At PLI’s Securities Regulation Institute this morning, Corp Fin Director Keith Higgins highlighted* some recent issues the staff has identified in the context of public offerings.

  • Predecessor accounting – Determining who is a predecessor under the accounting definition as well as which financial statements need to be presented can be a challenge. Higgins volunteered that the staff is ready and willing to walk companies through the analysis. The staff is also willing to discuss other financial statement issues in advance.
  • Focus on metrics – The staff will especially focus on performance metrics and how they relate to results. They should be well-defined, including any relevant assumptions.  If the metrics used are inconsistent with those employed industry-wide – that’s ok – but the staff will ask about them.  If they are used in the summary, the staff expects them to appear in the MD&A.
  • Share-based compensation – Remember that the staff has scaled back the extent of the disclosure required related to share-based comp. While more extensive information will likely be required for the staff to evaluate the fair value accounting, investors don’t really require all that detail.
  • Non-GAAP financial measures – Prospectus disclosure of NGFMs involves the more extensive requirements of S-K Item 10(e). Higgins believes that companies generally do a good job with this, but disclosure regarding how the NGFM is used could be improved. If a company labels an NGFM as reflecting a non-recurring event, but the event is recurring, that can be problematic.
  • Recent developments – Companies that include a “Recent Developments” section should take care to make sure that the presentation is balanced.
  • Unresolved comments – Higgins’s rule of thumb is that, if there have been two rounds of comments without resolution of the issue, it’s appropriate to ask for a conference call to seek the views of a higher authority.
  • Review beyond prospectus – The staff reviews a lot of material outside the four corners of the prospectus, including the company’s website. Counsel should be familiar with it and scrub it.
  • MD&A – The staff spends the most time reviewing MD&A and is particularly looking for discussions of trends, uncertainties and forward-looking information.
  • Omnicare – In Omnicare, SCOTUS held that the appropriate standard to determine §11  liability with respect to omissions in connection with statements of opinion is “if a registration statement omits material facts about the issuer’s inquiry into or knowledge concerning a statement of opinion, and if those facts conflict with what a reasonable investor would take from the statement itself, then §11’s omissions clause creates liability.” (See this PubCo post.) Although Higgins viewed the Omnicare standard as complex, he suggested, with regard to opinion statements, that companies may want to express the bases for their beliefs if material.
  • Disclosure effectiveness – The staff is encouraging companies to cut back on repetition and replace it with cross-references where appropriate. One of the panelists responded that, in some cases, there may be concerns regarding §11 liability if the information is not repeated.