May 17, 2019

Disclosure Simplification: SEC Referral Prompts FASB to Seek GAAP Tweaks

Last August, when the SEC adopted its disclosure simplification rules, it referred to FASB certain Reg S-X & S-K line items that overlapped with GAAP but called for incremental disclosure, and asked FASB to consider incorporating those additional disclosure requirements into GAAP. Here’s an excerpt from this SEC Institute blog describing FASB’s recent response:

On May 6, 2019, the FASB issued an exposure draft related to this “referral” from the SEC. The proposed amendments in the exposure draft would modify disclosure or presentation requirements in a variety of topics in the Codification, ranging from removing the impracticability exception, to the requirement to disclose revenues for each product and service or each group of similar products and services, to adding disclosure of where derivative instruments and their related gains and losses are reported in the statement of cash flows.

A chart summarizing the proposed changes to GAAP appears on page 5 of the exposure draft. FASB also decided not to implement some of potential changes referred by the SEC. These include changes to GAAP that would have required financial statement disclosure of:

– The formula for calculating the number of shares available for issuance under an equity comp plan required Item 201(d) of Reg S-K
– The identity of 10% customers required by Item 101(c) of Reg S-K
– Discounts on shares as a deduction from equity accounts either on the face of the balance sheet or in the notes as required by Rule 4-07 of Reg S-X
– Significant changes in the authorized or issued debt since the date of the latest balance sheet as required by Rule 4-08(f) of Reg S-X
– Amounts of related party transactions on the face of the financial statements as required by Rule 4-08(k)(1) of Reg S-X.

Comments on the proposed changes laid out in FASB’s exposure draft are due by June 28, 2019.

“Test the Waters” for All:  Comments on SEC Proposal

In February, the SEC issued a proposal to expand expand the “test-the-waters” accommodation from EGCs to all companies.  So far, about 20 comments have been submitted on the rule proposal.  This “Corporate Secretary” article says that the bulk of them have been supportive, but comments submitted by the non-profit Better Markets questioned several aspects of the proposal.  Here’s an excerpt from the article describing the organization’s concerns about the rule’s potential impact on unsophisticated investors:

Better Markets, which was founded following the financial crisis with an eye on reforming Wall Street, raises concerns about the SEC’s plan. For one thing, the group argues that the SEC proposal creates ‘a dangerous loophole’ by not requiring issuers, and those authorized to act on their behalf such as underwriters, to validate the status of the investor – to make sure the investor is truly a QIB or an IAI – before a solicitation is made.

‘This loophole would permit solicitations to retail and other investors that either lack financial sophistication or cannot bear the financial risks associated with investing in highly risky investments such as those offered by, for example, penny stock issuers, leveraged business development companies or asset-backed security issuers,’ writes Better Market president and CEO Dennis Kelleher.

Better Markets also wants companies that “test the waters” prior to an offering & decide to move forward to file their testing-the-water communications with the SEC.

SEC Signs Off On Silicon Valley Stock Exchange

Last November, Broc blogged about efforts by some Silicon Valley heavy hitters to establish a new stock exchange for startup tech companies.  While efforts to obtain regulatory approval for the new exchange hit a snag at the time, the SEC approved the application of the Long-Term Stock Exchange last Friday.  This Reuters article summarizes some of the features of the new exchange that are designed to promote long-term thinking on the part of companies that list there:

The new exchange would have extra rules designed to encourage companies to focus on long-term innovation rather than the grind of quarterly earnings reports by asking companies to limit executive bonuses that award short-term accomplishments.

It would also require more disclosure to investors about meeting key milestones and plans, and reward long-term shareholders by giving them more voting power the longer they hold the stock.

It’s that final point – time phased voting – that prompted the CII to file a letter opposing the LTSE’s application. While the CII doesn’t like “tenure voting,” this TechCrunch article notes that it’s an old concept that’s picked up a number of advocates in recent years.  In the end, the SEC approved the application, noting that its rules do not mandate that an exchange impose a “one-share, one-vote” requirement on listed issuers.

John Jenkins