On March 25, 2020, the Securities and Exchange Commission (the “SEC”) issued an order extending its prior conditional relief from SEC periodic reporting deadlines for public companies. The staff of the SEC’s Division of Corporation Finance (the “Division”) also published its current views regarding disclosure and other securities law considerations related to COVID-19.
The SEC’s new order supersedes its prior order dated March 4, 2020 which extended the time period for its conditional relief from filing deadlines for periodic reports that otherwise would have been due between March 1, 2020 and April 30, 2020. Under the new order, companies that are unable to meet a filing deadline due to circumstances related to COVID-19 are given 45 additional days to file quarterly reports on Form 10-Q and annual reports on Form 10-K that otherwise would have been due between March 1, 2020 and July 1, 2020. The primary condition for obtaining this relief is that the company must first file a current report on Form 8-K (or, for a foreign private issuer, on Form 6-K) to disclose the conditions caused by COVID-19 that prevent timely reporting. This current report is due by the original reporting deadline that cannot be met. Companies using Form S-3 or Form S-8 (or both) will remain eligible to use those forms in reliance on the relief order if they were current and timely in their public reports as of the first day of the relief period and if they actually file the subject reports within the 45-day relief period.
The Division issued new guidance regarding disclosure and other securities law obligations related to COVID-19. Recognizing the impact on companies is evolving rapidly and its future effects are uncertain, the Division continues to encourage timely reporting while recognizing that assessing and predicting impacts of COVID-19 may be difficult. The Division stresses that “the effects COVID-19 has had on a company, what management expects its future impact will be, how management is responding to evolving events, and how it is planning for COVID-19-related uncertainties can be material to investment and voting decisions.” Companies should be aware that disclosure requirements can apply to a broad range of evolving business risks, even in the absence of a specific line item requirement in relevant regulations and rules that names the particular risk presented. Additionally, the Division notes that “a number of existing rules or regulations require disclosure about the known or reasonably likely effects of and the types of risks presented by COVID-19” and “disclosure of these risks and COVID-19-related effects may be necessary or appropriate in management’s discussion and analysis, the business section, risk factors, legal proceedings, disclosure controls and procedures, internal control over financial reporting, and the financial statements.”
The impact of COVID-19 and the related risks will require a facts and circumstance analysis and disclosures of these risks and effects, including how the company and management are responding, should be company-specific. The Division identified a number of potential questions that management should consider with respect to present and future operations. These questions are illustrative, not exhaustive. Each company needs to carefully assess COVID-19’s impact and its disclosure obligations.
Companies should provide disclosures that are tailored to their specific circumstances and provide material information on COVID-19’s impact to investors and market participants so they can evaluate the current and expected impact of COVID-19. Further, companies should be proactive in their revisions and disclosure updates as facts and circumstances change. Answers to the above questions may involve forward-looking information that could be based on assumptions and expectations regarding future events, in which case the disclosures should be made in a way to take advantage of the safe harbors provided by Sections 27A of the Securities Act of 1933 and 21E of the Securities Exchange Act of 1934. In the current, rapidly changing, environment, companies should update their risk factors quarterly (as required by Forms 10-Q and 10-K) and should consider updating their safe harbor disclaimers with every press release or other utterance.
Companies and related persons are reminded of the need to be mindful about their securities market activities, including issuing and purchasing stock. Where COVID-19 has or may affect a company in a way that is material to investors, or where a company has become aware of risks that would be material to investors, the company, its directors, officers and other insiders who are aware of these matters must refrain from trading until such information is publicly disclosed. In making these disclosures, companies must avoid selective disclosure prohibited by Regulation FD by broadly disseminating the relevant information while revisiting and updating prior disclosure to the extent that it has become inaccurate due to subsequent events.
In these times of uncertainty, companies and their auditors should be proactive to address financial reporting matters earlier than usual, including engaging with experts to determine how COVID-19 might impact their reporting in unusual ways. Companies are also reminded of their obligations under Item 10 of Regulation S-K and Regulation G with respect to their presentation of non-GAAP financial measures. If a company presents non-GAAP financial measures or performance metrics to adjust for or explain the impact of COVID-19, such as an adjustment to EBITDA or another common metric, the company should also highlight why management finds the measure or metric useful and how it helps investors assess COVID-19’s impact on the company’s financial position and results of operation.
When companies are confronted with GAAP financial measures being unavailable at earnings time due to COVID-19 related adjustments requiring additional information and analysis, companies may reconcile non-GAAP financial measures to preliminary GAAP results that either include provisional amounts based on reasonable estimates, or a range of reasonably estimated GAAP results. If a company reconciles non-GAAP financial measures to provisional amounts or estimated ranges of GAAP financial measures, then the company should limit the non-GAAP financial measures to those it uses to report financial results to its Board. It is not appropriate to present non-GAAP financial measures or metrics for the sole purpose of presenting a more favorable view of the company. Rather, non-GAAP financial measures should be shared to show investors how management and the Board are analyzing the current and potential impact of COVID-19 on the company’s financial condition and operating results. If a company reconciles non-GAAP financial measures to provisional amounts or estimated ranges of GAAP financial measures, then the company should explain why the accounting is incomplete and what additional information is needed to complete the accounting.
In summary, it is important for public companies to be aware of their options for periodic reporting requirements as well as their obligations under the securities laws as they are affected by the novel coronavirus. For more information about recommended steps, please contact your Foley relationship partner. For additional web-based resources available to assist you in monitoring the spread of the coronavirus on a global basis, you may wish to visit the CDC and the World Health Organization.
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