Increasing Access to Public Markets: Rule 3-13 Relief

In a series of recent public statements (most recently in February 2018), the SEC has encouraged companies to pursue relief under Rule 3-13 of Regulation S-X—the regulation that specifies the form and content of financial statements required by public companies. Pursuant to Rule 3-13, the SEC Staff may permit the omission of financial statements that are otherwise required under Reg S-X or the substitution of such required financial statements with other statements of comparable character. Companies seeking relief must submit a written request to the Staff that is consistent with investor protection.

For companies considering an IPO or other transaction, such as a significant acquisition, that will trigger the inclusion of audited and/or pro forma financial statements, Rule 3-13 may provide welcome relief. Because the preparation of audited financial statements is often a gating item, it is generally a threshold question in determining the deal timeline. If the required statements, once identified, are burdensome and do not appear to provide information that would be material to investors, the company should consider seeking Rule 3-13 relief.

Prior to making a written request for relief, the company should review the SEC’s Financial Reporting Manual (FRM), which provides examples where the Staff has permitted others to omit or provide modified financial statement disclosures and the criteria under which such relief was granted.

For example, the Staff has granted include waivers related to financial statements of significant acquisitions that are required by Rule 3-05 to allow:

  • abbreviated financial statements in lieu of full financial statements for a recently acquired business; and
  • the omission of one or more years of historical financial statements for a recently acquired business.

Based on the Staff’s stated goals to facilitate capital formation and public statements by senior SEC officials, like SEC Chairman Jay Clayton, encouraging companies to seek relief if they feel that strict application of Regulation S-X is unduly burdensome and not in furtherance of the SEC investor protection mandate, it seems likely that the Staff will continue to be receptive to requests for Rule 3-13 relief. As further evidence of the Staff’s collaborative approach in this area, the Staff will allow and has encouraged companies to contact the Staff in advance of making a written request for relief. This flexibility, which is not afforded in many similar circumstances, allows companies an opportunity to assess the likelihood that a request would be granted prior to devoting time and resources to a formal request. We encourage companies to make these initial assessments and discuss them with their independent auditors early so that they can maximize the potential benefit of Rule 3-13.

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