The SEC recently released new Compliance and Disclosure Interpretations (CDIs) on a variety of topics under the Securities Act, the Exchange Act and Regulation S-K. A brief summary of some of these new CDIs is presented below.

Securities Act Section 5

The SEC clarified when a company may file a registration statement for the resale of securities sold in a private equity line financing. In many equity line financings a company will rely on the private placement exemption from registration to sell the securities under the equity line and will then register the "resale" of the securities sold in the equity line financing. In these types of equity line financings, the delayed nature of the puts and the lack of market risk resulting from the formula price differentiate private equity line financings from financing PIPEs (private investment, public equity). Thus, the SEC analyzes the private equity line financings as indirect primary offerings. However, the SEC will permit a company to register the "resale" of the securities prior to its exercise of the put if the transactions meet each of the following conditions:

  • the company must have "completed" the private transaction of all of the securities it is registering for "resale" prior to the filing of the registration statement
  • the "resale" registration statement must be on the form that the company is eligible to use for a primary offering
  • in the prospectus, the investor(s) must be identified as underwriter(s), as well as selling shareholder(s)

The SEC will not object that a private transaction is not "completed" based on the lack of a fixed price if the agreement provides for pricing based on a formula tied to market price and there is an existing market for the securities as evidenced by trading on a national securities exchange or through the facilities of the OTC Bulletin Board or the OTCQX. (Q. 139.13)

http://www.sec.gov/divisions/corpfin/guidance/sasinterp.htm#139-13Securities

Securities Act Rules

Rule 144(a) Definitions

  • The SEC stated that where an affiliate donor transfers, by bona fide gift, company stock acquired in the open market which are not “restricted securities in the affiliate’s hands (i.e., "control stock") to a donee in a non-public transaction, these securities are “restricted securities” because they have been "acquired directly or indirectly from the issuer, or from an affiliate of the issuer, in a transaction or chain of transactions not involving any public offering." However, as these securities were not subject to any holding period requirement in the affiliate donor’s hands, the donee need not comply with the holding period requirement in Rule 144(d) for subsequent sales. If the donee is a non-affiliate and has not been an affiliate during the preceding three months, then the donee may resell the securities pursuant to Rule 144(b)(1) subject only to the current public information requirement in Rule 144(c)(1), as applicable. (Q. 129.03)

Rule 144(e) - Limitation on Amount of Securities Sold

  • An affiliate’s sales of securities back to the issuer in a non-public transaction are excludable when calculating the amount of securities that may be sold by the affiliate under Rule 144. Under Rule 144(e)(3)(vii)(C), securities sold in a transaction that is exempt pursuant to Securities Act Section 4 and does not involve any public offering need not be included in determining the amount of securities that may be sold under Rule 144. (Q. 133.07).

Rule 413 - Registration of Additional Securities and Additional Classes of Securities

  • An issuer who files an automatic shelf registration statement on Form S-3 to register the offer and sale of a specified number of securities of a specified class of securities may add to the automatic shelf registration statement on Form S-3, by post-effective amendment, more securities of the same class already registered. (Q. 210.03)

Rule 430B - Prospectus in a Registration Statement After Effective Date

  • The prospectus for the non-automatic shelf registration statement must disclose the aggregate number of shares being registered for resale before effectiveness, even if the issuer is entitled to rely on Rule 430B(b) to omit information required by Item 507 of Regulation S-K regarding specific selling security holders until after effectiveness. (Q. 228.04)

Rule 502 - General Conditions to be Met

  • If an acquiror seeks written consents from the target’s shareholders, which include non-accredited investors, to approve a business combination transaction involving the issuance of securities in reliance on Rule 505 or 506 of Regulation D, Rule 502(b)(1) requires that the financial statements and other information specified in Rule 502(b)(2) must be delivered to non-accredited investors in "a reasonable amount of time prior to sale." The delivery of a written consent constitutes the "sale" of securities in an offer conducted in reliance on Rule 505 or 506. Accordingly, to comply with the timing requirement set forth in Rule 502(b)(1), an acquiror issuing securities in a Rule 505 or Rule 506 offering must provide the disclosure required by Rule 502(b)(2) to non-accredited investors in a reasonable amount of time prior to obtaining any written consents from them. (Q. 256.22)

http://www.sec.gov/divisions/corpfin/guidance/securitiesactrules-interps.htm#129-03

Securities Act Forms

General Instructions I.B.1 to I.B.6 - Transaction Requirements

  • Instruction 2 to General Instruction I.B.6 applies to calculating the market value of warrants for purposes of the one-third cap, even when the warrants are not exercisable for common stock within 12 months. (Q. 116.24)

Form S-4

  • If a registrant "meets the requirements for use of Form S-3" as set forth in General Instruction B of Form S-4, and incorporates by reference registrant information into the Form S-4 pursuant to General Instruction B and either Item 11 or 13 of Form S-4, the registrant may incorporate the risk factors from its latest Form 10-K in response to Item 3 of Form S-4, even though Item 3 does not expressly contemplate incorporation by reference. The offering-specific risks, however, would be required to be disclosed in the Form S-4 itself. (Q. 125.12)

http://www.sec.gov/divisions/corpfin/guidance/safinterp.htm#125-12Regulation

Regulation S-K

Item 402(b) - Executive Compensation; Compensation Discussion and Analysis

  • Instruction 5 to Item 402(b) provides that "[d]isclosure of target levels that are non-GAAP financial measures will not be subject to Regulation G and Item 10(e) of Regulation S-K; however, disclosure must be provided as to how the number is calculated from the registrant’s audited financial statements." Provided that this disclosure is made in the context of a discussion about target levels, this disclosure extends to the disclosure of actual results of the non-GAAP financial measure that is used as a target. (Q. 118.09)

Item 402(c) - Executive Compensation; Summary Compensation Table

  • Instruction 2 to Item 402(c)(2)(iii) and (iv) provides that companies are to include in the Salary column (column (c)) or the Bonus column (column (d) any amount of salary or bonus forgone at the election of a named executive officer under which stock, equity-based, or other forms of non-cash compensation have been received instead by the named executive officer. In a situation where the value of the stock, equity-based or other form of non-cash compensation is the same as the amount of salary or bonus foregone at the election of the named executive officer, the amounts should be disclosed in the Salary or Bonus column, as applicable. The result would be different if the amount of salary or bonus foregone at the election of the named executive officer was less than the value of the equity-based compensation received instead of the salary or bonus, or if the agreement pursuant to which the named executive officer had the option to elect settlement in stock or equity-based compensation was within the scope of FAS123R (e.g., the right to stock settlement is embedded in the terms of the award). In the former case, the incremental value of an equity award would be reported in the Stock Awards or Option Awards columns, and in the latter case the award would be reported in the Stock Awards or Option Awards columns. In both of these special cases, the amounts reported in the Stock Awards and Option Awards columns would be the grant date fair value of the equity award, and footnote disclosure should be provided regarding the circumstances of the awards. (Q. 119.03)

Item 501 - Forepart of Registration Statement and Outside Front Cover Page of Prospectus

  • Instruction 1 to Item 501(b)(3) requires a preliminary prospectus for an initial public offering of securities, other than debt securities, to include a bona fide estimate of the range of the maximum offering price. However, there are constraints on how wide the disclosed price range may be. For initial public offerings, a price range in excess of $2 for offerings up to $10 per share, or in excess of 20% of the high end of the range for offerings over $10 per share, will not be considered bona fide. For example, if the high end of the range is $20, then the price range may be as wide as $16 to $20. If an auction clearing price will be used as the primary factor in establishing the final offering price, a price range in excess of $4 for offerings up to $20 per share, or in excess of 20% of the high end of the range for offerings over $20 per share, will not be considered bona fide. (Q. 134.04)

http://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm#118-09

Exchange Act

Item 2.06 - Material Impairments

  • The Instruction to Item 2.06 of Form 8-K indicates that a filing is not required if an impairment conclusion is made "in connection with" the preparation, review or audit of financial statements required to be included in the next periodic report due to be filed under the Exchange Act, the periodic report is filed on a timely basis and such conclusion is disclosed in the report. If the impairment conclusion coincides with the preparation, review or audit of financial statements required to be included in the next periodic report due to be filed under the Exchange Act and the other conditions of the Instruction to Item 2.06 are satisfied, a filing would not be required under Item 2.06. (Q. 110.01)

http://www.sec.gov/divisions/corpfin/guidance/8-kinterp.htm#110-01