Yesterday, the SEC proposed amendments to eliminate redundant, overlapping, outdated, or superseded provisions, in light of subsequent changes to SEC disclosure requirements, U.S. GAAP, IFRS and technology. The SEC also solicited comment on certain disclosure requirements that overlap with U.S. GAAP to determine whether to retain, modify, eliminate or refer them to the FASB for potential incorporation into U.S. GAAP. The proposing release is part of the SEC’s disclosure effectiveness review (criticized of late by Senator Warren), which is a broad-based staff review of the requirements, and the presentation and delivery of disclosures that companies make to investors. The proposals are also part the implementation of the Fixing America’s Surface Transportation (FAST) Act, which, among other things, requires the SEC to eliminate provisions of Regulation S-K that are duplicative, overlapping, outdated, or unnecessary. The proposals are subject to public comment and may or may not be enacted in the near-term, but many of them appear to be “low hanging fruit” that are common-sense, non-controversial changes that would help public companies to at least start to chip away at their bulging disclosure documents. While not radical changes, it’s a step in the right direction to see some of the simplification concepts the SEC has discussed for months start to move to the proposal stage.

Find more SEC resources on our Capital Markets page.

This interview was originally published on Sharon Merrill's blog, The Podium. It is republished here with permission.

On May 17, 2016, the SEC issued new Compliance & Disclosure Interpretations related to Regulation G.  The Podium discussed the new guidance on the reporting of non-GAAP financial measures with Sullivan Partner Howard Berkenblit. 

The Podium: What do you see as the most significant changes that came out of the new SEC guidance on Reg G?

HB: There are two main themes to the changes.  First there are some additional interpretations regarding what can and can’t be presented – these have the practical effect of creating new rules without technically changing the rules.  For example, one of the changes makes explicit that EBITDA “must not be presented on a per share basis,” while others give new examples of adjustments that may not be made to non-GAAP measures. While some of these were implicit from the rules or prior SEC Staff speeches and comments, having them in Compliance and Disclosure Interpretations, even if theoretically not binding, gives them greater weight.

The second theme revolves around changes to presentation.  These interpretations don’t directly prohibit a measure or adjustment, but do dictate the way the information appears. For example, while many companies’ quarterly earnings releases lead with a non-GAAP measure and only describe the comparable GAAP measure later in the release, that will no longer be acceptable under the new interpretations, which put tighter parameters around the presentation. 

The Podium: Can you give examples of the most common mistakes companies make in presenting non-GAAP financial measures?

HB: While the concept of giving equal or greater prominence to GAAP measures over non-GAAP measures is not new, the interpretations now give several specific examples of ways in which the presentation of non-GAAP measures have been presented more prominently than the GAAP measures in violation of Reg G. These include (1) a non-GAAP measure that precedes the most directly comparable GAAP measure (including in an earnings release headline or caption); (2) omitting comparable GAAP measures from an earnings release headline or caption that includes non-GAAP measures, and (3) describing a non-GAAP measure as, for example, "record performance" or "exceptional" without at least an equally prominent descriptive characterization of the comparable GAAP measure. Many companies will need to modify the way they draft their disclosures.

The Podium:  How are you advising clients on developing headlines in earnings releases as it pertains to Reg G?

HB: While non-GAAP measures can still appear in headlines, companies can no longer present them alone or before GAAP measures.  As a result of the interpretations, it’s clear now that the SEC expects any headline that contains a non-GAAP measure to only have that measure appear if the most directly comparable GAAP measure also appears and precedes it.   So essentially clients must lead with the GAAP measure.  For example, a headline that used to say “EBITDA increases 20% For Quarter” will now need to read along the lines of “Net Income increases 10% for Quarter; EBITDA increases 20%”.

The Podium: Were there areas that the SEC advised that they will be watching more closely as it relates to Reg G?  Where have companies been skirting the Regulation to date?

HB: The SEC seems to be most bothered by adjustments to non-GAAP measures that could appear to be misleading. The examples most often given in speeches and the press seem to be more clear cut abuses – for example, backing out certain cash items from a cash-based performance measure, accelerating revenue or presenting only the “good stuff’ while leaving out conspicuous negative adjustments. In my experience most companies present non-GAAP adjustments that are appropriate and because they show how management views the measure and give investors and analysts valuable additional information. But because of the abuses, the SEC felt the need to clamp down a bit not just on the more extreme examples, but in some cases more common practices as well.

The Podium: Do you expect the SEC to become more strict with enforcement of Reg G?  Should we expect to see issuers receive an increase in comment letters on filings related to Reg G?

HB: The SEC Staff has already begun to increase its comments on filings and I expect that will continue in the near future, now more directly pointing to the new interpretations as the basis for the comments. Companies are clearly expected to familiarize themselves with the interpretations and apply them and change any existing practices that don’t comply.  In terms of more severe consequences, I am hopeful that the SEC enforcement staff will only get involved in cases where companies take deliberate actions to mislead or defraud.  

The Podium:  Do you expect the SEC to get more strict with Reg G in communications other than filings, such as conference calls and presentations?

HB: For a while now, as part of its regular reviews, the SEC has been looking outside the four corners of the registration statement or periodic filing to earnings releases, websites, presentations, etc.  I expect this will continue – the SEC Staff in particular looks for inconsistencies in disclosures and non-GAAP measures play directly into this. For example, if a quarterly report on Form 10-Q presents financial information that indicates a mediocre quarter, but the parallel earnings release includes non-GAAP measures that appear to give a much rosier picture, companies should not be surprised to get questions from the Staff about the different trends.

The Podium: What are the key take-aways for issuers on the new guidance?

HB: The key is that anyone involved in preparing earnings releases, presentations or SEC filings that contain non-GAAP financial measures should read the guidance and make sure they understand it before the next disclosure event. Beyond that, any time a company is considering changes to how it calculates or presents non-GAAP financial measures, the measures and presentation should be analyzed against these interpretations, as well as recent SEC comments on other similarly situated companies and more generally in public appearances. Consistency is also very important – in the interpretations, the SEC Staff has made clear that it expects period-to-period comparisons to present the same types of information – the same adjustments, fairly presenting the negative with the positive, and not excluding recurring items.

Howard E. Berkenblit is a partner and leader of Sullivan’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, Howard 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. He is also the editor of The SEC Pulse, a blog that provides updates and commentary from Sullivan’s Capital Markets Group on issues affecting publicly traded and privately owned businesses, investment banks and foreign companies that trade or raise capital in the United States, and boards of directors and company officers in securities transactions and corporate governance matters. 

The SEC has approved an interim final rule that allows Form 10-K filers to provide a summary of business and financial information contained in the annual report. The rule implements a provision of the Fixing America’s Surface Transportation (FAST) Act. Note that this will be optional for companies – they do not have to provide a summary but the idea behind this is that a summary may help investors better digest the lengthier and lengthier annual reports they have been receiving lately. Importantly, however, companies opting to provide the summary must include hyperlinks to the related, more detailed disclosure in the Form 10-K. 

Earlier this month, the SEC released a small entity compliance guide for issuers regarding its recently passed crowdfunding regulation to help provide issuers with some additional clarity.  The guide presents a general description of the regulation and provides a step by step listing of the requirements issuers must meet in order to rely on the crowdfunding exemption.  In addition, the guide discusses disclosure requirements of issuers and other limits, restrictions and disqualifications under the regulation.

Find out more about crowdfunding:

• Posts on The SEC Pulse
• Posts on InhouseGo2

The SEC staff has released updated Compliance Disclosure and Interpretations regarding Regulation G/non-GAAP financial measures. Non-GAAP measures have been under attack in recent SEC speeches and media articles and now there are updated parameters surrounding their usage. 

From a practical standpoint, the biggest changes in the CD&Is appear in new question 102.10 –this will impact many companies’ earnings releases due to the parameters it places around ordering, headlines, etc. This CD&I points out that the rules require that when a registrant presents a non-GAAP measure it must present the most directly comparable GAAP measure with equal or greater prominence.  Included among the examples of disclosures that would cause a non-GAAP measure to be more prominent are some practices that are currently quite common, including (1) a non-GAAP measure that precedes the most directly comparable GAAP measure (including in an earnings release headline or caption); (2) omitting comparable GAAP measures from an earnings release headline or caption that includes non-GAAP measures and (3) describing a non-GAAP measure as, for example, "record performance" or "exceptional" without at least an equally prominent descriptive characterization of the comparable GAAP measure. 

Although the CD&Is are technically informal views, not rules, companies can expect the SEC staff to comment on their filings that contain non-GAAP measures if they don’t adhere to the updated guidance.

In March 2016, the Securities and Exchange Commission announced that AVEO Pharmaceuticals, Inc., a Massachusetts-based biopharmaceutical company, agreed, without admitting or denying the allegations, to pay $4 million to settle fraud charges alleging that AVEO and three of its officers misled investors regarding their dealings with the U.S. Food and Drug Administration. Companies and their officers can be held liable for any untrue statement of a material fact or omission to state a material fact required or necessary to make a statement not misleading.  The AVEO case serves as a cautionary reminder that when a company is telling investors about its dealings with regulators, it must be accurate and tell the whole story.

AVEO is focused on developing and commercializing cancer drugs. To date, none of its drugs have been brought to market. However, in 2012, AVEO had a drug called Tivozanib relatively far along in the FDA approval process. Tivozanib was developed with the intention of treating kidney cancer and had already undergone a clinical trial in Europe.

With that trial completed, AVEO was prepared to move forward in seeking FDA approval for Tivozanib by submitting a New Drug Application (NDA). In preparation for filing its NDA, AVEO had an initial meeting with the FDA in May 2012. At this meeting, the FDA expressed concerns about the data from Tivozanib’s clinical trial in Europe. Particularly, the FDA was concerned that although Tivozanib appeared to slow cancer’s progression in patients, the lifespan of patients taking the drug was shorter than those taking another drug already on the market. The FDA expressed its belief that a second clinical trial would likely be necessary before it could approve Tivozanib.

In the month that followed AVEO’s meeting with the FDA, AVEO conducted additional analyses of the data from the clinical trial in Europe. AVEO estimated that a second trial would cost approximately $83 million and last roughly 3 years. AVEO’s officers believed that they could explain the data that concerned the FDA without conducting a second clinical trial and avoid undue delay and expense. Ultimately, AVEO decided against conducting the second clinical trial.

In August 2012, AVEO issued a press release discussing AVEO’s progress in submitting an NDA for Tivozanib. In this press release, AVEO mentioned that the FDA was concerned about the lifespan of patients taking Tivozanib, but failed to mention that the FDA had recommended a second study be conducted or that AVEO had considered conducting such a study.

That same day, AVEO held an earnings call with investors and analysts where it discussed Tivozanib’s progress. During the call, several analysts asked officers of AVEO about the meeting with the FDA and whether the FDA had made any recommendations for getting Tivozanib approved. The officers participating in the call did not discuss the second trial recommended by the FDA, but instead said that they “can’t speculate on what the agency might want [AVEO] to do in the future.”

AVEO continued to believe that it could explain the shorter lifespans of the patients in the clinical study in Europe through certain of its analyses. Moreover, Tivozanib appeared effective at slowing the progression of cancer. Accordingly, AVEO submitted its NDA for Tivozanib in September 2012 without conducting a second clinical trial.

In January 2013, AVEO raised $53 million in a public equity offering. Approximately three months later, in April 2013, the FDA publicly disclosed its prior recommendation to AVEO to conduct a second trial for Tivozanib. That same day, AVEO’s stock price dropped 31% and roughly one month later, the FDA denied approval of Tivozanib.

Fast forward three years later: in March 2016, the SEC filed a complaint charging AVEO and three former officers with fraud for failing to disclose to investors the FDA’s recommendation that a second clinical trial be conducted. The SEC also announced that AVEO agreed to pay $4 million to settle these charges without admitting or denying the allegations in the complaint. The charges against the former officers continue. In a press release, Paul G. Levenson, Director of the SEC’s Boston Regional Office stated, “Companies must be forthcoming about their communications with regulators so investors can make informed investment decisions while knowing what challenges may lay ahead.”

Considering what to disclose – and what not to disclose – presents some of the most difficult decisions for companies. What’s “material” lacks a bright line and is instead based on decades old case law about what’s important to reasonable investors. Companies should always be careful in choosing how and when they disclose to investors communications with regulatory bodies and ensure that they are telling the whole story. Companies and their officers should strive to accurately represent their dealings with regulators, so as not to mislead investors since they can be held liable for material misstatements or omissions.

Not that it was all that difficult to begin with, but the SEC has released an online tool to help companies calculate registration fees for certain form submissions to EDGAR. According to the SEC’s press release, “the new tool is intended to improve the accuracy of fee calculations and minimize the need for corrections.” The new tool covers the most common filings companies use to register initial public offerings, debt offerings, asset-backed securities, closed-end mutual funds, limited partnerships, and small business investment companies. The tool prompts users to enter data based on the type of filing and the applicable fee rules and provides suggestions for completing required fee tables based on the data entered. Of course, the SEC reminds filers that this is just a tool to help - companies will remain responsible for paying all required fees and accurately including all required information in their filings.

The Registration Fee Estimator is available at https://www.sec.gov/ofm/registration-fee-estimator.html

Nano Dimension Ltd. (NNDM) and LabStyle Innovations Corp. (DRIO) are the first Israeli-based companies to be listed on NASDAQ in 2016.

Nano Dimension Ltd. (NNDM), a leader in the area of 3D printed electronics, uplisted its American Depositary Shares (ADSs) to the NASDAQ Capital Market under the symbol “NNDM,” effective on March 7, 2016. Nano Dimension’s ordinary shares also trade on the Tel Aviv Stock Exchange. In their press release, Nano Dimension's Chief Executive Officer Amit Dror said, "Becoming a NASDAQ-listed company is an important step in our overall corporate development strategy as we look to increase awareness of Nano Dimension within the U.S. investment community and expand our presence in the U.S. market."

LabStyle Innovations Corp. (DRIO), developer of the Dario™ Diabetes Management Solution, uplisted its common stock to the NASDAQ Capital Market under the symbol "DRIO" effective March 4, 2016, while raising $8.5 million in a public offering and private placement. LabStyle's announcement can be viewed here.

ZAG/Sullivan represented both companies in their listings. ZAG/Sullivan is the world's only true Israeli-American law firm committed to the success of Israeli and U.S. companies seeking to do business between each other's countries. Founded in 2001 through a unique joint venture of its founding firms, Zysman, Aharoni, Gayer & Co. (ZAG) and Sullivan & Worcester LLP (Sullivan), ZAG/Sullivan is a law firm partnership—one entity—not a referral relationship. Our innovative business model enables us to provide completely integrated, cost-efficient legal services, leveraging our experience on both sides of the Atlantic to help advance your objectives with maximum efficiency—whether it's forming a joint venture or listing your company on NASDAQ. But we do more than just provide legal services; we build business bridges for our clients, connecting them with the right players and the right resources to gain a competitive edge.

On December 4, 2015, the Fixing America’s Surface Transportation Act (the FAST Act) was signed into law. While the FAST Act primarily dealt with transportation and infrastructure improvements, it included a new subsection to Section 4 of the Securities Act of 1933. Specifically, it added Section 4(a)(7), which provides a new registration exemption for the private resale of securities. Previously, private holders of securities wishing to resell without registration had two options: (i) comply with a holding period before selling securities on a public market pursuant to Rule 144, or (ii) fall within the so-called “Section 4(a)(1½)”.

Generally, Section 5 of the Securities Act requires registration for all offers and sales of securities unless an exemption applies. Two common exemptions to registration exist under Sections 4(a)(1) and 4(a)(2) of the Securities Act. Section 4(a)(1) offers an exemption for transactions by any person other an issuer, underwriter or dealer. Section 4(a)(2) offers an exemption for transactions by an issuer that are not a public offering. However, private resales of securities fell into unclear territory. That uncertainty gave rise to the so-called “Section 4(a)(1½)”.

Section 4(a)(1½) is an exemption derived from case law and certain elements and principles of Sections 4(a)(1) and 4(a)(2). Section 4(a)(1½) essentially applies the Section 4(a)(1) exemption to a transaction with private characteristics similar to a private issuance under Section 4(a)(2). However, unlike a codified exemption, the little guidance that existed with regards to Section 4(a)(1½) was conflicted and incomplete.

Section 4(a)(7) creates more certainty by specifying the circumstances where a private resale of securities is exempt from registration. A resale of securities is exempt under Section 4(a)(7) if:

1. The purchaser is an “accredited investor” as defined by Regulation D
2. The seller, or any person acting on the seller’s behalf, refrains from any form of general solicitation or advertising
3. The seller is not the issuer or a subsidiary of the issuer
4. The seller, or any person that has been or will be paid for participating in the sale of the securities, is not qualified as a “bad actor” under Regulation D
5. The issuer is engaged in business, is not in the organizational stage or in bankruptcy or receivership, and is not a blank check, blind pool, or shell company that has no specific business plan or purpose and has not indicated that the issuer’s primary business plan is to merge or acquire an unidentified person
6. The transaction does not relate to an unsold allotment to, or a subscription or participation by, a broker or dealer as an underwriter of the securities
7. The transaction is with respect to a class of securities that has been authorized and outstanding for at least 90 days prior to the transaction
8. For securities of issuers not subject to periodic reporting and eligible to register securities under Schedule B, certain information must be provided to prospective purchasers, including financial statements prepared in accordance with generally accepted accounting principles or, for foreign issuers, International Financial Reporting Standards

Securities sold under Section 4(a)(7) are “restricted securities” under Rule 144. They are also “covered securities” within the meaning of Section 18(b) of the Securities Act, and are therefore exempt from state securities registration requirements. Further, Section 4(a)(7) does not replace Section 4(a)(1½), meaning resellers can still rely on procedures that fell under Section 4(a)(1½) if they are unable to comply with the requirements of Section 4(a)(7).

In mid-February, the SEC posted an investor bulletin designed to educate investors about the ins and outs of its crowdfunding rules that go into effect in mid-May.  The bulletin presents examples illustrating the investment limits based on income and net worth under the new rules.  The bulletin also contains guidance on how to make a crowdfunding investment and how to get information about companies seeking crowdfunding, and highlights some of the key risks involved with a crowdfunding investment, all in a fairly “plain English” format.