Overview: Disclosure Requirements for Resource Extraction Issuers
The U.S. Securities and Exchange Commission (“SEC”) recently released frequently asked questions (“FAQs”) to provide guidance on certain aspects of its final rules1 related to resource extraction issuers engaged in the commercial development of oil, natural gas or minerals (“Resource Extraction Rules”), which were adopted on August 22, 2012 pursuant to section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. In a prior memorandum,2 we discussed the Resource Extraction Rules required for companies that are engaged in the commercial development of oil, natural gas or minerals and required to file annual reports with the SEC to disclose certain payments made to the U.S. federal government or foreign governments for the purpose of commercial development of oil, natural gas or minerals.
We have set forth below brief summaries of the key takeaways of the FAQs, which generally fall into two categories: (1) guidance on resource extraction issuers (i.e., questions that determine whether, as a threshold matter, a company is subject to the Resource Extraction Rules); and (2) guidance on specific reporting requirements of the Resource Extraction Rules (i.e., requirements that arise only after a company has determined that it has reporting obligations subject to the Resource Extraction Rules). The full FAQs are available at http://www.sec.gov/divisions/corpfin/guidance/resourceextraction-faq.htm.
Resource Extraction Issuers
Holding Companies May Be Resource Extraction Issuers. A holding company is a resource extraction issuer if a subsidiary or other controlled entity thereof is engaged in the commercial development of oil, natural gas or minerals. A reporting issuer that is not engaged in commercial development activities but whose subsidiary or other controlled entity engages in those activities would be considered a resource extraction issuer and would be subject to the Resource Extraction Rules.
Companies Engaged in “Associated Services” Alone Are Not Resource Extraction Issuers. Generally, an issuer providing services associated with the exploration, extraction, processing and export of a resource is not considered a resource extraction issuer. Only issuers directly engaged in the commercial development of oil, natural gas or minerals must disclose payments to governments. For example, issuers providing associated services not covered by the Resource Extraction Rules include the following: (1) companies that provide hardware and logistics to assist companies explore or extract resources; (2) companies engaged by an operator to provide hydraulic fracturing services or drilling services for the operator; or (3) companies that provide transportation services, including between countries, so long as the company does not have an ownership interest in the transported resources.
The Term "Minerals" is Broadly Defined. For purposes of the Resource Extraction Rules, “minerals” are any materials commonly understood to be minerals, which includes any materials for which disclosure would be required under Industry Guide 7, “Description of Property by Issuers Engaged or to be Engaged in Significant Mining Operations,”3 notwithstanding any materiality test used for purposes of Industry Guide 7.
Resource Extraction Payment Disclosures
Payments are subject to the Resource Extraction Rules to the extent that they are made to further the commercial development of oil, natural gas or minerals and take the form of taxes, royalties, fees, production entitlements, bonuses, dividends or payments for infrastructure improvements.
Certain Specified Payments are Excluded from the Disclosure Requirements. Certain payments will not be subject to disclosure pursuant to the Resource Extraction Rules, including but not limited to (1) payments made to majority-owned government entities for services or activities that are ancillary or preparatory to the commercial development of oil, natural gas or minerals, such as payments for providing transportation services to supply people or materials to a job site; (2) penalties or fines related to resource extraction; and (3) income tax payments to governments on income not generated by the commercial development of oil, natural gas or minerals.
The Format For Payment Disclosure Has Been Clarified. A resource extraction issuer is required to present payment information on an unaudited, cash basis for the year in which the payments are made.
Failure to Timely File a Form SD Alone Will Not Cause an Issuer to Lose Its Form S-3 Eligibility. Disclosures required under the Resource Extraction Rules must be included in a report on Form SD filed within 150 days after the conclusion of any fiscal year ending after September 30, 2013. The failure to timely file a Form SD will not impact an issuer’s eligibility to use Form S-3 (an SEC short-form registration statement), as the relevant Form S-3 timely reporting requirements do not apply to Form SD. Nevertheless, issuers who have not already done so should begin to assess their compliance with, and implement appropriate disclosure controls and procedures regarding, these new disclosure requirements.
The FAQs clarify a number of points, but provide limited relief to issuers. The FAQs clarify that payments must be reported on an unaudited cash basis and not an accrual basis. Reporting on a cash basis may impose a significant burden on issuers. Therefore, issuers should ensure that their accounting/finance departments review the disclosure requirements and establish the necessary controls and procedures to calculate the amount of any government payments per the SEC’s guidance.