SEC Final Amendments On Disclosures For Registered Debt Offerings

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In This Article

• Rule 3-10:
• Rule 3-16:

On March 2, 2020, the SEC adopted amendments to the financial disclosure requirements applicable to registered debt offerings under Rules 3-10 and 3-16 of Regulation S-X. Rules 3-10 and 3-16 renumbered as Rules 13-01 and 13-02 under a new article 13 in the same Regulation. The amendments will:

• Facilitate easy understanding of the disclosure
• Reduce the cost of compliance for companies
• Eliminate unnecessary burdens on issuers
• Discourage unregistered debt-offerings

Rule 3-10:

Rule 3-10 of Regulation S-X requires financial statements of all issuers and guarantors of securities (that are registered or being registered) to be filed with the SEC. The rule includes exceptions, generally available for wholly-owned individual subsidiaries of a parent company on providing delineated disclosures.

The SEC believes that both issuers and the guarantor of registered securities have filed their audited annual and reviewed stub period financial statements under Rule 3-10. The amendments are similar to the present rule, defining the requirements to omit separate subsidiary issuer or guarantor financial statements.

Amendments:

• The exemption will be applicable if the subsidiary issuer’s or guarantor’s financial statement is consolidated in the parent company’s consolidated financial statements compared to the earlier requirement of the subsidiary issuer or guarantor to be 100%-owned by the parent company
• The amended financial disclosures require summarized financial information of the issuers and guarantors according to Rule 1-02(bb)(1) of Regulation S-X, which can be presented on a combined basis and reduce the number of periods presented.
• The amended non-financial disclosures will expand the qualitative disclosures about the guarantees and the issuers and guarantors.
• The amended rules allow registrants to exclude subsidiary issuer’s or guarantor’s financial disclosures from the footnotes and include it in their company’s audited annual and unaudited interim consolidated financial statements in all filings
• The issuer or guarantor will only be required to submit additional Alternative Disclosure to meet Exchange Act reporting obligations instead of the period the guaranteed securities are outstanding.
• The pre-acquisition financial statements of recently acquired subsidiary issuers and guarantors will not be required, excluding a significant acquisition.

Eligibility:

• The consolidated financial statements of the parent company have been filed
• The subsidiary or guarantor is a consolidated subsidiary of the parent
• The guaranteed security is debt or debt-like
• Either of the following structures must exist:
• The parent company must issue or co-issue the security, jointly and severally, with one or more of its consolidated subsidiaries; or
• The security must be fully and unconditionally guaranteed by the parent company, where its consolidated subsidiary issues or co-issues the security with other consolidated subsidiaries of the parent company.

The new rules include conforming amendments to apply to Rule 8-01 of Regulation S-X dealing with smaller reporting companies and Forms 1-A, 1-K, and 1-SA to apply to Regulation A issuers.

Rule 3-16:

Rule 3-16 requires a registrant to provide separate financial statements for each affiliate whose securities equals or exceeds 20% for any fiscal year presented by the registrant. The collateral is determined by comparing the highest amount among the aggregate principal amount, par value, book value, or market value of the affiliate’s securities to the principal amount of the securities registered or to be registered.

Amendments:

• The registrant will be allowed to submit the amended financial and non-financial disclosures of the affiliate’s collateral securities outside the footnotes in its audited annual and unaudited interim consolidated financial statements in all filings. The level of disclosure is based on materiality and would include certain line items of the balance sheet and income statement of the affiliate
• The collateral arrangement will be a supplement to the consolidated financial statements of the registrant
• The financial and non-financial disclosures of pledged securities must be provided in all cases irrespective of the numerical threshold unless immaterial

The amendments will be effective on January 4, 2021, with immediate permission to voluntary compliance.

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