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E-MailDavid A. Katz and Wayne Carlin are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Katz and Mr. Carlin.
The SEC recently instituted a settled cease-and-desist proceeding against an issuer found to have violated SEC requirements relating to the disclosure of non-GAAP financial information in two earnings releases, with the issuer paying a $100,000 civil money penalty.
Item 10(e)(1)(i)(A) of Regulation S-K requires that an issuer including non-GAAP financial measures in SEC filings present, with equal or greater prominence, the most directly comparable financial measures calculated and presented in accordance with GAAP. The SEC 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.
This enforcement action highlights the importance of continued vigilance when presenting non-GAAP financial measures in earnings releases and SEC filings. Notably, there was no suggestion in the SEC’s order that the issuer formulated any non-GAAP measure in a misleading manner, or used it inconsistently. While the SEC has issued numerous comment letters as well as updated Compliance & Disclosure Interpretations regarding the use of non-GAAP financial measures, this is the first enforcement action regarding the failure of an issuer to present with “equal or greater prominence” the relevant GAAP financial measures.
