May 17, 2021

Human Capital Management: What Might a New Rule Proposal Look Like?

Speaking before the SEC’s 8th Annual Conference on Financial Market Regulation, SEC Chair Gary Gensler reportedly stated that the Staff was working on a new rule addressing disclosure of human capital metrics.  If you’re thinking, “didn’t they just do this?” the answer is “sort of.” Last year’s S-K modernization rules addressed human capital, but from a principles-based perspective only. Now, they’re talking about mandatory line-item disclosures focusing on specific metrics.

What might those metrics be? Commissioner Lee’s dissenting statement on last year’s rule adoption might provide some insight. In that statement, she cited favorably comments on the rule proposal received from the Human Capital Management Association, which called for a combination of a principles-based & line-item disclosures.  In particular, the HCMA cited four specific metrics that should be required disclosure for all registrants:

1. The number of people employed by the issuer, broken down by full-time and part-time employees along with contingent workers who produce its products or provide its services (independent contractors, supplied through subcontracting relationship, temporary employees, etc.);

2. The total cost of the issuer’s workforce, including wages, benefits and other transfer payments, and other employee expenses;

3. Turnover or similar workforce stability metric; and

4. Workforce diversity data, concentrating on gender and ethnic/racial diversity across different levels of seniority.

These four metrics also have been cited in media reports concerning Gary Gensler’s remarks about a new human capital rule proposal, and given Commissioner Lee’s prior favorable reference to the HCMA comment letter, it’s probably a pretty good bet that they are likely to be included in any proposal forthcoming from the SEC.

Reg D: 2013 Amendment Proposals Back On The Table?

In her keynote speech at last week’s conference, Commissioner Caroline Crenshaw expressed concern that the SEC has taken actions in recent years to make it easier for issuers and investors to access the private markets without having a lot of information about those markets. Here’s an excerpt:

So do the actions the Commission took to expand access to private markets further our agency’s mission? It is a question that is harder than it should be to answer, because for the most part, we lack good data on private issuers and offerings. What we do know is that the private markets have increased in size over the years, both in absolute terms and relative to the public markets. The amount of capital raised via exempt offerings now far outpaces the amount raised on the public markets. Offerings under Regulation D alone accounted for $1.5 trillion of proceeds in 2019, compared with $1.2 trillion in the public markets.

And yet, while these markets have been expanding, the information we are collecting about them has not. For the most part, we do not know who invested in these private market offerings or how their investments performed.

Commissioner Crenshaw went on to call for the SEC to adopt amendments to Reg D that were proposed in 2013 & subsequently fell off the face of the earth. In case you’ve forgotten, these proposals would:

– require the filing of a Form D in Rule 506(c) offerings before the issuer engages in general solicitation;
– require the filing of a closing amendment to Form D after the termination of any Rule 506 offering;
– require written general solicitation materials used in Rule 506(c) offerings to include certain legends and other disclosures;
– require the submission, on a temporary basis, of written general solicitation materials used in Rule 506(c) offerings to the Commission;
– disqualify an issuer from relying on Rule 506 for one year for future offerings if the issuer, or any predecessor or affiliate of the issuer, did not comply, within the last five years, with Form D filing requirements in a Rule 506 offering; and
– amend Form D to require additional information about offerings conducted in reliance on Regulation D.

The rule proposals received a lot of pushback from commenters, including this letter from the ABA’s Federal Regulations of Securities Committee, which contended that they were “especially ill-suited” for small business issuers, “which often operate without the advice of sophisticated counsel that would be necessary to ensure compliance with the proposed rules’ detailed requirements, and avoid their pitfalls.”

Crowdfunding: Corp Fin Updates Guidance on Form C EDGAR Filings

In March, I blogged about guidance on EDGAR filings of Form C that Corp Fin issued shortly after the SEC’s private offering simplification rule amendments went into effect. The first part of the original guidance addressed the fact that the form hadn’t caught up to the rule changes, and provided advice to companies that are taking advantage of the new $5 million size limit for crowdfunded offerings on how to fill out a form that only contemplates a $1.07 million maximum offering size.

On Friday, Corp Fin updated that guidance to reflect the fact that the form’s been updated to reflect the higher maximum offering size limit. Here’s the relevant language:

Effective May 10, 2021, the changes to the XML-based fillable form have been implemented and issuers are now able to, and must, provide accurate offering amounts in the XML-based fillable form and in the offering document attached as an exhibit to the Form C. An issuer that previously completed the offering amount fields by including $1,070,000 in the XML-based fillable form in reliance on prior staff guidance must update its Cover Page to provide the actual offering amounts if it files an amendment to the Form C after May 10, 2021.

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John Jenkins