The SEC announced that the Small Business Capital Formation Advisory Committee will meet next Tuesday to discuss the accredited investor definition (again) and the state of the IPO market. The public can watch the live meeting via webcast on www.sec.gov. As the agenda for the meeting notes, after the opening and remarks and an update from SEC’s Office of the Advocate for Small Business Capital Formation, as a follow up to the Committee’s November 29, 2023 discussion, the Committee will deliberate possible recommendations related to the accredited investor definition. In the afternoon, following remarks from Allison Wise, Acting Director, SEC’s Office of Minority and Women Inclusion, the speakers plan share data and their views on the state of the IPO market, trends, and factors that may be at play in the decline in IPOs. As part of this discussion, the Committee will address how decreased IPO activity and market shifts are impacting smaller companies (including growth and exit strategies) and related capital raising challenges.
I don’t know about you, but I have been fielding my fair share of questions this reporting season regarding the SEC’s changes to the share repurchase disclosure rules that were vacated late last year by the United States Court of Appeals for the Fifth Circuit. I think the problem primarily stems from the fact that the rule text reflecting the amendments to Item 703 of Regulation S-K and other disclosure items is still reflected in a number of online resources, so unless you realize that those amendments have been vacated, it would appear that companies have to comply with the broader range of disclosure requirements contemplated by the amendments adopted last summer.
On December 19, 2023, the U.S. Court of Appeals for the Fifth Circuit issued an opinion in Chamber of Com. of the USA v. SEC, No. 23-60255 (5th Cir.) vacating the Share Repurchase Disclosure Modernization rule (the “Final Rule”). As a result of the vacatur, the disclosure requirements revert to those in effect prior to the Final Rule’s effective date.
Please direct any questions to the Division of Corporation Finance at (202) 551-3100.
I sure hope that the various online sources of SEC rules and forms get cleaned up over time so that this confusion does not persist past the current reporting season.
In my spare time, I have been working with the SEC Historical Society to create a gallery addressing the SEC’s regulation of corporate disclosure that will be located in the Society’s virtual museum and archive. As part of this effort, I recently had the good fortune to moderate a program covering the evolution of materiality, featuring an all-star panel of experts that included: Trevor Barton from Deloitte; Meredith Cross from WilmerHale; Dan Goelzer, former SEC General Counsel and PCAOB board member; Rich Levine from Whistleblower Advocates PLLC; and Joan McKown from Jones Day.
The panel covered a wide range of questions, including:
1. How does the concept of materiality continue to evolve and what is the role of the SEC in that evolution?
2. What are the considerations around the application of the “reasonable investor” and “total mix” and “probability/magnitude” standards?
3. What is the importance of materiality in SEC enforcement actions and private securities litigation?
4. How is materiality assessed from a financial statement perspective, including the impact of Staff’s guidance in SAB 99 on the consideration of materiality in financial reporting?
5. How does the concept of “what information is material to a reasonable investor” continue to evolve in areas beyond financial performance and business development, such as climate change, governance, cybersecurity and sustainability matters, and what are the implications?
I have always enjoyed exploring the history of the SEC. In my mind, it is difficult to provide good advice today if you do not understand where the laws, rules and standards have come from, and that is why it is so important for me to try to chronicle some of these key developments.
We have posted the transcript for our recent webcast – “ISS Forecast for the 2024 Proxy Season,” which featured Marc Goldstein from ISS, Ning Chiu from Davis Polk and Rob Main from Sustainable Governance Partners. The webcast covered the following topics:
– 2023 U.S. Proxy Season Recap
– 2024 ISS Policy Updates
– Looking Ahead to the 2024 Proxy Season
During the webcast, Marc Goldstein – who serves as Head of U.S. Research for ISS – shared the proxy advisor’s perspectives on some of the key issues that companies are facing for this year’s proxy season, while Ning Chiu and Rob Main provided their perspectives on these issues.
In a recent decision in In re Lottery.com Securities Litigation, (SDNY 2/24), a federal judge held that corporate statements concerning preliminary results for a completed quarter constituted “forward looking statements” protected under the “bespeaks caution” doctrine. The case arose out of a series of allegedly false and misleading statements by the target of a de-SPAC transaction made before and after completion of the merger.
One of the challenged statements was an October 21, 2021 press release announcing the company’s results for its third fiscal quarter, which ended on September 30, 2021. The plaintiffs alleged that since the results disclosed were for a completed quarter, they should not be regarded as forward looking statements. The Court disagreed:
The 10/21/21 Press Release’s statements regarding Lottery’s preliminary revenue results are nonactionable under the bespeaks-caution doctrine because they, too, are “statements whose truth [could not] be ascertained until some time after the time they [we]re made.” In re Philip Morris, 89 F.4th at 428 (citation omitted). Plaintiffs contend that these statements were “simply not forward-looking” because they “concern[ed] revenue results for Q3 2021, a quarter that had already closed when the statement was made.” Lottery Class Opp. at 13.
Although this line of reasoning has some intuitive appeal, the Court disagrees. When applying the bespeaks-caution doctrine, courts in the Second Circuit generally treat “corporate statements of projections as to corporate earnings” as forward-looking statements, “without regard to whether the last day of the covered earnings period had passed.” Lopez v. Ctpartners Exec. Search Inc., 173 F. Supp. 3d 12, 39 (S.D.N.Y. 2016).
Citing the Lopez case, the Court went on to say that just because a quarter has been completed, that doesn’t mean its results have been finalized, and that insofar as a press release offers a “preliminary” calculation of those results “based on currently available financial and operating information and management’s preliminary analysis of the unaudited financial results for the quarter,” it involves forward-looking statements.
In January, the voluntary compliance period under the SEC’s Filing Fee Modernization Rule began and filers became eligible to voluntarily file fee data in Inline XBRL format. Yesterday, the SEC announced that it had posted “How do I” guidance on preparing iXBRL fee exhibits. If you’re not feeling particularly motivated to click through to the SEC’s website this morning, here’s the guidance in its entirety:
Filers can prepare an Inline XBRL filing fee exhibit (EX-FILING FEES) and submit it to EDGAR for processing with an option to construct structured filing fee information within EDGAR using the Fee Exhibit Preparation Tool (FEPT).
Filers using the FEPT to prepare an Inline XBRL Filing Fee exhibit as part of EDGAR Link Online (ELO) should refer to the EDGAR Filing Fee Interface Courtesy Guide (PDF, 1.2 mb). FEPT includes features such as prompts, explanations, and automated calculations to produce a filing fee exhibit in submission-ready format. Filers using FEPT to construct the EX-FILING FEES in EDGAR generally will receive error and warning messages before they submit both test and live filings.
Filers using XBRL should refer to the EDGAR XBRL Guide (Filing Fee Extract) (PDF, 0.5 mb). Constructing the Filing Fee Exhibit outside of FEPT, however, will provide filers with error and warning messages after they submit both test and live filings.
EDGAR will validate the Inline XBRL fee data submission and generally will issue warnings for any validation failures caused by incorrect or incomplete structured filing fee-related information until an announced date of approximately November 1, 2025, when it will suspend filings rather than issue warnings.
Note that accelerated filers will be required to submit fee data in iXBRL beginning on July 31, 2024 and all other filers will be required to do so on July 31, 2025.
The latest issue of The Corporate Counsel has been sent to the printer. It is also available now online to members of The CorporateCounsel.net who subscribe to the electronic format. The issue includes the following articles:
– Enforcement: What the SEC’s Record-Setting Year Means for Disclosures & Compliance
– Related Person Transactions: Navigating Common Transaction Types & Disclosure Issues
Please email sales@ccrcorp.com to subscribe to this essential resource if you are not already receiving the important updates we provide in The Corporate Counsel newsletter.
According to a recent Bloomberg Law article, the percentage of S&P 500 companies including AI-related disclosure in their 10-Ks has increased from 28% in 2021 to 41% in 2023. That trend hasn’t escaped the SEC’s notice. As Dave noted in a recent blog, Corp Fin Director Erik Gerding recently observed that the Staff is focused on AI disclosures in SEC filings and cautioned that, among other things, companies need a basis for their claims.
That message was re-enforced by SEC Chair Gary Gensler in a speech delivered at Yale Law School earlier this week. Chair Gensler covered a wide range of AI-related topics in his remarks, and at one point zeroed in on the issue of “AI washing”:
As AI disclosures by SEC registrants increase, the basics of good securities lawyering still apply. Claims about prospects should have a reasonable basis, and investors should be told that basis. When disclosing material risks about AI—and a company may face multiple risks, including operational, legal, and competitive—investors benefit from disclosures particularized to the company, not from boilerplate language.
Companies should ask themselves some basic questions, such as: “If we are discussing AI in earnings calls or having extensive discussions with the board, is it potentially material?”
These disclosure considerations may require companies to define for investors what they mean when referring to AI. For instance, how and where is it being used in the company? Is it being developed by the issuer or supplied by others?
Gary Gensler’s message about avoiding “boilerplate” echoed another comment from Erik Gerding referenced in Dave’s blog. The Corp Fin director also observed that the Staff is seeing a lot of boilerplate in AI disclosures, particularly in the “Risk Factors” discussion. By the way, this is the second time in less than three months that the SEC Chair has flagged AI washing as a big area of concern for the SEC in public remarks. I guess public companies can’t say they haven’t been warned.
CEOs at companies involved in high-profile financial reporting or governance scandals often find themselves out of a job and face difficulties finding new executive positions. Interestingly, a new study points out that these “tainted” CEOs don’t face the same challenges when it comes to keeping existing board seats or obtaining new ones.
The study concludes that the likely explanation for this is that the value they add outweighs their baggage, which can be managed by limiting their role on the board. Here’s an excerpt from a recent CLS Blue Sky blog by the authors of the study:
Our empirical tests yield five key findings. First, firms with powerful CEOs or weak monitoring are not more likely than other firms to appoint tainted executives to their boards. In contrast, tainted executives tend to join the boards of less visible firms or those with greater advising needs. Second, firms generally avoid placing tainted directors on nominating and governance committees, both of which have important monitoring responsibilities. Instead, these directors often serve on committees that play more of an advisory role.
Third, the skills of tainted and non-tainted appointees are similar, and the evolution of board-level skills is comparable in firms appointing tainted and non-tainted executives to their boards. Fourth, after appointing tainted executives to their boards, firms perform better than a matched control sample. This effect is more pronounced for firms with greater advising needs. Importantly, firms with tainted appointees are not monitored less effectively.
The study also says that shareholder satisfaction with board’s performance remains stable or even improves after these tainted CEOs become directors, suggesting that their appointments meet the needs of the board.
We’ve posted the transcript for our recent webcast – “The ABCs of Schedule 13D and Schedule 13G”, which featured Barnes & Thornburg’s Scott Budlong, Simpson Thacher’s Jennifer Nadborny, Gibson Dunn’s David Korvin and Gunderson’s Andrew Thorpe. The webcast covered the following topics:
– Overview of Schedule 13D and 13G requirements
– Amendments to Schedule 13D and 13G filing deadlines
– Amendments and Guidance on Derivative Securities
– Guidance on Schedule 13D “groups”
– Recurring beneficial ownership reporting issues
– Implications of the amendments and guidance for activism and hostile M&A
Our panelists provided insights into the basics of beneficial ownership reporting, the changes to the reporting scheme resulting from the amendments, and the implications of the SEC’s new guidance on cash settled derivatives and Schedule 13D “group” formation.