Corporate And Financial Weekly Digest - April 5, 2013

Edited by Robert Weiss and Gregory Xethalis SEC/CORPORATE

SEC Advisory Committee on Small and Emerging Companies Makes Recommendations

On March 21, the Securities and Exchange Commission Advisory Committee on Small and Emerging Companies (Advisory Committee) submitted several recommendations to the SEC on rules, regulations and policies relating to emerging privately held small businesses and publicly traded companies with less than $250 million in public market capitalization.

Scaled Disclosure Recommendations

The Advisory Committee addressed some inconsistencies between the scaled disclosure requirements available to “smaller reporting companies” under current SEC rules and to emerging growth companies under the Jumpstart Our Business Startups Act. The Advisory Committee recommended that the SEC revise disclosure requirements for smaller reporting companies to include certain exemptions available to emerging growth companies, including exemptions from shareholder advisory votes on executive compensation and the frequency of those votes (“say-on-pay” and “say-on-frequency” votes), certain compensation disclosure requirements and certain requirements relating to compliance with financial accounting standards. In addition, the Advisory Committee recommended that smaller reporting companies no longer be required to file with their material contracts schedules or similar attachments that are not material to an investment decision or otherwise disclosed, or submit financial information in XBRL format for periodic reports and other filings. The Advisory Committee also expressed its belief that the threshold for smaller reporting companies is too low and recommended that the definition of a smaller reporting company be revised to include companies with public floats of up to $250 million (or less than $100 million in annual revenues if the public float cannot be calculated). The Advisory Committee further recommended that the definition of “accelerated filer” be revised to include companies with public floats of $250 million or more, but less than $700 million, as of the applicable measuring date (thereby excluding companies with public floats of between $75 million and $250 million from the auditor attestation requirement under Section 404(b) of the Sarbanes-Oxley Act).

Click here to read the full text of the recommendation.

In a separate recommendation, the Advisory Committee expressed its belief that the disclosure requirements in the Dodd-Frank Wall Street Reform and Consumer Protection Act relating to conflict minerals and payments by resource extraction issuers are disproportionately burdensome to small businesses and outside of the scope of the SEC's mission. The Advisory Committee recommended that the SEC inform the Committee on Banking, Housing and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives of the Advisory Committee's belief.

Click here to read the full text of the recommendation.

Trading Recommendations

The Advisory Committee further expressed its belief that current US equity markets may be unsatisfactory for the trading of securities of small and emerging companies due to onerous listing requirements and failure to provide sufficient liquidity. The Advisory Committee recommended that the SEC encourage the creation of a separate equity market with a more flexible regulatory regime for trading in securities of small and emerging companies by accredited investors.

Click here to read the full text of the recommendation.

In a separate recommendation, the Advisory Committee expressed its belief that a change in the method of determining tick sizes for equity securities of smaller exchange-listed companies could increase their liquidity and facilitate initial public offerings and capital formation. The Advisory Committee recommended that the SEC adopt rules to increase tick size for these companies and allow them to choose their own tick sizes within a limited range determined by the SEC.

Click here to read the full text of the recommendation.

SEC Provides Guidance Regarding Social Media and Regulation Fair Disclosure (Regulation FD)

On April 2, in connection with an investigation of Netflix, Inc. and its Chief Executive Officer, Reed Hastings, regarding a possible violation of Regulation FD, the Securities and Exchange Commission released a Report of Investigation clarifying a company is permitted to use social media outlets such as Facebook and Twitter to provide important company information to the public pursuant to Regulation FD, so long as those social media outlets are viewed as “recognized channels of distribution” and the company first takes “steps sufficient to alert investors and the market to the channels it will use for the dissemination of material, nonpublic information.”

Regulation FD requires that if an issuer or its representatives discloses material, nonpublic information to stockholders or securities market professionals in a situation where it is reasonably foreseeable that such investors or professionals will trade on the basis of this information, the same information must be distributed to the public simultaneously for intentional disclosures and promptly for non-intentional disclosures. The investigation by the SEC was initiated after Mr. Hastings made a post on his personal Facebook page regarding the hours of content streamed by Netflix in June of 2012, which coincided with an increase in the stock price of Netflix. Prior to this post, the Facebook page of Mr. Hastings had not been used to announce any metrics of Netflix, and Netflix had not indicated to the public or its shareholders that Mr. Hastings's Facebook page would be used to disclose information regarding Netflix. In addition, Netflix did not file a Form 8-K, issue a press release or make a post on its own Facebook page to accompany the disclosure posted by Mr. Hastings.

In the Report of Investigation, the SEC made clear that communications by issuers using social media outlets, just like communications made through more traditional channels, must be analyzed carefully for compliance with Regulation FD, and confirmed that the guidance it issued in 2008 regarding the application of Regulation FD to dissemination of information through a company's website also applies to the dissemination of information through social media outlets. In that 2008 guidance, the SEC stated that for a company's website to serve as a broad, non-exclusionary method of distributing information to the public pursuant to Regulation FD, the website must be a “recognized channel of distribution” for communicating with the company's investors. This requirement is also applicable to social media outlets, and in the Report of Investigation, the SEC reminded companies that it expects them to “examine rigorously the factors indicating whether a particular channel is a recognized channel of distribution.”

The SEC also emphasized that, consistent with the guidance issued in 2008, providing investors with appropriate notice of the forms of communication that a company plans to use to disclose material, nonpublic information, including information regarding any social media outlets that may be used for such purpose and the types of information that may be disclosed through these outlets, iscritical to the fair and efficient disclosure of information. One possible way to provide this notice to investors, as suggested by the SEC in the Report of Investigation, is to include...