A few weeks ago the President renewed discussion of the possibility of eliminating quarterly reporting by US public companies and moving back to semi-annual reports. In a tweet on August 17, he said, “In speaking with some of the world’s top business leaders I asked what it is that would make business (jobs) even better in the U.S. ‘Stop quarterly reporting & go to a six-month system,’ said one. That would allow greater flexibility & save money. I have asked the SEC to study!” He later indicated the idea came primarily from the CEO of Pepsi. Later that day SEC Chairman Jay Clayton said that the SEC “continues to study public company reporting requirements, including the frequency of reporting.”
This is not a new drumbeat. It was reported about 3 years ago that some leading attorneys, including Marty Lipton of M&A law firm Wachtell Lipton, were making just such an argument. Why is less reporting potentially good? As was noted in 2015, because it allows companies to focus less on short-term results, which can help encourage capital investment and strategic thinking, especially in this era of activist investing. Who else agrees? Al Gore. The European Union eliminated mandatory quarterly reporting for listed companies in 2013. It is only since 1970 that the SEC required quarterly reporting for US public companies.
Those who counter this argument believe six months is too long to spot trends that are developing. They also argue that shareholder activists help shine a light on bad managers. Interestingly, Clayton’s response to the President’s tweet did not seem to suggest he considered the tweet a mandate requiring him to commence a formal review of the issue. Under recent legislation, the SEC currently is examining a variety of steps to simplify and update disclosure requirements. It will be interesting to see if the Commission takes a more serious look at reducing compliance obligations and pressure to beat quarterly earnings expectations.
Today, Sebastian Abero, the head of the SEC’s Office of Small Business Policy, had some very positive news for those interested in the new Regulation A+. He revealed that, since the Reg A+ rules were adopted by the SEC in June 2015, through September 2017, there have been 69 completed Reg A+ offerings raising a total of $611 million. That’s an average of $8.8 million per deal. As we also know, seven of those companies completed offerings that immediately commenced trading on national securities exchanges.
Abero was speaking at the annual SEC Government-Business Forum on Small Business Capital Formation, this year being held in Austin, TX. Other speakers included SEC Chairman Jay Clayton. Mr. Clayton’s remarks focused on helping what he called “Mr. and Ms. 401(k)” obtain opportunities to invest in growth companies. He acknowledged that a “one size fits all regulatory structure does not fit all” as he talked about the benefits of scaled disclosure for smaller issuers. He acknowledged there is room for improvement in the regulations to remove some of the “speed bumps” in the path to capital formation. He also hinted at expanding which companies can benefit from reduced disclosure as “smaller reporting companies.”
Investment banker Mark Elenowitz also spoke this morning at the Forum and pushed to increase the maximum that can be offered in Reg A+ deals to $75 million (a bill is working its way through Congress to do that). Nasdaq Vice President AnneMarie Tierney agreed with increasing the cap. She also talked about the challenges of best efforts underwritings in Reg A+ deals. The best efforts deals can garner less aftermarket support than in firm commitment underwritings. Panelists also suggested that the resales of Reg A+ securities should be exempt from SEC registration when trading in the over-the-counter markets. Currently issuers have to rely on certain somewhat cumbersome exemptions.
At this week’s Practising Law Institute’s Annual Institute on Securities Regulation, SEC Chairman Jay Clayton commented, among other things, on initial coin offerings, or ICOs. As we know, this year alone billions of dollars have been raised in ICOs, where cryptocurrency in the form of a “token” or coin is sold to investors to raise money for a company or other business endeavor. The tokens often trade on an online platform. Previously the SEC had issued a warning saying that the tokens may be securities and to be careful. Prior to that players were assuming securities laws did not apply. They also last week issued a warning to celebrities about risks of endorsing ICOs.
Chairman Clayton went a bit further today, going off his script to say that he has yet to see an ICO that doesn’t have “sufficient indicia” of being a securities offering. He also mentioned that the trading platforms could face SEC scrutiny and might have to either register as national securities exchanges or make clear they have an exemption from doing so.
While there may well be circumstances in which structures can be implemented to avoid being deemed securities, it seems there could be an exciting opportunity for ICO promoters to conduct their offerings under the securities laws, and allow trading of tokens on proper SEC approved exchanges. There would still be real benefits, including not diluting insiders’ ownership of their company. This could reduce the risk of fraud and still encourage capital formation.