The coronavirus (COVID-19) outbreak has impacted publicly traded companies that have to provide information to trading markets, shareholders and to the Securities and Exchange Commission (SEC) in a number of ways. The SEC has been particularly active in acknowledging the challenges that the outbreak poses to such companies and has provided conditional relief and has issued guidance as the outbreak has developed. The SEC Enforcement Division is also on high alert for COVID-19 scams.
RELIEF GRANTED BY SEC AND NASDAQ
On March 4, 2020, the SEC issued an Order designed to provide conditional regulatory relief for companies affected by COVID-19. Pursuant to the order, SEC reporting companies may be granted an additional 45 days to file certain reports that would otherwise have been due between March 1 and April 30, 2020. For year-end reporting companies, this includes the Form 10-K annual report.
For those companies seeking to rely upon the Order, they must file a Form 8-K (or a Form 6-K) by the later of March 16, 2020 or the original filing deadline of the report or form. In such filing, the Company must (1) state that it is relying on the Order; (2) provide a brief description of the reasons why it could not file such report or form on a timely basis; (3) state the estimated date by which the report or form is expected to be filed; and (4) if appropriate, provide a risk factor explaining, if material, the impact of COVID-19 on its business (see “Disclosure Considerations” below). Companies relying on the Order will be granted additional relief relating to Form S-3 and Form S-8 eligibility.
Nasdaq Rule 5250(c) requires that companies timely file all required periodic financial reports with the SEC. As a result of the SEC’s action, Nasdaq declared that listed companies impacted by the COVID-19 outbreak that satisfy the conditions in the SEC’s Order will not be deficient under Nasdaq Rule 5250(c) for failing to file reports by the existing deadlines.
As the SEC notes in the Order, “Disruptions to transportation, and limited access to facilities, support staff, and professional advisors as a result of COVID-19, could hamper the efforts of public companies and other persons with filing obligations to meet their filing deadlines.”
In the SEC’s Press Release discussing the Order, SEC Chairman Jay Clayton stated the following: “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.”
Companies need to be mindful with respect to disclosures in Form 10-Ks and/or upcoming quarterly reports, earnings releases, current reports, and public and private securities offering documents.
Specific attention should be paid to the Company’s Risk Factors, including, but not limited to, risks relating to demand for products, supply chain, workforce and contingency planning issues and market risks including market volatility and investment exposure. As always, disclosures should be specific to individual circumstances, avoiding broad or generic language.
Specific attention should also be paid to Management’s Discussion and Analysis sections, as the impact of COVID-19 may have repercussions on a number of accounting disclosure areas, including liquidity and capital resources discussions and discussions of known trends (favorable or unfavorable) and uncertainties. Companies should review existing public disclosures relating to financial forecasts and should check the adequacy of existing disclosures relating to potential write-downs or impairment losses, potential loan defaults or covenant breaches and potential credit risks posed by customers impacted by Covid-19 events.
Companies are encouraged to maintain close communications with their audit committees, external auditors and legal counsel.
PRESS AND MARKETING CONSIDERATIONS
The SEC’s Office of Investor Education and Advocacy Investor issued an Alert in February to warn investors about investment frauds involving claims that a company’s products or services will be used to help stop the coronavirus outbreak. The Office noted: “We have become aware of a number of Internet promotions, including on social media, claiming that the products or services of publicly-traded companies can prevent, detect, or cure coronavirus and that the stock of these companies will dramatically increase in value as a result.”
The SEC staff actively monitors trading activity, and the SEC can suspend trading in any stock for up to 10 days when it believes that information about a company is inaccurate or unreliable. The SEC issued temporary trading suspensions for the common stock of two different companies:
- a NASDAQ listed Company, based in part on concerns regarding the accuracy and adequacy of information in the marketplace about the viability of the company’s product to treat COVID-19; and
- an OTC listed Company, because of concerns about the adequacy and reliability of publicly available information concerning the company’s purported international marketing rights to an approved COVID-19
Additionally, SEC Enforcement Division Co-Director Steve Peikin stated at a conference on March 6, 2020 that the Enforcement Division is on the lookout for COVID-19 scams.
Publicly traded companies should be aware of the SEC’s focus on and concerns about COVID-19 disclosures. Any disclosures that would imply that a product or product candidate could prevent, detect, or cure COVID-19 will be highly scrutinized by regulatory agencies and should be reviewed by appropriate regulatory counsel.