By Liz Dunshee
The SEC has issued its long-awaited proposal to permit semiannual reporting for US public companies. In this Cooley alert, we share a summary of how the rules would work if adopted as proposed. We also flag open questions that the SEC’s final release may address and issues for companies to consider if semiannual reporting becomes an option. Here are the key takeaways:
- Under the proposed rule, domestic Exchange Act reporting companies would have the option to determine annually whether to file a semiannual report on a new Form 10-S in lieu of the current quarterly Form 10-Q regime.
- Semiannual reporting may be of particular appeal to newly public companies, smaller issuers, and pre- or lower-revenue companies. Companies should carefully weigh their investor base, financing needs, debt covenants and analyst coverage to determine which reporting cadence best fits their needs.
- Switching to semiannual reporting presents potential consequences, including less frequent shelf registration statement updates, potential extended insider trading blackout periods and Rule 10b5-1 cooling-off periods for insiders, as well as tensions with current practices regarding underwriter comfort letters for capital raises and potential information asymmetries between semiannual and quarterly reporting companies, making careful advance planning essential.
- This is a proposal only, subject to a 60-day comment period, and the SEC is actively seeking input on key open questions, including what the compliance date should be and whether a transition period is needed.
The proposal would also simplify the financial statement staleness framework that applies to registration and proxy statements. The alert explains:
Currently, Rules 3-01 and 8-08 of Regulation S-X (for smaller reporting companies) address how the date of an interim balance sheet is determined in registration or proxy statements. These rules require a company to assess the number of days from the filing date or from the effective date of a registration statement (or mailing date of a proxy statement) to the date of the most recent balance sheet to determine if the balance sheet falls within 130 days or 135 days, as applicable. The proposal would replace the current day-count tests with a requirement that, generally, a registrant include interim financial statements – as of the end of the most recently completed fiscal quarter (for quarterly filers) or semiannual period (for semiannual filers) – that have been filed, or were required to be filed, on or before the relevant filing date.
If this change is adopted, it would eliminate the current one- or two-day period under the existing framework during which financial statements are required to be updated in a registration statement or proxy statement before those updated financial statements would be required to be filed on Form 10-Q, which is a pain point for some companies under the current rules.
The SEC’s semiannual reporting proposal is open for public comment, and the SEC is actively soliciting input on the numerous questions it has posed. As highlighted in the alert, there are many important factors that companies will need to carefully consider as they evaluate whether moving to semiannual reporting makes sense for them.
Cooley’s corporate governance and securities regulation attorneys are available to discuss these issues. Reach out to your existing Cooley contact or email the Cooley capital markets team.
