TheCorporateCounsel.net

Early this month, the SEC posted an order involving a company’s failure to disclose related party transactions involving family members of corporate officers. This omission highlights a trap for the unwary:

Smaller reporting companies qualify for scaled disclosure — scaled generally meaning less — but not for related-party transactions. Under Item 404 of Regulation S-K, SRCs must disclose related party transactions exceeding the lesser of $120,000 or 1% of the average of the company’s total assets at the end of the last two fiscal years, and the disclosure must cover two fiscal years, instead of one.

The company was an SRC during the period in question, and at least one of the undisclosed related party transactions involved dollar amounts below the $120,000 threshold for non-SRCs. According to the order, the relevant thresholds for the company over the covered fiscal years ranged from approximately $20,000 to $30,000, well below $120,000. This is an important reminder — especially for companies who have recently become SRCs or go in and out of SRC status — to update your policies, procedures and internal inquiries, including D&O questionnaires, if and when the lower threshold is relevant.

For other reasons, advisors of life sciences companies should read the entire order. The SEC also took issue with the company’s statements in two press releases about a screening test it developed to detect COVID-19. And the SEC wasn’t the only regulator who inquired about these statements — the FDA had also contacted the company with concerns about the language used.

– Meredith Ervine