25 Jun An introduction to SEC filings – Part II
Once a private company files a registration statement with the SEC and completes the requirements for an exchange listing, it may list on a national exchange if it meets the exchange's requirements. If it doesn't qualify, it may become eligible to trade on OTCMarkets' OTCQB tier once it finds a sponsoring market maker to file a Form 211 and obtain a ticker from FINRA.
When the registration process is complete, even if the company has no intention of trading, it's obliged to make periodic reports to the SEC, whether its initial statement was a Form 10 or an S-1. The only difference between a 1933 company and a 1934 company, in terms of reporting requirements, is that 1933 registrants are not bound by proxy rules, and their beneficial owners need not make insider trading reports.
Perhaps the most important of the filings required are Form 10-K, used for annual reports, and Form 10-Q, used for interim reports for the first three quarters of the company's fiscal year. The fourth quarter is included in the annual report.
If the company is a Large Accelerated Filer, which means it has a public float worth more than $700 million, it must file its K within 60 days of the end of its fiscal year, and its Q withing 40 days of the end of the quarter. Accelerated Filers—companies with a float worth between $75 million and $700 million—must file their Ks within 75 days and their Qs within 40 days. Naturally most penny stocks are Non-Accelerated Filers. They have 90 days to submit Ks, and 45 days to submit Qs. It's easy to check what category any stock falls into: it's noted just below the header of the filing, along with questions about whether the company has ever been a shell, whether it has any 12(g) or 12(b) registered stock, a statement noting the number of shares outstanding on the date of the filing, and more.
In a 10-K, the company must describe the nature of its business, and offer a brief history of its development. It will also describe risk factors associated with the sector in which it operates, and, if appropriate, specific to the company. Accounting methods used must be explained, and management must offer an analysis of its own performance. Stock issuance and a discussion of any debt carried by the company—this includes an explanation of debt financing entered into, which is particularly important information for shareholders—will be included. Any legal proceedings in which the company may be embroiled, and any regulatory actions, if pending, must also be discussed. If it will not be filing a proxy statement within the next four months, a list of greater-than-5% shareholders, and the size of their holdings, must be appended, along with an accounting of executive compensation.
Material events that transpired between the end of the fiscal year and the date of filing, if any, must be reported in a “subsequent events” section.
At the end of the document are the financial statements. They include the independent auditor's report, consolidated statements of operation, consolidated balance sheets, other accounting reports, if applicable, and notes. The notes often contain information that investors will find useful and interesting.
If the auditor includes a “going concern” statement in his report, shareholders may have reason to be concerned. While a warning that the company may not be able to continue as a going concern unless it succeeds in raising money is pretty standard for over-the-counter companies, if the company is exchange-listed, it's a big red flag.
10-Ks are complicated, long, and usually boring to read. But the effort is well worth the trouble, as it paints a detailed and comprehensive picture of the business and its progress, or lack thereof. With a little practice, red flags suggesting trouble ahead will become readily apparent to shareholders and prospective shareholders.
10-Ks must be audited; 10-Qs need not be. In them, companies are required to report financial results for the quarter in question, along with management's analysis and other material similar to that found in a K. But the information is less detailed, and the document is shorter. The company must include financials for the quarter, comparing them to those of the preceding quarter, and to the same quarter from the previous fiscal year.
8-Ks are familiar to just about everyone who follows the market. They must be filed to report a material event, and are due within four days of that “triggering event,” except in certain circumstances. Usually they're preceded or accompanied by a press release, though if the news is bad that's not always the case. Most 8-Ks are fairly short, though very long exhibits may be appended. They are worth following with attention.
Triggering events are identified and listed by the SEC. They include:
Entry into a material definitive agreement. This event would be an agreement made outside the company's ordinary course of business. Termination of material agreements must also be reported.
Bankruptcy or receivership. Detailed information about the proceedings must be provided.
Mine safety. If the company is in the mining business, it must report shutdowns and patterns of violations.
Completion of an acquisition or disposition of assets. All parties involved in the transaction must be named, and consideration given or received must be specified.
Results of operations and financial condition. If a company announces material non-public information about operations and financial condition between periods covered by annual and quarterly reports, it must file an 8-K. A filing is not required if the information is provided as part of a presentation made by means easily accessible to the public, such as a conference call, webcast, or website announcement. Thanks to a recent SEC pronouncement concerning the social media, the information could also be presented through the company's Facebook or Twitter account.
Creation of a direct financial obligation or an obligation under an off-balance sheet arrangement of a registrant. These would include long term debt obligations of any kind.
Events that accelerate or increase a direct financial obligation of an obligation under an off-balance sheet arrangement.
Costs associated with exit or disposal activities. If the company's board of directors disposes of an asset or terminates employees in certain circumstances, the associated costs of the actions must be reported.
Material impairments. If the company's board or officers determine that a material charge for impairment to any of its assets is required, it must file an 8-K.
Notice of delisting or failure to satisfy a continued listing rule or standard; transfer of listing. The registrant must disclose the date and reason for the the notice of delisting and the response it plans.
Unregistered sales of equity securities.
Material modification to rights of security holders. If documents defining the rights of any class of securities of the registrant are modified, it must be reported.
Changes in the registrant's certifying accountant. The resignation or dismissal of an independent accountant, and the appointment of a replacement must be reported. Sometimes two filings are required.
Non-reliance on previously issued financial statements—10-Ks or 10-Qs—or a related audit report. If the board of directors learns there are problems with financial reports already reported, it must file an 8-K, and subsequently restate the financials.
Changes in control.
Departure of directors or certain officers; election of directors; appointment of certain officers; compensation arrangements of certain officers.
Amendments to articles of incorporation of bylaws or change in fiscal year.
Temporary suspension of trading under registrant's employee benefit plans. If some employees of the company are to be subjected to a blackout period in connection with a change in the service provider of the plan, it must be reported.
Changes to the registrant's code of ethics.
Changes in shell company status. If a shell becomes an operating company, it must file an 8-K disclosing the terms of the transaction that caused the event.
Submission of matters to a vote of security holders.
Shareholder director nominations. Shareholders or shareholder committees wishing to nominate directors must be notified of the date by which their nominations must be submitted.
Regulation FD disclosure. Fully-reporting companies are required to make material information available to all shareholders and the public to be compliant with Reg FD (Fair Disclosure).
Other events. The company may, at its option, disclose any other information it believes is important to shareholders.
Once a company has filed its initial registration statement, and the statement has been deemed effective, the submission of 10-Ks, 10-Qs, and 8-Ks are the most important regular filing obligations it has. Some other types of filings are required less frequently, or in special circumstances. They will be discussed in our next installment.
See Part 1 of An Introduction to SEC Filings here.