SEC Adopts JOBS Act Inflation Adjustments
By Marissa Dressor, Mayer Brown
On September 9, 2022, the Securities and Exchange Commission (SEC) announced amendments to its rules in order to implement inflation adjustments mandated by the JOBS Act. The SEC’s amendments increase the annual gross revenue threshold for emerging growth companies and raise certain dollar amounts contained in Regulation Crowdfunding. Pursuant to the JOBS Act, the SEC is required to make inflation adjustments to various JOBS Act rules at least once every five years.
Title I of the JOBS Act added Securities Act Section 2(a)(19) and Exchange Act Section 3(a)(80) that define the term “emerging growth company.” Pursuant to the statutory definition, the SEC is required to index to inflation the annual gross revenue amount used in determining EGC status. The SEC therefore adopted amendments to Securities Act Rule 405 and Exchange Act Rule 12b-2 to adjust the EGC threshold from $1.07 billion to $1.235 billion.
Title III of the JOBS Act added Securities Act Section 4(a)(6), which provides an exemption from the registration requirements of Section 5 of the Securities Act for certain crowdfunding transactions. Sections 4(a)(6) and 4A of the Securities Act set forth dollar amounts to be used in connection with the crowdfunding exemption. The SEC implemented inflation adjustments for Rules 100 and 201(t) of Regulation Crowdfunding, which cover offering maximum and investment limits, and financial statement requirements, respectively. The SEC noted, due to increases it made in March 2021 to Regulation Crowdfunding’s offering limit contained in Rule 100(a)(1), it is declining to further increase the $5 million offering limit. Please see the Fact Sheet for the specific dollar amounts in Rules 100 and 201(t), as adjusted for inflation.
SEC Adds New Industry Offices
By Jason Hyatt, Latham & Watkins
On September 9, 2022, the Securities and Exchange Commission (SEC) announced its plan to add two new industry offices to its Division of Corporation Finance’s Disclosure Review Program (DRP). The two new offices are the Office of Crypto Assets and the Office of Industrial Applications and Services. The two new offices will join the seven existing focused offices under the DRP.
The Office of Crypto Assets will review filings involving crypto assets and will allow the SEC to focus its attention and resources on the unique and evolving filing issues related to crypto assets.
The Office of Industrial Applications and Services will be responsible for the non-pharma, non-biotech, and non-medicinal products companies currently assigned to the Office of Life Sciences. In recent years, the number of companies assigned to the Office of Life Sciences has significantly increased. The SEC believes that transitioning some companies to this new office will allow the DRP staff to better build specialized expertise in this space.
The DRP expects the new offices will be established later this fall.
SEC Chief Accountant Addresses Use of Non-Local Auditors to Avoid HFCAA
By Thomas W. White, Retired Partner, WilmerHale
Acting Chief Accountant Paul Munter of the Securities and Exchange Commission (SEC) recently warned China- and Hong Kong–based issuers about attempting to avoid the strictures of the Holding Foreign Companies Accountable Act (HFCAA) by using auditors other than local China- or Hong Kong–based registered public accounting firms.
As discussed in prior notes on the HCFAA, foreign issuers will be subject to US trading prohibitions if their auditors are not subject to full inspection and investigation by the Public Company Accounting Oversight Board (PCAOB), due to positions taken by the auditors’ home country regulators, for three consecutive years. At present, the potential trading prohibitions apply to companies whose auditors are headquartered in mainland China or Hong Kong, though the PCAOB and Chinese regulators recently reached an agreement that, if implemented to the PCAOB’s satisfaction, could result in lifting the threatened trading prohibitions.
In a recent statement, Mr. Munter noted that some China- and Hong Kong–based issuers have begun attempting to structure audit engagements not with local China- or Hong Kong–based accounting firms, but with accounting firms located in the US or elsewhere. Mr. Munter described structures in which issuers with multiple locations or business units might choose to retain a lead auditor that is already able to be inspected and investigated completely by the PCAOB (i.e., headquartered somewhere besides China or Hong Kong) and that (1) uses, and assumes responsibility for, the work or reports of other independent auditors, or (2) directly engages another independent accounting firm or other individual accountants to participate in the audit under the direction of the lead auditor. Mr. Munter stressed that PCAOB auditing standards impose significant responsibilities on the lead auditor under either structure, notably including the requirement that audit documentation be retained by or be accessible to the lead auditor. He also noted that issuers seeking to change auditors to remediate an HCFAA problem have responsibilities regarding communications with the predecessor auditor, which also include access to the predecessor auditor’s documentation. (Although unstated, Mr. Munter’s comments appear to presuppose that non-local lead auditors may have difficulties meeting their responsibilities, because the local auditors will be restricted by local regulations in their ability to satisfy the lead auditor’s requirements.)
Mr. Munter raised the specter of enforcement action if lead auditors do not comply with their responsibilities under PCAOB rules and standards: “The failure of the retained lead auditor to meet any of its legal or professional obligations with respect to PCAOB inspection and investigative demands, or the failure of the lead auditor to comply with all applicable audit standards can result in significant liability for not only the auditor and its personnel, but also for the issuer.” He also warned of potential liability not only for accounting firms and their associated persons, but also issuers, their audit committees and officers and directors, if they engage in what he calls “an efficient breach”—thinking that avoiding the uncertainty of HCFAA is worth the potential costs of violating other legal and audit requirements.