The SEC has extended the comment period for Nasdaq’s proposal to require notice & disclosure of reverse stock splits, which John blogged about in July. This means that, under Exchange Rules, November 1st is the date by which the Commission will either approve or disapprove, or institute proceedings to determine whether to disapprove, the proposed rule change. You can use this form to submit comments.

– Liz Dunshee

Whether you spent the weekend as outside counsel frantically finalizing registration statements in order to claim your spot in “the backlog review queue,” a corporate employee worrying whether delayed regulatory approvals could cost you budget or even your job, or a federal employee attempting to plan for a month or more without pay, it likely was welcome news that, with mere hours to spare on Saturday, our legislators came to a last-minute compromise to keep our government running.

Unfortunately, the SEC’s operating plan and Corp Fin’s guidance on how the Commission and Staff will operate during a shutdown could still become relevant, because the resolution only funds the government for the next 45 days – through November 17th. Let’s all hope for the best!

– Liz Dunshee

On Friday, the SEC posted the notice & request for comment for a proposed listing standard from the NYSE that would create a new asset class for “Natural Asset Companies.” Here’s an excerpt that defines what an “NAC” is:

For purposes of proposed Section 102.09, a NAC is a corporation whose primary purpose is to actively manage, maintain, restore (as applicable), and grow the value of natural assets and their production of ecosystem services. In addition, where doing so is consistent with the company’s primary purpose, the company will seek to conduct sustainable revenue-generating operations. Sustainable operations are those activities that do not cause any material adverse impact on the condition of the natural assets under a NAC’s control and that seek to replenish the natural resources being used. The NAC may also engage in other activities that support community well-being, provided such activities are sustainable.

NYSE announced that it was working to develop this new asset class way back in 2021, so it’s been at least two years in the making. A lot has changed since then! ESG sentiment has become more discerning, and many companies have become more transparent over the past two years about environmental risks and emissions. But the proposal predicts that demand for this separate type of investment opportunity exists and will continue to grow because “investors still express an unmet need for efficient, pure-play exposure to nature and climate.”

Under the proposed standard, in addition to GAAP financial reporting provided in SEC filings, NACs would be required to periodically publish an “Ecological Performance Report.” Here’s more detail:

The EPR provides statistical information on the biophysical measures (e.g., tons of carbon, acre feet of water produced), condition, and economic value of each of the ecosystem services produced by the natural assets managed by the NAC. This will allow investors to gauge the effectiveness of management. The information will be consistently produced and periodically reported, following best practices from accepted valuation methodologies, as outlined in the Reporting Framework (as defined below).

The EPR produced by a NAC must follow IEG’s Ecological Performance Reporting Framework (the “Reporting Framework”). The Framework, in turn, is based on the natural capital accounting standards established in the United Nations System of Environmental- Economic Accounting – Ecosystem Accounting Framework (“SEEA EA”).

The EPR will measure, value, and report on the ecosystem services and natural assets managed by a NAC. Under the proposed amendments to the Manual, NACs will conduct a Technical Ecological Performance Study (“Technical EP Study”) annually, following the Reporting Framework. This Technical EP Study will generate the information used to prepare and publish the EPR. The EPR and Technical EP Study must be examined and attested to by a public accounting firm that is registered with the Public Company Accounting Oversight Board (“PCAOB”) and is independent from the NAC and NAC licensor, if applicable, under the independence standard set forth in Rule 2-01 of Regulation S-X (“Independent Reviewer”).

NACs would also be required to adopt policies on biodiversity, human rights, and other matters and post those on their website. The proposal gives more detail on the reporting framework, license, charter & policy requirements, corporate governance standards, and more. The standard, if adopted, will also come with a bunch of new terms to add to your “ESG glossary,” because it includes a whole section dedicated to definitions. The SEC is requesting comments on the proposal.

– Liz Dunshee

Also on Friday, the SEC posted notice & request for comment for a proposed NYSE rule change that would make it easier for companies to raise money from existing shareholders. Long story short, under the proposed amendment, companies would no longer have to get shareholder approval before issuing shares at a discount to “passive” (non-controlling) shareholders, even if the shareholder is buying more than 1% of currently outstanding shares and even if the shareholder owns 5% or more of the company’s outstanding stock or voting power at the time of the transaction – as long as they aren’t part of a control group. Here’s the rationale:

Certain NYSE listed companies are significantly dependent on their ability to regularly raise additional capital to fund their operations or acquire new assets. For example, pre-revenue stage biotechnology companies regularly seek additional capital to fund their research and development activities and real estate investment trusts seek to fund the acquisition of new properties by selling equity securities in private placements or direct registered sales priced at a small discount to the prevailing market price.

It is the Exchange’s understanding that, in many cases, existing shareholders of the listed company are willing purchasers of securities in such circumstances, as they already understand the company’s business and have a positive view of its future prospects. Sales to existing shareholders can also be advantageous to both the issuer and the shareholders because of the speed with which a direct sale to an existing shareholder can be completed if no shareholder approval is required.

However, the benefits of low transaction costs and speed of execution that typically exist when conducting these transactions with existing shareholders face countervailing factors if the counterparty is deemed to be a substantial securityholder for purposes of Section 312.03(b)(i). In such cases, to mitigate potential conflicts of interest, Exchange rules require that any sale below the Minimum Price can relate to no more than one per cent of the shares of common stock or one percent of the voting power outstanding before the issuance. Any such transaction that relates to more than one per cent of the common stock is subject to shareholder approval, which imposes significant delay and additional costs on the issuer, thereby often making the sale impracticable.

The NYSE notes that it is currently the only U.S. exchange with this requirement, which puts its listed companies at a disadvantage. The Exchange believes that transactions with these kinds of passive holders do not give rise to the potential conflicts of interest in the determination of transaction terms that exist where the purchaser has a role in the listed company’s board or management.

The shareholder approval requirement for issuances that exceed 1% of outstanding shares or voting power (other than cash sales for at least the “Minimum Price”) would continue to apply to issuances to officers or directors. In addition, it would apply to any controlling shareholder or member of a control group or any other substantial security holder of the company that has an affiliated person who is an officer or director of the company. The proposal emphasizes that other shareholder approval requirements also would continue to apply:

The Exchange notes that any listed company selling securities in a private placement that does not meet the Minimum Price requirement to a passive investor will remain subject to the shareholder approval requirement of Section 312.03(c) if such transaction relates to 20 percent or more of the issuer’s common stock. In addition, any such transaction would remain subject to shareholder approval under Section 312.03(e) if it resulted in a change of control. Finally, the Exchange notes that Section 312.03(b)(i) as proposed to be amended would continue to provide a significant protection to shareholders against conflicts of interest in sales of securities to related parties and that no other listing venue has such a protection in its rules.

The SEC is seeking comments on the proposal. We have resources in our “NYSE” Practice Area for anyone who is trying to navigate approval requirements or other compliance issues.

– Liz Dunshee

For some reason, I can’t get that song “The Final Countdown” from Europe out of my head this morning, as the clock ticks down to the end of the federal government’s fiscal year. As has happened so many times in the past, it is still possible that we could see Congress reach an eleventh-hour deal to kick the can down the road, but that outcome appears to be increasingly unlikely.

As this Washington Post article notes, the U.S. government notified federal workers yesterday that a government shutdown appears to be imminent. If there is a lapse in appropriations, approximately 2.1 million federal workers and 1.3 million active duty troops will stop receiving their paychecks. As we know from the Corp Fin guidance that I blogged about yesterday, there would be inevitable disruptions in capital markets transactions (including the recently reawakened IPO market) and other matters that the SEC staff is involved with if the SEC has to furlough its employees as a result of a government shutdown, and similar disruptions in government services will play out across Washington and beyond.

As we gird ourselves for what could potentially be a long shutdown, I try to recall some of the brighter spots from the almost month-long government shutdown in 2018-2019. As we noted in the blog back then:

But if you live in Washington DC, the government shutdown is big news as many of your friends & neighbors are nervously sitting at home. Or maybe they have run out to one of Jose Andres’ restaurants, as the famous chef is handing out free food if you can flash a government ID. Some DC bars are offering speciality cocktails, such as as “Nothing Really Mattis” (Mad Dog 20/20 and Vodka) and “Mexico Will Pay for This” (Montezuma Blue tequila, orange juice and grenadine).

As we go into this weekend, all we can do now is hope for the best and prepare for the worst.

– Dave Lynn

At this point in my life, I think that I have come to accept a lot of things. This is what we call “growth.” I accept that I may never see a day when Congress does not turn every budget cycle into a political football and when members of Congress actually work together in a bipartisan manner to pass legislation that benefits the American people. I accept that the SEC may never revert to some sort of pre-politicized version of itself (if in fact that version of itself ever really existed). I accept that I am probably not going to get a chance to do a third tour at the SEC, particularly given that I have committed the cardinal sin of having represented clients in private practice. I accept that I am likely not going to be able own (or even drive) all of those dream cars that I have had on my list. And, perhaps most grudgingly, I accept that XBRL is here to stay.

As a self-avowed XBRL skeptic from the get-go, there was certainly a time when I hoped against hope that XBRL was just some sort of fad. With an EDGAR filing system that has always seemed to be just barely hanging on by a thread, I felt that the introduction of clunky XBRL files was inevitably just going to make a bad problem worse, with little upside in terms of the actual utility of the XBRL data to the SEC and outside parties.

I accept today that I was wrong – XBRL was not a fad. The requirements to tag data using Inline XBRL are coming in fast and furious these days, and now XBRL tagging is required in more filings than ever before – including the proxy statement, thanks to the pay versus performance disclosure requirements. This proliferation of XBRL requirements creates more opportunities for errors, which could have significant consequences for companies.

With a lot of skeptics like me out there, the SEC obviously needed a “stick” to compel XBRL compliance, and it landed on making the failure to provide the required XBRL data with a filing an error that impacts whether the company is considered current for the purposes of short-form eligibility (e.g., Forms S-3 and S-8) and the current public information requirement of Rule 144. While this consequence of non-compliance was adopted way back in 2009, to this day I think this comes as a surprise to companies when they come across a failure to comply with the XBRL requirements. The good news is that the filing of the required XBRL data will cause the filer to immediately regain compliance for these purposes, so it is a problem that can be easily remedied with an amendment to the deficient report.

As Liz noted in the blog earlier this month, Corp Fin recently provided some XBRL guidance in the form of a sample comment letter that identified several common areas of concern that the Staff comes across in the course of reviewing of filings, including: (i) filings that do not include the required Inline XBRL presentation in accordance with Item 405 of Regulation S-T, which must be amended to include the required Inline XBRL presentation; (ii) situations where the common shares outstanding reported on the cover page and on the balance sheet are tagged with materially different values (e.g., presenting the whole amount in one instance and the same amount in thousands in the second). (iii) pay versus performance disclosure must tagged using in Inline XBRL; (iv) while it is permissible to combine one or more sets of pay versus performance relationship disclosures into one graph, table, or other format, an issuer must still provide separate XBRL tags for each required item; using different XBRL elements to tag the same reported line item on the income statement from period to period; and (v) in situations where an issuer uses a custom tag, the Staff may requests an explanation of why the current U.S. GAAP tag is not applicable or asks the issuer to correctly tag the disclosure.

I do not think that the Staff’s sample comment letter is some indication that the Staff has undertaken a comprehensive effort to review XBRL compliance, but rather I think it is meant more as a reminder to companies that, in the face of so many new disclosure requirements that include an XBRL element, it is really time to get you XBRL house in order. Given the aforementioned consequences of non-compliance, there should be heightened awareness within the organization as to the importance of accurate and complete XBRL tagging. To an outside adviser like me, the XBRL process at clients is a black box – I do not have any visibility into the tagging process, which is by necessity often left to the very end of the filing process, when mistakes are more likely to occur.

The renewed focus on XBRL tagging presents a great opportunity to pull XBRL out of the black box and make sure appropriate steps are being taken as part of the company’s disclosure controls and procedures to get the XBRL tagging right and to avoid the sort of unforced errors that the SEC staff has observed – because XBRL is not a fad, and the scope of disclosure that must be tagged is only going to continue to increase.

– Dave Lynn

Earlier this week, Alan Dye noted on the Section16.net blog that the SEC announced cease and desist orders against five issuers and six individuals based on violations of Section 16(a), Section 13(d) and Item 405 disclosure obligations. Alan’s blog notes:

[I]t looks like:

All of the five issuers were charged with “causing” Section 16(a) violations by undertaking but failing to assist insiders with Section 16(a) reporting requirements

Three of the issuers also were charged with violating the proxy and 10-K disclosure requirements by failing to disclose insiders’ reporting violations under Item 405

Three of the individuals were officers or directors and were charged with violating Section 16(a)

The other three individuals were 10% owners of one or more companies and were charged with failure to comply with Sections 13(d) and 16(a).

All of the respondents consented to the orders and civil money penalties. Most of the alleged violations occurred in the 2017-2022 timeframe, but the SEC’s press release suggests that there may be more to come—it says today’s orders are part of “the SEC’s ongoing investigation of potential beneficial ownership violations.”

You may recall that we last saw a series of Section 16 and beneficial ownership reporting sweep cases way back in 2014.

– Dave Lynn

Yesterday, Corp Fin issued nine new Regulation S-K Compliance and Disclosure Interpretations and updated one existing Regulation S-K Compliance and Disclosure Interpretation to provide guidance regarding the pay versus performance disclosure requirements specified in Item 402(v) of Regulation S-K. The new CDIs address the following areas:

Question 128D.14 – Awards granted in fiscal years prior to an equity restructuring (such as a spin-off) that are retained by the holder must be included in the calculation of executive compensation actually paid.

Question 128D.15 – The change in fair value of awards granted prior to the date of an issuer’s IPO must be based on the fair value of those awards as of the end of the prior fiscal year for purposes of determining executive compensation actually paid (not based on other dates, such as the date of the IPO.

Question 128D.16 – In accordance with FASB ASC Topic 718, the effect of a market condition should be reflected in the fair value of share-based awards with such a condition. In addition, for purposes of the table required by Item 402(v)(1) of Regulation S-K, market conditions should also be considered in determining whether the vesting conditions of share-based awards have been met.

Question 128D.17 – The fair value of an award that did not meet vesting conditions during the year because the performance or market conditions were not met, but for which there is still potential for the award to vest in the future, should not be subtracted under Item 402(v)(2)(iii)(C)(1)(v) of Regulation S-K because it failed to vest in the current year.

Question 128D.18 – If retirement eligibility is the only vesting condition for a stock or option award, that condition would be considered satisfied for purposes of the pay versus performance disclosures and calculation of executive compensation actually paid in the year that the holder becomes retirement eligible.

Question 128D.19 – A performance-based vesting condition is considered satisfied when the applicable condition is achieved; however, a provision which requires the compensation committee to certify the level of performance attained should be analyzed to determine if it creates an additional substantive vesting condition, such as an employee does not vest in the award unless and until they remain employed through the date such certification occurs, in considering whether the award is vested for purposes of the Item 402(v) of Regulation S-K disclosures at the end of the fiscal year-end.

Question 128D.20 – An issuer may satisfy the requirement in Item 402(v)(2)(iii)(C)(3) of Regulation S-K with respect to the fair value of all equity awards being computed in a manner consistent with the methodology used to account for share-based payments under GAAP by using a valuation technique that differs from the one used to determine the grant date fair value of the equity-based awards that are classified as equity in the financial statements, as long as the valuation technique would be permitted under FASB ASC Topic 718, including that it meets the criteria for a valuation technique and the fair value measurement objective.

Question 128D.21 – To comply with Item 402(v)(2)(iii)(C)(3) of Regulation S-K, the methodology used to compute the fair value amounts of all equity awards must be consistent with the methodology used to account for share-based payments in the financial statements under GAAP. It is not acceptable to value these awards as of the end of a covered fiscal year based on methods not prescribed by GAAP.

Question 128D.22 – If the assumptions disclosure required by Item 402(v)(4) would involve confidential trade secrets or confidential commercial or financial information, the disclosure of which would result in competitive harm for the issuer, the issuer may omit such information to the extent such information would be subject to the confidentiality protections of Instruction 4 to Item 402(b) of Regulation S-K. However, the issuer must provide as much information responsive to the Item 402(v)(4) requirement as possible without disclosing the confidential information, such as a range of outcomes or a discussion of how a performance condition impacted the fair value. In addition, consistent with Instruction 4 to Item 402(b), the issuer should also discuss how the material difference in the assumption affects how difficult it will be for the executive or how likely it will be for the issuer to achieve undisclosed target levels or other factors.

The Staff also updated Regulation S-K CDI Question 118.08, which addresses the approach for satisfying Item 10(e) of Regulation S-K and Regulation G with respect to non-GAAP financial measures that are presented in pay-related circumstances in the proxy statement. The same principles articulated in Question 118.08 continue apply, where an issuer can refer to annex or cross-reference the non-GAAP financial measure disclosure in the Form 10-K, but the Staff updated the language in the CDI to replace references to “the relationship between pay and performance” with “how pay is structured and implemented to reflect the registrant’s or a named executive officer’s performance.”

– Dave Lynn

With only three days left until the end of the federal government’s fiscal year, we appear to be no closer to seeing Congress act on an appropriations bill or an interim funding measure, so that means I am going to keep blogging about government shutdown developments!

Yesterday, Corp Fin issued an announcement titled Division of Corporation Finance Actions in Advance of a Potential Government Shutdown, providing guidance on Corp Fin’s operations during the shutdown and various considerations for filing matters that would inevitably arise in the event of a lapse in appropriations and the resulting furlough of the SEC Staff during the pendency of a shutdown. This guidance may seem very familiar, because it closely tracks the guidance that we have received from the Staff in past government shutdown situations.

My top ten takeaways from the Staff’s guidance include:

1. In the event that a government shutdown occurs, Corp Fin intends to provide as much advance notice as possible of any change of its operating status.

2. EDGAR will continue to accept registration statements, offering statements and any other required filings, regardless of the SEC’s operating status.

3. Once the SEC’s operations cease due to a government shutdown, the Staff will not be able to declare registration statements effective (including post-effective amendments to registration statements) and the Staff will not be able to qualify Form 1-A offering statements.

4. Given the uncertainty as to the timing of when the SEC’s operating status will change, the Staff suggests that an issuer may want to submit a request for acceleration or qualification while the SEC is open and operating, if that issuer has a pending registration statement or Form 1-A offering statement that is substantially complete, and that has met all the statutory requirements to request acceleration of the effective date or qualification.

5. The Staff indicates that, in a situation where the required “no objections” statement from FINRA has not yet been obtained, the Staff will consider granting requests for acceleration or qualification if the underwriters confirm in their request that they will not execute the underwriting agreement or confirm sales of the registered securities until they receive that statement from FINRA.

6. During a government shutdown, the issuer can file a post-effective amendment on EDGAR, but the Staff will not be in a position to declare that post-effective amendment effective. Issuers will have to decide for themselves if they can update a registration statement by prospectus supplement, which requires no action on the part of the Staff.

7. If an issuer does not price an offering within the 15-day time period provided in Rule 430(a), the Staff indicates that the issuer may file post-effective amendments, as necessary, under Rule 462(c) to restart the 15-business-day period so that, at the time of pricing, the issuer will be able to include the pricing information in a Rule 424(b) prospectus supplement.

8. The Staff notes that an issuer can elect to amend to remove a delaying amendment while the SEC is open or while the SEC is shut down; however, the Staff may request that the issuer amend the filing to include the delaying amendment if and when the SEC is operational.

9. An issuer does not need to hear from the Staff regarding a preliminary proxy statement during the ten-day period before the issuer may file definitive proxy materials; however, the Staff notes that it may review the issuer’s preliminary proxy statement when the SEC is operational.

10. During a government shutdown, the Staff will not be able to respond to any written or oral guidance for legal or interpretative questions, including Rule 14a-8 no-action letters. The Staff may consider a request for emergency relief under Rule 3-13 of Regulation S-X.

Perhaps the biggest takeaway here is that if you have a registration statement or a post-effective amendment to a registration statement that you need to get declared effective in the near term, or some other filing or interpretive issue that you need to get resolved, I suggest that you give the Staff a call first thing this morning, because they will no doubt be inundated with requests to resolve pending matters in advance of a potential September 30 shutdown date.

Now, if you want a blast from the past on the topic of government shutdowns, check out this Dave and Marty Radio Show from April 8, 2011. The discussion that I had with Marty way back then tends to prove the point that the more things change, the more they stay the same!

– Dave Lynn

Yesterday, SEC Chair Gensler may have wished that the government shutdown had come a few days early as he faced some hostile members of the House Financial Services Committee at an oversight hearing. Chair Gensler’s written testimony highlighted the Commission’s efforts on a wide range of regulatory fronts.

– Dave Lynn