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SEC Penalizes Issuer for Presenting Non-GAAP Financial Measures Without Giving Equal Prominence to GAAP Measures

In a cease-and-desist order dated December 26, 2018, the Securities and Exchange Commission enforced rules regarding the disclosure of non-GAAP financial measures, resulting in a $100,000 penalty to the violating issuer. With earnings season approaching, this enforcement action provides a timely reminder that the Commission remains focused on disclosure of non-GAAP financial measures.

Item 10(e)(l)(i)(A) of Regulation S-K provides that an issuer, when including a non-GAAP financial measure in a filing with the Commission, must include a presentation, with equal or greater prominence, of the most directly comparable financial measure or measures calculated and presented in accordance with GAAP.

The Commission found that the issuer failed to satisfy this “prominence” requirement in two of its earnings releases:

  • In the headline of an earnings release, the issuer presented its adjusted EBITDA (a non-GAAP financial measure) for the fiscal year and stated that adjusted EBITDA was up 8% year-over-year, without mentioning the issuer’s net income or loss (the comparable GAAP financial measure) in the headline;
  • In the headline of a subsequent quarterly earnings release, the issuer presented its adjusted EBITDA for the quarter and stated that adjusted EBITDA was up 7% year-over-year, without mentioning the issuer’s net income or loss in the headline; and
  • In its quarterly earnings release, the issuer listed “FIRST QUARTER 2018 HIGHLIGHTS,” including bullet points noting (with dollar amounts) that adjusted EBITDA was up 7%, adjusted net income was up 26%, and adjusted net income per share was up 10%, without providing comparable GAAP financial measures for net income or loss in the HIGHLIGHTS section.

It is worth noting that there was no suggestion in the Commission’s order that the issuer formulated any non-GAAP measure in a misleading manner, or used it inconsistently. 

The full text of the Commission’s enforcement action is available here.

© 2020 Bracewell LLP


About this Author

Gary W. Orloff, Domestic, Foreign, Transactions, attorney, Bracewell

Gary Orloff has experience in domestic and foreign transactions, with specific emphasis on the legal and business implications of business plans and strategies, particularly in the areas of corporate and project finance. An experienced securities lawyer, Mr. Orloff is equally knowledgeable regarding mergers, acquisitions and divestitures, including management and leveraged buy-outs. He advises corporate clients, master limited partnerships and other entities on governance, fiduciary duties and change of control.

Mr. Orloff represents committees...

Troy L. Harder, Bracewell, SEC Representation Lawyer, Finance, Capital Markets Attorney

Troy Harder advises clients in all aspects of corporate and securities law, with an emphasis on corporate finance transactions. He has experience representing both issuers and investment banks in a wide range of capital markets transactions, including initial public offerings, public and private offerings of debt and equity securities, tender offers, consent solicitations and exchange offers. He also counsels clients in connection with SEC reporting and corporate governance and compliance matters, including insider reporting and compliance with the rules of the New York Stock Exchange and NASDAQ.

Mr. Harder has represented companies involved in all aspects of the energy industry, including exploration and production companies, master limited partnerships, pipeline joint ventures and oilfield services companies. His experience with MLPs includes both representation of the partnerships in connection with a variety of capital markets transactions and representation of conflicts committees in connection with drop-down transactions. He has also advised companies in a variety of other industries, such as private equity firms, bank holding companies, investment banks and manufacturing companies.

Shannon Baldwin Securities Lawyer Bracewell

Shannon Baldwin represents privately owned and publicly traded companies in securities matters, capital markets, corporate governance, joint ventures, mergers and acquisitions, and master limited partnership (MLP) dropdown transactions. In addition, she represents companies in equity and debt offerings, including public and private issuances and private investment in public equity (PIPE) transactions.