As this election year begins and the prolonged downturn in the economy continues, the political rhetoric is creeping up and more politicians are jumping on the bandwagon to rail against regulatory hurdles to raising capital. This issue of Public Company Perspectives surveys reform initiatives coming out of Congress and the SEC. There are currently several bills going through Congress seeking to assist companies with capital formation.  It remains to be seen if any of these bills will pass substantially as submitted as it is debatable whether any of them will actually facilitate capital formation while still adequately protecting investors.  However, more importantly, these bills provide an important service by initiating discussions and debates on some of the hurdles that many emerging and growth companies face in the current economic climate. We can only hope that such discussions and debates lead to responsible legislative activity and rule-making instead of a political response that does not address the underlying causes to the problems or that fails in striking the right balance between raising capital and adequately protecting investors.

Of Note:

  • On October 3, 2011, the Public Company Accounting Oversight Board released Staff Audit Practice Alert No. 8 - Audit Risks in Certain Emerging Markets. The Alert highlighted the importance of emerging markets in the global economy but was a cautionary tale for heightened awareness by auditors of risks when auditing companies with operations in emerging markets.  The Alert stressed that auditors should consider local business practices and cultural norms when evaluating risks of material misstatements, the environment in which the company operates, and the maturity and robustness of the regulatory environment in assessing fraud risks, which is an integral part of the audit under PCAOB standards. The Alert gave examples of situations indicating fraud risks and ways in which an auditor can adequately perform its risk assessment procedures.
  • On October 13, 2011, the SEC's Division of Corporation Finance issued guidance on the disclosure by reporting companies of cybersecurity risks and cyber incidents. The Division defines cybersecurity as "the body of technologies, processes and practices designed to protect networks, systems, computers, programs and data from attack, damage or unauthorized access." Although there is no explicit disclosure requirements relating to cybersecurity risks and cyber incidents, there are a number of disclosure obligations that may require disclosure of such risks or incidents, including: (i) the securities law's general anti-fraud statute; (ii) the risk factors section if these issues are among the most significant factors that make investment in the company speculative or risky; (iii) the MD&A section if the costs or other consequences associated with one or more known incidents or the risk of potential incidents represent a material event, trend or uncertainty that is reasonably likely to have a material effect on the company's results of operations, liquidity or financial condition or would cause reported financial information not to be necessarily indicative of future operating results or financial condition; (iv) the business section if a cyber incident materially affects a company's products, services, relationship or competitive conditions; (v) the legal proceedings section if the company is a party to a material lawsuit as a result of a cyber incident; (vi) the company's financial statements such as reflecting capitalization of certain costs to prevent cyber incidents and losses from asserted and unasserted claims, among others; and (vii) the disclosure controls and procedures to the extent a cyber incident poses a risk to a company's ability to record, process, summarize and report information that is required to be disclosed in a company's public filings. The guidance was not based upon a review project, but rather to help companies provide clear disclosure regarding actual risk in this area.
  • On October 18, 2011, six months after the deadline to finalize conflict minerals disclosure rules as mandated by the Dodd-Frank Act, several U.S. Senators wrote a letter to SEC Chairman Mary Schapiro urging the SEC to finalize those rules or risk missing a year of implementation.  Industry participants are also urging the SEC to reevaluate the economic impact of the proposal, setting the stage for a possible legal challenge if the proposal is adopted without additional cost-benefit analysis. Conflict minerals disclosure rules are now expected from the SEC sometime before June 2012. 
  • On October 18, 2011, the SEC's Division of Corporation Finance provided guidance on the types of brokers and banks that constitute record holders under Rule 14a-8(b)(2)(i) for purposes of verifying whether the underlying beneficial owner is eligible to submit a proxy proposal under Rule 14a-8. The guidance provides that only banks and brokers who participate in DTC are record holders of securities that have been deposited at DTC. A beneficial owner of securities holding those securities in "street name" can provide proof of ownership by obtaining and submitting two statements verifying that, at the time the proposal was submitted, the required amount of securities were continuously held for at least one year.  One of the statements must be obtained from the shareholder's broker or bank confirming the shareholder's ownership, and the other from the DTC participant confirming the broker or bank's ownership. This guidance is important to companies when determining whether to challenge shareholder proposal access based on the proof of ownership requirement.
  • PCAOB Chairman James R. Doty mentioned in a speech on October 24, 2011 that the PCAOB remains unable to inspect registered firms that perform or participate in U.S. audits but reside in China and some parts of Europe.  He further stated that according to some press accounts, the Chinese authorities have called the heads of global firms and suggested that they are prohibited from taking out of China summaries of audit results. Meanwhile, a new chairman was appointed to head the China Securities Regulatory Commission. The PCAOB hopes the change will break the current impasse that is preventing Chinese companies or the auditors of Chinese companies from disclosing work papers or other information deemed to be a "state secret" under PRC law.
  • On October 26, 2011, the Financial Accounting Standards Board was unable to decide whether auditors or management of a company should make the judgment about whether the company can survive as a going concern. The FASB is working on clarifying the term "substantial doubt" as it relates to such a judgment.
  • The SEC is now requiring certain foreign private issuers to publicly disclose first time registration statements. Previously, the SEC allowed foreign private issuers to file such registration statements on a non-public basis, which encouraged foreign private issuers to access U.S. markets. Exceptions to the new rule would continue to allow non-public filings for foreign governments registering debt securities, foreign private issuers whose securities are on a foreign exchange, foreign private issuers being privatized by a foreign government, and foreign private issuers that can demonstrate that the public filing of an initial registration statement would conflict with the law of an applicable foreign jurisdiction.