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CorpFin’s Updated and Refined WKSI Ineligible Issuer Waiver Framework

On Wednesday the Division of Corporation Finance issued a revision to its July 2011 statement on well-known seasoned issuer waivers. The original statement was issued to provide guidance on what constitutes “a showing of good cause” for purposes of an ineligible issuer waiver request; it outlines the framework that CorpFin uses when assessing such a request. The revised statement updates and refines that original framework based on CorpFin’s experience with waiver requests to date.

WKSIs

A “well-known seasoned issuer” (a WKSI) is an issuer (other than an asset-backed issuer, investment company or business development company) that: (i) meets the registrant requirements of General Instruction I.A or Form S-3 or Form F-3; and (ii) as of a date within 60 days of the determination date, either: (A) has a worldwide non-affiliate equity market capitalization (a public float) of $700 million or more; or (B) has issued for cash more than an aggregate of $1 billion in non-convertible securities, other than common equity, through registered primary offerings over the prior three-year period.

Ineligible Issuers

In addition, in order to qualify as a WKSI, an issuer must not be an “ineligible issuer.” An an ineligible issuer is generally one that:

  • is an Exchange Act reporting issuer that has failed to file all reports and other materials required to be filed during the prior 12 month period (other than certain reports on Form 8-K);
  • is, or during the prior three-year period was, a blank check company, a shell company or an issuer in an offering of penny stock;
  • is a limited partnership that is offering and selling its securities other than through a firm commitment underwriting;
  • has filed, or has had filed against it, a petition for bankruptcy during the prior three-year period;
  • is, or during the prior three-year period was, the subject of a refusal or stop order, or is the subject of a pending proceeding under Section 8 or Section 8A of the Securities Act; or
  • is, or during the prior three-year period was (or whose subsidiary is or was), convicted of any felony or misdemeanor described in certain provisions of the Exchange Act, found to have violated the antifraud provisions of the federal securities laws, or made the subject of a judicial or administrative decree or order prohibiting certain conduct or activities regarding the antifraud provisions of the federal securities laws.

The Commission may waive ineligible issuer status upon a showing of good cause that it is not necessary under the circumstances that the issuer be considered an ineligible issuer. The authority to grant such waivers has been delegated by the Commission to the Director of CorpFin.

Framework for Assessing a Waiver of Ineligible Issuer Status

In assessing a request for a waiver of ineligible issuer status CorpFin will generally focus on how the conduct giving rise to ineligibility relates to the reliability of an issuer’s current and future disclosures. If the conduct does relate to the reliability of an issuer’s disclosures, CorpFin will also focus on the steps an issuer has taken to remediate any deficiencies. CorpFin’s analysis is a facts and circumstances one, with no single factor being determinative and the burden of proof being on the issuer “to demonstrate that the conduct that gave rise to the violation, and the facts and circumstances as they currently exist, do not affect its ability to produce reliable disclosure … . ”

[Updated: April 24, 2014: CorpFin again revised its statement on WKSI waivers to clarify that a criminal conviction or scienter based violation involving disclosure will significantly elevate an issuer’s burden of proof in justifying a waiver request.]

Specifically, some of the factors CorpFin will consider include:

  • the nature of the violation or conviction;
  • whether it involved disclosure for which the issuer or any of its subsidiaries was responsible;
  • whether it calls into question the ability of the issuer to produce reliable disclosure currently and in the future;
  • whether the conduct involved a criminal conviction or scienter based violation (as opposed to a civil or administrative non-scienter based violation);
  • who was responsible for the misconduct and whether it was known by the issuer or whether personnel at the issuer ignored warning signs regarding the misconduct;
  • whether the individuals responsible for or involved in the misconduct were officers or directors of the issuer, or were lower level employees in the operation of a subsidiary;
  • whether there were red flags about the conduct and whether more senior officers of the issuer disregarded these warning signs;
  • the duration of the violative conduct (did the conduct last over a period of years or was it an isolated instance);
  • what remedial measures the issuer has taken to address the violative conduct and whether those actions would likely prevent a recurrence of the misconduct and mitigate the possibility of future unreliable disclosure;
  • whether there were key changes in the personnel involved in the violative or criminal conduct;
  • whether the issuer has taken steps to improve training or made improvements to internal controls and disclosure controls and procedures;
  • the severity of the impact on the issuer if the waiver request is denied against the facts and circumstances relating to the violative or criminal conduct to assess whether the loss of WKSI status would be a disproportionate hardship in light of the nature of the issuer’s misconduct; and
  • in the context of considering whether a waiver would be consistent with the public interest and the protection of investors, any effects that the issuer’s loss of WKSI status could have for the markets as a whole and the investing public.

Something to Consider Even if You’re Not a WKSI

While CorpFin’s revised statement on WKSI waivers no doubt provides WKSIs with a greater degree of insight into the waiver assessment process, even non-WKSIs can glean insight from the framework in terms of understanding CorpFin’s current thinking on what constitutes a showing of good cause for purposes of a waiver request and perhaps even outside of the context of a waiver request for those issuers that a find themselves in the midst of a violation of the antifraud or other provisions of the federal securities law.

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