Going Green in your IPO

GOING GREEN IN YOUR IPO

Environmental Issues When Going Public
By Lynne Bolduc, Esq.

Introduction
Disclosure regarding environmental laws and issues has been required by the United States Securities and Exchange Commission SEC since the 1970s. Now the SEC is also requiring disclosure regarding climate change.
The Basics
Disclosure regarding costs of compliance penalties for noncompliance, and effects on the business of environmental laws and issues is currently required in the following sections of disclosure documents, such as prospectuses:¹:

• Item 101. Description of Business: Disclose costs of and effects that compliance with environmental laws may have upon capital expenditures, earnings, and the competitive position of the company.

• Item 103. Legal Proceedings. Disclose any threatened or pending environmental litigation or regulatory issues.

• Item 303. Management’s Discussion and Analvsis. Disclose the actual costs of compliance with and capital expenditure required by environmental laws. Also disclose known trends, events, demands, commitments, and uncertainties that are reasonably likely to have a material effect on the company’s financial condition or results of operation such as proposed environmental laws.

• Item 503. Risk Factors. Include risk factors relating to penalties for noncompliance with environmental laws and business related risks for costs of compliance.

New Requirements
On February 8, 2010, the SEC issued guidance² stating that climate change issues must also be considered as part of the environmental disclosures described above as follows:

• Item 101. Description of Business: This item now also requires disclosure of any material estimated costs for environmental control facilities required by laws regulating greenhouse gasses and potential decreased demand for goods or services that produce greenhouse gas emissions.

• Item 303. Management’s Discussion and Analysis. This item now requires companies to assess whether any climate change legislation or regulation is reasonably likely to have a material effect on the company’s financial condition or results of operations. The SEC also requires management to have sufficient information regarding the company’s greenhouse gas emissions and other operational matters to make this assessment.

• Item 503. Risk Factors. A risk factor may need to be added regarding existing or pending legislation related to climate change.

This is a sample general climate change risk factor that you can tailor for your own use:
“Climate Change, Climate Change Regulations and Greenhouse Effects May Adversely Impact our Operations and Markets.

There is a growing political and scientific consensus that emissions of greenhouse gases GHG continue to alter the composition of the global atmosphere in ways that are affecting and are expected to continue affecting the global climate. Climate change, including the impact of global warming, creates physical and financial risk. Physical risks from climate change include an increase in sea level and changes in weather conditions, such as an increase in changes in precipitation and extreme weather events. Climate change could have a material adverse effect on our results of operations, financial condition, and liquidity. [NEED TO EXPLAIN HOW AND GIVE SPECIFIC EXAMPLES.]

We may become subject to legislation and regulation regarding climate change, and compliance with any new rules could be difficult and costly. Concerned parties, such as legislators and regulators, shareholders and non-governmental organizations, as well as companies in many business sectors are considering ways to reduce GHG emissions. Many states have announced or adopted programs to stabilize and reduce GHG emissions and federal legislation has been proposed in Congress. While little progress has been made on these proposals in Congress, it is likely that federal legislation limiting GHG emissions may be imposed in the U.S. soon. If such legislation is enacted, we could incur increased energy, environmental and other costs and capital expenditures to comply with the limitations. Unless and until legislation is enacted and its terms are known, we cannot reasonably or reliably estimate its impact on our financial condition, operating performance or ability to compete.

We could face increased costs related to defending and resolving legal claims and other litigation related to climate change and the alleged impact of our operations on climate change.”
Industry Considerations

Certain industries have more environmental concerns than others, some of which aren’t readily apparent:

• Any companies that extract materials from the ground, such as mining and oil and gas companies;

• Any companies that build, buy, or finance other companies to build or buy land or structures affixed to land, such as construction and real estate and companies financing those industries;

• Companies using hazardous or toxic substances, such as dry cleaners;

• Companies which discharge gasses into the air, such as the automotive and motorsports industries, transportation, utilities, and manufacturing;

• Companies that grow things, including wineries;

• Companies with locations or operations near coastlines or in flood plains; and

• Insurance companies.

Positive Disclosure
The SEC notes that not all disclosure regarding climate change and other environmental issues is negative. Changes in the law or business practices of companies in response to the law may provide new opportunities. These changes may create demand for new products or services. A shift in the business of a company to respond to these new opportunities should be described in the Description of Business, while the cost of gearing up to take advantage ofnew opportunities should be described in Management’s Discussion and Analysis with any resulting risks described in the Risk Factors.

Conclusion
Save yourself some time and money by considering the environmental issues, including climate change, before filing with the SEC. This consideration will either prompt you to add the disclosure and avoid an SEC comment or, at the very least, have an answer ready if the SEC asks you why you didn’t make any disclosure regarding climate change or other environmental issues. If you are making positive disclosure, proceed with caution not to be too promotional to avoid an SEC comment.

About the Author
Lynne Bolduc, a partner at Oswald Yap LLP in Irvine, California, is a corporate and securities attorney. She represents private and public companies, as well as investment bankers and broker/dealers. Her services include contract review, negotiation, and drafting; mergers and acquisitions; Rule 144 opinions; private offerings; public offerings; and SEC reporting requirements. Lynne has structured and implemented over $1 billion in financings. Contact Lynne at info@oswald-yap.com or 949/788-8900.

Websites: www.oswald-yap.com and www.144opinions.com.

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¹ Item numbers refer to those items described in Regulation S-K of the Securities Act of 1933.
² SEC, 17 CFR Parts 211, 231 and 241 Release Nos. 33-9106; 34-61469; FR-82; Commission Guidance Regarding Disclosure Related to Climate Change; found at http://www.sec.gov/rules/interp/2010/33-9106.pdf.