How Coronavirus Disease 2019 (COVID-19) Will Impact Offering Materials of Public and Private Issuers
The rapidly developing news on the spread of the Coronavirus Disease 2019 (“COVID-19”) in the United States and other nations across the world has resulted in significant turmoil in global financial markets, bringing renewed attention to the manner in which unforeseen circumstances of this nature should be reflected in the offering of public and private securities.
OFFERING MATERIALS
The materials prepared in connection with an offering of securities should address the actual and prospective financial impact of the outbreak on the issuer and the issuer’s anticipated response. In a recent release regarding the impact of COVID-19, SEC Chairman Jay Clayton noted that “how companies plan and respond to [COVID-19] events as they unfold can be material to an investment decision”, a clear indication that the SEC (and the plaintiff’s bar) will expect robust COVID-19 disclosure in offering materials.
MD&A and Recent Developments. A management discussion and analysis of the actual and prospective financial impact of the outbreak on an issuer of securities and its plan of action for addressing consequences of the outbreak would be appropriate to include as part of the description of the business of the issuer or in a section of the offering materials describing “recent developments”. Where the issuer has recent quantitative or qualitative financial data reflecting the impact of the outbreak on its financial performance that is materially different than the most recent quarterly unaudited or annual audited financial statements included as part of the offering materials, it may be appropriate to include as “flash” numbers in a section on recent developments on the issuer (particularly when the impact is adverse).
Forward Looking Projections. It may also be appropriate for the management of the issuer to forecast the potential impact of the outbreak on the financial performance of the issuer under different scenarios where future financial performance is expected to differ materially from past financial performance. It is important that projections of financial performance under future scenarios are properly caveated, including by acknowledging that the actual performance is expected to differ, and may differ materially, from what is forecast and that projections are made in a manner that is in compliance with Regulation FD when appropriate. In the SEC’s recent release, Mr. Clayton reminded issuers that “companies providing forward-looking information in an effort to keep investors informed about material developments, including known trends or uncertainties regarding coronavirus, can take steps to avail themselves of the safe harbor in Section 21E of the Exchange Act for forward-looking statements.”
Risk Factors. The risk factor section included in the offering materials for a securities offering should also specifically address any risk of a material nature to the operations of the issuer, which will vary based on the sector of the real estate industry in which the issuer is investing. Examples of these risks may include potential business interruptions resulting from the outbreak, negative impacts to tenants resulting from the outbreak, the expectation of rent concessions or delays to support tenant financial viability, rentability of vacant space post-recovery, slow-down in commercial activity and the movement of goods, access to capital or other issues impacting liquidity (near term and short term) and, to the extent relevant, healthcare, privacy and other comparable topics relevant to the issuer’s tenant base and information in its possession. The SEC (and the plaintiff’s bar) values specificity and context in risk factor disclosure. On numerous occasions, the SEC staff has cautioned the importance of not relying on boilerplate language and merely hypothetical risks, especially when in fact, such risks have been or are occurring.
