Disclosure

Additional Lessons in Social Media and the Securities Laws Courtesy of Zipcar

by Vanessa Schoenthaler on January 7, 2013

On Friday night DealBook reported that Zipcar, the car-sharing company which Avis Budget Group recently agreed to acquire, filed a Form 8-K earlier in the evening to disclose the following tweet by CEO Scott Griffith:

Scott Griffith Tweet

Zipcar also filed a copy of The Boston Globe article referenced in Griffith’s tweet and a copy of a transcript from Griffith’s CNBC interview earlier that day.

For the most part the remainder of Dealbook’s brief article goes on to discuss Netflix CEO Reed Hastings’ July 2012 Facebook posting and the potential Regulation FD issues surrounding that posting, including Netflix and Hastings’ recent receipt of Wells notices from the Securities and Exchange Commission.

But Zipcar’s filing on Friday night wasn’t about Regulation FD, which to its credit Dealbook does acknowledge:

Zipcar made the S.E.C. filing about Mr. Griffith’s Twitter message because the transaction with Avis is subject to Zipcar’s shareholder approval and securities laws dictate that the company must file with regulators any announcements that could be construed as soliciting shareholder votes.

Unfortunately, that single sentence was placed without elaboration in the middle of a discussion about the role of Regulation FD in the age of social media. So it seems like this might actually be a Regulation FD issue. But it’s not.

Zipcar’s Form 8-K filing is about the proxy solicitation rules. As Zipcar is in the process of being acquired by Avis, it must seek shareholder approval of its merger agreement, which in turn requires that Zipcar file a proxy statement to solicit shareholder votes and proxies.

Whenever anyone “solicits” proxy authority, regardless of whether it’s the company, an officer, director, shareholder or even a third-party proponent, that person must meet certain disclosure and filing requirements. While not every communication qualifies as a solicitation, the Commission does define the term broadly to include any communication—whether in the form of a widely distributed announcement or a private email message—that is reasonably calculated to result in the procurement, withholding or revocation of a proxy.

If a communication qualifies as a solicitation and it’s in writing then it must be filed with the Commission on the same day that it’s first published, sent or given to a shareholder. Written communications encompass all forms of information not otherwise disseminated orally and generally include things like blog posts, tweets, slide presentations and videos (which must be transcribed when filed).

Which is exactly what’s going on here. Griffith’s tweet and the other exhibits to Zipcar’s Form 8-K are being filed as proxy solicitation materials, not as some last-minute filing after a CEO tweet slips out (as might be inferred from the Dealbook piece). What’s more, Zipcar’s legal team seems to be right on top of its social media presence, having previously filed tweets by both the company and Griffith on January 2nd:

Zipcar Tweet

Scott Griffith Tweet

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The SEC Issues New Exchange Act C&DIs: Business Activities Related to Iran

by Vanessa Schoenthaler on December 6, 2012

The Iran Threat Reduction and Syria Human Rights Act of 2012 (the “Act”), which was enacted on August 10, 2012, amended the Securities Exchange Act of 1934 to add new Section 13(r), requiring reporting companies to disclose certain business activities related to Iran in periodic reports filed with the Securities and Exchange Commission after February 6, 2013.

Yesterday the Division of Corporation Finance issued seven new Compliance and Disclosure Interpretations related to Section 13(r). In summary:

  • If an issuer’s annual report is required to be filed after the Act’s February 6, 2013 effective date, the report must include disclosure of Iran-related business activities pursuant to Section 13(r) even if the issuer files the report early (on or before the February 6, 2013 effective date).
  • If an issuer’s annual report is required to be filed after the Act’s February 6, 2013 effective date, the report must include disclosure of Iran-related business activities pursuant to Section 13(r) that occurred during the entire fiscal year covered by the report, including the period prior to enactment of the Act. For example in the case of an issuer that files an annual report for the fiscal year ending December 31, 2012, that issuer is required to disclose any Iran-related business activities specified in Section 13(r) for the period from January 1, 2012 through December 31, 2012.
  • The term “affiliate” as used in the Act has the meaning set forth in Exchange Act Rule 12b-2.
  • Disclosure is only required in a periodic report if an issuer or any of its affiliates engaged in any Iran-related business activities specified in Section 13(r) for the period covered by the report; it is not necessary to include a statement to the effect that the issuer and its affiliates have not engaged in any Iran-related business activities specified in Section 13(r).
  • A transaction or dealing with any person or entity identified under 31 CFR § 560.304 must be disclosed unless it was specifically authorized by a U.S. federal department or agency. If a disclosable transaction was specifically authorized by a foreign governmental authority, an issuer may disclose that fact in addition to the other information specified in Section 13(r) to provide appropriate context.
  • Both general and specific licenses constitute specific authorization by the Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury to engage in a transaction, provided all conditions of the applicable license are strictly observed.
  • Any disclosures included in a periodic report in response to Section 13(r) will automatically become publicly available upon filing through the EDGAR system.

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General Solicitation and the Importance of Good Disclosure

by Vanessa Schoenthaler on September 13, 2012

Yesterday the WSJ Venture Capital Dispatch reported that Felix Investments, LLC, is offering investors the opportunity to buy pre-IPO shares in clean-tech company Bloom Energy Corporation through one of Felix’s pooled investment funds.

You might recall the name Felix Investments from this past March, when the Securities and Exchange Commission announced that it had filed a complaint against Felix, Facie Libre Management Associates, LLC and principal Frank Mazzola, in connection with the operation of certain pooled investment funds that were used acquire pre-IPO shares of companies like Facebook and Zyanga, among others.

The allegations in the Commission’s complaint relate to issues of self-dealing and material misstatements and omissions about the investments themselves (not the form thereof) and the matter is still pending, so of course the parties are presumed innocent until proven otherwise.

I just went back and reread the complaint this morning. What a difference a couple of months and a liquidity event can make. Among other things, the Commission is alleging that Mazzola created the impression that Felix Investments acquired Facebook shares at $66 per share, when in fact they had been acquired at even higher prices; FB opened at $20.95 this morning.

What’s more interesting though are some of the communications from Mazzola and Felix to potential investors, which are necessarily without full context and for the benefit of the arguments that Commission is making in the complaint, but still interesting nonetheless. I wonder if we’ll end up seeing more of these types of actions once the ban on general solicitation and general advertising is lifted and funds really begin advertising.

It’s certainly a good reminder for anyone thinking about using general solicitation and general advertising of the importance of balancing marketing and advertising with good disclosure and compliance practices.

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Is it Time to Revisit Earning Guidance?

by Vanessa Schoenthaler on March 13, 2012

Recently NYU professor and author Baruch Lev penned an article in the Wall Street Journal on the perennial subject of earning guidance, arguing that when done “smartly” guidance can benefit investors, companies and management alike.

Professor Lev is of the school of thought that guidance contributes to better overall market data, reduces uncertainty, share price volatility and litigation risk and that it can increase analyst coverage and management credibility.

However, the trend over the last several years has been that of companies moving away from issuing quarterly earnings guidance, many instead offering annualized guidance or non-financial guidance of a general nature, and still others electing to suspend or all together discontinue guidance.

On the other side of the debate, those critical of the practice of issuing earnings guidance argue that preparation and delivery of guidance is a drain on management’s time and a company’s resources, that guidance encourages short-termism and that it distorts incentives.

But in his article Professor Lev dismisses many of these criticisms, and offers up a few tips on the “right … ways to do guidance,” including to: “guide when you are a better prognosticator than analysts … if most of your industry peers release guidance regularly … when uncertainty about your company’s prospects are high … [and] when forthcoming earnings will disappoint … .” Professor Lev also argues that guidance “should be part of a wider strategy of regularly disclosing fundamental information about [your] company and its business model … .”

Whether or not to provide guidance and, if you do, the type of guidance to provide, is a company specific choice, one that should be made by management together with the audit committee, and in some cases the entire board of directors. But let’s assume for a moment that you’re in agreement with Professor Lev and that your company has decided to provide guidance, what then should you consider when developing (or revisiting and updating) your guidance policy?

What Kind of Guidance Will You Provide?

One of the first things to address is what kind of guidance to provide. There are any number of metrics for you to choose from, both quantitative and qualitative. For example, many companies provide guidance on factors like revenues, net income, margins and of course earnings per share, as well as on non-GAAP measures* like adjusted net income, adjusted EBIT or EBITA and adjusted earnings per share.

The myriad of possibilities notwithstanding, you should only provide guidance in metrics that you feel you can accurately forecast. Additionally, once you’ve selected an appropriate set of metrics, you need to consider whether you are best suited to offer guidance in terms of a single number (e.g., “we expect earnings of $9.30 a share on sales of $37 billion”), in a range of numbers (e.g., “we expect net income to be between $144 million and $150 million”) or as a percentage (e.g., “we expect our adjusted EBIT margin to increase to around 13% and adjusted earnings per share by about 10%”).

Guidance can also come in the form of non-financial metrics, such as guidance about market conditions, trends in your industry or your long-term vision and strategy. Non-financial guidance can take just about any form you can think of (e.g., “we plan to open approximately 100 new stores” or “we anticipate market conditions to remain challenging due to the economic environment”) and can be useful in adding context to a forecast.

How Often Will You Provide Guidance?

Closely related to the matter of form is the question of how often to provide guidance, with most companies doing so on an annual or  quarterly basis, and occasionally on a selective basis in between periods. The appropriate interval is again a company specific choice. It depends in part on internal considerations, like the resources that you’re willing to devote to the preparation of guidance and the interval at which you feel you can accurately forecast in the metrics you’ve chosen, and to a certain extent on external considerations, like the norms in your industry.

For example, if you’re a regulated utility you can likely forecast earning per share on a quarterly basis with less effort and more accuracy than say an airline carrier or a bank holding company can. In addition, if a majority of companies in the utility industry, or even just a majority of your peers, provide quarterly earnings per share guidance you should factor that into your own analysis of whether to provide similar guidance.

How Will You Present Your Guidance?

Whenever you present guidance it must be delivered in a manner that is compliant with both the requirements of the federal securities laws, the anti-fraud provisions and Regulation FD in particular, and the disclosure and reporting requirements of the exchange on which your securities are listed. Accordingly, most companies that provide guidance do so as part of their annual or quarterly earnings calls, with many still making guidance a part of their earnings release (as was required of NYSE listed companies prior to May 2009).

Still you can provide guidance at just about any other time, but doing so at odd intervals or in between periods requires a bit of careful planning. Let’s say, for example, that you decide to provide additional guidance in between your regularly scheduled quarterly earnings calls. Best practices for written guidance might include the issuance of a press release or a written statement coupled with a Form 8-K filing. Similarly, best practices for oral guidance might include the prior issuance of a press release or a written statement coupled a Form 8-K filing, which either sets forth the guidance to be presented orally or announces your intention to provide oral guidance by a means readily accessible to the general public, such as on a conference call or in a webcast. What’s more, whenever presenting oral guidance you have to be mindful that you only address forward-looking information. Any discussion of or updates regarding material non-public information from a previously completed fiscal period will trigger additional disclosure requirements under Item 2.02 of Form 8-K.

In addition, regardless of how you choose to present your guidance, it should always be preceded by an appropriately fashioned cautionary statement on forward-looking information, one that is up-to-date and addresses material risks specifically related to the guidance. Any presentation should also set forth the key assumptions on which your guidance is based and note that actual results may differ from projections.

What’s In Your Guidance Policy?

In the end, you should put it all together in a written guidance policy, whether a stand alone policy or as part of your overall disclosure policies. Your guidance policy should at least sets forth when and how you will provide guidance and whether you will update previously issued guidance. Your guidance policy should also be amended any time your practices change and everyone responsible for providing guidance should be familiar with its terms.

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*Remember that if you provide guidance in a non-GAAP financial measure you also have to comply with the requirements of Regulation G.

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Should There Be Uniform Disclosure Requirements Regarding Political Contributions?

by Vanessa Schoenthaler on February 27, 2012

Two years ago, in its landmark Citizens United v. FEC decision, the U.S. Supreme Court ruled that government imposed restrictions on corporate political speech–prohibiting corporations and other associations from using treasury funds to make independent political expenditures–were a violation of the First Amendment.

Following Citizens United there was a tremendous uptick in election spending and a great deal of debate around what kind of disclosure corporations should make about political expenditures.

In April 2010 Congressman Chris Van Hollen introduced the DISCLOSE Act in the House of Representatives. It was later introduced in the Senate in July 2010.  The DISCLOSE Act sought to amend the Federal Election Campaign Act of 1971 to require, among other things, that corporations, unions and other associations make certain disclosures regarding political expenditures. The bill passed in the House, but not in the Senate.

Earlier this month Congressman Van Hollen again introduced legislation to amend the Federal Election Campaign Act to require additional disclosure regarding political expenditures, though the text of this latest bill is not yet available.

Taking a different route, in August 2011, the Committee on Disclosure of Corporate Political Spending (the “Committee on Disclosure”), a group made up of ten prominent securities law professors, petitioned the Securities and Exchange Commission to develop uniform disclosure rules for corporate political spending. That petition remains pending.

This past Friday Commissioner Aguilar, in his remarks before PLI’s SEC Speaks in 2012 program, also called for the Commission to enact uniform disclosure rules related to corporate political spending, noting the large number of comment letters received in support of the Committee on Disclosure’s petition for rulemaking (64,790 in total as of this writing; 42,439 of which the Commission has characterized as a variant on the form of Letter A and 22,118 as a variant on the form of Letter B).

However, according to Reuters, at the same PLI program Chairman Shapiro told reporters that while the Commission will address the rule-making petitions that it receives “at some point” shareholders already have a means of requiring more disclosure. “Companies that receive a shareholder proposal asking them for disclosure about political contributions have been required to put those shareholder proposals in the proxy, so there is a mechanism for shareholders to directly represent to the companies they own to have that issue put forward for a shareholder vote.”

In his remarks Commissioner Aguilar noted that, according to the Committee on Disclosure’s rulemaking petition, out of a total of 465 shareholder proposals that made it into company proxy statements in 2011, 50 addressed disclosure of political expenditures (10.7% of all proposals). A quick search on the outcome of those proposal shows that at least 10 (of the 10 I looked at) failed to garner a sufficient vote to pass.

The success rate of shareholder proposals notwithstanding, there are a number of companies that are making voluntary disclosures about direct and, to a lesser extent, indirect political expenditures on their websites (e.g., Time Warner Inc. and Merck & Co Inc.).

In October 2011, the Center for Political Accountability released an index of corporate political accountability and disclosure policies in S&P 100 companies. The index will be updated annually and expanded to include S&P 500 companies in 2012.

While it doesn’t appear that uniform disclosure rules regarding corporate political expenditures will be a priority, unless Congress suddenly decides to allocate enough funds for the Commission to get through its Dodd-Frank rulemaking and still have something left, the number of companies making voluntary disclosures, at least in the S&P 100, is encouraging. Though the disclosure is sometimes difficult to find and certainly not uniform.

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SEC’s New C&DI: How to Describe A Say on Pay Proposal on Your Proxy Card

by Vanessa Schoenthaler on February 13, 2012

The Division of Corporation Finance issued new a Compliance and Disclosure Interpretation (C&DI) today (Exchange Act Rule Question 169.07), addressing how shareholder advisory votes on executive compensation should be presented on proxy cards and voting instruction forms:

Question: On its proxy card and voting instruction form, how should a company describe the advisory vote to approve executive compensation that is required by Exchange Act Rule 14a-21?

Answer: The following are examples of advisory vote descriptions that would be consistent with Rule 14a-21’s requirement for shareholders to be given an advisory vote to approve the compensation paid to a company’s named executive officers, as disclosed pursuant to Item 402 of Regulation S-K.

  • To approve the company’s executive compensation
  • Advisory approval of the company’s executive compensation
  • Advisory resolution to approve executive compensation
  • Advisory vote to approve named executive officer compensation

The following is an example of an advisory vote description that would not be consistent with Rule 14a-21 because it is not clear from the description as to what shareholders are being asked to vote on. Shareholders could interpret this example as asking them to vote on whether or not the company should hold an advisory vote on executive compensation, rather than asking shareholders to actually approve, on an advisory basis, the compensation paid to the company’s named executive officers.

  • To hold an advisory vote on executive compensation

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The SEC Issues Disclosure Guidance on European Sovereign Debt Exposure

by Vanessa Schoenthaler on January 9, 2012

On Friday the Division of Corporation Finance issued informal disclosure guidance related to financial institutions with direct and indirect exposure to European sovereign debt.

Intending to encourage greater clarity and comparability within and across filings, the guidance makes note of disclosures that the staff found to be inconsistent and of the type of comments issued in response, such as requests that for each country of concern an issuer provide:

  • disclosure of gross sovereign, financial institution and non-financial corporation exposure, separately by county;
  • quantified disclosure explaining how gross exposures are hedged; and
  • disclosure of the circumstances under which losses may not be covered by purchased credit protection.

The guidance also addresses some of the disclosure requirements that may trigger the need to discuss sovereign debt exposure, such as in risk factor and market risk disclosures and in MD&A disclosures regarding known trends, demands or uncertainties that may affect liquidity or results of operations. It also refers to further guidance available in Industry Guide 3, regarding bank holding company disclosure requirements.

In determining which countries the guidance applies to — a determination which is expected to change over time —  issuers are advised to focus on those countries that are “experiencing significant economic, fiscal and/or political strains such that the likelihood of default would be higher than would be anticipated when such factors do not exist” and to disclose the basis of their determination.

The guidance also advises that disclosure “be provided separately by country, segregated between sovereign and non-sovereign exposures, and by financial statement category, to arrive at gross funded exposure, as appropriate.” And, that issuers should “consider separately providing disclosure of the gross unfunded commitments made … [and] provide information regarding hedges in order to present an amount of net funded exposure.”

Finally, the guidance outlines a number of considerations (reproduced below in their entirety) that an issuer should take into account when determining what disclosure is relevant and appropriate.

I. Gross Funded Exposure

a. Countries

i. The basis for the countries selected for disclosure.

ii. The basis for determining the domicile of the exposure.

b. Type of Counterparty

i. Separate categories of exposure to sovereign and non-sovereign counterparties.

1. Sovereign exposures consist of financial instruments entered into with sovereign and local governments.

2. Non-sovereign exposures comprise exposure to corporations and financial institutions. To the extent material, separate disclosure may be required between financial and non-financial institutions.

c. Categories of Financial Instruments

i. Categories to be considered for disclosure include loans and leases, held-to-maturity securities, available-for-sale securities, trading securities, derivatives, and other financial exposures to arrive at a gross funded exposure.

1. For loans and leases, the gross amount prior to the deduction of the impairment provision and the net amount after impairment provision.

2. For held-to-maturity securities, the amortized cost basis and the fair value.

3. For available-for-sale securities, the fair value, and if material, the amortized cost basis.

4. For trading securities, the fair value.

5. For derivative assets, the fair value, except that amount could be offset by the amount of cash collateral applied if separate footnote disclosure quantifying the amount of the offset is provided.

6. For credit default contracts sold, the fair value and notional value of protection sold, along with a description of the events that would trigger payout under the contracts.

7. For other financial exposures, to the extent carried at fair value, the fair value. To the extent carried at amortized cost, the gross amount prior to the deduction of impairment and the net amount after impairment.

II. Unfunded Exposure

a. The amount of unfunded commitments by type of counterparty and by country.

b. The key terms and any potential limitations of the counterparty being able to draw down on the facilities.

III. Total Gross Exposure (Funded and Unfunded)

a. The effect of gross funded exposure and total unfunded exposure should be subtotaled to arrive at total gross exposure as of the balance sheet date, separated between type of counterparty and by country.

b. Appropriate footnote disclosure may be provided highlighting additional key details, such as maturity information for the exposures.

IV. Effects of Credit Default Protection to Arrive at Net Exposure

a. The effects of credit default protection purchased separately by counterparty and country.

b. The fair value and notional value of the purchased credit protection.

c. The nature of payout or trigger events under the purchased credit protection contracts.

d. The types of counterparties that the credit protection was purchased from and an indication of the counterparty’s credit quality.

e. Whether credit protection purchased has a shorter maturity date than the bonds or other exposure against which the protection was purchased. If so, clarifying disclosure about this fact and the risks presented by the mismatch of maturity.

V. Other Risk Management Disclosures

a. How management is monitoring and/or mitigating exposures to the selected countries, including any stress testing performed.

b. How management is monitoring and/or mitigating the effects of indirect exposure in the analysis of risk. Disclosure should explain how the registrant identifies their indirect exposures, examples of the identified indirect exposures, along with the level of the indirect exposures.

c. Current developments (rating downgrades, financial relief plans for impacted countries, widening credit spreads, etc) of the identified countries, and how those developments, or changes to them, could impact the registrant’s financial condition, results of operations, liquidity or capital resources.

VI. Post-Reporting Date Events

a. Significant developments since the reporting date and the effects of those events on the reported amounts.

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Recent Commission Comments on Business Activities in Certain Countries Designated As State Sponsors of Terrorism

by Vanessa Schoenthaler on December 12, 2011

SEC Comment LettersThe Financial Times ran a piece yesterday noting the the Securities and Exchange Commission’s Division of Corporation Finance has been increasingly focusing on disclosure regarding business activities in and with Cuba, Iran, North Korea, Sudan, Syria and other countries designated by the U.S. as state sponsors of terrorism.

Below are some of the recurring comments that the Commission has been issuing*:

  • Please describe your current, past and anticipated operations in and contacts with [Cuba, Iran, North Korea, Sudan and Syria], if any, including through subsidiaries, affiliates and other direct and indirect arrangements. Include a discussion of direct and indirect contacts with the governments of these countries and entities controlled by them.
  • Discuss the materiality to you of the operations and contacts described in your response to the foregoing comment, in light of the related countries’ status as state sponsors of terrorism. Please also discuss whether the operations or contacts constitute a material investment risk to your security holders.
  • Your materiality analysis should address materiality in quantitative terms, including the approximate dollar amount of revenues, assets and liabilities associated with [Cuba, Iran, North Korea, Sudan and Syria], individually and in the aggregate. Please also address materiality in terms of qualitative factors that a reasonable investor would deem important in making an investment decision, including the potential impact of corporate activities upon your reputation and share value.
  • Your qualitative materiality analysis also should address whether, and the extent to which, the governments of [Cuba, Iran, North Korea, Sudan and Syria], or entities controlled by them, receive cash or act as intermediaries in connection with your operations or other direct or indirect contacts with those countries.
  • Please also address the impact of your regulatory compliance programs which cover operations and contacts associated with these countries, and any internal risk assessment undertaken in connection with business in these countries.
  • Please address the applicability to your Iran-related activities, including any direct or indirect payments to the Iranian government, of Section 5(b) of the Iran Sanction Act of 1996, as modified by the Iran Freedom Support Act on September 30, 2006.

The FT also notes that the Commission is considering requiring companies to disclose any dealings with countries designated as state sponsors of terrorism, not just those that are material.
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* Remember, comment letters are released no earlier than 20 business days after the Commission has completed its review.

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Drafting Better Risk Factor Disclosure

by Vanessa Schoenthaler on December 4, 2011

Risk factors are an important part of a company’s disclosure documents. They caution potential and existing investors about specific, material risks that should be considered when making an investment decision.

Well-drafted, unambiguous risk factors can also serve as a safeguard against liability for inaccurate forward-looking statements under the twin safe-harbors of Sections 27A of the Securities Act and 21E of the Exchange Act, as well as the judicially derived “bespeaks caution” doctrine.

But quite often risk factors are bemoaned, by investors and regulators alike, as little more than mundane, boilerplate prose.

Accordingly, and in light of the perennial debate over how much of what kind of disclosure we really need, let’s take a look at what makes for an effective risk factor.

Basic Requirements as to Form and Substance

Item 503 of Regulation S-K addresses the basic form and substance of risk factor disclosure. It requires that you discuss, in plain English, the most significant factors that make an investment in your company or a particular securities offering speculative or risky. The factors should:

  • be concise and organized logically, with each limited to one or two short paragraphs set forth under a subheading that clearly describes the risk being addressed;
  • be limited to one risk per subheading;
  • plainly and directly describe the extent of each risk and how it specifically might affect an investment in your company or securities offering;
  • avoid generic (i.e., boilerplate) risks that could apply to any company or securities offering; and
  • avoid mitigating or offsetting language intended to explain away or lessen risks.

Item 503 also offers up a few examples of typical factors that may make an investment in a company or securities offering speculative or risky, including: lack of an operating history, lack of profitable operations in recent periods, a company’s financial position, business or proposed business, or lack of a market for a company’s equity securities.

The Plain English Rules

Beyond the basics of form and substance, Rule 421 of Regulation C requires that your risk factor disclosure be written in plain English, which entails, among other things, the use of:

  • short sentences;
  • definite, concrete, everyday language;
  • personal pronouns that speak directly to your audience;
  • an active voice with strong verbs;
  • tabular presentations and bullet lists for complex material, whenever possible; and
  • pictures, logos, charts, graphs or other design elements, provided their design is not misleading and any information required to be disclosed is clear.

In contrast, when drafting plain English disclosure you should avoid the use of:

  • legal jargon, highly technical business terminology and overly complex presentations that make the substance of your disclosures difficult to understand;
  • multiple negatives;
  • superfluous verbiage;
  • vague boilerplate explanations that are imprecise and subject to multiple interpretations;
  • complex information copied directly from legal documents without a clear or concise explanation of the provisions; and
  • repetitive disclosure that does not enhance the quality of the information presented.

Three Broad Categories of Risk

In a 1999 update to Staff Legal Bulletin No. 7A,addressing plain English disclosure, the Commission identified three broad categories that risk factors should address:

Industry Specific Risks

Industry specific risks are risks that you face by virtue of the industry in which you operate. For example, companies in the transportation industry may face significant risks related to pending climate change legislation because they depend on products that emit greenhouse gases.

Company Specific Risks

Company specific risks are risks that are particular to your company. For example, companies like Amazon.com and eBay may face significant risks related to incidents of cyber attacks, which could result in significant data breaches and have a material adverse effect on their operations and revenues. Whereas companies like Target and Walmart may not face similarly significant risks because of their large brick and mortar retail presence.

Investment Specific Risks

Investment specific risks are risks that are specifically tied to an investment in a security. For example, following an initial public offering, whether for Skullcandy or LinkedIn, there’s always the risk that an active trading market may not develop for a company’s securities, or, if one does develop, that it may not be sustained.

For a relatively more interesting sampling of investment specific risk factors, check out the “Risks Related to the Securities Markets and Ownership of Our Class A Common Stock” in Groupon’s recent IPO prospectus.

Drafting Better Risk Factors

Now that you have the basics of form, substance and plain English down, how do you improve your own risk factor disclosure?

One of the simplest things you can do, perhaps as part of your quarterly risk factor review (or annual review if you’re a smaller reporting company), is to assess your existing disclosures against each of the foregoing principles. Is each factor tied to a specific industry, company or investment risk? Have you adequately explained how the risk might impact your company or securities? Are you using an active voice and everyday, jargon-free language? Would a table or bullet list add clarity to your disclosure?

You should also compare your risk factor disclosure with the disclosure of other companies in your industry, or companies in other industries that are similar in size, geographic reach or some comparable characteristic. If your risk factor disclosure is part of a registration statement, you should compare it to the disclosure of other companies that have undergone or are undergoing similar offerings. Are other companies disclosing risks that might equally apply to you? Are theses risks significant enough that you should consider disclosing them as well?

Finally, you should consider whether any of your existing risk factors should be eliminated because they are either no longer relevant or the risks described are no longer significant.

Additional Resources

If you’re looking for even more guidance on plain English and drafting risk factor disclosure you can find it in the plain English rule’s adopting release, the Commission’s ever useful Plain English Handbook and Updated Staff Legal Bulletin No. 7A.

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Recent Commission Comments on the Tax Implications of Overseas Earnings and Offshore Cash Holdings

by Vanessa Schoenthaler on September 21, 2011

SEC Comment LettersThe Financial Times ran a piece on Monday noting the the Securities and Exchange Commission’s Division of Corporation Finance has been increasingly focusing on disclosure regarding the tax implications of overseas earnings and offshore cash holdings in accounting and regulatory reviews of company filings.

Below are some of the recurring comments that the Commission has been issuing*:

  1. Please disclose the amount of cash, cash equivalents and investments held outside the U.S. Please also describe any potential income tax consequences or other limitations that may impact your ability to repatriate cash, cash equivalents and investments held outside of the U.S.
  2. Please tell us what consideration you gave to providing a discussion of the need to repatriate undistributed earnings of foreign subsidiaries and the associated potential tax impact.
  3. Please tell us how you considered providing disclosures that explain how having earnings in countries where you have different statutory tax rates impacts your effective income tax rates and obligations. In this regard, you should consider explaining the relationship between the foreign and domestic effective tax rates in greater detail as it appears as though separately discussing the foreign effective income tax rates may be important information necessary to understanding your results of operations. To the extent that certain countries have had a more significant impact on your effective tax rate, then tell us how you considered disclosing this information and including a discussion regarding how potential changes in such countries’ operations may impact your results of operations.

Most of the above also refer back to Item 303(a)(1) of Regulation S-K, addressing liquidity in MD&A disclosure, and Sections III.B and IV of Interpretive Release 33-8350, addressing the Commission’s guidance on MD&A content and focus, and on liquidity and capital resources disclosure. Both of which you may want to revisit as we approach the quarter’s end.

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*Remember, comment letters are released no earlier than 20 business days after the Commission has completed its review.

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