Rule 144, 145 Changes; Canadian Pay Rules

Proposed changes to ease restrictions on certain sales of securities, part of a larger plan by the Securities and Exchange Commission to improve the process of raising capital, are winning support in the financial reporting community.

Last week the SEC closed the public comment period on its proposals for Rule 144 and Rule 145 of the Securities Act. Rule 144 creates a safe harbor for the sale of securities under the exemption set forth in Section 4(1) of the act; Rule 145 establishes resale limitations on certain persons who acquire securities in business combination transactions. The changes to those rules are expected to increase the liquidity of privately sold securities and to cut the cost of capital for all companies.

The two dozen comments made about the rules were generally positive, although some suggested a few changes to the SEC.

“Overall, the proposals represent a dramatic and positive set of steps to help smaller public companies raise necessary capital on a timely basis and at a lower cost of capital than the current regulations permit,” wrote David Feldman, managing partner of the law firm Feldman Weinstein & Smith.

A comment letter from the law firm Cleary, Gottlieb, Steen & Hamilton also called the changes “a positive and significant step,” and said the amendments “should reduce the cost to issuers of raising capital through private placements by increasing the liquidity, and thus the value, of restricted securities, thereby reducing the discount that investors charge to purchase restricted securities.”

The proposed amendments to Rule 144 would shorten the holding period for restricted securities of reporting companies to six months, and reintroduce a provision that delays the holding period for up to six months while the security holder is engaged in certain hedging transactions. Additionally, the proposals would allow resale of restricted securities by non-affiliates of reporting companies after satisfying a six-month holding period (up to 12 months if there is hedging) and by non-affiliates of non-reporting companies after satisfying a 12-month holding period. The measures would also codify several SEC staff interpretations related to Rule 144, simplify the Preliminary Note to Rule 144, eliminate the manner of sale restrictions on debt securities, and increase the Form 144 filing thresholds.

Proposed amendments to Rule 145 would eliminate the presumptive underwriter position in Rule 145(c) except for transactions involving a shell company and would revise the resale requirements in Rule 145(d).

Feldman

Still, many commenters said there’s room for improvement. In particular, some objected to the proposed delay provision for hedged positions, which they said would increase the cost of capital for issuers. Calling it “ill-advised and unnecessary,” Feldman wrote: “Given the continuous disclosure available to the capital markets today … and the overwhelming prevalence of program and institutional trading in the equity markets, we respectfully disagree with the notion that only people who hold a security for six months (or a year) are not underwriters.”

He continued, “We believe there is very little practical basis remaining for distinguishing between primary offerings by issuers and after-market trading.”

Similarly, the Cleary Gottlieb letter says the reinstitution of tolling is “likely to be generally problematic from a practical, operational standpoint, will impose unnecessary additional costs on capital raising, and is unnecessary to achieving the Commission’s stated purpose.”

The proposals, published for comment in June, are part of a package of six measures aimed at modernizing the capital raising and reporting requirements for smaller companies, making it easier and cheaper for those companies to raise capital. They stem from recommendations made in April 2006 by an SEC Advisory Committee on Smaller Public Companies.

Other measures under consideration include a new system of securities regulation for smaller public companies that would make scaled regulation available to a larger group of companies; modified eligibility requirements so companies with a public float below $75 million can take advantage of shelf registration; a new exemption from Securities Act registration requirements for sales of securities to a newly defined category of “qualified purchasers,” in which limited advertising would be permitted; new exemptions from Exchange Act registration requirements for compensatory employee stock options; and electronic filing of the form filed by companies making private or limited offerings.

Canada Delays New Pay Disclosure Rules

Canadian securities regulators have delayed the implementation of proposed new executive compensation disclosure requirements.

The proposed rules were originally supposed to take effect Dec. 31, 2007, in time for the 2008 proxy season.

“After extensive review and consideration of the comments received, we have decided to revise the proposal and delay implementation,” the Canadian Securities Administrators wrote in an Aug. 31 notice.

The CSA said it will publish an amended version of proposed Form 51-102F6 for comment later this year. The move follows a comment period that ended June 30, during which the CSA received 41 comment letters on the proposals.

The measures are aimed at updating Canada’s current disclosure requirements for executive compensation, which date back to 1994. The proposed rules—Proposed Form 51-102F6, Statement of Executive Compensation—are generally similar, but not identical to, those adopted last year by the Securities and Exchange Commission.

Among other things, the proposals call for the summary compensation table to include a column showing the total compensation provided to each named executive officer; a new compensation discussion and analysis section that explains the rationale for specific compensation programs for executives; the disclosure of all equity compensation in the summary compensation table on the basis of the compensation cost of the awards over the requisite service period, as reflected in a company’s financials, rather than according to the number of shares or other securities granted; and more specific disclosure of potential payments to NEOs upon termination, including more detail on retirement benefits.