Mandatory and Voluntary Disclosure

Many of an issuer’s disclosures are mandatory. The 1933 and 1934 Acts, as well as SEC and stock exchange rules, all require a variety of periodic reports and other filings. In addition, issuers make voluntary disclosures—sharing news or facts with the market as part of a financial public relations strategy. Issuers make these mandatory and voluntary disclosures while adhering to SEC ground rules. These key rules include Regulation G (GAAP) and Item 10(e) of Regulation S-K for disclosure of non-GAAP financial measures, Regulation FD (Fair Disclosure) for many other voluntary statements and Regulation M-A (Mergers and Acquisitions) for transactional disclosure.

Public companies are not generally required to publicly disclose all material information at all times. But there are so many “triggers” of mandatory disclosure that it can seem like it! Mandatory disclosures include:

• In any 1933 Act registration statement, beginning with an IPO prospectus on Form S-1 and later in a Form S-3 or other forms;
• In every 1934 Act annual or quarterly report (Form 10-K or 10-Q);
• For every event for which a Form 8-K (the 1934 Act “current” report) requires disclosure;
• Any time a company is in the marketplace to buy or sell its stock (referred to as the “disclose or abstain” rule);
• When the company needs to confirm or correct a rumor that began with information leaked from the company, causing unusual trading activity likely to impact the marketplace;
• When required by stock exchange requirements (Chapters 9 and 10 describe how the NYSE and Nasdaq call on companies to promptly release material information and dispel unfounded rumors); and
• To update prior statements that the market considers current or “evergreen,” but which the passage of time has rendered inaccurate or incomplete.

Virtually all other communications, both formal and informal, by a public company are voluntary—such as earnings calls, attending analyst conferences, posting information on a company website or social media account, and discussions with analysts, investors or the press.

Three key SEC regulations guide all voluntary disclosure:

• Regulation G, Item 10(e) of Regulation S-K and SEC Compliance and Disclosure Interpretations (referred to as SEC interpretations or C&DIs) cover the disclosure of non-GAAP financial measures;
• Regulation FD covers the intentional or inadvertent disclosure of nonpublic information; and
• Regulation M-A requires target companies and acquirers in mergers and acquisitions to file all their written communications on the date of first use.

“Mind the GAAP”—Presenting Non-GAAP Information

Non-GAAP financial measures are voluntary disclosures made by companies to provide investors and analysts with a better understanding of their business. A study by Audit Analytics determined that over 97% of S&P 500 companies use at least one non-GAAP metric in their financial statements. With Regulation G, Item 10(e) of Regulation S-K and its interpretive releases, the SEC has set bounds around the use and presentation of non-GAAP measures. By non-GAAP financial measures, the SEC means any numerical measure of historical or future performance, financial position or cash flow that a company creates by adjusting a comparable GAAP measure, generally by eliminating or including specific metrics.

Companies frequently use non-GAAP financial measures such as adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), adjusted free cash flow, net debt and other similar measures. Where business or operational performance metrics— often known as key performance indicators or KPIs—are calculated on a non-GAAP basis, they are considered non-GAAP metrics for purposes of Regulation G and Item 10(e) of Regulation S-K. However, metrics that are based on operating and statistical data alone, such as same-store sales or the number of employees, will not be considered non-GAAP measures. Similarly, ratios calculated using only GAAP financial measures are not included in the definition of non-GAAP measures.

Non-GAAP financial measures have in recent years been the most frequent subject of SEC comment letters, as well as a frequent area for SEC enforcement actions. While non-GAAP measures can provide valuable information, the SEC has sought—through C&DIs, comment letters and enforcement actions—to establish guardrails to limit the risk that these measures could mislead investors.

Practical Tip: Key Performance Indicators and Other Metrics as Part of MD&A Disclosure

In interpretive guidance, the SEC has noted that issuers may need to disclose certain financial and operating metrics—such as KPIs—that management uses to manage the business. These KPIs can be material information as part of their management’s discussion and analysis (MD&A) in periodic reports. When presenting these metrics, issuers will want to carefully consider these four disclosure guidelines even if the KPI is not a non-GAAP measure:

• Provide a clear definition of the metric and how it is calculated;
• Include a statement indicating why the metric is useful to investors and how management uses the metric in managing the business;
• Consider whether any estimates or assumptions underlying the metric need to be disclosed in order for the metric not to be misleading; and
• Consider whether any differences in presentation or calculation from previous years need to be explained or whether prior metrics need to be recast, given the differences.

Public Disclosures

All public releases of material information that contain a non-GAAP financial measure—whether in writing; orally; telephonically; on blogs, social media or websites; or in a webcast—must comply with Regulation G and related C&DIs and rules, which require a company to:

• Reconcile to GAAP. In any release of non-GAAP financial information, companies must present the most directly comparable GAAP information and a reconciliation of the non-GAAP information to the GAAP information.
• Comply with Regulation S-K Requirements for “Filed” Information. In any disclosure of non-GAAP financial information that is filed (as opposed to furnished) with the SEC or earnings release furnished with a Form 8-K, companies must comply with the stricter Regulation S-K requirements under Item 10(e) outlined below.

SEC-Filed Documents

Item 10(e) of Regulation S-K, like Regulation G, requires that companies reconcile the differences between non-GAAP financial measures and the most directly comparable GAAP financial measures in any filings with the SEC. Item 10(e) of Regulation S-K, which applies only to SEC-filed documents, also requires:

• Prominence. Companies must present the comparable GAAP financial measure with prominence that is equal to or greater than that given to the non-GAAP financial measure. (For example, headers of earnings releases that contain a non-GAAP number should also contain the comparable GAAP number.)
• Explanation. Management must disclose the reasons it believes the non-GAAP financial measure is useful and, to the extent material, any additional purposes for its use of the non-GAAP financial measure.

And Item 10(e) of Regulation S-K prohibits:

• Other Than EBIT or EBITDA, Liquidity Measures Excluding Charges or Liabilities Requiring Cash Settlement. Companies may use EBITDA and earnings before interest and taxes (EBIT) but should not otherwise present liquidity measures that exclude charges or liabilities requiring settlement of these amounts in cash.
• Smoothing. Companies should not adjust non-GAAP performance measures to smooth or eliminate items identified as nonrecurring, infrequent or unusual where those items are reasonably likely to recur within two years or where a similar charge or gain has occurred in the previous two years. Adjustments can be made for items within the two-year window, so long as the company does not describe them as nonrecurring, infrequent or unusual.
• Non-GAAP Financial Statements on Face. Companies should not present non-GAAP financial measures on the face of financial statements, notes to financial statements or pro forma financial statements.
• Confusingly Similar Titles. Companies should use titles or descriptions for non-GAAP financial measures that are clearly different from titles or descriptions used for GAAP financial measures.
   

Regulation FD’s Mandate: Share and Share Alike

Senior executives strive to maintain a dialogue with professional analysts, the financial press and major shareholders to help market professionals follow their company’s stock and to provide shareholders with access to management. Reports that equity analysts write and distribute to their customers in turn encourage investor interest. Yet private discussions with analysts and major investors can create an imbalance of information, and absent Regulation FD, detailed private discussions could provide institutional investors and professional analysts more in-depth information than other investors receive. Regulation FD is the SEC’s effort to create a level playing field.

Regulation FD promotes fair play by requiring issuers to widely share information that would otherwise be disclosed selectively to a mere handful of market professionals. Specifically, Regulation FD requires a company to inform the public when the company, or a person acting on its behalf, voluntarily discloses material nonpublic information to securities market professionals or to security holders when it is reasonably foreseeable that the holders will trade on the basis of that information.

The timing of the company’s required public disclosure depends on whether its voluntary selective disclosure was intentional or unintentional.

• If intentional, the company must make public disclosure of material information simultaneously with any selective disclosure. In practice, companies usually publicly distribute material information prior to disclosing it to a limited audience.
• If unintentional, the company must make public disclosure promptly after the inadvertent disclosure of material information. Promptly means by the later of:
  • 24 hours after the unintentional disclosure; or
  • If the next trading day does not begin for more than 24 hours, prior to the beginning of the next trading day.

The SEC’s 24-hour clock begins at the moment a senior official of a company learns of the unintentional disclosure and recognizes the disclosed information to be both material and nonpublic.
 

“Curing” Unintentional Disclosures

Unintentional disclosures will happen. When they occur, the company should promptly distribute the disclosed material non-public information through a press release or appropriate website or social media disclosure. The company may also wish to include the curative press release on Form 8-K, which includes a Regulation FD item, Item 7.01, designed to “furnish” rather than “file” the information. Issuers can use Item 7.01 as a “super-press release” to ensure broad dissemination of the relevant information.

Practical Tip: “Follow the Script” at Conferences

Unscripted questions during an analyst or industry conference regarding the company’s performance could lead to the release of material nonpublic information. To avoid inadvertent disclosures, follow a script for the presentation, anticipating any questions that could come up, and:

• Prior to presenting at an analyst or industry conference, disclose in a press release or Form 8-K the material nonpublic information that you would like to be free to discuss.
• Arrange for (and pre-announce) a webcast of the company’s presentation.
• Have your IRO or CFO listen for and help your CEO decline to answer “unscripted” questions that may require disclosure of material nonpublic information.

What Is Material? Is It Just “Market Moving”?

Regulation FD applies only to the disclosure of material non-public information. Although Regulation FD does not itself define what constitutes material information, the U.S. Supreme Court and the SEC provide guidance. Information is material to an investor making an investment decision if there is a “substantial likelihood that a reasonable shareholder would consider the information important in making an investment decision” or if the information “would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” The Supreme Court has rejected any bright-line test for determining materiality. Materiality with respect to contingent events depends on balancing the probability that the event will occur with the magnitude of the expected event in light of the company’s other activities.

Practical Tip: Hot Buttons of Materiality

The SEC has provided a list of seven categories of information that a company should review carefully when determining materiality:

• Earnings information—historical results or future estimates;
• Mergers, acquisitions, tender offers, joint ventures and other similar transactions;
• New products or discoveries, or developments concerning customers or suppliers (such as gaining or losing a contract);
• Changes of control or of senior management;
• A change in auditors;
• Events regarding securities, such as defaults on senior securities, splits, dividend changes or public or private sales of additional securities; and
• Bankruptcy or receivership.

The most sensitive of these is earnings estimates. The SEC, in its discussion of materiality in Staff Accounting Bulletin No. 99—Materiality (SAB 99), put to rest the practice of using certain dollar or percentage thresholds to judge non-materiality. SAB 99 asked:

[M]ay a registrant or the auditor . . . assume the immateriality of items that fall 
below a percentage threshold . . . to determine whether amounts and items are material?

The SEC answered with a resounding “No.” Why? Qualitative factors can cause misstatements of even small amounts to be material.

Practical Tip: Use a “Rule of Thumb” Test? Only with Caution and Just as a Starting Point

In SAB 99, the SEC acknowledges that some issuers and accountants may use a “rule of thumb” test such as 5%. But measures like this should be used only as a starting point. Any percentage threshold can be only a first step toward answering the question:

Is there a substantial likelihood that a reasonable person would consider this to be important?

SAB 99 notes that stock price volatility may be an indicator of materiality. SEC enforcement actions demonstrate that the SEC will assess materiality in hindsight by looking at a company’s stock price and trading volume in the period immediately following a selective disclosure of nonpublic information.

Practical Tip: How to Conduct an Earnings Call That Complies with Regulation FD and Non-GAAP Disclosure Requirements

Quarterly earnings calls are the best example of the voluntary disclosures for which the SEC designed Regulation FD and non-GAAP disclosure requirements. Prior to each earnings call, your company should do the following:

• Issue Notice. Issue a press release or broadly disseminated website or social media notice several days or weeks in advance, notifying the public of the earnings call and webcast. Include the time and date of the call, together with the access information. State that the discussion may also cover any material developments occurring after the date of the notice but before the date of the call.
• Pre-Release Information. Announce earnings results by press release or web disclosure prior to the call and “furnish” (a less formal action than “filing”) the release to the SEC under Item 2.02 of Form 8-K. Form 8-K has a narrow safe harbor exemption that allows an earnings call to proceed promptly after a filed earnings release, without a new Form 8-K filing, even if the call contains material nonpublic information. This safe harbor allows a company to disclose new information about a completed earnings period in an oral, telephonic or webcast communication, typically an earnings call, without having to file a transcript of the call in a new Form 8-K filing. Some companies may combine press releases with social media and web disclosure, issuing advisory releases that point investors to the full earnings results on their websites. If possible, do this either immediately following the market close the day before the call or before the market open the morning of the call.
• Post Data. Post all financial and statistical data provided in the call or presentation on the company’s website before the call. Post any required reconciliations of non-GAAP financial information to GAAP.
• Hold Call Promptly. Conduct your earnings call within 48 hours after the Form 8-K filing. If the call includes new material nonpublic information and occurs more than 48 hours after the related Form 8-K filing, file a new Form 8-K “furnishing” a transcript of the earnings call within four business days after the call.
• Post New News. Following your earnings call, promptly post an audio file or transcript of any newly disclosed material. The SEC encourages companies to provide access to website postings for at least one year. After a brief period, be sure to archive the data with appropriate disclaimers on the investor relations page of your website.

Website and Social Media Disclosure Can Satisfy Regulation FD

Disclosing material information on your company’s website or social media accounts can fulfill the requirements of Regulation FD “public disclosure” if the company’s web or social media presence is prominent enough to constitute broad, nonexclusive distribution to the public. The SEC has offered three tests to determine whether the release of information on a company’s website or social media is public for Regulation FD purposes:

• Recognized Channel for Distribution? Is the company’s website or social media account recognized as a channel for distribution of information to the market? What steps has the company taken, if any, to alert the market to its intent to use its website or social media account to distribute information? Do investors and market professionals know to look to the company’s website or social media posts for this kind of information?
• Broad Dissemination? Does posting information on the website or social media account disseminate the information so as to make it available to the securities marketplace in general? Is the website designed to lead investors to the disclosures? Is the social media profile one that can be followed or accessed by the general public?
• Time to Absorb? Did the posting give investors and the marketplace enough time to absorb and react to the information? The length of time before information may be considered public for Regulation FD purposes depends on the facts and circumstances of the release and the company. These may include the size and market following of the company, the steps taken to alert investors to information on the website and relevant social media accounts, the nature and complexity of the information, and the efforts made by the company to disseminate the information.

Companies should caution employees and directors that posting material information on a personal social media account may violate Regulation FD if the company has not laid the appropriate groundwork to prepare investors. For example, the SEC investigated DraftKings for a post on its CEO’s personal X and LinkedIn accounts, published by an external public relations firm. The post contained material information about DraftKings’ quarterly financial results. The information was quickly removed without any other disclosure from DraftKings for nearly a week. The SEC order stated that the company had not identified the CEO’s personal social media accounts as a channel of communications with investors for new material information and made clear its expectation that if the company makes an unintentional disclosure, the company must promptly disclose the key information to all investors in the time period required under Regulation FD.

Before relying on a company website or social media account to communicate with the marketplace, make sure that these outlets have become recognized channels for distribution. Do this by including a cautionary legend in your Form 10-K or 10-Q filings that describes the company’s intent to disclose material information by website or social media, as well as which social media channels the company intends to use.

Exemptions from Regulation FD

Regulation FD applies only to certain communications. Communications exempt from Regulation FD include:

• Discussions with persons who agree expressly to maintain the information in confidence. For example, a company may bring one or a small number of investors “over the wall” to pre-market a securities offering. In that case, the nondisclosure agreement may be either written or verbal and may be made before or after the disclosure. It must be more than an implicit agreement or a mere belief on the issuer’s part that there is an agreement.
• Ordinary course of business disclosure to customers and suppliers.
• Disclosure made by foreign private issuers. (Chapter 15 discusses the qualifications necessary for a non-U.S. company to qualify as a foreign private issuer.)
• Disclosure to persons who owe a duty of trust or confidence to the company (e.g., lawyers, bankers, financial advisors and accountants).
• Communications—such as a road show—made in connection with most 1933 Act registered offerings. Most, but not all, 1933 Act registrations are exempt from Regulation FD. However, both a shelf offering to employee optionees on Form S-8 and a Form S-3 resale registration statement are fully subject to Regulation FD.

Rating Agencies

Disclosures made to nationally recognized statistical rating organizations (NRSROs), such as Moody’s and Standard & Poor’s, are not subject to Regulation FD. While rating agencies are no longer explicitly exempt from Regulation FD, NRSROs have regulatory obligations that prevent them from using the information to trade or to advise others on trading, and so are not “covered persons.” A cautious issuer may wish to ask a smaller non-NRSRO to sign a nondisclosure agreement prior to sharing confidential information as part of the rating review process.

Liability for Selective Disclosure

To prevent Regulation FD from having a chilling effect on issuers’ communications to the public, the SEC has limited Regulation FD liability:

• Regulation FD is not an antifraud rule—an issuer may be liable only for knowing and reckless conduct (not for good faith mistakes in making materiality judgments); and
• Regulation FD does not create private rights of action. Outside Regulation FD, liabilities imposed under Rule 10b-5 under the 1934 Act for selective disclosure continue unchanged. For example, an issuer’s failure to make a public disclosure might give rise to liability under a duty-to-correct or duty-to-update theory.

While not a separate antifraud rule, Regulation FD compliance is actively monitored by the SEC. The SEC closely follows corporate disclosure and continues to bring enforcement actions in the challenging area of one-on-one discussions of earnings guidance with analysts.

Corporate Disclosure Policy: Forward-Looking Statements and the Safe Harbor

Providing required disclosures under Regulation FD or non-GAAP financial information often relates to future events, creating a level of uncertainty. Thankfully, Section 21E of the 1934 Act, Section 27A of the 1933 Act (both part of the Private Securities Litigation Reform Act of 1995) and Rule 175 under the 1933 Act give companies guidelines for disclosing forward-looking statements to the investing community. Forward-looking statements are projections, plans, objectives, forecasts and other discussions—whether oral or written—of future operations. These guidelines provide a safe harbor defense to securities litigation challenging forward-looking statements that fail to predict the future accurately.

Written Forward-Looking Statements

Sections 21E and 27A incorporate a caselaw concept known as the “bespeaks caution” doctrine, which provides that a reader or listener needs to take any forward-looking statement in context. If the context provides fair warning of future uncertainties, the reader cannot fairly ignore them. To fall within the safe harbor, the forward-looking statements must be accompanied by:

• Meaningful cautionary language that identifies the forward-looking statements; and
• In the case of written statements, the important factors that could cause actual results to differ materially. Boilerplate disclaimers are insufficient for this purpose.

Practical Tip: Sailing into the Safe Harbor by Updating Risk Factors

The risks that companies face can evolve quickly. Risk factors and other cautionary statements from last year’s or last quarter’s Form 10-K or 10-Q (or even from an earlier press release) may be inadequate for the report you are filing today.

When preparing to file a new periodic report or press release:

• Review the report or press release to identify its forward-looking statements;
• Tailor cautionary language to the forward-looking statements and make the warnings conspicuous (do not bury cautionary language in legal jargon);
• Clearly disclose any assumptions underlying each specific forward-looking statement and identify a variety of reasons for possible deviation from projected results;
• Describe the existence of a specific risk and its magnitude; and
• Update the statements to remain current and add any new cautions or risks that your Disclosure Practices Committee, Audit Committee or managers identify.

Oral Forward-Looking Statements

For oral forward-looking statements, meaningful cautionary language must include a declaration that additional information concerning factors that could cause actual results to vary materially is contained in a readily available written document, such as a recent Form 10-K or 10-Q. As with written forward-looking statements, boilerplate disclaimers are insufficient.

Regulation M-A: Merger and Acquisition Communications

A company in the midst of a business combination transaction—such as a stock-for-stock merger, cash merger or tender offer—will need to file with the SEC many communications that relate to the transaction.

Regulation M-A is a series of rules that fashion safe harbors permitting companies to communicate freely about planned business combination transactions (both before and after a registration statement is filed) so long as the company files its written communications with the SEC.

What communications must a company file with the SEC? It must file any written communication made in connection with, or that relates to, a business combination transaction that is provided to the public or to persons not a party to the transaction (e.g., written information about the transaction that is provided to a company’s employees generally).

In contrast, a company does not need to file:

• Factual business information that relates solely to ordinary business matters;
• Internal communications that are provided solely to parties to the transaction; and
• Oral communications (but if a company posts an audio or video clip or slides of a conference call on its website, then it must file a transcript of the recording with the SEC).

Regulation M-A’s filing requirement begins from the first public announcement of the transaction and continues until the transaction closes. During that period, information subject to Regulation M-A must be filed with the SEC on or before the “date of first use.” Each Regulation M-A written communication must include a prominently displayed legend that advises investors to read the relevant registration statement, proxy statement or tender offer statement and that directs investors to the SEC’s website for copies of the relevant documents.

Practical Tip: Interplay Between Regulations M-A, G and S-K

In business combination transactions, financial forecasts are often used by financial advisors and disclosed as part of the M&A disclosure documents to stockholders. The SEC has issued guidance that clarifies that such forecasts do not trigger Regulation G or Item 10(e) of Regulation S-K, and therefore do not need to be reconciled to GAAP, so long as the measures are:

• Used by the financial advisor to render an opinion materially related to the business combination transaction; and
• Disclosed to comply with the requirements of Regulation M-A.

Similarly, where a company provides forecasts to bidders and includes these forecasts in the M&A disclosure documents (for purposes of antifraud concerns and to ensure that other disclosures are not misleading), the forecasts are excluded from the definition of non-GAAP financial measures under Regulation G. However, the SEC guidance states that if the same non-GAAP financial measures are disclosed in a registration statement or proxy statement, Regulation G and Item 10(e) of Regulation S-K will apply.

Practical Tip: Interplay Between Regulations M-A and FD

Regulations M-A and FD have overlapping, but slightly different, timing and disclosure requirements. Regulation M-A requires filing of a written public communication on the “date of first use.” In contrast, Regulation FD requires public disclosure of all material nonpublic communications simultaneously with (and, as a practical matter, prior to) any selective disclosure of the information. When both Regulations M-A and FD apply, use a format that satisfies Regulation M-A, but for timing, comply with Regulation FD by making a prior or simultaneous filing.

Key Takeaway: Adopt a “Best in Class” Disclosure Policy

Most public companies will want to adopt a corporate disclosure policy and investor relations practices that comply with rules and regulations around non-GAAP measures, with Regulations FD and M-A, and that take full advantage of the safe harbor for forward-looking disclosures. A compliant disclosure policy will include some variation of the following elements:

Non-GAAP Measures. When disclosing non-GAAP measures, make sure that the presentation is not misleading and that all non-GAAP measures are reconciled to the most directly comparable GAAP measure.

Spokespersons. Designate procedures for drafting, reviewing, approving and distributing all material communications. This includes specifying which individuals (e.g., the chair, CEO, CFO and IRO) can act as spokespersons for the company to analysts and investors.

Materiality and Need for Disclosure. Have a process for determining, with company counsel as necessary, whether information is material and whether it needs to be disclosed.

Cautionary Language. For all oral and written communications, include a legend cautioning against reliance on forwardlooking statements.

Earnings Calls. Adhere to the procedures suggested earlier in this chapter to conduct earnings calls that comply with non-GAAP financial measures and with Regulation FD.

One-on-One Calls or Meetings.

Timing. Limit the timing of conversations with analysts and/ or investors to the period following an earnings call up until a blackout period.

Subject Matter. Consider preparing a script or responses to anticipated questions. Limit responses in these conversations to elaboration of previously disclosed or generally known information.

Analyst Projections and Previous Earnings Guidance. Do not comment on or confirm previous earnings guidance or individual analyst projections. Addressing the “street” consensus in your guidance is okay, but take care to comply with Regulations FD and G.

Extraordinary Transactions or Unusual Market Activity. Unless required by law, do not respond to questions about potential financings, restructurings, acquisitions, mergers or other transactions or unusual market activity.

Interviews with News Media. Treat communications with the media as if they were subject to Regulation FD.

Merger and Acquisition Transactions. File—with an appropriate legend—all written communications that relate to a business combination transaction before publicly disclosing the information.