September 27, 2019

Everybody Into the Pool! SEC Adopts “Test the Waters” for All

Yesterday, the SEC announced that it had adopted final rules permitting all companies to gauge market interest in a possible initial public offering or other registered securities offering to “test the waters” by reaching out to certain institutional investors before filing a registration statement. Previously, only EGCs had been able to engage in this activity under applicable provisions of the JOBS Act. Here’s an excerpt from the fact sheet included in the press release summarizing the rule:

Securities Act Rule 163B will permit any issuer, or any person authorized to act on its behalf, to engage in oral or written communications with potential investors that are, or are reasonably believed to be, QIBs or IAIs, either prior to or following the filing of a registration statement, to determine whether such investors might have an interest in a contemplated registered securities offering. The rule is non-exclusive and an issuer may rely on other Securities Act communications rules or exemptions when determining how, when, and what to communicate about a contemplated securities offering.

Under the rule:

– there are no filing or legending requirements;
– the communications are deemed “offers”; and
– issuers subject to Regulation FD will need to consider whether any information in a test-the-waters communication would trigger disclosure obligations under Regulation FD or whether an exemption under Regulation FD would apply.

In a public statement accompanying the announcement of the new rule, SEC Chair Jay Clayton said that it will allow issuers to “better identify information that is important to investors and enhance the ability to conduct a successful registered offering, ultimately providing both Main Street and institutional investors with more opportunities to invest in public companies that, in turn, provide ongoing disclosures to their investors.” The new rule will become effective 60 days after publication in the federal register.

Auditor Independence: Flurry of SEC & PCAOB Enforcement

Earlier this week, the Division of Enforcement announced a settled enforcement proceeding with PwC arising out of alleged violations of the SEC’s independence rules. PwC’s Mexican affiliate was also sanctioned for independence violations by the PCAOB in August. The SEC’s action against PwC comes on the heels of another settled proceeding late last month involving RSM US LLP. Earlier this month, the PCAOB sanctioned another two accounting firms for independence violations.

So, what’s with this recent spate of enforcement proceedings? It’s hard to say for sure, but this may have been coming for quite some time. Broc blogged last year that Lynn Turner reported that there was “trouble brewing” at the PCAOB & SEC over independence issues. The PCAOB apparently discovered a number of independence issues in its 2016 inspection reports, and noted that many of these were not reported to the audit committee as required under PCAOB rules.

Earlier this year, the PCAOB came out with additional guidance on what the rules require auditors to communicate to audit committees when they identify independence issues, and the failure to comply with independence disclosure requirements is at the heart of both the PCAOB & SEC enforcement proceedings involving PwC.

PCAOB: Board Laying Low in Wake of KPMG Scandal?

Speaking of the PCAOB, according to this article by’s Francine McKenna, the PCAOB continues to be in transition in the wake of the KPMG scandal – and its board has apparently decided to keep a very low profile, even if that appears to violate the PCAOB’s bylaws:

The PCAOB board is staying out of the public eye in 2019, in violation of bylaws established by the law that created the PCAOB, the Sarbanes-Oxley Act of 2002. The law requires the PCAOB to hold at least one public meeting of its governing board each calendar quarter. However, the PCAOB board has held no public meetings of its governing board since December 20, 2018.

MarketWatch asked the PCAOB to comment on its apparent lack of compliance with its bylaws regarding open board meetings. A PCAOB spokeswoman told MarketWatch, “Consistent with long-standing practice, the Board holds open meetings to take action on business such as standard-setting or voting on its budget and strategic plan. We expect to hold two open meetings in the coming months to address our 2020 budget and a proposed concept release related to our quality control standards.”

Even by current D.C. standards, the PCAOB’s response leaves much to be desired. It’s not a denial, and it isn’t even a “non-denial denial.”  By the way, it isn’t just the board – the article says that the PCAOB’s two outside advisory groups haven’t met in 2019 either.

John Jenkins