On March 12, 2014, the SEC revised its 2011 statement on well-known seasoned issuer (WKSI) waivers. In order to qualify as a WKSI, an issuer may not be an “ineligible issuer,” which can be, among other things, an issuer that has, or whose subsidiary has, been convicted of certain securities-related felony or misdemeanor, violated the anti-fraud provisions of the federal securities laws or that is the subject of a judicial or administrative decree or order prohibiting certain conduct or activities involving the anti-fraud provisions of the federal securities laws.
In its revised statement, the SEC clarified the framework that the SEC will follow in determining whether to grant a waiver of ineligible issuer status. In making a determination whether to grant a waiver, the Division of Corporation Finance will evaluate the issuer’s ability to produce reliable disclosure and will consider the following factors:
- the nature of the violation or conviction and whether it calls into question the ability of the issuer to produce reliable disclosure currently and in the future;
- whether the conduct involved a criminal conviction or scienter based violation, as opposed to a civil or administrative non-scienter based violation;
- who was responsible for the misconduct and whether it was known by the WKSI parent (in case of the misconduct at the subsidiary level) or whether personnel at the WKSI parent ignored warning signs regarding the misconduct;
- whether the individuals responsible for or involved in the misconduct were officers or directors of the WKSI parent, or were lower level employees in the operation of a subsidiary;
- the duration of the violative conduct (did it last over a period of years or was it an isolated instance);
- what remedial measures the issuer has taken to address the violative conduct and whether those actions would likely prevent a recurrence of the misconduct and mitigate the possibility of future unreliable disclosure;
- whether there were key changes in the personnel involved in the violative or criminal conduct; and
- whether the issuer has taken steps to improve training or made improvements to internal controls and disclosure controls and procedures.
The loss of a WKSI status for a company may have a significant effect on its ability to raise capital, and, in addition to the foregoing factors, the SEC will consider:
- severity of the impact on the issuer if the waiver request is denied weighing any such impact against the facts and circumstances relating to the violative or criminal conduct; and
- effects of the issuer’s loss of WKSI status on the markets as a whole and the investing public, in light of the issuer’s significance to the markets and its connectedness to other market participants.
The SEC does not consider any single factor to be dispositive, and the issuer should submit a request letter that explains, based on the framework outlined above, why a waiver should be granted.