SEC Pursues Violations of Rule 12b-25: Has "Broken Windows" Returned?
The U.S. Securities and Exchange Commission ("SEC") has charged a group of small companies with making deficient filings on Form 12b-25, harkening back to the SEC's "broken windows" strategy from the last decade.
For the second time in just over two years, the U.S. Securities and Exchange Commission ("SEC") has charged a group of small companies with making deficient filings on Form 12b-25 (commonly referred to as a "Form NT"). On August 22, 2023, the SEC announced settled proceedings against five companies for allegedly violating Section 13(a) of the '34 Act and Rules 13a-11 and 12b-25 thereunder. Each company allegedly filed a Form NT containing boilerplate language about its inability to timely complete its quarterly or annual report, but the SEC alleged that each company knew when it filed the Form NT that the delay, in fact, stemmed from an anticipated restatement or correction of prior financial reporting. Some of the companies also allegedly omitted required disclosure of anticipated significant year-over-year changes in operating results. Without admitting or denying the SEC's findings, each company consented to civil penalties of either $35,000 or $60,000.
The ReShape Lifesciences Inc. order illustrates the typical fact pattern. The company's Form NT stated only that it was "unable, without unreasonable effort or expense, to file its Form 10-Q … within the prescribed time periods as it requires additional time to complete the compilation of information for its financial statements and related disclosures." Three days later, the company filed its Form 10-Q disclosing "the correction of an immaterial error in the computation of the weighted average shares used to compute basic and diluted net loss per share." There were no other changes to prior financial results, but the Form 10-Q revealed a 153% increase in quarterly operating loss versus the prior year. According to the SEC, the company knew but did not disclose this information when it filed its Form NT.
As with its identical sweep in April 2021, the SEC does not allege that the deficient Form NT filings were fraudulent or harmed investors, and each company charged was a thinly traded microcap issuer. As we noted at the time, the SEC attributed the previous sweep to its use of data analytics, which it also presumably applied here.
While the charges and fines involved in these cases are relatively minor, they harken back to the SEC's "broken windows" strategy from the last decade, which saw the SEC pursue even small infractions. It is yet unclear whether these cases signal a revival of that controversial strategy, but they show that the SEC is closely watching what public companies say in their filings and will hold them to strict compliance with disclosure rules, even in the absence of investor harm. Therefore, public companies facing delays in their periodic reporting should ensure that they provide candid and complete disclosures in their Form NT filings and eschew boilerplate of the sort the SEC challenged here.
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