SEC Issues Guidance and Temporary Relief for COVID-19 Coronavirus Outbreak for Recurring Public Company Disclosures; Guidance Also Applicable to Disclosures Made in Public and Private Securities Offerings
The continuing spread of the COVID-19 coronavirus is affecting humans and businesses across the globe and will impact disclosure obligations of some U.S. public reporting companies and companies engaged in public or private securities offerings in the United States.
In a Jan. 30 public statement, the U.S. Securities and Exchange Commission (SEC) Chairman Jay Clayton stated that he had instructed the SEC staff to monitor public reporting company disclosures “related to the current and potential effect of the coronavirus.”1 He also noted that “this is an uncertain issue” and that “how issuers plan for that uncertainty and how they choose to respond to events as they unfold can nevertheless be material to an investment decision.” On Feb. 19, the SEC chairman and others reiterated the prior message and also noted that coronavirus exposure could have an impact on financial disclosures and audit quality.2
On March 4 the SEC, recognizing the challenges for public reporting companies particularly affected by the coronavirus outbreak, issued an order that, subject to certain conditions, provides affected publicly traded companies with an additional 45 days to file certain disclosure reports that would otherwise have been due between March 1 and April 30, 2020.3 A public company must make a current filing stating why the relief is needed in its particular circumstances. The SEC may extend the time period for the relief, with any additional conditions it deems appropriate, or provide additional relief as circumstances warrant. In announcing the order, SEC Chairman Clayton said, “We also remind all companies to provide investors with insight regarding their assessment of, and plans for addressing, material risks to their business and operations resulting from the coronavirus to the fullest extent practicable to keep investors and markets informed of material developments.”
It is of course difficult to predict all potential effects of the ongoing coronavirus outbreak. So far, well-publicized examples include supply chain disruption, business location closures, cancellation of events and meetings, and travel restrictions, in particular with respect to companies based in China, companies with significant operations in China or companies significantly relying on suppliers, distributors or customers located in China. Other potential effects may include:
- impairment of officers, directors or key personnel;
- business transactions stalling, such as mergers and acquisitions;
- furloughs and reduction in workforce;
- volatility in stock and commodities markets;
- delays in performance and missed deadlines under material agreements;
- gaps in government services;
- trigger of force majeure provisions in material agreements or disputes related thereto; and
- filing claims under business insurance policies.
U.S. public reporting companies and companies engaged in public or private securities offerings in the United States should carefully consider whether they have any disclosure obligation with respect to the business effects of the coronavirus outbreak.
Public reporting company disclosure obligations require disclosure of, among other things, general business matters, known trends and uncertainties reasonably expected to have a material impact on net sales, revenue or income, and factors making an investment in the company speculative or risky.4 In addition, all companies engaged in securities offerings are subject to so-called anti-fraud obligations, which generally prohibit material misrepresentations and omissions of material facts in connection with the offer or sale of a security. In particular, companies should consider whether their risk factor disclosure should be revised or new risk factors added.
Risk factor disclosure is important because it discusses factors making an investment in a company speculative or risky. In assessing whether to make such disclosure, companies should assess both the likelihood of occurrence and materiality if it does. Even if existing risk factors already generally cover current or potential effects of the coronavirus threat, these risk factors should be revised to ensure they reflect the actual threat specifically. Many public reporting companies have expressly discussed coronavirus concerns in the risk factors included in recently filed annual reports on Form 10-K.