On May 30, 2013, the Division of Corporation Finance at the Securities and Exchange Commission (the “SEC”) issued Frequently Asked Questions (“FAQs”) on disclosure relating to the use of conflict minerals from the Democratic Republic of the Congo (DRC) or adjoining countries. Although the FAQs have not been approved or disapproved by the SEC and are not considered rules or regulations, they provide useful insight into the SEC staff’s approach to, and interpretation of, the rules. For a discussion of the final conflict mineral rules, which were adopted by the SEC on August 22, 2012, please see Hinckley Allen’s Securities Alert entitled, “SEC Adopts Final Rules on Conflict Minerals — Thousands of Public Company Manufacturers Implicated” (September 11, 2012).
The FAQs provide the following guidance to issuers:
Voluntary Filers. The conflict mineral rules apply to all issuers that file reports with the SEC under Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including voluntary filers.
Mining Activities. Instruction 1 to Item 1.01 of Form SD excludes “mining” from the definition of manufacturing. In the FAQs, the SEC staff confirmed that activities customarily associated with mining of minerals, such as crushing and milling, extracting and smelting of lower grade ores, would not be deemed to be manufacturing under the conflict mineral rules.
Consolidated Subsidiaries. An issuer is subject to the conflict mineral rules if a product that has conflict minerals necessary to its functionality or production is manufactured or contracted to be manufactured by a consolidated subsidiary of the issuer.
Etching of a Logo onto a Generic Product. An issuer is not considered to be “contracting to manufacture” a generic product if the issuer is simply etching or otherwise marking a generic product manufactured by a third party with a logo, serial number or other identifier.
Generic Components in Products Manufactured or Contracted to be Manufactured by an Issuer. If an issuer manufactures or contracts to manufacture a product and conflict minerals are contained in a “generic” component included in the product, an issuer must still conduct a reasonable country of origin inquiry with respect to the conflict minerals in the generic component. The SEC staff does not draw a distinction between components of a product that an issuer directly manufactures and components that an issuer purchases to include in its manufactured product.
Packaging and Containers. The packaging or container sold with a product is not considered to be part of the underlying product, and only conflict minerals contained in the underlying product would be considered “necessary to the functionality or production” of a product (even if the packaging or container is used to preserve the usability of the product up to and following the product’s purchase). If, however, an issuer manufactures and sells packaging or containers independent of the product, such packaging or containers would themselves be considered products and be subject to the conflict mineral rules.
Equipment Used to Provide Services. The SEC staff does not consider equipment manufactured by an issuer for the provision of services (e.g., a cruise ship manufactured by a cruise line) to be “products” under the conflict mineral rules.
Tools, Machines and Other Equipment Subsequently Sold. If an issuer manufactures or contracts for the manufacture of tools, machines or other equipment (containing conflict minerals) for the manufacture of its products and subsequently sells the tools, machines or other equipment after using them, the SEC staff will not consider such tools, machines or other equipment to be “products” of the issuer under the conflict mineral rules.
Product Description. In providing a description of products that have not been found to be “DRC conflict free” or that are “DRC conflict undeterminable,” an issuer can describe its products based on its own facts and circumstances and is not required to describe its products using model numbers. However, the description in the Conflict Minerals Report must state clearly that the products “have not been found to be ‘DRC conflict free'” or are “DRC conflict undeterminable,” as the case may be.
Conflict Minerals Originating from the DRC but “DRC Conflict Free.” An issuer with products containing conflict minerals originating from the Democratic Republic of the Congo or an adjoining country must file a Form SD with a Conflict Minerals Report and obtain an independent private sector audit, even if the products are determined to be “DRC conflict free.” However, as the products are “DRC conflict free,” the issuer is not required to disclose the products containing the conflict minerals in its Conflict Minerals Report or provide a description of the facilities used to process the conflict minerals, the country of origin of the conflict minerals, or the efforts to determine the mine or location of origin with the greatest possible specificity.
Initial Form SD for an IPO Company. The SEC staff will not object if a newly public company that manufactures or contracts to manufacture products with conflict minerals necessary to the functionality or production of those products starts reporting for the first calendar year that begins no sooner than eight months after the effective date of the registration statement for its initial public offering. Thus, an issuer that goes public in July 2013 (which is within eight months prior to the start of the next calendar year) would be subject to the rules for calendar year 2015 and be required to file its first Form SD by May 31, 2016.
Form SD and Eligibility to Use Form S-3. The failure to timely file a Form SD will not cause an issuer to lose its eligibility to use a Registration Statement on Form S-3. According to the FAQ, eligibility to use a Form S-3 requires, among other things, that an issuer file in a timely manner during the prior twelve calendar months all reports and materials required to be filed under Sections 13(a), 14(a), 14(c) and 15(d) of the Exchange Act. The Form SD is required to be filed under Section 13(p) of the Exchange Act.
If you have any questions regarding the material discussed in this update, please contact the Hinckley Allen attorney with whom you regularly work.