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. 

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

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).

The SEC recently issued under the JOBS Act the long-awaited crowdfunding rules, whereby small businesses may raise capital from a large number of investors, each of whom contributes a small amount of money, without going through the trouble of filing a registration statement with the SEC.  However, it is important to understand the limits and filing requirements imposed by the SEC before moving forward with a crowdfunding transaction.  

1. Limits.  As much as we’d each like to go collect $5 from every person we’ve ever met, the SEC has imposed several limits on crowdfunding in order to protect investors.  To qualify for the registration exemption, the aggregate amount of securities sold by a company to all investors in a crowdfunding transaction during a 12-month period cannot exceed $1 million.  In addition, the aggregate amount of securities sold by a company to any one investor in a crowdfunding transaction cannot exceed certain limits – if the investor’s annual income or net worth is less than $100,000, the limit is the greater of $2,000 or 5% of the lesser of the investor’s annual income or net worth, and if both the investor’s annual income and net worth are equal to or more than $100,000, the limit is 10% of the lesser of the investor’s annual income or net worth.  Still with me?  The SEC has also limited the aggregate amount of securities sold to one investor through all crowdfunding transactions to a maximum of $100,000.   In addition to these limits, a crowdfunding transaction must be done using one – and only one – intermediary (i.e., broker or funding portal).  So if you were thinking about crowdfunding through your website or by using multiple funding portals, sorry to be the bearer of bad news. 

2. Issuer Requirements.  As mentioned above, the crowdfunding rules exempt a company from filing a registration statement with the SEC, but create a different obligation to file a new “Form C” with the SEC.  The Form C, despite not being as full-blown as a registration statement, still requires detailed disclosures.  As of the date of this post, the Form C was not available on the SEC’s website, but the crowdfunding rules tell us that it will require disclosures such as descriptions of the company, financial condition, intended use of proceeds, targeted amount of money to be raised and price per share.  Notably, a company will need to provide a complete set of financial statements that are, depending on the amount of securities offered and sold in a crowdfunding transaction during a 12-month period, accompanied by information from the company’s tax returns, reviewed by an independent public accountant or audited by an independent auditor.  A company that relies on these rules for the first time would be permitted to provide reviewed rather than audited financial statements, unless its audited financial statements are available.  The Form C will also require disclosures about the company’s officers, directors and any beneficial owners of 20% or more.  Each required disclosure has a specific description as to what needs to be included in the Form C, so be sure to read each rule and each instruction to each rule once the Form C becomes available. 

3. Intermediary Requirements.  If you’re interested in crowdfunding from the perspective of the intermediary, this is where your ears perk up.  Any person acting as an intermediary in a crowdfunding transaction must register with the SEC as either a broker or funding portal.  These registration requirements are also very detailed and include registering with applicable self-regulatory organizations in addition to the SEC.  The crowdfunding rules also prohibit an intermediary’s directors, officers or partners from having any financial interest in any company using its services, so be careful to do your research before getting involved in a crowdfunding transaction. 

The crowdfunding rules are rather extensive and the above summary is intended only to give some quick answers to the questions we’ve received so far.  Remember that the crowdfunding rules, while making it easier for companies to raise capital, are designed with the intention of preventing fraud and protecting investors.  Stay tuned as these rules are put to the test. 

The SEC today adopted final rules to update and expand Regulation A, an existing exemption from registration for smaller issuers of securities. The rules are mandated by Title IV of the Jumpstart Our Business Startups (JOBS) Act. The updated exemption will enable smaller companies to offer and sell up to $50 million of securities in a 12-month period, subject to eligibility, disclosure and reporting requirements. 

The final rules, often referred to as Regulation A+, provide for two tiers of offerings: Tier 1, for offerings of securities of up to $20 million in a 12-month period, with not more than $6 million in offers by selling security-holders that are affiliates of the issuer; and Tier 2, for offerings of securities of up to $50 million in a 12-month period, with not more than $15 million in offers by selling security-holders that are affiliates of the issuer. Both Tiers are subject to certain basic requirements while Tier 2 offerings are also subject to additional disclosure and ongoing reporting requirements.

The final rules also provide for the preemption of state securities law registration and qualification requirements for securities offered or sold to "qualified purchasers" in Tier 2 offerings. Tier 1 offerings will be subject to federal and state registration and qualification requirements, and issuers may take advantage of the coordinated review program developed by the North American Securities Administrators Association (NASAA).