The SEC Pulse

Howard Berkenblit

Howard E. Berkenblit is a partner and leader of the firm’s Capital Markets Group. He specializes in counseling both public and private companies involved in equity and debt financings and ongoing corporate governance and disclosure matters, stock exchange listing standards and Sarbanes-Oxley Act and Dodd-Frank Act compliance. He also advises Israeli and other international companies that seek to have their securities traded in the United States, as well as real estate investment trusts that engage in securities offerings and governance initiatives. In addition, Mr. Berkenblit works with clients on mergers and acquisitions, capital raising and general corporate matters. He has written articles and spoken on many topics including Sarbanes-Oxley, Dodd-Frank and a range of securities law issues impacting U.S. and foreign companies.
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Recent Posts

SEC amends Rule 701 and solicits comments on ways to modernize offerings pursuant to compensatory arrangements

Posted by Howard Berkenblit on July 18, 2018 at 1:52 PM

The SEC today issued final rules to amend Securities Act Rule 701, which provides an exemption from registration for securities issued by private companies pursuant to compensatory arrangements, such as equity plans. As mandated by the Economic Growth, Regulatory Relief, and Consumer Protection Act, the amendment increases from $5 million to $10 million the aggregate sales price or amount of securities sold during any consecutive 12-month period in excess of which a company is required to deliver additional disclosures to investors/grantees. This will allow private companies to make more grants without having to meet more extensive disclosure requirements.

In addition, the SEC approved a "concept release" soliciting comment on possible ways to modernize rules related to compensatory arrangements in light of the significant evolution in both the types of compensatory offerings and the composition of the workforce since the SEC last substantively amended these rules in 1999. The SEC is soliciting comment on possible ways to update the requirements of Rule 701 and Form S-8 (which provides a simplified registration form for companies to use to issue securities pursuant to employee equity plans). Among other things, the concept release solicits comment on:

  • "Gig economy" relationships, in light of issuers using internet platforms to provide workers the opportunity to sell goods and services, to better understand how they work and determine what attributes of these relationships potentially may provide a basis for extending eligibility for the Rule 701 exemption;
  • Whether the SEC should further revise the disclosure content and timing requirements of Rule 701(e); and
  • Whether the use of Form S-8 to register the offering of securities pursuant to employee benefit plans should be further streamlined.

The amendment to Rule 701 to increase the threshold will be immediately effective. The Concept Release is merely soliciting comments, and further action by the SEC will depend on many factors, including comments received and competing items on its regulatory agenda.

Topics: Securities Act, Rule 701, Concept Release

SEC expands "smaller reporting company" definition

Posted by Howard Berkenblit on June 28, 2018 at 4:55 PM

The SEC today approved amendments to the "smaller reporting company" definition to expand the number of companies that qualify for certain existing scaled disclosure accommodations. The new smaller reporting company definition enables a company with less than $250 million of public float to provide scaled disclosures, as compared to the $75 million threshold under the prior definition. The scaled disclosures for smaller reporting companies include, among other things, fewer disclosure requirements regarding executive compensation and financial statements.

The final rules also expand the definition to include companies with less than $100 million in annual revenues if they also have either no public float or a public float that is less than $700 million. This reflects a change from the revenue test in the prior definition, which allowed companies to provide scaled disclosure only if they had no public float and less than $50 million in annual revenues. The $700 million threshold in particular may help biotech and other development companies developing new drugs and products that have significant public floats but have not yet recognized significant revenues.

Notably, the amendments do not change the threshold in the somewhat overlapping "accelerated filer" definition that requires, among other things, that filers provide the auditor's attestation of management's assessment of internal control over financial reporting. So companies between the $75 million and $250 million threshold will still need to provide a SOX 404 audit report even if they take advantage of the scaled disclosures in other areas. However, the SEC has begun to formulate recommendations for possible additional changes to the "accelerated filer" definition, so stay tuned.

The rules will become effective 60 days after publication in the Federal Register.

 

Topics: scaled disclosure accommodations, public float, accelerated filer, smaller reporting company

SEC Requires "Inline XBRL"

Posted by Howard Berkenblit on June 28, 2018 at 4:52 PM

Today the SEC adopted amendments to eXtensible Business Reporting Language (XBRL) requirements for operating companies and funds. The amendments are intended to improve the quality and accessibility of XBRL data by replacing the existing requirements for tagged data to be filed as exhibits to certain SEC filings and posted as separate files on companies’ websites. The amendments, which will go into effect in phases, require the use of Inline XBRL for financial statement information and risk/return summaries.    

While the amendments modify existing XBRL requirements, they do not change the categories of filers or scope of disclosures subject to XBRL requirements, nor do they change the relevant liability standards.

Operating companies that are currently required to submit financial statement information in XBRL will be required, on a phased basis, to transition to Inline XBRL, with large accelerated filers that use U.S. GAAP being required to comply beginning with fiscal periods ending on or after June 15, 2019, accelerated filers that use U.S. GAAP being required to comply beginning with fiscal periods ending on or after June 15, 2020, and all other filers being required to comply beginning with fiscal periods ending on or after June 15, 2021. Filers will be required to comply beginning with their first Form 10-Q (not 10-K) filed for a fiscal period ending on or after the applicable compliance date.

Funds that are currently required to submit risk/return summary information in XBRL will be required, on a phased basis, to transition to Inline XBRL, with large fund groups (net assets of $1 billion or more as of the end of their most recent fiscal year) being required to comply two years after the effective date of the amendments and all other funds being required to comply three years after the effective date of the amendments. The amendments also eliminate the 15 business day filing period for risk/return summary XBRL data, so that the data will be more timely available to the public.

Topics: SEC, GAAP, Securities and Exchange Commission, Inline XBRL, eXtensible Business Reporting Language

SEC issues guidance on cybersecurity disclosures

Posted by Howard Berkenblit on February 21, 2018 at 3:07 PM

The SEC posted today an interpretive release regarding its latest guidance public companies’ disclosure obligations under existing law with respect to matters involving cybersecurity risk and incidents. It also addresses the importance of cybersecurity policies and procedures and the application of disclosure controls and procedures, insider trading prohibitions, and Regulation FD and selective disclosure prohibitions in the cybersecurity context.

The timing of the release was a bit unusual. Initially, the SEC was scheduled to consider the guidance at an open meeting on February 21st. It abruptly cancelled the meeting and instead put out a press release saying the interpretive guidance had been approved on February 20th. Sounds like the SEC may be having its own issues with disclosure controls and procedures!

Topics: cybersecurity, SEC, Securities and Exchange Commission, Regulation FD

NYSE Rule Change: Material News at End of the Day

Posted by Howard Berkenblit on December 6, 2017 at 11:11 AM

The SEC has approved a NYSE rule that will prohibit listed companies from issuing material news after the official closing time of trading until at least 5 minutes after closing (unless the company’s official closing price is published sooner).

Topics: SEC, New York Stock Exchange, NYSE, Securities and Exchange Commission

Insider Trading and Equifax

Posted by Howard Berkenblit on October 2, 2017 at 5:00 PM

We regularly have conversations with our clients about whether particular non-public information is "material," who at the company knows about such information and whether certain individuals should be allowed to engage in securities transactions while such information remains non-public. Very often these conversations revolve around who knows what and when, how developed the facts are, etc. As a rule of thumb we advise clients to think about how things would look in hindsight if they came to light in a front page story on the cover of the Wall Street Journal.

Well, the General Counsel of Equifax is dealing with exactly that situation (see article from today's cover of The Wall Street Journal).  As outsiders, we don’t know what exactly the general counsel (or outside counsel if they were involved) said to the insiders whose trades are being investigated, what the insiders knew or for that matter what the GC knew. We don’t know how Equifax’s insider trading policy operated in practice. All we currently know is that trades were made after the cyber-breach was known to at least some individuals – and that doesn’t look so good on the cover of the Wall Street Journal.  Whether and how this will make our advice and our clients’ actions regarding allowing trades, time will tell, but it’s a good reminder that the conversations around these topics are not just theoretical.

Topics: Equifax

SEC fees to increase on October 1st

Posted by Howard Berkenblit on August 25, 2017 at 2:44 PM

Yesterday, the SEC announced that in fiscal year 2018 the fees that public companies and other issuers pay to register their securities with the Commission will be set at $124.50 per million dollars. This is an increase from the current rate of $115.90/million. The new higher rate goes into effect on October 1, 2017.

Topics: public companies, U.S. Securities Laws

Confidential IPO Filing System to be Expanded

Posted by Howard Berkenblit on June 30, 2017 at 10:29 AM

GettyImages-506172508.jpgAs of July 10th, the SEC’s Division of Corporation Finance will permit all companies to submit draft registration statements relating to initial public offerings for review on a non-public basis. Previously, this process was only available for “emerging growth companies” under the JOBS Act, although that covered a substantial majority of IPO candidates. 

More notably, this process will now be available for most offerings made in the first year after a company has entered the public reporting system. 

More information can be found at:  https://www.sec.gov/corpfin/announcement/draft-registration-statement-processing-procedures-expanded

Topics: Jobs Act, SEC, Division of Corporation Finance

Auditor Reports to Require Additional Information

Posted by Howard Berkenblit on June 2, 2017 at 11:00 AM

GettyImages-182188675.jpgThe Public Company Accounting Oversight Board has approved a new standard (though still subject to SEC approval) designed to enhance the relevance and usefulness of the Auditor's Report with additional information for investors.

The new standard and related amendments require auditors to include in the auditor's report a discussion of the critical audit matters (CAMs), which are matters that have been communicated to the audit committee, are related to accounts or disclosures that are material to the financial statements, and involved especially challenging, subjective, or complex auditor judgment. Under the new standard, the auditor's report will disclose, among other things, the tenure of an auditor, specifically, the year in which the auditor began serving consecutively as the company's auditor. It also will include the phrase, "whether due to error or fraud," in describing the auditor's responsibility under PCAOB standards to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements.

If approved by the SEC, the new auditor's report format, tenure, and other information would be effective for audits for fiscal years ending on or after December 15, 2017. The communication of CAMs for audits of large accelerated filers would be effective for audits for fiscal years ending on or after June 30, 2019 and the communication of CAMs for audits of all other companies would be effective for audits for fiscal years ending on or after December 15, 2020.

Communication of CAMs is not required for audits of emerging growth companies, brokers and dealers, investment companies other than business development companies, and employee stock purchase, savings and similar plans.

A fact sheet on the new rules also is available: https://pcaobus.org/News/Releases/Pages/fact-sheet-auditors-report-standard-adoption-6-1-17.aspx

Topics: SEC, fraud, audit committee, Public Company Accounting Oversight Board, Critical Audit Matters

SEC Announces New Changes to Covers of Periodic Reports and Registration Statements

Posted by Howard Berkenblit on April 4, 2017 at 12:54 PM

The SEC adopted technical rule and form SEC graphic.jpgamendments (https://www.sec.gov/rules/final/2017/33-10332.pdf) under the JOBS Act that impact almost every periodic report and registration statement by adding an additional “check the box” item on the covers (as well as the introductory language prior to such item.

Specifically, in the section where companies check off what type of issuer they are, there is now a new box for emerging growth company (“EGCs” - they will also still check the other relevant box for accelerated filer, smaller reporting company, etc.). In addition, to provide a uniform way to identify if EGCs have elected to take advantage of JOBS Act rules permitting them to defer adoption of accounting standards, the covers will also include an additional check the box item regarding such election. An example is below.

These rules go into effect as soon as they are published in the Federal Register, which should be in the next few days – in other words, for upcoming 10-Qs for the quarter ended March 31, 2017, companies will need to reflect this change (if not sooner for other reports). The forms impacted include, among others:  S-1, F-1, S-3, F-3, S-4, S-8, S-11, 20-F, 8-K (note this was not previously on the 8-K cover at all), 10-K, 10-Q – see the end of the rule release linked above for the forms and formats.

Example:

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer 􀀀
Accelerated filer 􀀀
Non-accelerated filer 􀀀 (Do not check if a smaller reporting company)
Smaller reporting company 􀀀
Emerging growth company 􀀀

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Inflation Changes for EGCS and Crowdfunding Amounts:

The JOBS Act requires the SEC to revisit certain definitions that contain dollar amounts to index them for inflation every 5 years. These include the $1 billion revenue threshold in the EGC definition, as well as certain limits in Regulation Crowdfunding on the dollar amount raised and invested. As a result the technical rule amendments have now raised each of these amounts slightly. For example, to qualify as an EGC, an issuer’s revenues must now be less than $1,070,000,000 and the maximum amount of crowdfunding in any 12 month period cannot now exceed $1,070,000 (increased from $1 million). With respect to the EGC definition, many issuers describe this definition in their registration statements or periodic reports and should be mindful to make the updates to such description.

Other Changes:

The technical amendments also update various rules in Regulation S-K and S-X (in areas such as required financial statements, MD&A, executive compensation and others) to include references to various JOBS Act provisions that benefit EGCs. These are not new rules, but make it more convenient when checking the rules for particular filings to see what applies (or more likely does not apply) to EGCs by directly including instructions within the applicable rule provisions.

Topics: SEC, reporting requirements, Compliance Rules, Filing Rules

About the Blog


The SEC Pulse provides updates and commentary from our Capital Markets Group on issues affecting publicly traded and privately owned businesses, investment banks and foreign companies who trade or raise capital in the United States, and boards of directors and company officers in securities transactions and corporate governance matters. 

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