This memorandum outlines key considerations from White & Case’s Public Company Advisory Group for foreign private issuers (“FPIs”) during the 2023 annual reporting season.
This memo describes our key considerations for Annual Reports on Form 20-F in two parts:
- Six Housekeeping Considerations: (i) Confirming Filing Status, (ii) Exhibit Index Reminders, (iii) Recent Form Check Items, (iv) Stock Repurchase Table Reminder, (v) Considerations for Outstanding Registration Statements, and (vi) D&O Questionnaires; and
- Five Disclosure Considerations: (i) Non-GAAP/Non-IFRS Compliance – Five Key Reminders, (ii) Management’s Discussion & Analysis (MD&A) Considerations, (iii) Recent Developments to Consider for Annual Report and Risk Factor Disclosure, (iv) ESG and (v) Reg. S-K 1300 Requirements for Issuers with Mining Operations.
We also discuss Other Reporting Season Considerations for FPIs.
Six Housekeeping Considerations
1. Confirm Filing Status and Form 20-F Deadline: Confirm your filing status in order to appropriately complete the checkboxes on your Form 20-F cover page. For an FPI, filing status will impact (i) to the extent applicable, whether it continues to qualify as an emerging growth company (“EGC”) (i.e., until the first fiscal year where an issuer becomes a “large accelerated filer”), and (ii) whether it is subject to SOX 404(b) auditor attestation requirements (which apply once an issuer becomes an “accelerated filer” or a “large accelerated filer”).
Filing status does not affect the filing deadline. This year’s Form 20-F is due on Monday, May 1, 2023 for all calendar-year-end FPIs, regardless of filing status. However, where a calendar-year-end FPI has an effective shelf registration statement on Form F-1 or F-3 (e.g., for resales by selling shareholders) and plans to allow uninterrupted sales of securities from its registration statement, SEC rules require that the company file its audited FYE 2022 financial statements by March 31, 2023, which may push up the Form 20-F deadline to such earlier deadline. For more information, see “5. Considerations for Outstanding Registration Statements” below.
For companies that experienced stock price volatility in the recently completed fiscal year, re-assessing filing status is even more important. To confirm your filing status, keep in mind that:
- Determining Public Float: Public float is central to calculating your filing status and is computed as of the last business day of the company’s most recently completed second fiscal quarter (June 30, 2022 for calendar year end companies) by multiplying (a) the number of shares of common stock on that day held by non-affiliates1 by (b) the closing stock price on that day. As a result, confirming the identity and holdings of affiliates and subtracting out those shares is critical for an accurate calculation of “public float.”
- Large Accelerated, Accelerated and Non-Accelerated Thresholds: If a company previously qualified as a “large accelerated filer” or an “accelerated filer” under Rule 12b-2 of the Exchange Act, the thresholds to now move into accelerated filer or non-accelerated filer are different and lower than those required for the initial qualification (e.g., less than $560 million as opposed to $700 million for accelerated filer status and less than $60 million as opposed to $75 million for non-accelerated filer status).2
Determine whether you continue to qualify as an EGC based on: (i) your total annual gross revenues on the last day of fiscal year 2022, (ii) the passage of time, (iii) the issuance of more than $1 billion in non-convertible debt in the previous three years, or (iv) becoming a large accelerated filer. Effective September 20, 2022, the SEC increased the revenue threshold to qualify as (or remain) an EGC from $1.07 billion to $1.235 billion.
2. Exhibit Index Reminders: For the exhibit index, companies should: (i) review the exhibit list and confirm inclusion of all required exhibits in accordance with Item 19 of Form 20-F, including (a) exhibits that were filed since last year’s Form 20-F and (b) the description of securities for each class of securities registered under Section 12 of the Exchange Act;3 and (ii) remove outdated exhibits no longer required to be filed, such as material contracts that have been fully performed.
In addition, with respect to exhibit redactions, keep in mind that there are three separate avenues for omitting information from exhibits, each with separate requirements under Item 601 of Regulation S-K:
- Personal Privacy: Companies should make sure to omit information in exhibits that would constitute a clear unwarranted invasion of personal privacy (e.g., disclosure of bank account numbers, social security numbers, home addresses, and similar information). For these redactions, no additional steps or disclosure (such as inclusion of legends specifying the redacted information) is needed. The private information may simply be removed.4
- Schedules or Similar Attachments: Companies may omit schedules or similar attachments to exhibits, provided that such schedules or attachments do not contain material information and the information is not otherwise disclosed in the exhibit. Each exhibit must contain a list of the omitted contents, but this list is not required if the exhibit already conveys the subject matter of the omitted schedules, such as in a table of contents included in the exhibit.5 Notably, there is no requirement under Item 19 of Form 20-F for a company using this avenue to provide any other language or header either in its exhibit index or the exhibit itself.
- Confidential Business Information: Lastly, a company may omit information that it “customarily and actually treats. . . as private or confidential” and that “is not material” to the company.6 In this case, companies must (i) mark the exhibit index to indicate that portions of the exhibit have been omitted and (ii) include a prominent statement on the first page of the redacted exhibit that certain identified information has been excluded because it is not material and is the type that the company treats as private or confidential.
3. Recent Form Check Items: As part of this year’s Form 20-F form check, remember the following items, which were new last year:
- Update Item 3.A Form 20-F to state “Item 3.A [Reserved]” (instead of “Item 3.A Selected Financial Data” as may have been included in prior Form 20-Fs) due to the SEC’s elimination of the disclosure requirement for selected financial data in 2021;7
- Add new “Item 16I” of the Form 20-F with the caption “Disclosure Regarding Foreign Jurisdictions that Prevent Inspections”. As background, new Item 16I was added to the Form 20-F in 2022 pursuant to the Holding Foreign Companies Accountable Act (“HFCAA”) (as explained in our prior alert) in order to identify, starting in 2023, any issuers that retain auditors that the PCAOB is unable to inspect completely. That said, while this item must be included in the Form 20-F, given the PCAOB’s recent announcement that it “has secured complete access to inspect and investigate registered public accounting firms headquartered in mainland China and Hong Kong,”8 this year companies (including those in mainland China and Hong Kong) should not have any disclosure (beyond “Not applicable” or “None”) under this item in their upcoming Form 20-Fs; and
- Tag in inline XBRL the independent auditor’s: (i) name, (ii) location (i.e., city and state, province or country) and (iii) PCAOB ID number.9 Practices vary as to the location of this tagging in annual reports, but a commonly used option is to tag the auditor’s name and PCAOB ID number in the Index to the Financial Statements (in Item 17 or 18, as applicable) and the auditor’s location at the end of the audit report. Companies should coordinate this tagging with the financial printer to the extent they use one.
4. Stock Repurchase Table Reminder: While not a new requirement for 2023, it is important to remember that Item 16E of Form 20-F requires disclosure of the company’s repurchases of its equity securities during the fiscal year covered by the report. For this purpose, keep in mind that the withholding of restricted stock (or the tendering of outstanding shares owned by an employee) to pay taxes due upon vesting must be disclosed under Item 16E of Form 20-F because the issuer is acquiring its own outstanding shares. However, if the equity at issue was never outstanding (for example, in the case of withholdings of restricted stock units, or forfeitures of restricted stock when vesting conditions have not yet been satisfied), then no such disclosure is required.10
5. Considerations for Outstanding Registration Statements: Consider how the filing of the Form 20-F may impact any outstanding registration statements.
- All Effective Registration Statements: Remember to update your auditor consent attached as an exhibit to the Form 20-F to include any newly filed registration statements and remove any registration statements that are no longer effective.
- Effective Shelf Form F-1s:
- Post-Effective Amendment and Timing of Form 20-F: You must file a post-effective amendment to the Form F-1 in order to incorporate the audited annual financial statements and other information from the Form 20-F into the Form F-1. If you plan to allow uninterrupted sales (e.g., by selling stockholders) off of that Form F-1, you must file and have the SEC declare effective this post-effective amendment by the end of the third month after your fiscal year end (for calendar-year-end FPIs, March 31, 2023). For the sake of efficiency, you may want to consider filing your Form 20-F before this three-month deadline (for calendar-year-end FPIs, March 31, 2023) and then immediately preparing and filing a post-effective amendment on Form F-1, all with enough time to ensure the SEC declares the post-amendment effective by the three-month deadline.
- Potential Form F-3 Eligibility: You should also consider if you have become Form F-3 eligible, so that you can convert the Form F-1 into a Form F-3 and avoid future post-effective amendments for as long as you remain F-3 eligible.
- Effective Shelf Form F-3s:
- Timing of Form 20-F: You are not required to file a post-effective amendment with audited annual financial statements and can instead update the registration statement merely by filing the Form 20-F. However, if you plan to allow uninterrupted sales off of that Form F-3, you must file your audited annual financial statements by the last day of the third month after your fiscal year end (March 31, 2023 for calendar-year-end FPIs). You should consider filing the Form 20-F by the three-month deadline, ahead of the normal 120-day deadline for filing an annual report on Form 20-F, or, if your Form 20-F is not ready by such date, filing by such deadline a current report on Form 6-K with the audited financial statements (incorporated by reference into the Form F-3).
- Form F-3 Eligibility: You should also ensure that you continue to meet the eligibility requirements for using the Form F-3 when filing your Form 20-F: (i) if you previously filed as a well-known seasoned issuer (WKSI), confirm that you are still a WKSI in order to use that registration statement (otherwise, it will need to be re-filed (if eligible) as a non-WKSI shelf); or (ii) if you previously filed a non-WKSI shelf registration statement, confirm that you still meet the requirements to use that registration statement. Otherwise, you will need to re-file as a Form F-1.
While it does not affect the Form 20-F, all FPIs with outstanding registration statements should also bear in mind the requirement to file a Form 6-K by the date that is nine months after the end of their fiscal year including six-months consolidated interim financial statements (which may be unaudited), containing explanatory notes.12 This Form 6-K should be incorporated by reference into any effective Form F-3s and would trigger a prospectus supplement for any effective Form F-1.
6. D&O Questionnaires: Ahead of your Form 20-F filing, review and update your D&O questionnaires, which provide back-up and support for the disclosures to be included in your Form 20-F and proxy statement. In particular:
- If you are a Nasdaq-listed company subject to the board diversity requirements13 or if you otherwise plan to voluntarily disclose the diversity of your directors, include a question to elicit information on your directors’ diversity characteristics that covers the potential diversity categories that you may want to disclose (under Nasdaq and/or investor policies) and to obtain their consent to disclose this information;
- Consider adding a question to elicit information from directors on their expertise with respect to ESG, human capital and/or cybersecurity in light of both SEC and investor focus on board qualifications in these areas;
- Consider adding or refining questions on outside directorships or officerships to identify any potential antitrust concerns, given recent Department of Justice focus on potential violations of Section 8 of the Clayton Act; and
- Consider building out (or adding) Iran-related activities questions to cover potentially problematic transactions with Russian entities.14
See Appendix A for a summary of the Nasdaq diversity disclosure requirement, along with other key investor and proxy advisory firm policies on board diversity. It is also important to keep track of the number of boards on which each of your directors sits, bearing in mind key investor and proxy advisory firm policies on overboarding, which tend to be country/region-specific.
See Appendix B for a discussion of over-boarding policies.
Five Disclosure Considerations
1. Non-GAAP/Non-IFRS Compliance – Five Key Reminders:
On December 13, 2022, the SEC posted an update to its Non-GAAP Measures Compliance and Disclosure Interpretations (“C&DIs”) Questions,15 as non-GAAP financial measures remained one of the most frequent topics in SEC staff comment letters over the last year. The same guidance also applies to non-IFRS financial measures. Given these developments, companies should review their non-GAAP disclosures and consider the following five key reminders:
1. Nature of Adjustments Can Be Misleading (Application: Any FPI Document Including Non-GAAP/Non-IFRS Financial Measures). The nature of the adjustments made to calculate a non-GAAP/non-IFRS measure has been a focus of the SEC since Regulation G was adopted in 2003.16 For Form 20-F filings and Form 6-K filings where non-GAAP/non-IFRS measures are incorporated by reference into registration statements, certain types of adjustments are specifically prohibited by Item 10(e) of Regulation S-K.17 However, even when not specifically prohibited by SEC rules, adjustments may result in a misleading non-GAAP/non-IFRS measure, such as when a company “cherry-picks” adjustments by inconsistently adjusting between periods or excluding charges, but not gains, to GAAP measures. Thus, FPIs should beware of this guidance in the context of any document directed at investors including non-GAAP/non-IFRS financial measures.
The 2016 C&DI 100.01 addressed misleading non-GAAP/non-IFRS adjustments, cautioning companies that “presenting a performance measure that excludes normal, recurring, cash operating expenses necessary to operate a registrant’s business…could be misleading.” Moreover, one of the most frequent comments issued by the Staff in the past fifteen months requested that companies defend the exclusion of expenses that appear to be “normal, recurring operating expenses” from non-GAAP/non-IFRS performance measures.18
The December 2022 C&DI updates reflect a heightened SEC focus on this issue. In particular, updated C&DI 100.01 now states that the determination of whether adjustments result in a misleading non-GAAP/non-IFRS measure will depend on the facts and circumstances, and also notes the following:
The “nature and effect of the non-GAAP adjustment and how it relates to the company’s operations, revenue generating activities, business strategy, industry and regulatory environment” are factors that will be considered by the Staff when evaluating what is a “normal” operating expense; and
Operating expenses that occur repeatedly or occasionally, even at “irregular intervals”, would be viewed as “recurring” by the Staff.
Moreover, the Staff added new C&DI (100.06) stating that a non-GAAP/non-IFRS measure can still be misleading even if there is “extensive, detailed disclosure about the nature and effect of each adjustment.” In light of these developments, companies should reconsider the disclosures around the reasons for their adjustments (as discussed below) and also whether the Staff may object to adjustments that may be considered normal operating expenses based on the company’s operations, revenue generating activities, strategy, industry and regulatory environment.
2. Greater Prominence to GAAP/IFRS Measure (Application: Any Form 20-F or Form 6-K Fully Incorporated into a Registration Statement). When non-GAAP/non-IFRS measures are included in Form 20-F filings and in Form 6-Ks fully incorporated by reference into registration statements, the most directly comparable financial measure calculated in accordance with GAAP must be presented with equal or greater prominence. This requirement does not apply outside the context of these documents, although FPIs may sometimes follow the requirement there as a matter of best practice. In particular, the Staff has issued comments when the results of operations discussion primarily focused on the period-over-period changes in the non-GAAP/non-IFRS measures as opposed to, or without, a discussion of movements in the comparable GAAP measures.
In line with these Staff comments, updated C&DI 102.10(a) provides that the greater or equal prominence requirement specifically applies to any related discussion and analysis of a non-GAAP/non-IFRS measure, and not just to the presentation of the measure itself.19 Moreover, the Staff added two new C&DIs that largely reorganized and provided further detail regarding the Staff’s existing guidance on prominence.20 The new C&DIs provide, among other things, that:
- presenting a ratio where the non-GAAP/non-IFRS measure is the numerator or denominator also requires presenting the ratio calculated using the most directly comparable GAAP measures with equal or greater prominence;
- presenting a reconciliation table that starts with a non-GAAP/non-IFRS measure (instead of the comparable GAAP measure) provides greater prominence to the non-GAAP/non-IFRS measure; and
- presenting an income statement of non-GAAP/non-IFRS measures is prohibited (not just a full income statement of non-GAAP/non-IFRS measures, as listed under the prior C&DI), and a “non-GAAP income statement” is one that includes “all or most of the line items and subtotals found in a GAAP income statement.”21
3. Clear Explanations of Non-GAAP/Non-IFRS Measures (Application: Any FPI Document Including Non-GAAP/Non-IFRS Financial Measures). Companies are reminded that when disclosing non-GAAP/non-IFRS measures in any document directed at investors, the reasons why management believes the non-GAAP/non-IFRS measure provides useful information and any additional purposes for which management uses the non-GAAP/non-IFRS measure must be disclosed.22 The Staff has issued comments regarding disclosures that are boilerplate or overly generic for this purpose, and has also noted the importance of providing a clear explanation for each adjustment.23 Moreover, in December 2022, the Staff issued a new C&DI emphasizing the importance of clear disclosure, noting that without an appropriate label and clear description, a non-GAAP/non-IFRS measure or any particular adjustment could be misleading to investors.24
4. Forward Looking Non-GAAP/Non-IFRS Measures (Application: Any FPI Document Including Non-GAAP/Non-IFRS Financial Measures). Item 100(a) of Regulation G and Item 10(e) require a quantitative reconciliation, “to the extent available without unreasonable efforts,” for forward-looking non-GAAP/non-IFRS financial measures. Additionally, under Item 10(e) of Regulation S-K, if the most directly comparable GAAP/non-IFRS measure is not accessible on a forward-looking basis, this fact must be disclosed, along with the specific reconciling information that is unavailable and its probable significance. Additionally, in the context of Form 20-F filings and Form 6-K filings fully incorporated into registration statements, these required additional disclosures must be in a location of equal or greater prominence to the forward-looking non-GAAP/non-IFRS measure.25 This requirement does not apply outside the context of these documents, although FPIs may sometimes follow the requirement generally as a matter of best practice. While companies generally disclose what information is unavailable, in several recent comment letters the SEC has been requesting that companies also provide any reconciling information that is available.26
5. Individually Tailored Accounting Principles Inconsistent with GAAP (Application: Any FPI Document Including Non-GAAP/Non-IFRS Financial Measures). The Staff has long held that a non-GAAP/non-IFRS measure that uses an individually tailored recognition or measurement principle inconsistent with GAAP may be misleading. Historically, the focus has been on adjustments to revenue recognition that are prohibited by GAAP, and updated C&DI 100.04 provides additional examples of adjustments to revenue that may be misleading. Notwithstanding this focus, companies should carefully consider whether any of their non-GAAP/non-IFRS measures may involve individually tailored accounting principles. Updated C&DI 100.04 includes the following non-exclusive examples of misleading adjustments: (i) changing the pattern of recognition, including the acceleration of revenue recognized ratably over time; (ii) deducting transaction costs from revenue when gross presentation as a principle is required by GAAP (or the inverse, presenting revenue on a gross basis when net presentation is required by GAAP); and (iii) changing the bases of accounting for revenue or expenses from an accrual basis to a cash basis.
2. MD&A Considerations
MD&A has continued to be one of the most frequent targets of SEC Staff comments in the last year, following the SEC’s comprehensive rule changes to MD&A, as described in our prior alert. SEC comments concerning MD&A disclosures primarily focus on greater transparency regarding: (i) the drivers of period-to-period changes in financial statement line items; (ii) known events, uncertainties and trends; (iii) liquidity and capital resources, including material cash requirements; and (iv) critical accounting estimates. The Staff has also focused on consistency across company disclosures, targeting companies that disclose trends or other material information impacting their financial results in earnings releases or earnings calls, but not referencing such information in their MD&A.27
As noted in Item 5 of Form 20-F, MD&A disclosures should “better allow investors to view the registrant from management’s perspective” and “relate to all separate segments and/or other subdivisions (e.g., geographic areas, product lines) of the company.” Companies should consider the following four items as they prepare their MD&As:
1. Discussion of Drivers in Period-to-Period Changes: Item 5.A of Form 20-F requires disclosure of the underlying reasons for period-to-period material changes in a line item of a company’s financial statements in quantitative and qualitative terms, including where material changes within a line item offset one another. A discussion, with specificity, of both the “how” and the “why” of any material changes to financial statement line items is therefore needed.
- “How” factors impacted results. The Staff has continued to request that companies quantify the factors that impact results, including reminding companies that when multiple factors are cited as the cause of material fluctuations, each factor should be quantified to allow investors to understand the magnitude and relative impact of each factor. Additionally, describing a change as having been “primarily” caused by, or a factor as “predominantly” causing the change, may not meet the requirement to describe the quantitative nature of the reason for the change.
- “Why” factors impacted results. The Staff has noted that more informative disclosures may be required by companies, including explanations of the underlying reasons for the factor that caused material changes in financial statement line items. For example, disclosure that cost of revenues increased due to higher distribution costs may not be sufficient without an explanation as to why there was an increase in the distribution costs.
2. Known Events, Uncertainties and Trends Disclosure: Item 5.D of Form 20-F requires disclosures of material trends, events, commitments, demands and uncertainties known to management reasonably likely to cause reported information not to be necessarily indicative of future results, including matters that have had or are reasonably likely to have a material impact on future operations.
- The Staff has recently issued several comments requesting enhanced disclosures relating to known trends and uncertainties resulting from inflation, labor markets, supply chain issues and other macroeconomic factors.
- For example, a frequent comment requests companies to identify the principal factors contributing to macroeconomic issues, their impact, and any known trends or uncertainties regarding these issues that are reasonably likely to have a material impact.
- SEC comments also focused on issues related to mitigation efforts undertaken to address such risks. For example, when companies disclosed that their results of operations had been impacted by supply chain uncertainties, the Staff asked companies to discuss known trends or uncertainties resulting from their mitigation efforts, and whether such mitigation efforts introduce any new material risks, such as those related to product quality, reliability or regulatory approval of products.28
- In addition, although a number of companies disclosed that Russia’s actions in Ukraine had a negative impact on their businesses, the Staff requested that these companies disclose trends and uncertainties, if material, not just the historical impact.29
3. Liquidity and Capital Resources Disclosure: Item 5.B of Form 20-F provides the overarching requirement to analyze a company’s ability to generate and obtain adequate cash to meet its requirements and plans for cash in the short term (i.e., the next 12 months) and separately in the long term. In light of the increasing macroeconomic uncertainties in recent months, it becomes crucial for companies to assess their liquidity and capital resources disclosure ahead of their annual report filings.
- Material Cash Requirements. As part of their capital resources disclosures:
- Companies are required to describe material cash requirements from known contractual and other obligations under Item 5.B. This analysis should specify the type of obligation and the relevant time period for the related cash requirements, to the extent material to liquidity and capital resources. One recent focus of Staff comments in this area has been consistency, e.g., companies that disclose information about their business that could involve material cash requirements elsewhere in their disclosures, but not addressing any cash requirements in the liquidity and capital resources section.30
- Since 2021, companies are no longer required to include the contractual obligations table that was previously required under Item 5.F of Form 20-F. Notably, the contractual obligations table previously required by Item 5.F of Form 20-F may not meet the new principles-based requirement to disclose all known material cash requirements (including capital investments, human capital, intellectual property, contractual obligations, and any off-balance sheet arrangements), as well as material trends, commitments or uncertainties reasonably likely to affect liquidity and capital resources, so companies should not merely retain the previous table without assessing if it meets the new requirements.
4. Critical Accounting Estimates (Not Required if Using IFRS): Companies are reminded that, unless they report under IFRS, Item 5.E requires disclosures that are necessary to an understanding of critical accounting estimates that had or are reasonably likely to have a material impact on a company’s financial condition or results of operations. The Staff has recently issued comments reminding companies that this disclosure should not be a repetition of significant accounting policies disclosed in the footnotes to the financial statements.31 Instead, the disclosure in MD&A should address the uncertainties associated with assumptions underlying the critical accounting estimates, risks related to using different assumptions and an analysis of the company’s sensitivity to changes based on outcomes that are reasonably likely to occur. Registrants using IFRS do not need to provide this disclosure and may complete this section with “Not Applicable.”
5. Off-Balance Sheet Caption No Longer Required: Companies are reminded that in 2021, the SEC eliminated the requirement under Item 5.E to present a separately captioned section discussing off-balance sheet arrangements and instead added a principles-based Instruction 7 regarding commitments and obligations that constitute off-balance sheet arrangements. As a result, companies should be sure that, as in their prior year Form 20-F, they do not include the separately captioned off-balance sheet arrangements section, but continue to consider whether additional disclosure is required in liquidity and capital resources.
6. Hyperinflation: As a reminder, beginning in 2021, the SEC updated Item 5.A.2 to provide that “[i]f the currency in which financial statements are presented is of a country that has experienced hyperinflation, disclose the existence of such inflation, a five-year history of the annual rate of inflation and a discussion of the impact of hyperinflation on the company’s business.” This is in addition to the requirement in Item 5 to “provide information regarding any governmental economic, fiscal, monetary or political policies or factors that have materially affected, or could materially affect, directly or indirectly, the company’s operations or investments” by investors in the US.
3. Recent Developments to Consider for Annual Report Risk Factor and MD&A Disclosure
- Macroeconomic Developments: Management should assess the impacts on the company’s business from the recent volatile economic conditions and approach the company’s disclosure in an organized manner across annual report risk factors, MD&A, as well as the earnings release and earnings call, in order to provide a consistent message to investors. Impacts should be assessed both for 2022 and for expectations going into 2023, and may include the following:
Inflation, Interest Rates, Capital Markets: As a result of the high levels of inflation in the US, increased supply costs may impact pricing and consumer demand, both of which may impact companies’ revenues and earnings, depending on the degree of their exposure to the US. In addition, rising interest rates have increased the cost of borrowing for many companies, while volatility in the capital markets presents challenges to companies seeking to raise funds. This may impact a company’s business plans, such as adopting strategies that may be less capital-intensive in the near term. Companies should therefore consider disclosure regarding how inflation and rising interest rates have materially affected them, including their operating results, sales, profits, cash flows, liquidity, financial position, wage expenses, employee retention and capital expenditures.
The Inflation Reduction Act of 2022 (“IRA”), passed in August 2022, included several changes for corporations – a corporate minimum tax, a one percent excise tax on certain stock buybacks and certain clean energy incentives and initiatives.32 Companies should consider whether any provisions of the IRA could be expected to materially impact their financial condition, results of operations or capital allocation strategies.
- Currency Exchange Rates: The relative value of the U.S. dollar is currently at its highest level since 2000, appreciating sharply against many foreign currencies. As a result, companies may experience vulnerability when converting results in foreign currencies to U.S. dollars for financial reporting purposes, which may impact companies’ results of operations.
- COVID-19: It may still be too early to entirely eliminate COVID-19 specific disclosure, but companies may be able to significantly streamline their disclosures. Companies should take a fresh look at their existing COVID-19 disclosure and update it to account for the current environment, including by eliminating or de-emphasizing risks that are no longer expected to be material.
- Ukraine/Russia: The SEC’s sample letter provides guidance on disclosure obligations related to developments in Ukraine. In particular, companies should consider (i) impacts of import or export bans on products and commodities used or sold by the company, (ii) whether and how supply chain disruptions have materially impacted the business, including mitigation efforts, and, where possible, a quantification of the impact, and (iii) any changes in internal control over financial reporting resulting from the situation in Ukraine and/or supply chain disruptions.
- Exposure to Crypto Asset Market Participants: In light of the dislocation experienced by the crypto industry in recent months, the SEC issued a sample comment letter asking companies to evaluate how the distress among crypto asset market participants may, directly or indirectly, impact the company’s business and, potentially, investors. Companies should consider the need to address crypto asset market developments, including disclosure of a company’s exposure to counterparties and other market participants; risks related to a company’s liquidity and ability to obtain financing; and risks related to legal proceedings, investigations or regulatory impacts in the crypto asset markets.
For more information on these and other developments, as well as tips for drafting risk factors, see our recent client alert Updating Annual Report Risk Factors: Key Developments and Drafting Considerations for Public Companies.
4. Consider Climate Change, Human Capital Management and Other ESG Disclosure
With continued focus from the SEC and investors on climate-related and other environmental, social and governance (“ESG”) disclosures, companies should consider disclosure on ESG ahead of their Form 20-Fs.
Climate Change and Sustainability Disclosure
Climate change remains a particularly strong focus of both the SEC and investors. In March 2022, the SEC proposed extensive climate-related disclosure requirements that, if adopted, would require U.S. public companies to dramatically expand the climate-related disclosures in their SEC filings. While these rules are pending (action is expected in the spring of 2023), companies should continue to consider their existing climate-related disclosure in light of the SEC’s 2010 climate change disclosure guidance, as well as the SEC’s sample comment letter on climate disclosure. 33
In light of this focus, companies should confirm whether any additional information regarding climate change is material for their business and should consider their risk factors (Item 3.D), business description (Item 4), legal proceedings (Item 8.A.7) and MD&A (Item 5) when assessing this potential disclosure. In addition, companies should assess (1) whether pending regulatory requirements or developments in the area of ESG or sustainability pose any material risks or challenges to their businesses, (2) whether any material risks related to their ESG goals and commitments are appropriately disclosed, and (3) whether any of the ESG information contained in their sustainability reports is or has become material and therefore required to be included in their Form 20-F.34
Human Capital Management (“HCM”) Disclosures35
The HCM disclosures required in the business section of domestic issuers’ Form 10-Ks are not required for FPIs, and FPIs generally are not adopting such disclosures voluntarily. However, the SEC’s enactment of rules around HCM disclosure for domestic issuers, coupled with institutional investor focus on the area, indicate that this is a key area for Form 20-F readers across the board, so it is important for FPIs to consider any appropriate risk factor disclosure on this topic subject to any limitations imposed by the laws of the jurisdiction under which the registrant is organized. Companies should assess what, if any, material issues their company faces with respect to human capital resources. This could include risks related to the ability to attract and retain skilled employees, employee health and safety issues, increases in labor costs and increased employee turnover.
5. For Issuers with Mining Operations, Consider Whether Expanded Regulation S-K 1300 Requirements Apply
In late 2018, the SEC adopted rules creating Regulation S-K 1300, which requires certain disclosures by issuer engaged in mining operations material to their business. Regulation S-K 1300 replaced and updated Industry Guide 7. The disclosures under Regulation S-K 1300 became mandatory for the first time in Form 20-Fs filed in 2022 for the fiscal year ended December 31, 2021. In the latter half of 2022, the SEC also sent comment letters to several issuers with mining operations asking them to analyze whether the disclosures in their Form 20-Fs filed earlier that year sufficiently complied with Regulation S-K 1300 based on the materiality of such operations and whether the omission of any required disclosures impacted their management’s determination of the effectiveness of their disclosure controls and procedures. With that in mind, for their Form 20-Fs filed in 2023, companies engaged in mining operations should determine whether their current mining operations,36 in the aggregate, are in fact material to their business such that Regulation S-K 1300 disclosures would be required in their Form 20-F.37 These disclosures include: (i) summary property disclosure38 on overall mining operations, mineral resources and mineral reserves; (ii) individual property disclosure39 for any property that is individually material to their business; and (iii) a description of the internal controls40 that the company uses in its exploration and mineral resource and reserve estimation efforts, including quality control/quality assurance programs, verification of analytical procedures, and a discussion of comprehensive risk inherent in the estimation.
Companies including individual property disclosure must also obtain a technical report summary,41 which must be signed by a “qualified person” (as defined in Regulation S-K 1300) and describe the information reviewed and conclusions reached by the qualified person about the company’s mineral resources and/or reserves on each material property (or, optionally, exploration results). The technical report summary must be filed as Exhibit 96.1 to the Form 20-F in any of the following instances: (i) the company discloses in the Form 20-F for the first time mineral reserves or mineral resources; (ii) there is a material change in the mineral reserves or mineral resources, as disclosed in the Form 20-F, from the last technical report summary filed for the property; or (iii) where the company has previously filed a technical report summary supporting the disclosure of exploration results, there is a material change in the exploration results from the last technical report summary filed for the property.
Other Reporting Season Considerations for FPIs
In addition to the above considerations related to Form 20-F preparation, FPIs are reminded of the following considerations for the upcoming reporting season more generally:
1. Make Sure to Update Cover Page of Form 6-K: As a result of recent changes to Form 144 and certain other filings, the SEC amended the cover page of Form 6-K to remove the following boxes starting January 11, 2023.
“Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ____ Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ____”
Thus, FPIs should be sure to make this change when filing Form 6-Ks going forward.
2. Electronic Form 144 Filings and EDGAR Codes: In June 2022, the SEC adopted rule amendments that require all Forms 144, which must be filed with the SEC by any affiliate42 of a reporting company relying on Rule 144 for certain resale transactions, to be filed electronically on EDGAR, rather than through a paper filing, starting April 13, 2023. This will require directors and executive officers who own company equity, as well as certain large shareholders, to obtain and/or confirm their EDGAR codes for such electronic filings. Directors and executive officers of FPIs typically do not have EDGAR codes (unless they are already 5%+ beneficial owners required to make Schedule 13 filings). Thus, in-house personnel at FPIs should coordinate with their directors and executive officers as soon as possible to confirm whether they already have EDGAR codes and, if not, apply for and receive such codes on their directors’ and executive officers’ behalf, given the April 13, 2023 compliance start date for electronic filings.
To assist with the EDGAR codes generation process, FPIs should circulate the following short package of documents for signing by each of their directors and executive officers.
- A power of attorney for application for EDGAR codes. This allows in-house personnel at the company (or, if outside counsel assists, personnel at outside counsel) to apply to the SEC for EDGAR codes on the director/executive officer’s behalf. The application sent to the SEC is called a “Form ID.” See Appendix D for a sample.
- A power of attorney for future Form 144 filings. This power of attorney allows in-house personnel at the company to file and sign future electronic Form 144 filings on the director/executive officer’s behalf. While we expect that brokers will continue to file and sign Form 144s for directors/executive officers, this power of attorney is helpful in the off-chance that a director/executive officer instead asks the company to electronically file and sign a Form 144 for them. See Appendix E for a sample.
- A blanket attestation for electronic filings, to the extent not collected from the director/executive officer in the past. This allows an individual to digitally sign SEC filings going forward. This will be particularly important for directors/executive officers of FPIs this year, given the new requirement to electronically file Form 144 filings (and is also helpful for any registration statements to be signed by directors/executive officers, such as a Form F-1 or post-effective amendment thereto, a Form F-3 or a Form S-8). Again, while we expect that brokers will continue to file and sign Form 144s for directors/executive officers, there may be instances where a director/executive officer individually signs the filing. See Appendix F for a sample.
In its instructions accompanying the package, a company should make clear that the two powers of attorney may be signed digitally, but the blanket attestation must be manually signed.43 It is also recommended to send this package separate from the D&O questionnaire to avoid confusion and make sure all documents are signed properly.
Once a director/executive officer returns a signed package, a company or its outside counsel should submit a Form ID application for EDGAR codes for that director/executive officer. The Form ID must be signed by an attorney-in-fact named in the power of attorney for the Form ID, notarized and transmitted to the SEC. The SEC may take anywhere from a few business days to several weeks to process EDGAR codes, depending on demand. For more information on applying for EDGAR codes and in preparing and submitting the electronic Form 144, see Form 144—Resources for Filing Electronically.
Finally, once EDGAR codes are generated, companies should check with the brokers used by directors/executive officers to confirm that they have the EDGAR codes once generated and that the necessary steps are being taken to make the electronic Form 144 filings, as required by the new rules.
2 See Rule 12b-2 of the Exchange Act for the definitions of “large accelerated filer” and “accelerated filer” and the SEC’s helpful guides for determining filing status. Each issuer should run this calculation as facts and circumstances vary depending on prior qualifications. For example, if a company had previously been a large accelerated filer, the subsequent qualification thresholds to become an accelerated filer are less than $560 million but $60 million or more, or to become a non-accelerated filer, less than $60 million, in each case, in public float. In addition, if an FPI files on domestic forms, rather than Form 20-F, it can also look to the revenue prong of these definitions to determine whether it could qualify as a smaller reporting company.
3 Item 2(d) of “Instructions as to Exhibits” in Item 19 of Form 20-F.
4 “Instructions as to Exhibits” in Item 19 of Form 20-F.
5 “Instructions as to Exhibits” in Item 19 of Form 20-F.
6 The SEC updated the standard for redacting confidential information in exhibit filings under Item 4(a) of “Instructions as to Exhibits” in Item 19 of Form 20-F to remove the “competitive harm” standard. Information may now be redacted if it is (1) not material and (2) the type that the company both “customarily and actually treats as private or confidential.” See our 2022 Housekeeping Items for a further discussion of these changes.
7 For more information, see “Mandatory Compliance with SEC’s Amendments to Part I of Form 20-F, Item 3.A and Item 5” in our prior memo.
8 Although the HCFAA and the SEC rules do not refer to China-based companies, their legislative and regulatory history make clear that Congress and the SEC created the rules with Chinese companies in mind.
9 This requirement is a result of the SEC’s December 2021 amendments implementing the HFCAA for all auditors that provide their opinions related to financial statements, in accordance with Section 6.5.54 of the EDGAR Filing Manual.
10 See Regulation S-K Compliance and Disclosure Interpretations, Questions 149.01 and 149.02.
11 This is based on the SEC rule that sales may not be made off of an effective shelf registration statement on either of Form F-1 or F-3 when the issuer’s latest audited financial statements are more than 15 months old.
12 This is based on the following requirement from Item 8.A.5 of Form 20-F, extracted below:
“The interim financial statements should include a balance sheet, statement of comprehensive income (either in a single continuous financial statement or in two separate but consecutive financial statements; or a statement of net income if there was no other comprehensive income), cash flow statement, and a statement showing either (i) changes in equity other than those arising from capital transactions with owners and distributions to owners, or (ii) all changes in equity (including a subtotal of all non-owner items recognized directly in equity). Each of these statements may be in condensed form as long as it contains the major line items from the latest audited financial statements and includes the major components of assets, liabilities and equity (in the case of the balance sheet); income and expenses (in the case of the statement of comprehensive income) and the major subtotals of cash flows (in the case of the cash flow statement). The interim financial statements should include comparative statements for the same period in the prior financial year, except that the requirement for comparative balance sheet information may be satisfied by presenting the year end balance sheet. If not included in the primary financial statements, a note should be provided analyzing the changes in each caption of shareholders’ equity presented in the balance sheet. The interim financial statements should include selected note disclosures that will provide an explanation of events and changes that are significant to an understanding of the changes in financial position and performance of the enterprise since the last annual reporting date. If, at the date of the document, the company has published interim financial information that covers a more current period than those otherwise required by this standard, the more current interim financial information must be included in the document. Companies are encouraged, but not required, to have any interim financial statements in the document reviewed by an independent auditor. If such a review has been performed and is referred to in the document, a copy of the auditor’s interim review report must be provided in the document.”
13 The matrix may be included in the Form 20-F, a proxy statement or the company’s website. For more information, see our prior alert, “Reminder: Nasdaq Board Matrix Disclosure Deadline is August 8th.”
14 Since February 2022, the US has imposed sweeping sanctions on Russia, bringing a number of high-net-worth individuals and companies with substantial investments in the US within scope of the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRA”). Companies should undertake diligence to determine whether any sanctioned individuals or entities may be involved in their activities to assess compliance and potential disclosure requirements, as the ITRA requires Form 20-F disclosure if the company (or any affiliate) 15 Specifically, the SEC updated Non-GAAP Financial Measures C&DIs Questions 100.01, 100.04-100.06, and 102.10(a), (b) and (c), which can be found here. A redlined version of the updated C&DIs to the prior version is included in Appendix C.
16 Note that Regulation G does not apply to a disclosure of a non-GAAP financial measure that is made by or on behalf of a registrant that is an FPI if the following conditions are satisfied: (1) the securities of the registrant are listed or quoted on a securities exchange or inter-dealer quotation system outside the U.S.; (2) the non-GAAP financial measure is not derived from or based on a measure calculated and presented in accordance with generally accepted accounting principles in the U.S.; and (3) the disclosure is made by or on behalf of the registrant outside the U.S., or is included in a written communication that is released by or on behalf of the registrant outside the U.S. For (3), the exemption will still apply if the written communication is released in the U.S. as well as outside the U.S., so long as the communication is released in the U.S. contemporaneously with or after the release outside the U.S. and is not otherwise targeted at persons located in the U.S. See Rule 100(c) of Regulation G.
17 See Item 10(e) of Regulation S-K for specifically prohibited adjustments in SEC filings. In addition to the prohibitions under Item 10(e), the SEC’s C&DIs prohibit disclosure of non-GAAP liquidity measures on a per share basis.
18 Between September 2021 and the end of 2022, the Staff issued 86 comments that specifically referenced C&DI 100.01.
19 See C&DI 102.10(a).
20 See C&DIs 102.10(b) and 102.10(c).
21 See C&DI 102.10(b) and Item 10(e)(1)(i)(B) of Regulation S-K.
22 Item 10(e)(1)(i)(C) of Regulation S-K.
23 Approximately 20 comments of this type have been issued since September 2021. For example, in August 2022, the Staff issued the following comment: “We note your explanation of the purpose for the various non-GAAP measures and adjustments…appears to be generic and non-specific to each individual adjustment. Please tell us and consider the need to revise your disclosures, in future filings, to provide a clearer explanation of each individual adjustment and the Company’s basis for exclusion.”
24 See C&DI 100.05.
25 See C&DI 102.01(c).
26 See, e.g., Staff comment issued in April 2022: “Please include quantitative reconciliations of the differences between your forward- looking non-GAAP measures, such as pro forma diluted earnings per share, and the comparable GAAP measures. If the GAAP measure is not accessible on a forward- looking basis, disclose that fact and provide reconciling information that is available without an unreasonable effort. Furthermore, identify the specific information that is unavailable and disclose its probable significance.”
27 For example, the SEC issued the following comment in September 2022: “Your quarterly earnings releases furnished in Form 8-K’s include meaningful supplemental information on revenues and expenses including trends and quantification of key drivers impacting your results of operations. Please tell us how you considered including such information in your Form 10-K and Form 10-Q filings. Please ensure that you quantify the key drivers of changes for each of the factors that you cite in your MD&A discussion. Refer to Item 303(a) and (b) of Regulation S-K.” Also see our prior alert on the importance of including KPIs in MD&A, “SEC Releases New Guidance on KPIs.”
28 For example, the SEC issued the following comment in September 2022: “We note your disclosure…of supply chain disruptions in the second half of the year. Please specify whether these challenges have materially impacted your results of operations or capital resources and quantify, to the extent possible, how your sales, profits, and/or liquidity have been impacted. Discuss any known trends or uncertainties resulting from mitigation efforts undertaken, if any. Explain whether any mitigation efforts introduce new material risks, including those related to product quality, reliability, or regulatory approval of products.”
29 For example, one comment issued in August 2022 noted: “In light of your disclosure that the conflict between Russia and Ukraine has had a negative impact on your earnings before interest and taxes, please…[d]isclose any known trends or uncertainties that have had or are reasonably likely to have a material impact on your cash flows, liquidity, capital resources, cash requirements, financial position, or results of operations arising from, related to, or caused by the global disruption from, Russia’s invasion of Ukraine. Trends or uncertainties may include impairments of financial assets or long-lived assets; declines in the value of inventory, investments, or recoverability of deferred tax assets; the collectability of consideration related to contracts with customers; and modification of contracts with customers.”
30 For example, one comment issued in August 2022 noted: “It does not appear you have disclosed all the material cash requirements of your anticipated….business. For example, we note that [you disclose entering into] a strategic sales contract …. and that the first set was to be delivered. Tell us why this was not discussed as a material cash requirement or revise your disclosure as necessary.”
31 For example, one comment issued in September 2022 stated: “The disclosures of your critical accounting policies and estimates appear to be a repetition of certain of your significant accounting policies. Please revise your disclosures to address the material implications of the uncertainties that are associated with the methods, assumptions and estimates underlying your critical accounting estimates. Your expanded disclosure should address the risk related to using different assumptions and analyze their sensitivity to change based on outcomes that are deemed reasonably likely to occur. Refer to Item 303(b)(3) of Regulation S-K and the related Instruction 3 to paragraph (b) of Item 303.”
32 For more information, see our alert, “New 1% Excise Tax on Stock Buybacks May Have Far-Reaching Consequences for Capital Markets, SPAC and M&A Transactions.”
33 Our 2022 survey of Fortune 50 companies found a significant increase in climate-related disclosure, including an increase in disclosure as a result of SEC comments. Forty-three of the 50 surveyed companies increased their climate-related disclosure in their 2022 Form 10-Ks, compared to 2021, seven addressed climate-related disclosure in their Form 10-K for the first time in 2022, 15 added entirely new risk factors devoted to climate related impacts and five added new sections discussing ESG, sustainability and climate change in their MD&A. Four of the surveyed companies received comments from the SEC in 2021 on climate-related disclosure, two of which agreed to additional risk factor and/or MD&A disclosure. Many other surveyed companies included additional Form 10-K disclosure that appeared, based on content, to be directly influenced by the SEC’s sample comment letter. See our prior alert, “ESG Disclosure Trends in SEC Filings (2022).”
34 One comment issued by the staff in this regard is the following: “We note that you provided more expansive disclosure in your corporate social responsibility report (CSR report) than you provided in your SEC filings. Please advise us what consideration you gave to providing the same type of climate-related disclosure in your SEC filings as you provided in your CSR report.”
35 For more information, see our alert, “SEC Adopts Amendments to Modernize Disclosures and Adds Human Capital Resources as a Disclosure Topic: Key Action Items and Considerations for US Public Companies.”
36 The SEC’s comment letter practices in 2022 indicate that this inquiry should be conducted both by companies that sell mineral extractions and vertically integrated companies that do not sell their mineral extractions but whose mining operations supply raw materials.
37 Item 1301 of Regulation S-K instructs companies to determine materiality as follows: “When determining whether its mining operations are material, a registrant must: (1) Consider both quantitative and qualitative factors, assessed in the context of the registrant’s overall business and financial condition; (2) Aggregate mining operations on all of its mining properties, regardless of the stage of the mining property, and size or type of commodity produced, including coal, metalliferous minerals, industrial materials, and mineral brines; and (3) Include, for each property, as applicable, all related activities from exploration through extraction to the first point of material external sale, including processing, transportation, and warehousing.”
38 Required by Item 1303 of Regulation S-K.
39 Required by Item 1304 of Regulation S-K.
40 Required by Item 1305 of Regulation S-K.
41 Required by Item 1302 of Regulation S-K.
42 An affiliate is defined as a person in a relationship of control with the issuer, which traditionally includes executive officers and directors of the company, as well as large shareholders.
43 An electronic filer must retain this manually signed attestation for as long as the signatory may use an electronic signature to sign an SEC filing (and in any case, at least seven years after the date of the most recent electronically signed SEC filing) and furnish a copy of the manual signature to the SEC upon request. For more information, see “Housekeeping Considerations: Ensure Criteria Are Met to Enable Use of Electronic Signatures” in our prior memo.