Snowed In…

As I sit at home working remotely (AGAIN!) due to the latest snowstorm, I am struck by the thought of how paralyzing this winter has been.  Similar to Hurricane Sandy in 2012, this snowy and icy winter is likely to have a material affect on many public companies.    

Companies should consider whether additional disclosure should be added to their earnings releases or periodic filings regarding the potential effects of this winter season.  In particular, companies should consider whether to include disclosure related to this winter season in the following areas:

  • Forward-looking statements –  references to the winter season as one of the risks and uncertainties which could cause actual results to differ materially from those projected;
  • Risk Factors–  risk factor related to the potential impact of this winter season on their results of operations and financial position;
  • MD&A –   disclosure about the effects of this winter season if the report is filed after the winter season affected the company and/or as a known trend, event or uncertainty;
  • Guidance – companies should consider whether guidance given in the past or currently being issued may be affected by the winter season.  Companies should consider whether it is necessary to point out that such guidance did or does not take into account the effects of this winer season or estimates the effects of this winter season.

 Hopefully this winter madness will end soon and we can all get back to our routines as usual.  Stay safe and warm.

JOBS Act – What People Are Talking About

The JOBS Act continues to be a hot topic.  Yesterday, the Practicing Law Institute presented its continuing legal education seminar on the JOBS Act.  Some discussion highlights from the seminar include:

  • Under Section 105(c) of the JOBS Act, an issuer that qualifies as an emerging growth company can engage in oral or written communications, prior to or after filing the registration statement with the SEC, with qualified institutional buyers and institutional accredited investors to determine whether they might have an interest in a contemplated securities offering, also known as “testing the waters.”   The panel discussed the SEC’s recent requests, in connection with reviews of issuers’ registration statements, that the issuers provided on a supplemental basis any written materials used by issuers in connection with such testing the waters.  It appears that the SEC is requesting these materials to determine if the materials are consistent with the issuer’s registration statement.  The fact that the SEC is requesting copies of such materials, combined with the general reluctance on the part of issuers and investment bankers to engage in testing the waters process due to liability concerns, probably means that most issuers and investment bankers will not be using written materials to test the waters, at least in the near term. 
  • The SEC is asking emerging growth companies to indicate on the cover of their registration statements that they are an emerging growth company and to include in the registration statement disclosure regarding how and when emerging growth company status may be lost, the various exemptions available to the issuer as an emerging growth company, such as exemptions from Section 404(b) of the Sarbanes-Oxley Act, and the issuer’s election under Section 107(b) of the JOBS Act.  Unless an issuer that is an emerging growth company opts out, under Section 107(b) of the JOBS Act, the issuer will be subject to any new or revised financial accounting standards on the effective dates applicable to private companies, rather than the effective dates applicable to public companies.  Historically, the effective dates for private companies have been later than the effective dates for public companies.  If the emerging growth company elects to opt out of the extended transition period, the SEC requests the issuer to state that such election is irrevocable.  If the emerging growth company chooses to be subject to the later effective dates for new or revised financial accounting standards, the SEC is requesting issuers to include a risk factor (as well as disclosure in the critical accounting policies section of the MD&A) explaining that the issuer’s financial statements may not be comparable to companies that comply with the public company effective dates.  There are at least a few SEC comments letters publicly available requesting this information.
  • Under the JOBS Act, once SEC rules are in place, general solicitation or advertising will be permitted in connection with Rule 506 offerings so long as the issuer sells securities only to accredited investors.  Interestingly, the definition of the term “accredited investor” provides that an accredited investor is not only someone that is actually an accredited investor, but also someone the issuer “reasonably believes” is an accredited investor.  The general consensus was that the SEC will likely not seek to change the definition of “accredited investor,” but will seek to provide for fairly stringent steps issuers will have to take in order to satisfy the JOBS Act requirement that an issuer take “reasonable steps to verify” accredited investor status in connection with Rule 506 offerings that use general solicitation or advertising.   
 

Don’t Forget About Your FCPA Risk Factor

The Foreign Corrupt Practices Act (FCPA) is back in the news.  The Securities and Exchange Commission has a specialized unit established to enhance the SEC’s enforcement of the FCPA, and the SEC reports that it has brought more than 30 FCPA enforcement actions since the start of 2010.  Moreover, as my colleagues Shawn M. Wright and James R. Billings-Kang recently wrote in The National Law Journal, the United States Department of Justice has over 150 open FCPA investigations and together the SEC and the DOJ netted approximately $1.8 billion in fines, penalties and disgorgement of profits in 2010 alone for FCPA violations. 

Generally, the FCPA covers, among others, any company with securities registered under the Securities Exchange Act of 1934 and any company that is required to file reports under the Exchange Act or has its principal place of business in the United States.  The anti-bribery provisions of the FCPA prohibit corrupt payments to foreign officials for the purpose of procuring or maintaining business.  The FCPA is extremely broad in its scope and determining exactly what is prohibited by the FCPA can be very difficult.  Because the FCPA makes illegal many payments that individuals working in countries other than the United States may consider ordinary or customary, it can be particularly difficult to put a stop to the sorts of payments that may be covered by the FCPA, even where a company has a robust training and compliance program. 

If your company has significant operations outside the United States, especially where those operations are in countries where unofficial payments or gifts are a regular part of the business culture, a risk factor about your company’s FCPA exposure is likely to be warranted.