Non-accelerated filers and other small companies have received an early Christmas gift of relaxed rules for capital-raising and reporting requirements from the Securities and Exchange Commission, part of a concerted effort to make raising capital simpler and cheaper for the little guy.
Approved Nov. 15, the three amended rules are part of a package of measures proposed over the summer. Among other things, the new rules expand eligibility for the SEC’s scaled disclosure and reporting requirements for smaller companies; shorten the holding periods for restricted Securities under Rule 144 of the Securities Act; create two new exemptions for compensatory employee stock options; and eliminate the current “small business issuer” category.
White
John White, director of the Division of Corporation Finance for the SEC, told commissioners that three more proposals—to expand eligibility for use of short form registration, to revise Regulation D, and to require electronic filing of Form D—are “all actively moving forward … It’s our goal to have those recommendations before you in the near future.”
What’s Approved Now
The amended rules significantly expand eligibility for the SEC’s scaled disclosure and reporting requirements for smaller companies. When the amendments take effect, companies with less than $75 million in public equity float will qualify for the scaled requirements. Companies that don’t have a calculable public equity float will be eligible if they had revenues of less than $50 million in their last fiscal year. Issuers can choose to comply with scaled disclosure on an item-by-item basis.
The changes mean an additional 1,500 companies will be eligible for the scaled requirements, White told commissioners at an SEC meeting last week.
Atkins
While the increased threshold is much higher than the current $25 million (set in 1992), Commissioner Paul Atkins said the SEC should revisit the $75 million threshold—which is the starting point for accelerated filers. “This test is already more than five years old and, I think, already outdated,” he remarked.
The amendments also move the scaled disclosure requirements from Regulation S-B into Regulation S-K and eliminate the “SB” forms. SB filers, however, have the option to continue using the SB forms for their periodic filings until their next annual report.
White said the staff has drafted a 12-page booklet to provide guidance for SB issuers on using the 10-K form for annual reports, written in Q&A format.
The SEC did not include indexing the eligibility ceiling for inflation in the definition of smaller reporting companies, as originally proposed. But it has not abandoned the idea. Rather, White said, a “larger project to look at indexing across the board” is underway, and the definitions of large accelerated filer, accelerated filer, and non-accelerated filer would be part of that analysis.
The rules take effect 30 days after their publication in the Federal Register.
Revisions to Rules 144 and 145
SEC SPEAKS
Below is a portion of the statement by SEC staffer Johanna Losert on changes to rules 144 and 145 of the Securities Act.
Although the Commission proposed to reintroduce a tolling provision that would suspend the Rule 144 holding period for the length of time that a security holder owning restricted securities of a reporting company engages in hedging activities, we do not recommend that you adopt it. We were persuaded by the public commenters that a reintroduction of the tolling provision would unduly complicate Rule 144 and require security holders and intermediaries to incur significant costs to monitoring hedging activities to comply with the provision in the absence of strong evidence that hedging activity has resulted in abuses in the context of Rule 144. We will continue to monitor the hedging activities of holders of restricted securities and revisit the issue if necessary.
We also recommend that you adopt amendments to substantially simplify Rule 144 compliance for a shareholder who is not an affiliate of the issuer and has not been an affiliate for at least three months before the sale of the securities. Specifically, we recommend that you permit a non-affiliate of a reporting company to freely resell his or her securities after holding them for six months, subject only to the Rule 144(c) public information requirement. We further recommend that you allow non-affiliates of both reporting and non-reporting companies to freely resell their restricted securities without having to comply with any other Rule 144 condition after satisfying a one-year holding period.
Source
SEC. (Nov. 15, 2007)
Amendments to Rule 144 shorten the holding period for the resale of restricted securities from one year to six months. They also allow non-affiliates of reporting companies to resell restricted securities after a six-month holding period and non-affiliates of non-reporting companies to resell restricted securities after a 12-month holding period. White said the discount on restricted securities should be “significantly reduced” by the shortened holding periods.
In a significant departure from the proposing release and in response to strong public criticism, the SEC did not reintroduce a tolling provision that would have suspended the holding period while a security holder engaged in hedging activities. SEC staff member Johanna Losert said the staff was persuaded by comments that bringing back tolling would “unduly complicate Rule 144,” and she added that no strong evidence exists that hedging activity has resulted in abuses in the context of the rule. But, she said, the SEC will monitor hedging activities of holders of restricted securities and will revisit the issue if necessary.
The amendments also raise the thresholds that trigger Form 144 filing requirements from 500 shares or $10,000 to 5,000 shares or $50,000; codify certain staff interpretations relating to Rule 144; and revise the manner of sale requirements and volume limitations. Cox said as a result of the changes to Rule 144, the SEC expects the number of Form 144 filings to drop by nearly 60 percent.
Related amendments to Rule 145 eliminate the presumptive underwriter provision, except for shell companies. The amendments to Rule 144 and 145 take effect 60 days after publication in the Federal Register.
Cox did ask White about public response to the SEC’s idea of consolidating Form 144 and Form 4 filings. White said commenters “like the idea, but at the end of the day we thought it was too complicated at this stage, given the amount of work it would require,” including reprogramming the EDGAR filing database. “We decided that needs to be a project for another day, hopefully not too far off,” White said.
Compensatory Employee Stock Options
The amendments provide two new exemptions from Section 12(g) of the Securities Exchange Act, which addresses registration of compensatory employee stock options. One exemption is for private non-reporting issuers, the other for reporting companies. The exemptions don’t extend to the class of securities underlying those options. Those amendments take effect upon publication in the Federal Register.
The adopting releases aren’t yet posted on the SEC Web site. The SEC noted that full text of the detailed releases on the amendments will be posted as soon as possible.
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