When we last visited our good client, Sid Hugdens, he was in the midst of taking his media company public and had successfully submitted a confidential treatment request for certain exhibits filed in connection with his company’s registration statement on Form S-1. Now, the SEC examiner wants to know “who is Rollo Tomasi?” and asks Sid to send some supplemental materials about this mysterious person. Sid wants to know whether he can keep these materials confidential. Can he?
Part I — Securities Act and Exchange Act Filings
Your good client Sid Hudgens is taking his media company public. The company has certain large contracts that contain highly sensitive commercial terms (and would blow the lid off a major municipal corruption scandal, but that’s a story for another day). He asks you whether they can be kept off the record, on the QT, and very hush-hush. Put more precisely, he wants to know whether they have to be filed as exhibits to the Form S-1. What do you tell Sid?
To answer this question, your first step is to crack open Regulation S-K Item 601, which specifies the documents that need to be filed as exhibits to your registration statement. Let’s assume your contracts are not otherwise called for by Item 601 (e.g., an underwriting agreement, by-laws, etc.), and we are dealing with the general heading of “material contracts” under Item 601(10).
Item 601(b)(10) gives the back-story to what is a material contract that needs to be filed. Generally, material contracts are contracts that are material to the company and not made in the ordinary course of business. If a contract is of the type ordinarily entered into in the company’s line of business, it may be deemed to be in the ordinary course of business unless it falls into another category covered by the rule. These other categories include agreements with directors, officers and promoters; contracts on which the company’s business is substantially dependent; and contracts calling for the acquisition or sale of certain fixed assets in excess of 15 percent of the consolidated fixed assets of the company. Additionally, certain management contracts and compensatory plans, such as option and incentive plans, also count as material contracts.
Keep in mind that in general you must also file exhibits to exhibits (i.e., schedules or other attachments to material contracts) — if you don’t, the SEC Staff may issue a comment instructing you to file the exhibit or explain why the omitted attachment to the contract need not be filed.
Form S-3 has many uses – primary sales, secondary resales, WKSI shelves – and will make frequent appearances in our blog. This week we tackle the “Transaction Requirements” of General Instruction I.B.1 and I.B.6.
Background: what is the difference between I.B.1 and 1.B.6 anyway?
General Instruction I.B.1 permits an S-3 eligible public company to conduct a primary offering for cash without limitation as to the amount of the securities sold in the offering. But I.B.1 is only available to a company that, among other things, has an aggregate market value of its voting and non-voting common equity held by non-affiliates (i.e., a public float) of $75 million or more.
Unlike I.B.1, the limited primary offering exemption of General Instruction I.B.6 does not require a company to meet a minimum public float threshold to conduct a primary offering. But I.B.6 comes at a cost – in particular, it limits the aggregate market value of the securities a company can sell during the trailing 12-month period immediately prior to, and including, the current offering to an amount equal to one-third of the issuer’s public float.2 Bear in mind that the one-third cap is computed at the time of each sale. Take the case of a company that, within the last 12 months, sells an amount of securities equal to one-third of its public float at the time of the offering. If that company’s public float later increases, it will be able to sell an additional amount of securities under I.B.6 equal to the difference between one-third of its public float at the time of its prior offering and one-third of the public float at the time of the subsequent offering. See Example A of Release No. 33-8878 at 28-30.
There are subtle differences between the public float calculations required by I.B.1 and I.B.6. In both cases, public float is computed by multiplying the amount of all of the company’s outstanding common equity held by non-affiliates by the price at which that equity was last sold, or the average of the bid and asked prices of its common equity, in the principal market for the securities as of a date within an immediately preceding 60-day period. See Instruction to I.B.1 and Instruction 1 to I.B.6. However, the beginning and end date of the period for calculating public float is not the same. Public float under I.B.6 is calculated on any date selected by the company within the 60-day period commencing 60 days prior to the date of sale. The relevant period for the purposes of I.B.1 is any date selected by the company within the 60-day period commencing 60 days prior to the date of filing the registration statement. The date used to determine the amount of shares held by non-affiliates and the price of the common equity need not be the same. See C&DI 116.06.
We’re talking SOX this week – not the Boston Red Sox or even the Chicago White Sox, but the Sarbanes-Oxley Act of 2002. SOX contains two required certifications from public company CEOs and CFOs, Section 302 and 906. The certifications are similar but not identical, particularly because Section 302 required the SEC to engage in rulemaking under the Exchange Act, while Section 906 added a new section to the US federal criminal code.
When must a Section 906 certification accompany an amendment to a periodic report (Form 10-K/A, Form 20-F/A or Form 10-Q/A)?
A Section 906 certification must accompany each periodic report that contains financial statements. As a result, “amendments to periodic reports that do not contain financial statements would not require a new Section 906 certification.” Release No. 33-8238 (text accompanying FN 154).
What about a Section 302 certification?
A Section 302 certification must accompany all amended periodic reports, although the form of certification (set out in Regulation S-K Item 601(b)(31)) may be modified as follows depending on the amendment’s contents:
- Paragraphs 1 (CEO/CFO have read the report) and 2 (no material misstatements or omissions) must accompany every amendment.
- Paragraph 3 (financial statements/information fairly present financial condition) may be omitted if the amendment includes no financial statements or other financial information.
- Paragraphs 4 (controls and procedures) and 5 (disclosure to auditors and audit committee) may be omitted if the amendment includes no disclosure under Regulation S-K Item 307 (regarding disclosure controls and procedures) or Item 308 (regarding internal control over financial reporting).
Does a Form 8-K require SOX certifications when the report includes financial statements or financial information?
No. Current reports, such as those on Form 8-K and Form 6-K, unlike periodic (i.e., quarterly and annual) reports, “are not covered by the certification requirement.” Release No. 33-8124 (text accompanying FN 50); see also Release No. 33-8238 (text accompanying FN 142).