Risk & Compliance

SEC Urges Heightened Disclosure During Volatility

Companies should address “the effects of a potential ‘short squeeze’ due to a sudden increase in demand for your stock.”
Matthew HellerFebruary 9, 2021

The U.S. Securities and Exchange Commission has recommended that companies include additional information and risk factors in their disclosures when they sell shares in particularly volatile market conditions.

The move comes 10 days after the SEC said it would work to protect investors by reviewing the recent trading volatility that fueled a meteoric rise in the stocks of GameStop and AMC Entertainment.

Such volatility “can create risks for both companies and investors,” the SEC said in a news release, adding that those risks can be particularly acute when companies seek to raise capital amid high short interest or reported short squeezes.

“When a company seeks to raise capital under these types of circumstances, specific, tailored disclosure about market events and conditions, the company’s situation, and the potential impact on investors is warranted,” the SEC said.

The commission suggested that on the cover page of a prospectus, companies “describe the recent price volatility in your stock and briefly disclose any known risks of investing in your stock under these circumstances.”

When listing risk factors, moreover, issuers could include intra-day stock price range information and address “the effects of a potential ‘short squeeze’ due to a sudden increase in demand for your stock” and “the impact on investors that purchase shares during this time.”

As The Wall Street Journal reports, regulators have been evaluating how to respond to the recent surge in the share prices of GameStop and other companies, with the Treasury Department last week meeting with financial watchdogs to discuss the recent trading volatility.

The SEC’s new guidance “is particularly relevant because the SEC usually doesn’t review documents related to raising capital such as automatic shelf registration statements before they are acted upon,” the Journal said. “Many larger companies qualify for automatic registration based on their size and history of issuing securities.”

The SEC may have recently received filings that didn’t address issues related to the market volatility, so it wants to be transparent about its expectations, according to Nicholas Losurdo, former counsel to SEC Commissioner Elad Roisman. “Having this out there eliminates some guesswork for companies,” he said.