January 29, 2025
SEC Enforcement Targets Accounting for Stock-Based Compensation
One of the final enforcement actions announced during Gary Gensler’s tenure as SEC Chair highlights one of the many traps for the unwary when modifying stock awards. The Cooley PubCo blog describes this commonly considered scenario at issue in the enforcement action:
Celsius, a developer and seller of fitness energy drinks traded on the Nasdaq Capital Market, usually provided that unvested stock awards to employees and directors would be forfeited if the individual left the company. However, in the second and third quarters of 2021, the SEC alleged, for six departing employees and retiring board members, “Celsius accelerated the vesting periods or allowed vesting to continue past their departure date, so the stock awards to these individuals would not be forfeited or cancelled upon their departure.”
ASC Topic No. 718 governing Stock Compensation requires a revaluation of awards as of the date of any modification, which includes changes to the vesting terms. The SEC alleged that the company did not have adequate internal accounting controls to reasonably assure that any equity award modifications were properly accounted for and, as a result, no one “consulted” ASC 718 or took steps to ensure the modifications were accounted for in accordance with GAAP. This caused some issues:
In a current report on Form 8-K filed in March 2022, the company disclosed that its stock-based compensation expenses had been materially understated for two quarters, and that, as a result, Celsius had overstated net income by approximately 400% for the three months ended June 30, 2021, and understated net loss by approximately 130% for the three months ended September 30, 2021. In its 2021 Form 10-K, the company included restated financial information for the periods ended June 30, 2021, and September 30, 2021, which “caused Celsius’s previously reported net income to become a net loss for the three- and nine-month periods ended September 30, 2021.”
Anytime you’re considering changes to outstanding equity awards, it’s time to consult the accountants and lawyers. The proxy disclosure implications of modifying equity awards are discussed in the “Executive Compensation Disclosure Treatise” — including in the “Summary Compensation Table” Chapter and the “Equity Tables” Chapter.
– Meredith Ervine