SEC, NASDAQ Provide Additional Guidance and Temporary Exceptions as the Effects of COVID-19 Continue to Impact Public Companies

On May 4, 2020, the staff of the Division of Corporation Finance (“Corp Fin”) at the Securities and Exchange Commission (the “SEC”) published four COVID-19-related FAQs.¹ This additional guidance relates to the SEC’s March 25, 2020 COVID-19 Order (the “Order”),² which provided public companies impacted by COVID-19 with a 45-day extension to file certain disclosure reports that would otherwise have been due between March 1 and July 1, 2020. Amidst the market uncertainty caused by the COVID-19 pandemic, Nasdaq has also announced measures to ease access to capital for Nasdaq-listed companies by providing temporary exceptions to shareholder approval requirements for certain offerings, which are described below.

Corp Fin Posts COVID-19-Related FAQs

Corp Fin has published four FAQs, one of which clarifies what a company must do to comply with the requirements of the Order, while the other three FAQs address a company’s continued Form S-3 eligibility in light of a company’s delayed filing in reliance upon the Order. The FAQs are summarized below.

What disclosure is required to take advantage of the extended filing deadline under the Order?

The first FAQ reiterates the requirement for registrants to provide specific disclosures in order to “appropriately rely on the COVID-19 Order”:

• Disclose on a Form 8-K (or Form 6-K): (1) reliance on the Order; (2) reasons why timely filings could not be made; (3) the estimated date by which the filing is expected to be made; and (4) company-specific risk factor(s) explaining the impact, if material, of COVID-19 on the company’s business. 
• If the delay is due to the inability of any person, other than the company, to furnish any required opinion, report or certification, attach as an exhibit a statement signed by such person stating the specific reasons why he or she is unable to do so on or before the original due date of such report.
• In the report, schedule or form filed on a delayed basis, disclose that the company is relying on the Order and state the reasons why the company could not timely file.

May a company that is relying on the Order for a periodic report conduct takedowns using an already-effective registration statement on Form S-3?

A company may continue to conduct takedowns under an effective Form S-3, even if it has relied on the Order to delay the filing of its Form 10-K, as long as it has determined that the prospectus complies with Section 10(a) of the Securities Act of 1933 (the “Securities Act”). Specifically, the FAQ clarifies that reliance on the Order extends the due date for a Form 10-K or other report, so as a technical matter a company may continue to use a prospectus containing information older than the 16-month limit of Section 10(a)(3) of the Securities Act. However, the staff cautions that, in such cases, companies “and their legal advisers will need to determine when it is appropriate to update the prospectus” and reminds companies that they are “responsible for the accuracy and completeness of their disclosure.” In addition, shelf offerings pursuant to Rule 415 require an undertaking to reflect in the prospectus any facts or events arising after the effective date of the registration statement which, “individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement.”

When must a company reassess its S-3 eligibility if relying on the Order to delay filing its Form 10-K?

For a company with an effective Form S-3, filing its Form 10-K serves as a Section 10(a)(3) update to the Form S-3, which then requires that the company reassess its eligibility to use Form S-3. Pursuant to Securities Act Rule 401(b), the form and contents of the registration statement must conform to the applicable rules and forms as in effect on the amendment filing date. If a company properly relies on the Order to extend the due date for the Form 10-K, the company must reassess its eligibility as of the date when it files the delayed Form 10-K, at which point it must meet all the requirements of Form S-3, including the requirement that the company has made all required Exchange Act reports for at least 12 calendar months immediately preceding the Section 10(a)(3) update. If all the conditions of the Order are met, the Form 10-K will be considered timely if it is filed by its extended due date.³

May a company relying on the Order file a new Form S-3 or request acceleration of effectiveness before the extended due date of a required filing?

If a company has not yet filed a required periodic report in proper reliance upon the Order, it may still file a new Form S-3 registration statement and be considered current and timely in its Exchange Act reporting. Staff cautions, however, that “[it] will be unlikely to accelerate the effective date of a Form S-3 until such time as any information required to be included in the Form S-3 is filed.” If the company fails to file the required report by the extended date, it will lose its Form S-3 eligibility. Companies with “compelling and well-documented facts” related to their specific capital raising needs are encouraged to contact the staff to discuss their specific circumstances.

Nasdaq Announces Temporary Relief for Certain Shareholder Requirements

On May 5, 2020, in response to current market conditions related to COVID-19 and in order to streamline issuers’ access to capital, Nasdaq announced that it is providing listed companies with a temporary exception from certain shareholder approval requirements under Nasdaq Listing Rule 5635 through and including June 30, 2020.⁴ As described in more detail below, the temporary exception creates two categories of transactions: a Safe Harbor Provision for transactions not requiring prior Nasdaq approval; and transactions requiring prior approval by the Nasdaq Listing Qualifications Department, but no 15 calendar-day waiting period after filing the listing of additional shares notification.

When is a company eligible for Nasdaq’s temporary relief from shareholder approval requirements in connection with transactions other than a public offering?

Nasdaq Listing Rule 5635(d) sets forth circumstances under which a company is required to obtain shareholder approval prior to a “20% Issuance” at a price that is less than the “Minimum Price”.⁵ The temporary exception to this shareholder approval requirement is aimed at allowing private financings and applies in circumstances where a delay in obtaining shareholder approval for such a transaction would result in one of the following:

• Have a material adverse impact on the company’s ability to maintain operations under its pre-COVID-19 business plan;
• Workforce reductions;
• Adversely impact the company’s ability to undertake new initiatives in response to COVID-19; or
• Seriously jeopardize the financial viability of the enterprise.

In addition to demonstrating that the proposed transaction meets one of requirements above, the company must also demonstrate to Nasdaq that the need for the transaction is due to circumstances related to COVID-19 and that the company underwent a process to ensure that the proposed transaction represents the best terms available to the company. In that vein, the company’s audit committee or a comparable body of independent, disinterested directors must “expressly approve reliance on this exception” and determine that the transaction is in the best interest of shareholders.

When is a company eligible for Nasdaq’s temporary relief from certain shareholder approval requirements in connection with certain issuances with insider participation?

Nasdaq Listing Rule 5635(c) requires a company, subject to certain exceptions, to obtain shareholder approval prior to an issuance of securities in connection with equity-based compensation of officers, directors, employees or consultants. Under Nasdaq’s temporary exception to the 5635(c) shareholder approval requirement, an insider’s de-minimis participation⁶  does not require shareholder approval if such insider’s participation in the transaction was specifically required by unaffiliated investors. Nasdaq notes that any insider participating in the transaction must not have participated in negotiating the economic terms of the transaction.

Is prior approval from Nasdaq required?

No prior approval of the exception by Nasdaq is required as long as the maximum issuance of common stock (or securities convertible into common stock) issuable in the transaction is less than 25% of the total shares outstanding and less than 25% of the voting power outstanding before the transaction; and the maximum discount to the Minimum Price at which shares could be issued is 15% (the “Safe Harbor Provision”).

Companies relying on the Safe Harbor Provision must notify Nasdaq about such transactions as promptly as possible, and at least two days before issuing shares. Transactions that involve issuance of warrants exercisable for shares of common stock are not eligible for the Safe Harbor Provision.

For transactions that do not fall within the Safe Harbor Provision, Nasdaq must approve the company’s reliance on the exception before the company can issue any securities in the transaction. Companies can seek approval by filing the listing of additional shares notification and the required supplement on the Nasdaq Listing Center. Upon approval by the Nasdaq Listing Qualifications Department, companies do not have to wait the otherwise required 15 calendar days after filing the listing of additional shares notification.

Must a company seeking to rely on the temporary relief publicly disclose the proposed transaction?

A company relying on Nasdaq’s temporary exception of certain shareholder approval requirements must provide shareholders with advance notice of the transaction by making a public announcement on a Form 8-K, if required by SEC rules, or by issuing a press release disclosing as promptly as possible, but no later than two business days before the issuance of the securities, the following:

• The terms of the transaction (including the number of shares of common stock that could be issued and the consideration received);
• That shareholder approval would ordinarily be required under Nasdaq rules but for the fact that the Company is relying on an exception to the shareholder approval rules; and
• That the audit committee or a comparable body of the board of directors comprised solely of independent, disinterested directors expressly approved reliance on the exception and determined that the transaction is in the best interest of shareholders.

_{1 The FAQs, which are not included within Corp Fin’s Compliance and Disclosure Interpretations because the responses relate to unique circumstances arising from COVID-19, can be found here.
2  The Order can be found here.
3 See the SEC’s press release, available here.
4 See Nasdaq’s press release, available here. The SEC has granted Nasdaq’s request to waive the 30-day operative delay period, which would otherwise apply. Accordingly, this temporary exception is effective immediately.
5 The “Minimum Price” is defined in Rule 5635(d)(1)(A) as the lower of: (i) the Nasdaq Official Closing Price (as reflected on Nasdaq.com) immediately preceding the signing of the binding agreement; or (ii) the average Nasdaq Official Closing Price of the common stock (as reflected on Nasdaq.com) for the five trading days immediately preceding the signing of the binding agreement. A “20% Issuance” is defined in Rule 5635(d)(1)(B) as a transaction, other than a public offering as defined in IM-5635-3, involving the sale, issuance or potential issuance by the Company of common stock (or securities convertible into or exercisable for common stock), which alone or together with sales by officers, directors or Substantial Shareholders of the Company, equals 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance. 
6 The temporary exception under Listing Rule 5636T(c) limits insider participation such that each insider’s participation must be less than 5% of the transaction and all insiders’ participation collectively must be less than 10% of the transaction. See the rule filing here.}
 

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