On November 5, the Securities and Exchange Commission announced enforcement actions against 10 companies for failing to make the required disclosures about financing deals and other unregistered sales that diluted their stock.
A public company is required to file a Form 8-K to inform investors when shares of its common stock are sold in transactions that are not registered with the SEC under the federal securities laws and constitute at least one percent of the last reported number of outstanding shares (five percent in the case of a “smaller reporting company”). A company also must report on Form 8-K when it has entered into a material definitive agreement, including a financing agreement not made in the ordinary course of business. These disclosures enable investors to be aware that stock dilution has occurred as a company issues additional shares in a financing transaction or other unregistered sales that have the effect of reducing the earnings per share and an investor’s percentage of ownership in the company.
SEC investigations found that each of the 10 companies failed to make the required 8-K disclosure for a stock dilution scenario. Three of the companies additionally failed to report accurate numbers when later disclosing the outstanding shares of their common stock in quarterly or annual reports. The companies all agreed to settle the SEC’s charges, and the SEC assessed a total of $350,000 in penalties.