Corp Fin revises interps on Reg S-K // Cooley // Global Law Firm

By Cydney Posner

Corp Fin has posted updates to the telephone interps for Reg S-K, adding a number of new interps or revising many previously published interps. Summarized below are the interps that the staff has indicated are new or updated (and, in some cases, apparently just tweaked, so you will still need to refer to the link for earlier guidance that was not changed in this round. I added asterisks by the interps that seemed most significant.

Item 10--General

*A company can be both an accelerated filer and a smaller reporting company at the same time. For example, a calendar-year company that was an accelerated filer with respect to filings due in 2007 and had a public float of $60 million on the last business day of its second fiscal quarter of 2007 will qualify as a smaller reporting company for filings due in 2008 because fiscal 2007 is the initial determination year for the company to qualify for smaller reporting company status, and it had less than $75 million in public float on the last business day of its second fiscal quarter. [That is, in this initial year, no issuer will have previously "failed to qualify" for smaller reporting company status within the meaning of the of paragraph (iii) of Item 10(f)(2) of Reg S-K.] However, since the company was an accelerated filer with respect to filings due in 2007, to exit accelerated filer status in 2008, it is required to have less than $50 million in public float on the last business day of its second fiscal quarter in 2007 as provided in paragraph (3)(ii) of the definition of "accelerated filer" in Rule 12b-2. Because this company had a public float of $60 million on the last business day of its second fiscal quarter of 2007, it may not transition to non-accelerated filer status and its annual report on Form 10-K is due 75 days after the end of its fiscal year and must include the SOX 404 auditor attestation report described in Item 308(b) of Reg S-K. However, the company may use the scaled disclosure rules for smaller reporting companies in its 10-K.
*By comparison, under Item 10(f)(2)(iii), any reporting company that can calculate its public float and previously failed to qualify as a smaller reporting company will not be able to qualify as a smaller reporting company in future years unless its public float falls below $50 million, not $75 million, on the last business day of its second fiscal quarter. This rule is consistent with the rule for exiting accelerated filer status in Rule 12b-2. Companies that cannot calculate their public float and previously failed to qualify as smaller reporting companies must fall below $40 million in annual revenues to qualify as smaller reporting companies in future years.
Under the definition of "smaller reporting company" in Item 10(f), for a majority-owned subsidiary to qualify as a smaller reporting company, the corporate parent of the subsidiary must also satisfy the requirements of the definition of smaller reporting company. However, that definition does not require the corporate parent of a majority-owned subsidiary to file reports under Section 13(a) or Section 15(d) of the Exchange Act for the majority-owned subsidiary to qualify as a smaller reporting company.
When an issuer has no public float and is seeking to determine whether it satisfies the definition of "smaller reporting company" in Item 10(f)(1) on the basis of revenues, in calculating the issuer's revenues, the issuer should include all revenues on a consolidated basis. Accordingly, a holding company would meet the terms of the definition only if it had less than $50 million in consolidated revenues.

Item 101 – Description of Business

Item 101 of Reg S-K does not require a discussion of the entry into a new segment after the close of the fiscal year for which the Form 10-K is being prepared.
In the narrative description of business, a company is required to specify "the number of persons employed by the registrant." In industries where registrants' general practice is to hire independent contractors (such as "contract employees" or "freelancers") rather than "employees" to perform the work of the company, this disclosure should indicate the number of persons retained as independent contractors, as well as the number of regular employees.

Item 103 – Legal Proceedings

Costs expected to be incurred under CERCLA (42 U.S.C. § 9601) (the "Superfund" law) pursuant to a remedial agreement entered into in the normal course of negotiation with the EPA are not generally considered "sanctions" within Instruction 5(C) to Item 103 of Reg S-K. Formerly, Corp Fin's view was that all environmental legal proceedings involving $100,000 or more instituted by a governmental authority were subject to the disclosure provisions of Instruction 5(C), regardless of whether the money was characterized as damages (as in the Superfund cases) or fines. That view has been superseded by Footnote 30 of Release No. 33-6835 (May 18, 1989) and the letter to Thomas A. Cole (Jan. 17, 1989), which clarify that, while there are many ways a Superfund "potential monetary sanction" may be triggered, including the stipulated penalty clause in a remedial agreement, the costs anticipated to be incurred under Superfund pursuant to a remedial agreement entered into in the normal course of negotiation with the EPA generally are not "sanctions" under Instruction 5(C).
The reference in Instruction 5 to Item 103 to an administrative or judicial proceeding arising under "local provisions" is sufficiently broad to require disclosure of environmental actions brought by a foreign government.
*The mere possibility that a company may be required to indemnify an officer for a material claim would not trigger disclosure pursuant to Instruction 4 to Item 103. Accordingly, a proceeding against an officer that could require the company to indemnify the officer would generally not be considered a proceeding in which the officer has a material interest adverse to the company that should be disclosed under that instruction. Under state corporation law, indemnification is potentially available to any officer in any suit or proceeding in which the officer is named by reason of the fact that the person is an officer. Whether or not an officer's material interest is "adverse" to the company depends upon the facts and circumstances of each proceeding.
Where a bank subsidiary of a one bank holding company initiates a lawsuit to collect a debt that exceeds 10% of the current assets of the bank and its holding company parent, because of the unusual size of the debt, Item 103 requires disclosure of the lawsuit even though the collection of debts is a normal incident to the bank's business.
Contrary to Release No. 33-5170 (July 19, 1971), it is no longer the practice of Corp Fin to require registrants automatically to furnish, as supplemental information, either a description of civil rights litigation omitted from a newly filed disclosure document or the reasons for the omission.

Item 202 – Description of Registrant's Securities

Items 202(a)(1)(x) and (xi) require disclosure of certain restrictions on ownership of the registrant's securities. The purchase and sale restrictions imposed by Section 16 of the Exchange Act are not the types of restrictions required to be disclosed under these items.

Item 303 – Management's Discussion and Analysis of Financial Condition and Results of Operations

A smaller reporting company that has not had revenues from operations in the fiscal periods for which financial statements are furnished in the disclosure document is not permitted to provide the "plan of operation" information previously required by Item 303(a) of former Reg S-B in lieu of the MD&A required of all companies by Item 303 of Reg S-K. Instead, smaller reporting companies must satisfy the requirements of Item 303 of Reg S-K modified by paragraph (d) for smaller reporting companies. However, MD&A disclosure for a company without recent revenues is frequently very similar to the disclosure previously required under Item 303(a) of former Reg S-B.

Item 304 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 304(a)(1)(iv) uses the phrase "the registrant's two most recent fiscal years and any subsequent interim period preceding such resignation, declination or dismissal," while Item 304(a)(1) uses the phrase, "the registrant's two most recent fiscal years or any subsequent interim period." The phrases are not intended to have the same meaning: the language used in Item 304(a)(1)(iv) is intended to refer to a time period preceding the accountant's resignation or dismissal, as the language would literally suggest.

Item 305 – Quantitative and Qualitative Disclosures about Market Risk

A registrant does not have to include Item 305 disclosure in its Form 10-Q unless there is a material change to the Item 305 information disclosed in its most recently filed Form 10-K.

Item 307 – Disclosure Controls and Procedures

*As discussed in FAQ 3 of "Management's Report on Internal Control over Financial Reporting and Certification of Disclosure Controls in Exchange Act Periodic Reports – Frequently Asked Questions (revised Sept. 24, 2007)," under limited and specified circumstances, the staff will not object to the exclusion of an acquired business from management's assessment of the company's internal control over financial reporting (ICFR). FAQ 3 relates only to omitting an assessment of an acquired business's ICFR; it does not address management's evaluation of disclosure controls and procedures. However, in light of the overlap between a company's disclosure controls and procedures and its ICFR (Venn diagram, remember), in those situations in which a company may properly rely on FAQ 3, management's evaluation of disclosure controls and procedures may exclude an assessment of those disclosure controls and procedures of the acquired entity that are subsumed by ICFR. In addition, consistent with FAQ 3, the company should indicate the significance of the acquired business to the company's consolidated financial statements.
*A royalty trust attempted to limit its conclusion regarding the effectiveness of its disclosure controls and procedures by stating that it relied on the working interest owners for disclosure in the document. Although a royalty trust can explain its reliance on working interest owners, it cannot thereby limit the scope of its conclusion.

Items 308 and 308T – Internal Control over Financial Reporting

A Form 11-K is not required to include ICFR reports because Item 308 does not apply to Form 11-K.
*In annual reports for fiscal years ending on or after December 15, 2007 but before December 15, 2009, non-accelerated filers are required to provide management's report on ICFR pursuant to Item 308T of Reg S-K. The report is deemed not to be "filed" for purposes of Section 18 of the Exchange Act, unless the company specifically states that the report is to be considered "filed" under the Exchange Act or incorporates it by reference into a filing under the Securities Act or the Exchange Act. Nevertheless, failure by a non-accelerated filer to provide management's report in its Form 10-K under Item 308T(a) would, in Corp Fin's view, render the annual report materially deficient. As a result, the company would not be timely or current in its Exchange Act reporting and, therefore, would not be eligible to file new Form S-3 or Form S-8 registration statements and would lose the availability of Rule 144. Because the filing of the Form 10-K constitutes the Section 10(a)(3) update for any effective Forms S-3 or S-8, the company also would be required to suspend any sales under already effective registration statements. If the company subsequently amends its Form 10-K to provide management's report on ICFR (regardless of whether management's conclusion was that ICFR was effective or ineffective), the company could file new Forms S-8 and resume making sales under already effective Forms S-8, and shareholders could make sales under Rule 144; however, because the company was not timely in its filing, it would not be eligible to file new Forms S-3.
Notwithstanding the introductory note to Item 308T, which states that it applies only to annual reports, any Form 10-Q that is required to include Item 308T disclosure pursuant to Item 4T of Form 10-Q must include the disclosure required by Item 308T(b) (changes in ICFR). Quarterly reports need not include Item 308T(a) disclosure (management's report on ICFR).

Item 401 – Directors, Executive Officers, Promoters and Control Persons

*Item 401(b) information presented in the Form 10-K should be furnished for current officers, rather than for those officers who held such positions during the last fiscal year.
Item 401(d) requires disclosure where a director's wife is the first cousin of an executive officer of the same company since the director and executive officer are related by marriage "not more remote than first cousin."
Item 401(e) information about business experience with respect to executive officers need not be included in proxy statements if it is included separately in the Form 10-K, even though Instruction 3 to Item 401(b) does not refer specifically to Item 401(e).
Item 401(f) is not applicable to persons in the "significant employee" category of Item 401(c), unless those persons are de facto executive officers.
*Item 401(f)(1) requires disclosure regarding petitions filed under the "[f]ederal bankruptcy laws or any state insolvency law." This item should be interpreted to require disclosure regarding comparable events in foreign countries (except in the unusual situation where an event is not material). For example, disclosure should be provided when a director of a U.S. public company is also the CEO of a non-U.S. company and a receiver is appointed for the non-U.S. company.
*A director of a public company is the general partner (and 50% owner) of limited partnership A which, in turn, is the general partner of limited partnership B, now in bankruptcy. Disclosure of the bankruptcy is required in the public company's filings under Item 401(f)(l), because the director's general partnership in, and percentage ownership of, A are evidence of control of A, the general partner of B.
The president of a company about to go public is convicted within the past year of misdemeanor criminal offenses involving two small checks of $30 and $50, respectively. The exclusion of Item 401(f)(2) for "traffic violations and other minor offenses" would not apply, Corp Fin believes, because disclosure of these offenses would be "material to an evaluation of the ability or integrity of any . . . executive officer of the registrant." (emphasis added by Corp Fin).
Item 401(f) would require the disclosure by an issuer of an order temporarily restraining another corporation from pursuing a tender offer where a director of the issuer, who is the president of the other corporation, has been specifically named in the order.

Item 402(a) – Executive Compensation; General

Where both a parent and its subsidiary are public reporting companies and the executive officers of the parent may receive a portion of their compensation from the subsidiary:
- if an executive spends 100% (or near 100%) of the executive's time for the subsidiary but is paid by the parent, then the compensation paid by the parent has to be reported in the executive compensation table of the subsidiary.
- if an allocation of the monies paid by the parent would be necessary because the executive splits time between the parent and the subsidiary, the payments allocable to services to the parent need not be included in the subsidiary's executive compensation table.
- if the subsidiary pays a management fee to the parent for use of the executives, disclosure of the structure of the management agreement and fees would have to be reported under Item 404.
- compensation paid by the subsidiary to executives of the parent must be included in the parent's executive compensation table if the payments are paid directly by the subsidiary.
- if the payments are part of a management contract, disclosure of the structure of the management agreement and fees would have to be reported under Item 404.
Parent and its consolidated subsidiary are public companies. X was CEO of parent for all of 2007 and was CEO of subsidiary for part of 2007. Y was an executive officer of parent for 2007 and was CFO of subsidiary for 2007. Even though parent made all salary and bonus payments to X and to Y, pursuant to intercompany accounting: 60% of X's 2007 salary and bonus was allocated to the subsidiary; and 85% of Y's 2007 salary and bonus was allocated to the subsidiary. If 100% of Y's salary and bonus are included, Y would be one of parent's three most highly compensated executive officers for 2007, but if the 85% allocable to subsidiary is excluded, Y would not be a parent NEO. Corp Fin took the position that 100% of the salary and bonus of each of X and Y should be counted in determining the parent's three most highly compensated executive officers and disclosed in the parent's Summary Compensation Table (SCT). Parent's NEO determinations and compensation disclosures should not be affected by whether its subsidiary is public or private. The staff also takes the view that subsidiary's SCT should report the respective percentages (60% for X and 85% for Y) of salary and bonus allocated to the subsidiary's books. Each SCT should include footnote disclosure noting the extent to which the same compensation is reported in both tables.

Item 402(b) – Executive Compensation; Compensation Discussion and Analysis

*A company should begin its analysis of whether it is required to disclose performance targets or other factors or criteria under Instruction 4 to Item 402(b) by addressing the threshold question of materiality in the context of the company's executive compensation policies or decisions. If performance targets are not material in this context, the company is not required to disclose the performance targets. Whether performance targets are material requires a good faith, facts-and-circumstances analysis.

Once a company has determined that the performance targets are a material element of its executive compensation policies or decisions, the "competitive harm standard" is the only basis for omitting performance targets; that is, a company may omit targets involving confidential trade secrets or confidential commercial or financial information only if their disclosure would result in competitive harm (the CTR standard applied under Rule 406 or Rule 24b-2). To reach a conclusion that disclosure would result in competitive harm, a company must undertake a competitive harm analysis, taking into account its specific facts and circumstances and the nature of the performance targets. In the context of the company's industry and competitive environment, the company must analyze whether a competitor or contractual counterparty could extract from the targets information regarding the company's business or business strategy that the competitor or counterparty could use to the company's detriment. A company must have a reasoned basis for concluding, after consideration of its specific facts and circumstances, that the disclosure of the targets would cause it competitive harm. The company must perform its analysis based on the established standards for determining what constitutes confidential commercial or financial information the disclosure of which would cause competitive harm. These standards have largely been addressed in case law, including National Parks and Conservation Association v. Morton, 498 F.2d 765 (D.C. Cir. 1974); National Parks and Conservation Association v. Kleppe, 547 F.2d 673 (D.C. Cir. 1976); and Critical Mass Energy Project v. NRC, 931 F.2d 939 (D.C. Cir. 1991), vacated & reh'g en banc granted, 942 F.2d 799 (D.C. Cir. 1991), grant of summary judgment to agency aff'd en banc, 975 F.2d 871 (D.C. Cir. 1992). To the extent that a performance target level or other factor or criteria otherwise has been disclosed publicly, a company cannot rely on Instruction 4 to withhold the information. Even though no CTR is required to be submitted in connection with the omission, nevertheless, because CD&A will be subject to staff review, a company may be required to demonstrate that it has met the CTR standard and will be required to disclose the information if that standard is not met.

A company that relies on Instruction 4 to omit performance targets is required by the instruction to discuss how difficult it will be for the executive or how likely it will be for the company to achieve the undisclosed target level or other factor or criteria.

Companies do not need to provide quantitative targets for qualitative/subjective individual performance goals (e.g., effective leadership and communication), as opposed to quantitative/objective performance goals (e.g., specific revenue or earnings targets).

*Item 402(b)(xiv) provides, as an example of material information to be disclosed in the CD&A, depending on the facts and circumstances, "[w]hether the registrant engaged in any benchmarking of total compensation, or any material element of compensation, identifying the benchmark and, if applicable, its components (including component companies)." In this context, benchmarking generally entails using compensation data about other companies as a reference point upon which to base, justify or provide a framework (in whole or in part) for a compensation decision. It would not include a situation in which a company reviews or considers a broad-based third-party survey for a more general purpose, such as to obtain a general understanding of current compensation practices.
*The rules may call for disclosure regarding the role of compensation consultants in determining or recommending the amount or form of executive and director compensation in both Item 407(e)(3)(iii) (corporate governance discussion of comp committee) and in CD&A. Information regarding "any role of compensation consultants in determining or recommending the amount or form of executive and director compensation" required by Item 407(e)(3)(iii) is to be provided as part of the company's Item 407(e)(3) compensation committee disclosure. If a compensation consultant plays a material role in the company's compensation-setting practices and decisions, then the company should discuss that role in CD&A.

Item 402(c) – Executive Compensation; Summary Compensation Table

*Item 402(c)(2)(ix)(A) and Instruction 4 to that item require a company to report as "All Other Compensation" perquisites and personal benefits if the total amount exceeds $10,000, and to identify each item by type, regardless of the amount. Once the $10,000 threshold is exceeded, a company must list by type the perquisites and personal benefits, even if there were no aggregate incremental cost to the company. However, any item for which an executive officer has actually fully reimbursed the company should not be considered a perquisite or other personal benefit and, therefore, need not be separately identified by type. In this regard, for example, if a company pays for country club annual dues as well as for meals and incidentals and an executive officer reimburses the cost of meals and incidentals, then the company need not report meals and incidentals as perquisites, although it would continue to report the country club annual dues. If there was no such reimbursement, then the company would need to also report the meals and incidentals as perquisites. [Note that this is a change from the staff's previous requirement that the nebulous "total cost" be reimbursed (as opposed to just the "incremental cost") for an item not to be considered a perquisite. Under prior interps, the officer would have "fully reimbursed'’ the company for the meal at the country club if he or she reimbursed not only the cost of the meal, but also a proportional amount of the country club dues paid by the company. Under this prior interp, translated to the context of personal use of company aircraft-- where this issue arises most frequently-- total cost would likely have included not just variable costs related to the flight by the individual but also a pro rata share of the fixed costs. Will "full reimbursement" now mean payment for only variable costs and, if so, how, if at all, is that concept then distinguished from incremental costs? Or does this concept not translate to aircraft use?]
*In interps issued last year, the staff said that only the previously expensed portions of awards that were previously reported in the SCT could be reversed in the SCT. Therefore, an expensed amount that relates to periods before effectiveness of the 2006 Executive Compensation rules or before the person became an NEO should not be deducted from the amount reported in, or shown as a negative number in, the Stock Awards or Option Awards column. In the new interp, the staff states that compensation for all executive officers should be computed on the same basis in order to determine the NEOs. As a result, this former position is apparently now to be distinguished in the context of determining whether an executive who was not previously in the SCT is an NEO under Item 402(a)(3)(iii) or Item 402(a)(3)(iv) for the last completed fiscal year. In that context, expensed amounts reversed under FAS 123R during the last completed fiscal year may be taken into account if they would have been reported had the executive been included in the SCT for the prior year in which the award was expensed, even though the previously expensed portions of the awards were not reported previously in the SCT. For example, during 2007, for both Executive A (who was in the SCT for 2006) and Executive B (who was not), the same amount of equity compensation that had been expensed in 2006 under FAS 123R was reversed. The amount of this reversal would be taken into account for both Executives A and B in determining whether they are among the company's NEOs for 2007.
*If the instructions to the SCT requiring footnote disclosure do not specifically limit the footnote disclosure to compensation for the company's last fiscal year, as do Instructions 3 and 4 to Item 402(c)(2)(ix), the footnote disclosure for the other years reported in the SCT would be required only if it is material to an investor's understanding of the compensation reported in the SCT for the company's last fiscal year.
*The instruction to Item 402(c)(2)(v) and (vi) requires disclosure of assumptions made in the valuation of stock or option awards by reference to a discussion of those assumptions in the company's financial statements, footnotes to the financial statements or MD&A. For an award that was recognized during the company's most recent fiscal year, the required assumption information generally will be in the financial statements (or associated footnotes) for the year in which that award was granted; it is not sufficient to reference financial statements for the current year if awards granted in prior fiscal years were recognized during the most recent fiscal year.
A company may provide the assumption information required by the Instruction to Item 402(c)(2)(v) and (vi) for equity awards granted in the company's most recent fiscal year by reference to the Grants of Plan-Based Awards Table if the company chooses to report that assumption information in that table, but the SCT must also refer to assumption information for each award that was recognized during the company's most recent fiscal year, even if not granted during that year.
*An agreement provides for payment of a cash retention bonus, conditioned upon the CEO's remaining employed by the company through specified subsequent years. (The agreement is not a non-equity incentive plan award as defined in Item 402(a)(6)(iii).) The bonus would be reportable in the SCT for the year in which the performance condition is satisfied. The same analysis applies to any interest the company is obligated to pay on the cash retention bonus, assuming the interest is not payable unless and until the performance condition has been satisfied. Before the performance condition has been satisfied, Instruction 4 to Item 402(c) would not require the bonus to be reported in the SCT as a bonus that has been earned but deferred, and the bonus would not be reportable in the Nonqualified Deferred Compensation Table. However, the company should discuss the cash retention bonus in its CD&A for the year it enters into the agreement and subsequent years through completion of the performance necessary to earn the retention bonus.

Item 402(f) – Executive Compensation; Outstanding Equity Awards at Fiscal Year-End Table

*Instruction 2 to Item 402(f)(2) requires footnote disclosure of the vesting dates of the awards reported in the Outstanding Equity Awards at Fiscal Year-End Table. A company may comply with this instruction by including a column in the table showing the grant date of each award reported and including a statement of the standard vesting schedule that applies to the reported awards. However, if there is any different vesting schedule applicable to any of the awards, then the table would also need to include disclosure about that vesting schedule.

Item 402(i) – Executive Compensation; Nonqualified Defined Contribution and Other Nonqualified Deferred Compensation Plans

*Information required in the Nonqualified Deferred Compensation Plan Table should be provided on a plan-by-plan basis.
*Item 402(i)(2)(iii) calls for disclosure of aggregate company contributions to each nonqualified deferred compensation plan during the company's last fiscal year. Company contributions earned in 2008, which are reportable in the All Other Compensation column of the 2008 SCT, are considered to be company contributions "during" 2008 even if they are not actually credited to the executive's account until January 2009 (e.g., as with certain excess plans related to a qualified plan).

Item 404 – Transactions with Related Persons, Promoters and Certain Control Persons

*Smaller reporting companies are not required to describe their policies and procedures for review, approval or ratification of transactions with related persons as specified by Item 404(b) of Reg S-K. Instead, smaller reporting companies comply with the requirements of Item 404 by furnishing the information called for by Item 404(d), the paragraph of Item 404 captioned "Smaller reporting companies," which does not require Item 404(b) disclosure.
See also the first bullet under Item 402(a) – Executive Compensation; General above.

Item 405 – Compliance with Section 16(a) of the Exchange Act

*Item 405 requires the company to disclose delinquent filings required by Section 16(a) of the Exchange Act during the most recent fiscal year or prior years. An insider's Form 5 with respect to 2007, due in February 2008, was filed late. If this late Form 5 is disclosed in the company's Form 10-K for the year ended December 31, 2007 and the proxy statement for the 2008 annual meeting, this Item 405 disclosure need not be repeated in the company's Form 10-K for the year ended December 31, 2008 and the proxy statement for the 2009 annual meeting.

Item 407 – Corporate Governance

See the third bullet under Item 402(b) – Executive Compensation; Compensation Discussion and Analysis.
While all smaller reporting companies are required to provide the audit committee report required by Item 407(d)(3), pursuant to Item 407(g), smaller reporting companies are not required to provide the audit committee financial expert disclosure required by Item 407(d)(5) until their first annual report after their initial registration statement under the Securities Act or Exchange Act becomes effective. The statement in the original version of the adopting release for Item 407(g) (Release No. 33-8876, Dec. 19, 2007) that smaller reporting companies are not required to provide an audit committee report was incorrect.

Item 501 – Forepart of Registration Statement and Outside Front Cover Page of Prospectus

The requirement of Item 501(b)(8)(iii) to disclose the presence or absence of arrangements to place funds in escrow is applicable only when a best-efforts offering is conditioned upon a minimum number of securities being sold.
The "Subject to Completion" legend specified in Item 501(b)(10) should be printed on all preliminary prospectuses used before the effective date of the registration statement and, in accordance with Item 501(b)(11), in any prospectus contained in an effective registration statement omitting Rule 430A information that is used after effectiveness and prior to the pricing. The prospectus date and "Subject to Completion" legend should be placed on the prospectus cover page so that the information is presented in a clear, concise and understandable manner.
Counsel for a company named Geo-Search was informed that if the company registered under the Exchange Act, the staff would not suggest a name change solely because there is an existing registrant named Geosearch.
The cover page of a prospectus relating to a secondary equity offering, registered for the shelf pursuant to Rule 415, need not contain the tabular or other presentation required by Item 501(b)(3) regarding "price to the public" and "underwriter's discounts" where the offering will not be underwritten, the securities will be offered at the market and brokerage commissions will be negotiated at the time of the offering.

Item 503 – Prospectus Summary, Risk Factors and Ratio of Earnings to Fixed Charges

The ratio of earnings to fixed charges is required by Item 503(d) for registration statements relating to both short- and long-term debt. However, if the ratio is already contained in a Form 10-K filed by the issuer, it can be incorporated by reference into the registration statement, provided the registration form permits the incorporation and the issuer is eligible to incorporate the information by reference.

Item 507 – Selling Security Holders

The term "security holders," as used in Item 507, means beneficial holders, not nominee holders or other holders of record.
Where an entity is identified as a selling shareholder, the company must identify in the registration statement the person or persons who have sole or shared voting or investment control over the company's securities that the entity owns. The staff advises use of Rule 13d-3 by analogy to make the determination.
Item 507 requires certain disclosure concerning each selling shareholder for whose account the securities being registered are to be offered. The staff has permitted this disclosure to be made on a group basis, as opposed to an individual basis, where the aggregate holdings of the group are less than 1% of the class prior to the offering. Where the aggregate holdings of the group are less than 1% of the class but for a few major shareholders, the disclosure for the members of the group other than the major shareholders also may be made on a group basis.
*If the company was eligible to rely on Rule 430B when the registration statement was originally filed, the company may add or substitute selling shareholders to a registration statement related to a specific transaction by prospectus supplement. The supplement is filed under Rule 424(b)(7). With one exception, if the company is not eligible to rely on Rule 430B when the registration statement is initially filed, it must file a post-effective amendment to add or substitute selling shareholders to a registration statement related to a specific transaction. The exception relates to investors who received shares in a gift transfer from a previously identified selling shareholder. In that situation, the company may substitute a new investor through the filing of a Rule 424(b) prospectus supplement as long as the new investor's shares can be traced back to the offering covered by the resale registration statement. [the millionth incarnation of the staff's advice on adding selling shareholders by supplement!]
An investment advisor manages security holder accounts in the advisor's exclusive discretion. Although the account agreements give the advisor complete discretionary authority to vote and sell securities held in the managed accounts, the account holders may revoke this authority within 60 days. Both the investment advisor and the individual account holders must be identified under Item 507 because both are viewed as security holders given their shared power to vote and sell the securities held in the managed accounts.
*An issuer with a resale registration statement naming several investment funds as selling security holders must name the natural persons who have or share voting or investment power for each fund as part of its Item 507 disclosure, even if voting or investment power for any fund is controlled by an investment committee consisting of a large number of individuals who each have a vote to approve the exercise of this power and, therefore, no single person exclusively possesses the power to vote, acquire or dispose of securities held by the fund. [this interp appears to spell the end for the exclusion, in this context at least, based upon the "Rule of Three." Could it also have implications in other contexts, such as in Section 16?]

Item 508 – Plan of Distribution

Item 508(a) of Reg S-K, which calls for disclosure of the identity of "principal underwriters" and their material relationships with the registrant, does not require disclosure as to each member of the selling group. The disclosure is limited to those underwriters who are in privity of contract with the issuer with respect to the offering.
Stabilizing transactions begun on the day a registration statement became effective, but prior to the time of effectiveness (e.g., stabilizing began at 10:00 A.M. and the registration statement was declared effective at 2:00 P.M.), are not deemed to be "before the effective date of the registration statement" for purposes of Item 508(l)(2). Accordingly, the disclosure set forth in Item 508(l)(2) (amounts and prices, etc.) need not be made for those transactions.

Item 509 – Interests of Named Experts and Counsel

A legal fee incurred in the preparation of a registration statement, even if in excess of $50,000, is not the kind of "substantial interest" in the registrant requiring disclosure under Item 509. These fees, of course, are normally disclosed in Part II of the registration statement.
Where a registrant's attorney has a 10% limited partnership interest in a limited partnership in which the registrant has a 50% limited partnership interest, the registrant's relationship to the partnership is sufficiently analogous to a parent-subsidiary relationship to warrant furnishing the disclosure required by Item 509.
A law firm is charging a flat fee to a registrant for services performed in connection with preparation of the registration statement. However, as the company will declare bankruptcy if the offering is unsuccessful, the law firm is not certain it will be paid unless the offering is successful. The staff has taken the position that this is not a form of "contingent interest" the disclosure of which was contemplated by Item 509.

Item 512 – Undertakings

A registration statement on Form S-8, covered by Rule 415, must include all applicable undertakings in Item 512 of Reg S-K, including specifically those in Items 512(a), (b) and (h); however, it need not include the undertakings contained in Items 512(a)(5)(i), 512(a)(5)(ii), and 512(a)(6).
A WKSI shelf S-3, other than for a dividend reinvestment plan, should include the Item 512(h) undertaking rather than the indemnification disclosure required by Item 510, even though the registrant will not request acceleration of effectiveness. For automatic shelf registration statements relating to dividend reinvestment plans, the Item 510 disclosure should be included in lieu of the Item 512(h) undertaking.
*Item 512(a), which is applicable to Rule 415 offerings, sets forth three circumstances requiring a post-effective amendment: Section 10(a)(3) updating, fundamental changes and material changes to the plan of distribution. In a Form S-3 or Form F-3, issuers may satisfy the Item 512(a) undertaking by incorporating by reference from Exchange Act reports containing the required information or by filing a Rule 424(b) prospectus.
A Rule 415 offering provides that purchasers within the first 60 days will receive a security with a higher yield than that to be received by subsequent purchasers. An extension of the preferential purchase period for an additional 30 days would be viewed as a material change in the plan of distribution, which, according to the Item 512(a)(iii) undertaking, would require a post-effective amendment (or, for registration statements on Form S-3 or F-3, compliance with one of the methods in Item 512(a)(1)(B)).
In an offering of limited partnership interests registered under the Securities Act, the undertaking required by Item 512(f) that the issuer provide certificates to the underwriter need not be included in the registration statement where no certificates will be used.

Item 601 – Exhibits

*Instruction 1 to Item 601(a) of Reg S-K provides that when filing amendments to registration statements, a registrant need not include copies of exhibits which have been modified only to correct minor typographical errors or to put in pricing terms. However, the incomplete exhibits already on file that do not reflect the pricing or typographical modifications noted above may not be incorporated by reference in any subsequent filing. [E.g., the underwriting agreement must be refiled as a completed and executed document if the company intends to list it as a material agreement.]
Under Item 601(a)(2), the exhibit index for each year's Form 10-K must list each of the exhibits required in the Form 10-K, even if some of the exhibits have previously been filed. However, the previously filed exhibits may be incorporated by reference from the prior year's Form 10-K or another appropriate document. In contrast, the exhibit index in a Form 10-Q can be limited to those exhibits actually filed as part of, or incorporated by reference into, the Form 10-Q.
*If a company is party to an oral contract that would be required to be filed as an exhibit pursuant to Item 601(b)(10) if it were written, the company should provide a written description of the contract similar to that required for oral contracts or arrangements pursuant to Item 601(b)(10)(iii) (management contracts and compensatory plans).
Instruction 2 to Item 601(b)(10) indicates that Item 10 material contracts need to be filed with the periodic report covering the period during which the contract is executed or becomes effective.
*Even if a material agreement becomes immaterial by the end of the reporting period during which the contract was entered into, the agreement must be filed as an exhibit to the periodic report. Item 601(a)(4) provides that if a material contract "is executed or becomes effective during the reporting period," then it shall be filed as an exhibit.
Item 601(b)(23)(ii) and Securities Act Rule 439(a) permit the incorporation by reference of consents filed with Exchange Act reports only into an already effective Securities Act registration statement. Consents may not be incorporated by reference into a registration statement that becomes effective after the filing of the consent with an Exchange Act document.
*An issuer filing a "special financial report" on Form 10-K must file with the report the certification required by Item 601(b)(31); however, the issuer may omit paragraphs 4 and 5 of the certification because the report will contain only audited financial statements and not Item 307 or Item 308 of Regulation S-K disclosures.
*If a smaller reporting company has chosen to use the definition of "named executive officer" in Item 402(m)(2) in its registration statement or report, by providing the disclosure permitted under Items 402(m) through 402(r) instead of the disclosure required under Items 402(a) through 402(k), that definition may also be used to interpret the filing requirements of Item 601(b)(10)(iii)(A) (i.e., plans, contracts and arrangements in which only NEOs as defined under Item 402(m)(2) participate).
*A copy of the employee benefit plan under which the registered securities will be issued should be filed as an exhibit to an S-8 registration statement.
*A written arrangement under which officers are provided company cars and other perquisites does not have to be filed as a "material contract" so long as the perquisite is separately identified and quantified in the proxy statement.
*Item 601(b)(3) requires that the entire amended text of the articles or by-laws be filed, along with the text of the new amendments, which could be accomplished by filing the entire amended text, redlined to show the new amendments.
Documents defining the rights of commercial paper holders are not required to be filed as exhibits to a Form 10-Q because the exhibit requirement is to file instruments defining the rights of security holders with respect to long-term debt and commercial paper is not long-term indebtedness.
Item 601(b)(4) (instruments defining the rights of security holders, including indentures) requires that an indenture be filed with a Form 10-Q only when the Form 10-Q discloses a new debt issue in the quarter for which the report is filed. If the indenture has already been filed as part of a registration statement, it can be incorporated by reference into the Form 10-Q pursuant to Exchange Act Rules 12b-23 and 12b-32.
A resolution adopted by a company that provided for confidential proxy voting rights for shareholders should be filed as an "instrument defining the rights of security holders" pursuant to Item 601(b)(4).
Subparagraph (iii)(A) of Item 601(b)(4) provides an exclusion from filing for instruments defining the rights of holders of long-term debt where the amount of indebtedness authorized thereunder does not exceed 10% of the total assets of the company and there is filed an agreement to furnish a copy of the instrument to the SEC upon request. The confidential treatment procedures set forth in Rule 83(c) would apply to the documents furnished upon request.
Where notes issued in a private placement amount to 5% of a company's total assets, the related indenture is not required to be filed pursuant to Item 601(b)(4) because the amount involved is less than 10% of total assets, even though the indenture was not made in the ordinary course of business.
In connection with a rights offering, a foreign company registering (1) warrants evidencing the rights to purchase American depositary shares representing ordinary shares, (2) provisional allotment letters ("PALs") evidencing rights to purchase ordinary shares, and (3) ordinary shares underlying the warrants and PALs must provide an opinion of counsel as to the legal issuance of the warrants and PALs and the fact that they are valid and binding obligations of the company, in addition to the opinion regarding the valid issuance and fully paid and non-assessable nature of the ordinary shares.
*In connection with a joint Form S-4 registration statement for a stock-for-assets acquisition, even though the target is not the registrant, there should be filed as exhibits any contracts or other documents of the target that would be material to the new entity.
Under Item 601(b)(10)(ii)(C), a contract for the acquisition of real estate must be filed if consideration in excess of 15% of the fixed assets of the company is paid for the real estate. When computing the consideration paid for the real estate, an issuer should include the cash purchase price plus the amount of any indebtedness assumed as a result of the purchase.
*Under Item 601(b)(10)(iii), a deferred compensation plan for an officer/director entered into during the fiscal year should be filed as an exhibit to a Form 10-K even though the officer/director retired during that fiscal year and no longer was an officer/director.
A remuneration plan applicable to 300 key executives in a company with 18,000 employees would not fall within the exemption provided by Item 601(b)(10)(iii)(C)(4) as a plan available to employees generally. In this regard, if a compensatory plan, contract or arrangement is available generally to all officers and directors but not to all employees of the company, the plan, contract or arrangement does not fall within this exemption.
If, in filing its first Form 10-K containing management's report on ICFR, a company inadvertently omits the ICFR language from the introductory portion of paragraph 4, as well as paragraph 4(b), of the SOX 302 certification, the staff will permit the company to file a Form 10-K/A that contains only the cover page, explanatory note, signature page and paragraphs 1, 2, 4 and 5 of the certification. The staff made this concession for the first 10-K because companies were permitted to omit these portions of the certification during the transition period to SOX 404(a) compliance; however, if the same company were to make this mistake in the following year, the staff would not be so charitable and the company would be required to file a Form 10-K/A containing full Item 9A disclosure as well as the company's financial statements.
*The following errors in a certification required by Item 601(b)(31) are examples of errors that will require the company to file a corrected certification that is accompanied by the entire periodic report:
- the company identifies the wrong periodic report in paragraph 1 of the certification;
- the certification omits a conformed signature above the signature line at the end of the certification;
- the certification fails to include a date; and
- the individuals who sign the certification are neither the company's principal executive officer nor the principal financial officer, or persons performing equivalent functions.

Item 701 – Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

The reporting of use of proceeds requires the reporting of actual expenditures of the funds. Merely earmarking funds for future use should not be reported.
Ordinarily, when purchase warrants remain outstanding, an offering is considered to be ongoing for purposes of reporting use of proceeds. However, if the only warrants were issued to underwriters as compensation, and if the proceeds from the exercise of the warrants will be de minimis with respect to the overall proceeds of the offering, the staff may deem the obligation to report use of proceeds from an initial offering to be completed.
Use of proceeds disclosure is required in the issuer's first periodic report filed following the effective date of its first registration statement filed under the Securities Act, even if the registration statement covered a best-efforts offering that has not closed on the due date of that periodic report.
If a registrant's first filing under the Securities Act is to register a secondary offering, no disclosure need be provided in response to Item 701(f) since there are no proceeds to the issuer. However, this secondary offering would not constitute "the first registration statement filed under the Act by an issuer" for purposes of Rule 463. Accordingly, the first primary Securities Act offering by that registrant would necessitate disclosure under Item 701(f).
In its IPO, a company registered, on the same registration statement, a specified number of shares for sale to the public and a specified number of shares for issuance pursuant to employee benefit plans. Under Rule 463(d)(3) and Item 701(f), the company should report the use of proceeds only for the shares sold to the public and may omit the information relating to the employee benefit plan shares. The staff's response was premised on the representation that the employee benefit plan shares were originally registered for that purpose; if the company were instead converting shares to employee benefit purposes that had originally been registered for sale to the public but remained unsold, the staff's position would not apply.

Item 703 – Purchases of Equity Securities by the Issuer and Affiliated Purchasers

*Item 703 requires tabular disclosure regarding any purchase made by or on behalf of the issuer or any affiliated purchaser of shares or other units of any class of the issuer's equity securities that are registered by the issuer under Exchange Act Section 12. An employee's net exercise of an employee stock option is not a transaction that involves a repurchase by the issuer for purposes of disclosure under Item 703. However, if any shares are withheld other than shares necessary to pay taxes or satisfy the exercise price, the company must disclose the repurchase of the additional shares under Item 703. Similarly, a stock-for-stock option exercise (where the option exercise price is paid with company stock that the option holder otherwise owns) also involves a company stock repurchase reportable under Item 703.
*Disclosure is not required under Item 703 for a forfeiture of restricted stock upon failure to satisfy vesting conditions so long as the employee was granted the shares for no consideration.
If a company receives its shares back from a vendor in settlement of litigation, these shares must be disclosed under Item 703.
*Forfeiture of pledged stock to the issuer upon failure to pay and cancellation of the related promissory note involves a company repurchase requiring disclosure under Item 703.

Items 901 through 915 – Roll-up Transactions

Pursuant to Item 901(c)(2)(ii), a "roll-up transaction" does not include transactions in which the securities to be issued or exchanged are not required to be, and are not, registered under the Securities Act. The roll-up rules are not applicable except from an anti-fraud perspective. See Release No. 33-6922 (Oct. 30, 1991).

Corp Fin revises interps on Reg S-K

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