In Wake of Market Volatility, SEC Urges Issuers to Be More Transparent with Investor Disclosures

On February 8, 2021, the SEC’s Division of Corporation Finance posted updated guidance that strongly encourages companies that are raising capital during times of market volatility to be more detailed and transparent in their disclosures to investors. The guidance describes examples of market volatility, such as:

• recent stock run-ups or recent divergences in valuation ratios relative to those seen during traditional markets
• high short interest or reported short squeezes
• reports of strong and atypical retail investor interest (whether on social media or otherwise)

According to the SEC, companies wishing to raise capital when the market is experiencing drastic fluctuations should take into account “market events and conditions, the company’s situation, and the potential impact on investors” when filing disclosures. In order to give an accurate picture of the risks involved when investing, the SEC recommends that issuers address items such as recent price volatility, known risks for investing, recent changes in financial condition, any inconsistences between stock price and actual operating performance/value, and any dilutive impact future offerings may have on current investors.

While the SEC’s guidance is general in nature, it comes on the heels of the recent GameStop saga that saw the market dramatically and frenetically influenced by a cohort of determined day traders organized through Reddit. Absent any real change in operating performance or company value, companies like GameStop, AMC Theatres, Bed Bath & Beyond, and Blockbuster—whose stocks are routinely targeted by short sellers—saw drastic spikes and eventual plunges in their stock prices as retail traders orchestrated a temporary trading frenzy.

Such events can create major risks for both investors and companies alike. The SEC places the onus on companies to provide investors with enough information to make well-informed decisions regarding the purchase of securities and the risks involved, especially when those risks are heightened by market fluctuations. If you have any further questions pertaining to company disclosures and best practices while raising capital during times of volatility, please contact a member of Barton’s securities team.