In addition to the annual report on Form 1-K and semiannual report
on Form 1-SA, the final rules require issuers to submit current reports on Form 1-U. The final rules are being adopted largely as proposed with one change and some technical amendments and additional guidance designed to ease compliance with the final rules and eliminate potential confusion as to the scope and applicability of the disclosure requirements. The final rules require issuers to submit a report on Form 1-U when it experiences one (or more) of the following events:
Fundamental changes;653
Bankruptcy or receivership;
Material modification to the rights of securityholders;
Changes in the issuer’s certifying accountant;
Non-reliance on previous financial statements or a related audit report or completed interim review;
Changes in control of the issuer;
652 See Rule 257(c).
653 As discussed below, disclosure pursuant to this requirement is limited to the entry into or termination of material definitive agreements resulting in fundamental changes in the nature of an issuer’s business. More generally, a fundamental change in the nature of an issuer’s business includes major and substantial changes in the issuer’s business or plan of operations or changes reasonably expected to result in such changes, such as significant acquisitions or dispositions, or the entry into, or termination of, a material definitive agreement that has or will result in major and substantial changes to the nature of an issuer’s business or plan of operations.
Departure of the principal executive officer, principal financial officer, or principal accounting officer; and
Unregistered sales of 10% or more of outstanding equity securities.
Additionally, as proposed, Item 9 of final Form 1-U contains provisions for disclosing other events not directly required of issuers in the form. As noted above in the context of suggestions by commenters to require or permit quarterly reporting by issuers,654 issuers that elect to provide relevant information to the market on, for example, a quarterly basis may do so pursuant to Item 9 (Other Events) of Form 1-U.655
Notwithstanding the view of some commenters,656 we believe that Form 1-U
should be required of all Tier 2 issuers, including smaller issuers. We believe that, on balance, the benefit of requiring a uniform base level of disclosure to investors of current event reporting for all issuers in Tier 2 offerings outweighs any potential additional compliance cost to smaller issuers. Additionally, given the inclusion of only the most significant events in the list of disclosable current events on Form 1-U, we do not anticipate that issuers, particularly smaller issuers, will on average be required to file many reports in this regard.
In a change from the proposed rules, and consistent with the suggestions of commenters,657 the final rules increase the threshold below which an issuer need not report unregistered sales of equity securities pursuant to Item 8 of Form 1-U from 5% to
654 See fn. 639 and 604 above.
655 An issuer seeking to, for example, report information that satisfies, and on a frequency that accords with, the requirements of Exchange Act Rule 15c2-11(a)(5) and (g) or Securities Act Rule 144A(d)(4) may do so pursuant to Item 9 of Form 1-U.
656 ABA BLS Letter; Milken Institute Letter.
657 ABA Letter; MoFo Letter.
10% of the number of shares outstanding of the class of equity securities sold. We believe that this increase in the threshold below which an issuer would not be required to report such sales remains consistent with our general approach to the final rules for Form 1-U—namely, that Form 1-U should reflect the most significant or substantial events that an issuer may experience in the interim period between the filing of the required periodic reports.
We are not amending Item 1 of Form 1-U to alter the use of the term “fundamental change,” as suggested by some commenters. 658 We are, however, revising Instruction 2 to Item 1 to make clear that the transactions described therein are deemed to be “fundamental changes” solely for purposes of Item 1 of Form 1-U and should not be read to influence the definition of that term in other contexts.659 Item 1 of Form 1-U is meant to require issuers to disclose material definitive agreements, including agreements to acquire other entities, which result or would reasonably be expected to result in fundamental changes to the nature of the issuer’s business or plan of operations. As Instruction 2 to Item 1 indicates, certain transactions are deemed to involve fundamental changes, and disclosure of these transactions, as prescribed by Item 1 is required.
Consistent with the suggestion of one commenter,660 we are narrowing from the proposed rules the applicability of Instruction 2(a) so that an acquisition transaction will only result in a fundamental change for these purposes if the purchase price, as defined by U.S. GAAP and IFRS, exceeds 50% of the total consolidated assets of the issuer as of the end
658 See E&Y Letter; see also ABA BLS Letter; Canaccord Letter.
659 Item 1(d) to Form 1-U.
660 E&Y Letter.
of the most recently completed fiscal year.661 We believe that this is consistent with our general goal of only requiring disclosure of significant and substantial matters that may affect an issuer’s business or plan of operations. We believe that this requirement is appropriately tailored for the types of issuers likely to conduct Tier 2 offerings by providing them with important flexibility as to the determination of a “fundamental change,” while providing clear guidance that certain transactions will always trigger disclosure under Item 1.
On a related point, we continue to believe, despite the suggestions of some commenters,662 that a fundamental change standard for some of the disclosure requirements in Form 1-U is a more appropriately tailored standard for Tier 2 issuers than a broader materiality standard. A fundamental (as opposed to a material) change to the nature of an issuer’s business includes major and substantial changes to the issuer’s business or plan of operations or changes reasonably expected to result in such changes.663 The final rules reflect our belief that, on balance, Tier 2 issuers should only be required make disclosures in Form 1-U that reflect major and substantial changes to business plans or operations, as opposed to material events that are otherwise reportable in their periodic reports. Moreover, we do not believe that a fundamental change standard will cause confusion or raise concerns as to the applicability of other standards applicable in the anti-fraud provisions of the federal securities laws.
661 Instruction(s) 2(b)-(c) to Item 1 of Form 1-U are adopted, as proposed.
662 E&Y Letter; Massachusetts Letter 2; NASAA Letter 2; WDFI Letter.
663 See Instruction 2(a) to Item 1 for the circumstances when an acquisition transaction would be deemed to trigger a fundamental change for purposes of Form 1-U.
Additionally, we note that Item 6 of Form 1-K and Item 2 of Form 1-SA permit issuers to disclose any information required to be disclosed under Form 1-U, but not so reported. For example, if an event occurs that would, under normal circumstances, require an issuer to file a Form 1-U within four business days, but such issuer is due to file either its annual or semiannual report within that period, then the issuer may instead report such information in its periodic report.
Finally, contrary to the suggestions of some commenters,664 we continue to
believe that the requirement to report unregistered sales of securities in Item 8 of Form 1-U will provide investors with valuable current information as to significant capital raising events by the issuer and should be disclosed in a timely manner to the market. We therefore retain this disclosure requirement in the final rules.665
As adopted, Form 1-U must be filed within four business days after the
occurrence of any of the triggering events, and, where applicable, will permit issuers to incorporate by reference certain information previously filed on EDGAR.666 Notwithstanding the suggestions of some commenters,667 we believe that requiring issuers to file the form within four business days, as opposed to fifteen business days, is appropriate in an ongoing reporting regime that otherwise only requires issuers to provide annual and semiannual reports. Further, we are concerned that extending the filing deadline for Form 1-U reports would make the reporting of disclosable events no longer