Reading SEC documents can be a tricky business. There’s the up-front information, and then there’s the hidden information that you have to know to look for. In this week’s article, first published by (and reprinted with kind permission from) our esteemed colleagues at Apra-Louisiana, HBG Senior Researcher Grace Chandonnet reminds us of the importance of reading the small print. ~Helen
Read the footnotes! It’s not new advice, but it is important and bears repeating. When evaluating the stock holdings of an individual, it is so important to read the footnotes in a proxy statement underneath the beneficial ownership section.
I know, it’s tempting to just take the number in the “total amount of beneficial ownership” column (let’s call it the ABO column), price the stock, and call it a day. But sometimes there is important information in the footnotes that will value that person’s stake very differently.
Recently, I was attempting to determine a prospect’s stake in a publicly traded pharmaceutical company. The ABO column indicated that he owned more than 1.4 million shares, which were worth a total of about $367 million. Very exciting news for a fundraiser of course!
However, an aggregator resource I was using indicated that this individual’s stake in this company was worth a much smaller amount. When I drilled down into the footnotes, I saw this:
“Includes shares under outstanding stock appreciation rights and restricted stock units that executive officers may acquire within 60 days.”
The footnote went on to indicate the number of shares that my prospect could acquire within that time frame, which was about 1.2 million shares. This piece of information led me to search Form 4s filed within 60 days of the date of the proxy statement to see if there were any transactions indicating that he actually had acquired any of those 1.2 million shares.
It turned out that he had not, so his stake was substantially smaller than suggested by the number in that ABO column and was much closer to the amount suggested by the aggregator resource I was consulting – about $47 million at that time. Still, that’s not an insignificant amount, but it’s definitely enough of a difference to change the capacity rating that I assigned the prospect.
Other important information that can be found in the footnotes includes a breakdown of indirect holdings.
Sure, your prospect may beneficially hold 10% of a company’s stock, but three percent might be owned by a trust where he shares voting power with other trustees, two percent by a family foundation (the existence of which might be good news for your organization), one percent in a retirement plan that is restricted as to when they can be exercised, and another two percent by his wife (which is especially important if the spouse is the member of the couple that has a closer affinity to your organization). This brings his direct stake down to two percent of the company’s stock. That’s still good news, but it’s a much different picture of his ability to use his stock to support your organization.
Something else to consider when researching stock holdings (as in my example above), after you check the most recent proxy statement and get an idea of your prospect’s stake, remember to look at any Form 4s that have been filed since the proxy statement. This can give you two important pieces of information:
1) If your prospect has sold a chunk of stock recently, she may have some liquid wealth available to gift to your organization!
2) The number of shares she now owns will be different depending on whether she has acquired shares or disposed of them, so this will change what you report to a gift officer, president, or dean about her possible wealth.
One last example
I’d like to close with an example of a very creative use of information found in footnotes that was relayed to me by a prospect research colleague.
The prospect researcher worked in the advancement department of a prominent university at the time and was working with “Sam,” an SEC form-savvy fundraiser. Sam was having trouble convincing the dean that he should visit a parent prospect who Sam knew instinctively was worth the time and trouble, although neither the researcher nor Sam could prove it through extensive research.
The prospect worked for a sizeable private equity company and represented that company on the board of a portfolio company that was about to go public. The footnotes in the proxy clearly indicated that the stake in the company held in the prospect’s name were (in reality) beneficially owned by the private equity company he worked for, but the fundraiser showed the dean the raw number in the ABO column and what that stake was worth without mentioning the footnote.
Suitably impressed, the dean agreed to meet with the prospect who has since made more than one seven-figure gift to the university. His daughter, who was a student at the time, is now also deeply involved with the university.
Disclaimer: This is definitely not intended to advocate for withholding information from your dean or fundraiser – it’s just another way to illustrate the importance of reading the footnotes!