U.S. DEVELOPMENTS

SEC and NYSE/Nasdaq Developments

SEC Proposes to Expand "Testing the Waters" Exemption to Permit Pre-Offering Communications

On 19 February 2019, the Securities and Exchange Commission (SEC) proposed an expansion of the allowance under the 2012 Jumpstart Our Business Startups Act ("JOBS Act"), referred to as "testing the waters", which is currently only available to emerging growth companies (EGCs). The new Rule 163B under the Securities Act of 1933 ("Securities Act") would, if adopted, enable all issuers (and their authorised representatives, including underwriters) to engage in communications with certain categories of large institutional investors prior to or after the filing of a registration statement to assess investor interest in a registered offering. These communications would be exempt from the prohibition imposed by Section 5 of the Securities Act on making any written or oral offers prior to the filing of a registration statement with the SEC.

Generally, companies with annual revenues in excess of US$1 billion do not qualify as EGCs and thus currently are unable to "test the waters" in reliance on this JOBS Act provision. In the SEC press release announcing the proposed rule, SEC Chairman Jay Clayton stated, "Extending the test-the-waters reform to a broader range of issuers is designed to enhance their ability to conduct successful public securities offerings and lower their cost of capital, and ultimately to provide investors with more opportunities to invest in public companies."

In view of the fact that communications under the proposed rule would be limited to "qualified institutional investors" and institutional "accredited investors," the rule as proposed would not require issuers to file or include specific legends on testing-the-waters communications made under Rule 163B. However, these communications would be subject to review by the SEC to ensure that testing-the-waters communications do not conflict with any material information included in the registration statement, in line with the SEC's current practice. These communications would continue to be considered "offers" under the Securities Act, and would consequently be subject to potential liability under the Securities Act and other federal anti-fraud provisions. Furthermore, companies subject to Regulation FD would need to consider whether testing-the-waters communications would be considered selective disclosure of material non-public information and whether the issuer has an obligation to simultaneously make such information public. Under Regulation FD, if the investors in testing-the-waters meetings enter into confidentiality agreements, the issuer may in certain circumstances conclude that public disclosure is not required at that time.

The new rule is meant to be non-exclusive, and a company could rely on other Securities Act communications rules or exemptions when assessing the means and timing of communication with potential investors prior to a contemplated offering.

Comments on the proposal are due by 29 April 2019. The proposed rule release is available here.

SEC Adopts Rule to Modernize and Simplify Regulation S-K Disclosures

On 20 March 2019, the SEC adopted final rules amending Regulation S-K and certain other rules and forms to modernise and simplify disclosure requirements. The amendments are intended to streamline disclosures made by public companies to make them more effective and reduce compliance costs while continuing to provide material information to investors.

Key changes effected by the final rules include:

  • revising the requirements for the "Operating and Financial Review and Prospects" (OFR) section of annual reports (Item 5 of Form 20-F) to allow companies to exclude a discussion of the earliest of the three years, provided that a discussion of that year has been included in a prior report;
  • clarifying that companies do not necessarily need to present the discussion in the OFR section in the format of a year-over-year comparison, but may use any other format that in their judgment enhances a reader's understanding of changes in its financial condition and results of operations;
  • allowing companies to redact confidential information from most exhibits to their filings without submitting a request for confidential treatment, provided that the redacted information is not material and that public disclosure would likely cause competitive harm;
  • permitting companies to omit entire schedules and similar attachments to any filed exhibits unless the schedules and attachments contain material information that is not otherwise disclosed in the exhibit itself or in the disclosure document;
  • revising rules or forms to update, streamline or otherwise improve the SEC's disclosure framework by eliminating the risk factor examples listed in the disclosure requirement;
  • clarifying the description of property requirements to emphasise that those disclosures should only include properties that are material to the company;
  • and incorporating technology to improve access to information by requiring data tagging for items on the cover page of certain filings and the use of hyperlinks for information that is incorporated by reference and available on EDGAR.

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