An Exhibit Hyperlink Reminder

This past spring, the SEC issued final rules designed to make it easier to access and retrieve exhibits to company filings through the use of hyperlinks. For most companies, this new requirement becomes effective for filings made on or after September 1, 2017, which means it’s time to be sure you are ready. (Smaller reporting companies and non-accelerated filers using ASCII format have until September 1, 2018 to comply.) Item 601 of Regulation S-K, which requires companies to include an exhibit index that lists each exhibit included with the filing, now requires that each exhibit to Forms S-1, S-3, S-4 and S-8 (among others) under the Securities Act and Forms 10, 10-K, 10-Q and 8-K (among others) under the Exchange Act include an active hyperlink to the particular document on EDGAR. This applies whether or not the exhibit is incorporated by reference. For periodic reports, an active hyperlink must be included for each exhibit listed when the report is filed. For registration statements, a hyperlink must be included in the initial filing and in each amendment (pre-effective and post-effective) thereafter. The new rules exclude a short list of filings, including among others: XBRL exhibits, and exhibits that were filed on paper before EDGAR filings became mandatory, have not been re-filed electronically and are incorporated by reference. Companies must submit all affected registration statements and reports in HyperText Markup Language (HTML) format, which is not generally a problem since that is the format already used by almost everyone. One potential glitch arises, however, if your exhibit list includes an old document that was filed in American Standard Code for Information...

The SEC Approves More Amendments to NYSE’s Notice Requirements

Back in September 2015, the New York Stock Exchange amended the NYSE Listed Company Manual to: expand the pre-market hours during which NYSE-listed companies must provide prior notice of material news, expand the circumstances under which NYSE may halt trading, and provide guidance related to the release of material news after the close of trading. Then last week NYSE did it again, this time to require listed companies to give NYSE’s Market Watch team at least 10 minutes prior notice before making any public announcement, including announcements made outside of normal trading hours (9:30 a.m. to 4:00 p.m. Eastern time), regarding: any dividend or stock distribution required by NYSE Listed Company Manual Section 204.12, and the fixing of a dividend or stock distribution record date. As a practical matter, this means that companies must now give NYSE notice of a dividend or stock distribution 10 minutes before the announcement, rather than simultaneously with the announcement, as before. The SEC deems this important because, among other things, the record date determines (a) when the stock will trade ex-dividend and (b) the requirements regarding brokers’ cutoff dates for determining full and fractional shares. Requiring notice 10 minutes before such announcements regardless of the time of day (rather than just during normal trading hours) allows NYSE to address any concerns with the content of the announcement and reduce the possibility of investor confusion if the disseminated information is inaccurate or misleading. The SEC noted in a footnote (perhaps hoping that NYSE’s staff wouldn’t notice) that NYSE Market Watch will be available “at all times” (day or night) to review the announcement and will...

Revisiting Rule 10b5-1 Trading Plans

I am sometimes surprised by the number of insiders who trade in their company’s stock outside of Rule 10b5-1 trading plans. It is often said, with some accuracy, that executive officers, directors and other insiders always possess material nonpublic information (MNPI) due to the very nature of their jobs. And in fact, many insiders are able to actually create MNPI merely by deciding to initiate a strategic change or direct a financial decision. If that is true, or at least arguable under the glare of 20/20 hindsight, then trading outside of a trading plan is a dangerous proposition. The question, then, is, “Why take the chance?” A trading plan provides an easily implemented affirmative defense against insider trading claims, and courts have consistently deferred to valid trading plans, even under questionable circumstances. Furthermore, it is well-known that the SEC is vigorously pursuing insider trading violations of all shapes and sizes. (See this Doug’s Note.) For that matter, why doesn’t every company require that its insiders trade only under a trading plan? The elements of a trading plan. An enforceable trading plan must satisfy the following requirements: The insider was not aware of any MNPI at the time it was adopted. It specifies a non-discretionary trading method. The insider may not exercise any subsequent influence over how, when or whether to make purchases or sales. The insider must enter into the plan in good faith and not as part of a plan or scheme to evade the insider trading prohibitions. That sounds easy, so what’s the problem? Honestly, I’m not sure. Some companies may feel that prohibiting trades outside of...

An Unexpected Free Cash Flow Comment from the SEC Staff

It is surprising how much attention free cash flow continues to generate in SEC disclosures. After all, it’s been used for decades as a non-GAAP financial measure. In fact, back in 2003, the SEC’s non-GAAP financial measure FAQs stated that companies should be “cautious” when using it, noting that it does not have a uniform definition and might inappropriately imply that it represents residual cash flow available for discretionary expenditures. Fast forward to the much-scrutinized 2016 non-GAAP financial measures C&DIs, which essentially repeated the old free cash flow FAQ, though now companies need only be “aware” of, rather than “cautious” about, the absence of a uniform definition. This softer language presumably reflects the staff’s general softening toward non-GAAP measures, which it now sees as helpful disclosure so long as it’s done properly. Then unexpectedly (at least to me), Monsanto Company received the following comment in a February letter that appears to have resulted from the staff’s routine review of Monsanto’s Form 10-K: “We note you define free cash flow as the total of net cash provided or required by operating activities and net cash provided or required by investing activities. Pursuant to Question No. 102.07 of the Staff’s Compliance & Disclosure Interpretations (“C&DIs”) on Non-GAAP Financial Measures, issued May 17, 2016, please advise of your consideration given to redefining this measure or its computation as the typical calculation of free cash flow (i.e., cash flows from operating activities less capital expenditures). Please provide us with any proposed revisions to your disclosure of free cash flow to be included in future filings.” The comment seems inconsistent with the staff’s position...

Virtual Coins are ‘Securities’ After All

On July 25, the SEC issued a Rule 21(a) investigative report concluding that the sun rises in the east and sets in the west. No, wait, that’s not right. The report actually concluded that tokens offered by an unincorporated “virtual organization” known as The DAO (presumably short for “decentralized autonomous organization”) in what is known as an “initial coin offering” (ICO) were securities and, therefore, are subject to the federal securities laws. Despite loads of cool-sounding techno-jargon in The DAO’s marketing materials and multiple breathless articles by mainstream media touting ICOs as the next big thing, the SEC had no trouble slotting The DAO tokens into the U.S. Supreme Court’s 71-year-old Howey definition of a “security,” which should come as no surprise to anyone. What’s going on? ICO’s have sprung out of nowhere in the past couple of years to rival traditional venture capital in the amount of funds raised for early stage technology projects. In fact, Shawn Langlois, social media editor of MarketWatch, said in a recent column that “the total crypto market cap now stands at a whopping $87 billion.” Basically, promotors sell virtual coins in ICOs in exchange for U.S. currency or some other form of virtual currency (for example, bitcoin or ether). The ICO proceeds are then ostensibly used to fund development of the company’s digital platform, software or other technology project. The virtual coins typically can be resold in a secondary market on virtual currency exchanges. Not surprisingly, the SEC says in its related Investor Bulletin that “some promoters … may lead buyers of the virtual coins … to expect a return for their...