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ANALYSIS: COVID-19 Extends SEC Deadlines, Adds to IPO Risks

March 9, 2020, 12:00 PM

The coronavirus originating in Wuhan, China, has begun changing the way people live, work, and do business around the world. In the U.S., the Securities and Exchange Commission has responded to the COVID-19 outbreak by conditionally extending some of its filing deadlines for public companies experiencing coronavirus-related disruptions to their operations. Startups that have filed with the SEC to take their companies public have taken note of this new, uncertain environment by disclosing the material, adverse risks that COVID-19 poses to their businesses.

For publicly registered U.S. companies, the SEC is giving registrants affected by the coronavirus more time to comply with certain filing obligations, provided they can adequately explain why their circumstances merit regulatory relief. Registrants may use an additional 45 days to file certain disclosure reports otherwise due between March 1 and April 30. The SEC is not formally requiring additional disclosures specific to COVID-19.

U.S. IPOs Still Must Disclose ‘Most Significant’ Risks

For companies filing their IPOs on Form S-1 or an annual report on Form 10-K, the same risk factor disclosure rules described in Item 105 of Regulation S-K apply. That means a registrant must include “a discussion of the most significant factors that make an investment in the registrant or offering speculative or risky.” If COVID-19 is having, or is likely to have, a material impact on a business’s operations or financial results, a filer should include a discussion of that impact in the appropriate filing. Filers should be aware, however, that proposed SEC rules issued Jan. 30 may come into effect in the future. If adopted as written in the proposal, these rules would necessitate material changes to disclosure obligations in a company’s MD&A (Management’s Discussion and Analysis of Financial Condition and Results of Operations) in circumstances in which the outcome is uncertain, as is likely concerning COVID-19.

A review of non-confidential IPO filings (Form S-1s, plus related SEC staff comments and company response letters to those comments) uploaded to the SEC’s EDGAR system since China first reported the outbreak in its Hubei Province to the World Health Organization on Dec. 30, 2019, reveals that only six companies have disclosed coronavirus/COVID-19 among their Form S-1’s risk factors. No publicly available SEC staff comment letters or filer responses mention the virus. Those Form S-1 filings typically present the disclosed risks in a generic way, such as revealing that a pandemic disease like COVID-19 could have a material impact on the business’s operations and financial results.

Cole Haan IPO Discusses Risks to Sourcing, Manufacturing

The IPO filing by Cole Haan Inc. is the exception. The footwear and clothing accessories company sources some of its materials, and manufactures a number of its products, in China. Its Form S-1 breaks out in some detail how the coronavirus might adversely affect the company’s sourcing and manufacturing operations, and suppress consumer spending. Impacts mentioned include disrupted travel by people and transportation of freight, interrupted supply chains, reduced workforce availability, and material price increases arising from using alternate, non-China-based suppliers. The filing also includes additional discussion of the virus in its MD&A section, the only IPO filing to do so thus far.

As this virus spreads and its impact grows, more and more companies will feel the adverse effects to their operations and to their bottom lines. The more that happens, the more common COVID-19 virus disclosure will need to become.

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