Securities

Nobody likes a late filer, especially not if the filing is a quarterly report and the reason its late is because of an accounting issue.

A recent academic study, out of the University of Southern California and New York University, examines the Capital Market Consequences of Filing Late 10-Qs and 10-Ks and finds, as you might have guessed, that capital markets react negatively when a company files a late quarterly or annual report. In addition, and perhaps less intuitively, the study finds that capital markets react more negatively in response to the filing of late quarterly reports than to the filing of late annual reports, and even more so when accounting issues are cited as the reason for the delay. The authors postulate that this is because quarterly reports require less disclosure and are unaudited, and so markets perceive accounting issues associated with the filing of late quarterly reports as more significant than accounting issues associated with the filing of late annual reports.

The study uses change in share price to measure market reaction and observes late filers for a period of eight months following their notice of late filing. In the short term, companies experience an immediate negative reaction when they announce a late filing and a significantly more negative reaction if they miss the Securities Exchange Act Rule 12b-25 filing grace period. Interestingly, companies continue to experience share price declines for several months following a late filing, except when accounting issues are the reason for the delay, because, the authors suggest, investors are better able to interpret and immediately react to accounting-related information.

Beyond the capital market consequences of a late filing, there are a host of other issues to consider:

Filing Deadlines

By way of review, a public company is required to file its quarterly and annual reports with the Securities and Exchange Commission within a certain number of days following a fiscal period’s end:

Note: these deadlines only apply to domestic companies, foreign private issuers are subject to a different set of filing requirements. For example, they currently have to file annual reports (on a Form 20-F) within 6 months following a fiscal year’s end. However, beginning with fiscal years ending on or after December 11, 2011, this deadline will be pushed up to within 4 months following a fiscal year’s end. Foreign private issuers also have an obligation to file current reports (on a Form 6-K) “promptly” after certain information is made public in accordance with the laws of their own jurisdictions.

Securities Law Consequences of a Late Filing

Exchange Act Rule 12b-25 provides that if a company cannot timely file all, or any portion, of a quarterly or annual report then within one business day after the report’s due date the company must file a Notification of Late Filing (on a Form 12b-25) stating the reason why.^*

Rule 12b-25 also provides that if the report could not have been filed by its due date without unreasonable effort or expense, then it may still be deemed to have been timely filed if the company:

• timely files its Notification of Late filing; and

• files the late report within the applicable grace period (no later than 5 calendar days in the case of a quarterly report, and no later than 15 calendar days in the case of an annual report, regardless of the company’s filer status).

This is an important detail because if a company has not timely filed all of its Exchange Act filings (with the exception of certain filings required to be made on a Form 8-K) it will lose the ability to file a short form registration statement on Form S-3 (or Form F-3 in the case of a foreign private issuer) for at least a period of 12 months. This will in turn limit the company’s ability to conduct certain types of registered securities offerings.

In addition, until the late report is filed the company will also lose its ability to file a Form S-8 registration statement and its Rule 144 eligibility. Form S-8 is a short form registration statement used for offering securities under an employee benefit plan, and Rule 144 covers unregistered public resales of restricted and control securities. These are temporary consequences, however, because neither Form S-8 nor Rule 144 require that a company’s reports be timely filed, only that they are filed.

As for any currently effective registration statement, a company’s ability continue to rely on that registration statement prior to filing a late report will depend on whether the prospectus and anti-fraud provision of the Securities Act are satisfied, the late filing notwithstanding.

Securities Exchange Consequences of a Late Filing

Where a company’s securities are listed or quoted will also effect what happens when a filing is late.

In the case of a NYSE-listed company, the NYSE Listed Company Manual (Section 802.01E) sets forth a series of procedures that are triggered if a company files a late annual report.

In the case of an AMEX or Nasdaq-listed company, both the AMEX Company Guide (in Section 1101) and Nasdaq Stock Market Rules (in Rule 5250(c)(1)) require that a company file with the exchange copies of reports filed with the Commission on or before their filing deadline. Late filings will result in a company’s receipt of a notice of failure to meet the exchange’s continued listing requirements, which must be disclosed on a Form 8-K, and will require a company to submit a plan for regaining compliance with those requirements. In each case, if a company fails to regain compliance with the exchange’s continued listing requirements, its securities may be suspended from trading or delisted.

In the case of a company with securities quoted in an over the counter market, like the OTC Bulletin Board, there are no listing requirements. However broker-dealers participating in the OTC Bulletin Board markets are members, and governed by the rules, of the Financial Industry Regulatory Authority (FINRA).  FINRA Rule 6530(e) prohibits members from quoting the securities of a company that has failed to timely file a required report three times in any 2-year period, or that has had its securities removed from the OTC Bulletin Board quotation service twice in a 2-year period for failing to file a required report within 30 days of the filing deadline. Once a company’s securities are prohibited from being quoted on the OTC Bulletin Board the company must timely file all required reports for a period of one year before it can regain eligibility.

Other Consequences of a Late Filing

Late filings occur for all kinds of reasons and under certain circumstances may simply be unavoidable. In addition to these general capital market, securities law and securities exchange consequences, late filers also need to be aware of and consider company-specific consequences, such as whether a late filing will trigger an event of default or violate any other contractual covenants.

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^* In gathering and investigating data for their Capital Market’s study, the authors communicated with Wayne Carnall, Chief Accountant of  the Commission’s Division of Corporation Finance, regarding discrepancies in the number of reported late filings that appeared in different data sources.  The authors noted that Mr. Carnall “suggested that it is very rare for late filers not to file [a Form 12b-25], and that he would be very interested in knowing of any … ” non-filers they were able to identify.

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