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As we know, the SEC is required by the Jumpstart our Business Startups (JOBS) Act to conduct a study of the key disclosure regime of the Securities Exchange Act of 1934, contained in Regulation S-K. Pretty much every SEC filing connects you to disclosure requirements in S-K, whether for public offerings, ongoing periodic reporting, proxy statements and the like. In fact it's known as the integrated disclosure system.
The thing is, many feel the requirements in S-K make things difficult. Complex compensation disclosures, detailed discussion of comparative financial results, reporting of all related party transactions, specific, sometimes hard to understand review of dilution from an offering and the like. In a perfect world theoretically unlimited disclosure will reduce fraud and the misleading of the public. But since disclosure cannot be unlimited, the focus should be on what is material to an investor. Unfortunately, the requirements are there and must be complied with regardless of materiality.
In a private offering to unaccredited investors under Regulation D, all the information that would be in a full SEC registration statement has to be provided to the unaccredited invetors. However, an issuer is permitted to exclude information that is not material to an investor. Yes the determination of materiality is left to the issuer. But, for example, a one month old company can argue that including audited financial statements vs. unaudited information is not material because it is not going to be important to an investor in making their investment decision.
The hope is that the SEC looks at the myriad of disclosure requirements individually to ask if they really do meaningfully add to the mix of information for potential investors and recommends ways to reduce the dislosure burden with the goal of lowering the cost of going and staying public and make capital formation easier. I look forward to seeing the results of the study.
For additional insights on reverse mergers, SPACs, other alternatives to traditional initial public offerings, the small and microcap markets and the economy, visit the Reverse Merger and SPAC Blog by David N. Feldman, Esq., Partner of Richardson & Patel LLP.
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