It isn’t unusual to see a registration statement or a prospectus supplement include a recent developments section disclosing “flash numbers” – preliminary revenue and income information for a quarter that hasn’t yet been finalized. The Staff scrutinizes flash number disclosures pretty closely if they’re reviewing a filing, and they often have questions for the issuer about the basis for its disclosure and whether it is appropriately balanced.
This recent Bass Berry blog points out that the Staff’s comments may also target disclaimer language relating to the flash numbers. The blog cites a recent IPO registration statement that included flash numbers accompanied by the following disclaimer:
This preliminary financial information is not a comprehensive statement of our financial results for this period, and our actual results may differ materially from these estimates due to the completion of our financial closing procedures, final adjustments, and other developments that may arise between now and the time the closing procedures for the fiscal quarter are completed.
The Staff asked the company to remove the disclaimer, noting that “If you choose to disclose preliminary results, you should be able to assert that the actual results are not expected to differ materially from that reflected in the preliminary results.” The company complied with the comment. This excerpt from the blog lays out the key takeaway for public companies from this exchange:
This comment letter exchange serves as a reminder that the SEC Staff generally disfavors disclaimer language aimed at limiting investors from relying on the information being provided. (As another example, see the Titan Section 21(a) Report related to whether investors could rely on the reps and warranties in a merger agreement.) As such, companies that are faced with issuing preliminary financial results, whether in a ’33 Act or ’34 Act setting, should ensure that they are comfortable with investors relying on the information presented, even if the results are only preliminary and unaudited.
I’ve always found the issues surrounding the use of flash numbers to be extremely interesting – and apparently many of you have as well. In fact, our 2017 webcast on the use of flash numbers in offerings was one of the most popular we’ve ever done. It may be time to think about an encore in the near future.
This recent blog from Perkins Coie’s Jason Day discusses the merits of in-house lawyers attempting to keep on top of SEC Staff comment letter trends. The short version is that Jason thinks it’s probably best to rely on your outside counsel & auditors to monitor the big picture, but there is merit in keeping an eye on the comments your peer companies are receiving. The blog also offers up some helpful tips for anyone – whether in-house or at a law firm – who is trying to monitor comment trends:
Know the Current Hot Topics –The SEC typically focuses many of its comments on several current hot button issues (e.g., financial measures not in accordance with generally accepted accounting practices, fair value measurements and estimates, loss contingencies, or segment reporting, among others).
Monitor Peer Comments –You can prepare for and preempt potential SEC comments before you file by knowing the current hot button issues. You can track and monitor the comments and responses of your industry peers or proactively consult with your audit firm or outside counsel for updates on emerging comment trends.
Monitor Broader Disclosure Trends – While its prudent to stay ahead of SEC comment trends to preempt easily addressed comments, don’t lose sight that many current disclosure trends are not driven by SEC rules or comments. Today’s SEC disclosure trends, like the current focus on ESG topics, arise from investor, proxy advisor or stakeholder initiatives with SEC rulemaking catching up later, if at all.
This is all good advice, but I’m particularly enthusiastic in my endorsement of the suggestion to monitor peer group comments. I’ve always been surprised at how relatively few companies seem to monitor the comments that their peers receive on a regular basis, but I’ve also never seen a lawyer who flagged a significant peer group comment trend in advance not end up being a hero to the entire corporate SEC reporting team.
Inflation may be haunting many areas of the economy, but the SEC’s filing fees continue their deflationary trend. Last week, the SEC issued this fee rate advisory that sets the filing fees for registration statements & certain other transactions for fiscal 2022. The current filing fee rate is $109.10 per million (the same rate applies under Sections 13(e) and 14(g)). Under the SEC’s new order, the rate will decrease to $92.7 per million. That’s a 15.0% decrease, and it follows last year’s nearly 16% decrease. As always, the new rate will apply effective October 1, 2021, which is when the SEC’s new fiscal year begins.
A recent Spencer Stuart Survey of nominating/governance committee chairs sheds some light on their priorities during the current year. In early 2021, the firm surveyed 77 committee chairs to find out what this year’s “top of mind” issues are, how their recruitment efforts have changed, and where the composition of their boards is headed. Here are some of the highlights:
– The top five governance priorities reported by survey respondents were enhancing ESG oversight (69%), enhancing racial and ethnic diversity (44%), developing a board succession strategy (39%), enhancing board effectiveness (38%) and overseeing company wide DEI efforts (36%).
– The top five recruiting priorities reported by survey respondents were adding directors from an underrepresented group (58%), directors with global perspectives & experiences (43%), directors with technology expertise (40%), directors with financial expertise (39%) and directors with operational expertise (38%).
– Interestingly, gender diversity, which was last year’s fourth most highly rated governance priority, did not crack this year’s top five. In terms of recruiting profiles, the survey says it fell from 3rd place to 10th.
– The number of respondents reporting that their board had underperforming directors dropped from 35% in 2020 to 18% this year.
Many commenters have expressed concern about the ability of companies to identify qualified directors from underrepresented groups, but 83% of the committee chairs surveyed reported no issues with recruiting directors with diverse backgrounds.
Earlier this year, the DOJ announced the formation of a “Covid-19 Fraud Enforcement Task Force.” The task force is a joint effort between DOJ & other governmental agencies, and Attorney General Garland promises that it “will use every available federal tool—including criminal, civil, and administrative actions—to combat and prevent Covid-19 related fraud.”
This Woodruff Sawyer blog says that the task force is likely to result in a full-court press targeting potential fraud by recipients of government funds in pandemic-related programs. That likely means that many companies are going to be subjected to probes by the DOJ or other agencies looking for potential violations of the False Claims Act (FCA). These investigations may be disruptive, but at least you can count on your D&O policy to pick up the tab, right? Well, as this excerpt from the blog explains, the answer is complicated:
One area of frustration for many companies will be the lack of response from a D&O insurance policy for governmental investigations of corporate entities. While some D&O insurance policies may provide limited coverage for the governmental investigation of a corporate entity, this is increasingly unusual. As a result, very large legal fees for these investigations are likely to fall on the corporation.
D&O insurance policies, on the other hand, may respond to defend individuals who are the target of government enforcement actions. However, this coverage is typically only available after the government has made it very clear whom they are pursuing, something that often happens quite late in an investigation process.
Having said that, some polices provide limited coverage for “pre-claim inquiries.” This means insurance coverage for legal counsel for individuals asked to respond to government subpoenas. The cost of document production for documents under the control of the company, however, is typically not covered by D&O insurance.
If there is an FCA investigation that, when disclosed, causes your company’s stock price fall, you can typically expect to be able to rely on your D&O insurance. A modern D&O insurance policy usually covers a securities claim or a breach-of-fiduciary-duty suit related to disclosure concerning the government investigating the company under the FCA. However, the insurance would not cover any settlements with the government. This is because Side C of the D&O insurance policy only covers securities claims. An FCA claim is not a securities claim.
The blog also points out that most D&O policies have an exclusion for claims involving intentional fraud, and that fines and penalties are typically excluded from coverage. Even if coverage is potentially available, the blog provides a reminder that government agencies often demand that companies and individuals forgo any insurance or rights to indemnification when settling with the government.
August is always a strange “either/or” month – either nothing happens in the financial markets or something apocalyptic happens. I guess we’re fortunate that, so far at least, this August seems to have fallen into the former category. But that doesn’t help me out, because I’ve still got to come up with 3 blogs a day, and all the newsmakers are at the beach.
I was getting a little desperate to find a third blog for this morning when it occurred to me that it’s been several months since I took a look at what the Wu-Tang Clan has been up to. Last time we checked-in with them, the guys were getting into the non-fungible token game. At the time, it was a group effort, but according to this Rolling Stone article, Method Man now has a solo NFT project going:
Method Man is launching his own comics universe, titled Tical World, via NFT. The first installment of the rapper’s anthology series, “Part 1: The Origin,” features original characters, animations, artwork, apparel, and unreleased music available for sale as NFTs.
This includes a Killa Beez-inspired original artwork signed by Method Man and New York artist Alex Smetsky; a 3D-enabled digital animation depicting the origin story of Tical World; an unreleased audio recording with music and lyrics by Method Man; the sole copies of the first artistic renderings of the Tical World characters; and a gold VIP card for Tical Athletics, Method Man’s athleisure line. Tical World also represents the first “community owned crypto-characters” to use Flow Blockchain, developed by Dapper Labs and secured by the patented TuneGO Vault.
I don’t understand very much of the excerpt I just quoted, but whatever he’s doing sure sounds pretty cool. In other Wu-Tang Clan news, the U.S. government sold the only copy of the group’s “Once Upon a Time in Shaolin” album that it confiscated from the previous owner, fraudster Martin Shkreli, and the second season of “Wu-Tang: An American Saga” is set to premiere on Hulu on Sept. 8th.
Okay, my work here is done – now I just have to figure out what I’m going to do over on the DealLawyers.com Blog.
Our friends at WilmerHale tipped us off to this email message, which purports to be from the author of the hoax whistleblower emails received by a number of public companies over the past few months. The message says that the false reports were part of a research project led by a PhD student at the National University of Singapore. What’s this research project all about? This excerpt will give you the gist of its supposed purpose:
The purpose for the investigation was to see whether firms responded differently based on the identity of the sender and the route of the plane we send seemingly identical messages from both customers and employees raising concerns ranging from alleged bribery fraud and accounting mistakes. we varied the email to suggest that in some claims firms are perhaps benefiting from the alleged misbehavior whereas in others it is completely to their detriment.
We then compared the differences in response time the quality of the response and the language used. Importantly throughout our experiment, we’ve made sure no real names are used to not harm any real employee. The claims brought forth were completely fictitious and deliberately did not bare enough details to necessitate the launch of an investigation. Once the claim was made, we’ve only recorded your initial response and did not pursue the matter any further. Thereby interfering with your day-to-day business as little as possible.
Don’t you just love that these experts on the workings of U.S. public company whistleblower programs blithely state that their deception “did not bare enough details to necessitate the launch of an investigation”? Then they have the gall to pat themselves on the back for structuring their charade to “interfer[e] with your day-to-day business as little as possible.” If you ask me, there’s enough self-serving manure in this explanation to fertilize Nebraska.
There’s always the possibility that this communication is itself another hoax (it comes from a gmail account, not a university address). If it is, then the plot has thickened considerably. On the other hand, if it is legitimate, it’s either the most disingenuous CYA attempt I’ve ever read or an admission of breathtaking recklessness on the part of everyone involved in signing-off on this research project.
I’d be willing to wager that the aggregate fees and expenses recipient companies incurred in determining whether and how to investigate these false whistleblower allegations are easily in the hundreds of thousands of dollars. The cost could be even higher once you factor in the cybersecurity concerns raised after companies realized this was a hoax. The email says that companies are “free to withdraw their data” from the study, but must let the researchers know within a month. Frankly, if I received this, the only thing I’d be tempted to send to these folks within a month is an invoice.
If you do choose to reach out to the researchers, it’s probably best to contact the university by means of a hard copy letter, given the potential concerns about the authenticity of the email & the possibility that we might still be dealing with some kind of elaborate phishing scheme.
Yesterday’s WSJ had an article on what aspects of Rule 10b5-1 plans are being scrutinized by the SEC. Not surprisingly, the list generally lines up nicely with the priorities Gary Gensler identified in his June 2021 speech to the WSJ’s CFO Summit. Single-trade 10b5-1 plans weren’t addressed in that speech, but the article suggests that they may be on the SEC’s list as well. This excerpt provides some insight on the reasons why the SEC might be interested in this topic:
Many 10b5-1 plans steadily sell shares, whether the stock is up or down. Facebook’s Mark Zuckerberg, for example, has sold consistent volumes of shares at regular intervals since at least August 2019, according to InsiderScore data. “Those plans that are selling routine amounts of shares every month over multiple years; that’s what the plan was intended for, to sell shares slowly over time,” said Daniel Taylor, an accounting professor who runs the Forensic Analytics Lab at the University of Pennsylvania’s Wharton School and one of the authors of the January study of trading under plans.
But about a third of plans since 2004 involve just a single trade, according to InsiderScore data. (Because documentation is scant, researchers can’t differentiate between plans that intended to execute a single trade and those that planned for multiple trades but were terminated after the first sale.) Single-trade plans outperformed multi-trade plans regardless of the timing, according to Mr. Taylor’s research. “When it’s a single-trade plan, it’s abusive,” he says.
That “January study” referenced in the excerpt is this Stanford study, which included single-trade plans in its list of three “red flags” for opportunistic use of 10b5-1 plans (the other red flags were a short cooling-off period & adoption of plans in a quarter that begin trading prior to the announcement of earnings). Here’s what the study had to say in support of its recommendation to prohibit single-trade 10b5-1 plans:
In the extreme, if the plan is designed to execute only a single trade, it is economically equivalent to a traditional limit order (or date-triggered order). Single-trade plans are inconsistent with traditional financial advice for exiting a concentrated equity position over time. They are also inconsistent with the original expectation that Rule 10b5-1 would govern trades made under a “regular, pre-established program.”
Perkins Coie’s Allison Handy put together a nice graphic depiction of the various ESG “materiality” concepts floating around. Traditionally, we’re accustomed to thinking of materiality by reference to the TSC v. Northway “reasonable investor” test. But ESG disclosure advocates argue for conceptions of materiality that take into account matters beyond financial considerations and constituencies other than investors. This graphic provides a quick reference tool that will help you navigate this brave new world.
One of the emerging items on this year’s shareholder proposal agenda has been requests for companies to convert to benefit corporations. Here’s an excerpt from this Faegre Drinker memo on these proposals:
Fifteen public companies received and voted on proposals to convert to benefit corporations at their 2021 annual meetings of shareholders, a dramatic shift from the previous year, when not one of these companies received a proposal to convert. Shareholder proponents requested companies approve an amendment or take the necessary steps to amend their certificates of incorporation and, if necessary, bylaws to become a benefit corporation.
The Shareholder Commons, a nonprofit that states it is seeking to catalyze a movement of shareholders that insist on responsible business, assisted the shareholder proponents with these requests. Accordingly, although each proposal was uniquely tailored to the specific company, the proposals exhibited a common rationale — prioritizing stakeholder interests in addition to shareholder interests is vital.
The memo reviews how companies responded to these proposals, and provides a chart indicating the level of support that they received. It turns out that most didn’t fare too well.
The blog notes that only a handful of proponents were responsible for these proposals, and suggests that the small proponent group & limited support raises the question of whether this initiative will have staying power or is just a fleeting trend. Personally, I have the same question about about benefit corporations themselves.
By the way, don’t say we didn’t warn you that these proposals were coming – over on the “Proxy Season Blog“, Liz gave everyone a heads-up last fall, when she blogged about The Shareholder Commons’ offer of drafting assistance to proponents.
