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Disclosure Update and Simplification: A Small Entity Compliance Guide [*]

Nov. 5, 2018

Introduction

On August 17, 2018, the Securities and Exchange Commission adopted rule and form amendments to facilitate the disclosure of information to investors and simplify compliance without significantly altering the total mix of information provided to investors. The amendments are part of an initiative by the Division of Corporation Finance to review disclosure requirements applicable to issuers to consider ways to improve the requirements for the benefit of investors and issuers. The amendments are also part of our efforts to implement title LXXII, section 72002(2) of the Fixing America’s Surface Transportation Act.

Who is affected by the revised rules?

The amendments affect a variety of entities regulated by the Commission including the following:

  • Domestic and foreign issuers with offerings registered under the Securities Act and classes of securities registered under the Exchange Act;
  • Issuers offering securities under Regulation A;
  • Issuers regulated under the Investment Company Act;
  • Broker-dealers;
  • Investment advisers; and
  • Nationally recognized statistical rating organizations.

What changes were made to the rules?

The amendments revised or eliminated certain disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded, in light of other Commission disclosure requirements, U.S. Generally Accepted Accounting Principles (“U.S. GAAP”), or changes in the information environment.As such, the majority of these amendments will result in investors continuing to receive substantially the same information from issuers. The following amendments resulted in revisions that could change the information an issuer is required to accumulate and disclose:

  • An extension of the annual disclosure requirement to present changes in stockholders’ equity and the amount of dividends per share for each class of shares to interim periods.[1] The changes in stockholders’ equity shall be provided for both the current and comparable year-to-date period and subtotals for the interim period, and may be presented either as a separate statement or in the notes to the financial statements;
  • Replacement of the 25 percent of consolidated net assets bright-line threshold in Rule 4-08(e) of Regulation S-X with a requirement to disclose restrictions on the ability of subsidiaries to transfer funds to the issuer and the amount of restricted net assets when material;
  • Replacement of requirements in Item 201(a)(1) of Regulation S-K to disclose trading prices of an issuer’s common stock with disclosure of the issuer’s trading symbol; and
  • Expansion of the requirement to disclose the Commission’s internet address and a statement that electronic Commission filings are available there, and adding a new requirement that all issuers must disclose their internet addresses, if they have one.

Among the amendments that eliminate disclosure or do not require disclosure of new information:

  • Revisions to certain financial statement presentation requirements (for example in Articles 5, 6, 7 and 9 of Regulation S-X and Form X-17-A-5);
  • Revisions to various rules and forms to replace references to “Generally Accepted Auditing Standards” or “GAAS” with “the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”);
  • Elimination of certain consolidation requirements in Article 3A of Regulation S-X;
  • Revisions to currency requirements in Rule 3-20 of Regulation S-X including specifying that domestic issuers and foreign issuers that do not meet the foreign private issuer[2] definition must present their financial statements in U.S. dollars;
  • Elimination of the requirements to identify the Public Reference Room and disclose its physical address and phone number in certain disclosure requirements and Forms;
  • Elimination of the requirement to present dividends per share on the face of the income statement for interim periods;
  • Elimination of the requirements in Item 101(b) of Regulation S-K and Item 7(b) of Form 1-A about disclosure of segment financial information and permission to cross-reference between the notes to the financial statements and description of business;
  • Elimination of disclosure requirements in Rule 8-03(b)(6) of Regulation S-X for development stage companies;
  • Elimination of the requirement to present pro forma financial information in interim filings for business combinations in Rule 8-03(b)(4) and Rule 10-01(b)(4) of Regulation S-X;
  • Elimination of the requirement for disclosure of the date of any material accounting change in Rule 8-03(b)(5) of Regulation S-X;
  • Elimination of certain disclosures about research and development activities from Items 101(c)(1)(xi) and 101(h)(4)(x) of Regulation S-K, Item 5.c of Form 20-F, and Item 7(a)(iii) of Form 1-A;
  • Elimination of requirements in Item 101(d) of Regulation S-K to disclose financial information about geographic areas;
  • Elimination of all disclosures in Rule 4-08(n) of Regulation S-X about accounting policies for derivative instruments, except for statement of cash flow disclosure;
  • Elimination of the disclosure of reason for change in accounting principle and reference to “material contingencies” in Rule 8-03(b) of Regulation S-X;
  • Elimination of the reference to when a business combination should be assumed to have occurred in pro forma financial information in Rule 8-03(b)(4) of Regulation S-X because U.S. GAAP already provides guidance; and
  • Revisions to Forms 1-A and 1-SA to clarify that Regulation S-X only applies to Regulation A issuers that report under U.S. GAAP and not the Regulation A Canadian issuers that report under International Financial Reporting Standards.

Refer to the release for a complete description of all amendments.

What are the compliance dates of the rules?

The amendments will take effect for filings made on or after November 5, 2018.

Example: An entity with a fiscal year end of August 31, 2018, files its annual report on Form 10-K on November 5, 2018. The information in the Form 10-K must comply with the adopted rule and form amendments.

The staff of the SEC’s Division of Corporation Finance, in Exchange Act Forms Compliance and Disclosure Interpretation 105.09, has provided additional guidance on the compliance dates as it relates to amendments to Rules 8-03(a)(5) and 10-01(a)(7) of Regulation S-X requiring presentation(s) of changes in stockholders’ equity in Forms 10-Q. In light of the timing of effectiveness of the amendments and proximity of effectiveness to the filing date for most filers’ quarterly reports, the staff would not object if a filer’s first presentation of the changes in shareholders’ equity is included in its Form 10-Q for the quarter that begins after the effective date of the amendments.

Examples: A December 31 fiscal year-end filer could omit this disclosure from its September 30, 2018 Form 10-Q. Likewise, a June 30 fiscal year-end filer could omit this disclosure from its September 30, 2018 and December 31, 2018 Forms 10-Q; however, the staff would object if it did not provide the disclosures in its March 31, 2019 Form 10-Q. Refer to

https://www.sec.gov/divisions/corpfin/guidance/exchangeactforms-interps.htm - 105.09.

The staff of the SEC’s Division of Trading and Markets issued a no-action letter stating that it will not recommend enforcement action to the SEC if a broker-dealer continues to file Parts II, IIA, and IIB of Form X-17A-5 (the “FOCUS Reports”) and the annual reports required by paragraph (d) of Exchange Act Rule 17a-5 (17 CFR § 240.17a-5) as required prior to the amendments in the adopting release when reporting for periods ending on or before December 31, 2018. Therefore, the staff no-action position is not applicable to FOCUS Reports and annual reports covering reporting periods ending after December 31, 2018. Refer to https://www.sec.gov/divisions/marketreg/mr-noaction/2018/finra-102918-17a5.pdf.

Other Resources

The adopting release for the new rules can be found on the SEC's website at https://www.sec.gov/rules/final/2018/33-10532.pdf.

A demonstration version that illustrates the amendments to the affected rules and forms can be found on the SEC’s website at https://www.sec.gov/rules/proposed/2018/33-10532-demonstration.pdf.

The SEC's disclosure forms can be accessed on the SEC’s website at https://www.sec.gov/forms.

Contacting the SEC Staff

The SEC's Division of Corporation Finance is happy to assist small companies and others with questions regarding the amendments. You may contact the Division for this purpose at (202) 551-3400 or at https://www.sec.gov/forms/corp_fin_interpretive.

Questions on other SEC regulatory matters concerning smaller reporting companies may be directed to the Division's Office of Small Business Policy at (202) 551-3460.


[*] This guide was prepared by the staff of the U.S. Securities and Exchange Commission as a "small entity compliance guide" under Section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996, as amended. The guide summarizes and explains rules adopted by the SEC, but is not a substitute for the rule itself. Only the rule itself can provide complete and definitive information regarding its requirements.


[1] Refer to Rule 8-03(a)(5) of Regulation S-X for Smaller Reporting Companies and Rule 10-01(a)(7) of Regulation S-X for all other entities.

[2] See Rule 405 of Regulation C and Exchange Act Rule 3b-4(c) [17 CFR 240.3b-4(c)]. A foreign private issuer is any foreign issuer other than a foreign government, except for an issuer that has more than 50 percent of its outstanding voting securities held of record by U.S. residents and any of the following: a majority of its officers or directors are citizens or residents of the United States; more than 50 percent of its assets are located in the United States; or its business is principally administered in the United States.

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