merely invest in or provide passive support to the company that is directly involved in the cannabis industry, or will your company take a predominant role in managing the other company (e.g., through seats on the corporate board)? The more significant your company’s role will be in managing the cannabis-related activities, the greater the perceived culpability of your company for those activities in the eyes of a federal prosecutor.
The memo also points out that companies should be particularly wary of involvement in the financial aspects of the company involved in the cannabis business – there’s a risk that the feds might characterize that activity as money laundering.
July-August Issue: Deal Lawyers Print Newsletter
– Finders & Unregistered Broker-Dealers
– Governance Perils Involved in Financing Transactions by Emerging Companies
– Impact of the European GDPR on M&A
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