While the Securities and Exchange Commission’s internal control guidance grabbed the spotlight last week, the Commission also proposed a series of measures to modernize the capital raising and reporting requirements for smaller companies, which experts say will make it easier and cheaper for those companies to raise capital.
Patel
“For smaller businesses, this is huge,” says Nimish Patel, a partner in the law firm of Richardson & Patel. “This is how they’re going to make it or break it in a tough climate to raise capital. These proposals will relieve a major burden on smaller companies.”
Among the proposals, which are in line with some recommendations made last year by the SEC’s Advisory Committee on Smaller Public Companies, are:
A new system of securities regulation for smaller public companies that would make scaled regulation available to a much 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;
Shortened holding periods under Securities Act Rule 144 for restricted securities to reduce the cost of and increase access to capital;
New exemptions for compensatory employee stock options so Exchange Act registration requirements wouldn’t be triggered solely by a company’s compensation decisions; and
Electronic filing of the form filed by companies making private or limited offerings.
PROPOSAL
Below is an excerpt of the new rules proposed by the SEC for small companies raising capital.
Revisions to the Eligibility Requirements for Primary Securities Offerings on Forms S-3 and F-3
[C]ompanies with less than $75 million in public float would be able to register primary offerings of their securities on Form S-3 or F-3, provided such companies:
do not sell more than the equivalent of 20% of their public float in primary offerings registered on Form S-3 or Form F-3, as applicable, over any one-year period;
meet the other eligibility conditions for the use of Form S-3 or Form F-3, as applicable; and
are not “shell companies” and have not been shell companies for at least 12 months before filing the registration statement.
Exemption of Compensatory Employee Stock Options from Registration under Section 12(g) of the Exchange Act
The Commission is proposing two amendments to Exchange Act Rule 12h-1. These amendments would:
Provide an exemption for private non-reporting issuers from Exchange Act Section 12(g) registration for compensatory employee stock options issued under employee stock option plans; and
Provide an exemption from Section 12(g) registration for compensatory employee stock options issued by issuers that have registered under Section 12 of the Exchange Act the class of securities underlying the compensatory stock options.
New Regulation D Limited Offering Exemption
The proposed amendments would:
Establish a new exemption from the Securities Act registration provisions in new Rule 507 of Regulation D for sales of securities to a new category of qualified purchasers, “Rule 507 qualified purchasers,” with respect to which the issuer could engage in limited advertising;
Add an investments-owned standard to the current total assets and net worth standards under which investors can qualify as “accredited” in other Regulation D offerings;
Provide for adjustments to the definition of “accredited investor” in Regulation D to account for inflation, with the first adjustments to occur in five years;
Shorten the integration safe harbor in Regulation D from six months to 90 days; and
Apply uniform, updated disqualification provisions to all offerings under Regulation D.
Electronic Filing of Form D
The proposed amendments would:
Mandate the electronic filing of the information required by Form D using a new online filing system that would be accessible using the Internet and that would automatically capture and tag data items;
Revise and update the Form D information requirements; and
Simplify and restructure Form D.
Revisions to Securities Act Rules 144 and 145
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 tolls the holding period for up to six months while the security holder is engaged in certain hedging transactions;
Substantially simplify compliance by allowing 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 – with no additional requirements;
For affiliates’ sales, raise the thresholds that trigger Form 144 filing requirements and also eliminate the manner of sale limitations with respect to debt securities;
Simplify and streamline the Preliminary Note to and other parts of Rule 144; and
Codify certain staff interpretations relating to Rule 144.
Source
SEC (May 23, 2007)
Patel say he expects to see more capital formation as a result of the proposed rule changes. “I think we’ll see more smaller companies able to access capital they wouldn’t have been able to before,” he says.
Others, however, say the changes don’t go nearly far enough to ease the regulatory burden for smaller companies.
Morgenstern
While he says the proposals are “helpful,” Marc Morgenstern, a partner at law firm Sonnenschein Nath & Rosenthal, says they are primarily technical and “none of them are earthshaking.”
“If I was a company deciding between going public or not, the proposed changes would not help me make the decision to go public,” Morgenstern says.
Among other things, the proposed amendments to the disclosure and reporting requirements would:
Make the Commission’s scaled disclosure and reporting requirements available to all companies with up to $75 million in public float;
Combine for most purposes the two current categories of small-business issuers and non-accelerated filers into a single new category of “smaller reporting companies”;
Integrate current Regulation S-B disclosure requirements into the disclosure requirements of Regulation S-K; and
Rescind the Commission’s “SB” forms for smaller companies.
Patel says the proposed amendments to Rule 144 and to Form S-3 are among the most significant for companies.
Among other things, proposals to amend Rule 144 would shorten the holding period for restricted securities of reporting companies to six months and reintroduce a provision that tolls the holding period for up to six months while the security holder is engaged in certain hedging transactions; and would allow the 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—with no additional requirements.
Patel says shortening the holding period to six months from the current 12 months will enable companies to lower significantly the discount they offer investors when they raise capital through the sale of restricted securities.
Proposed amendments to Form S-3 and Form F-3 would revise the eligibility requirements to allow companies that don’t meet the current public float requirements of the forms to nevertheless register primary offerings of their securities, subject to a restriction on the amount of securities those companies may sell pursuant to the expanded eligibility standard in any one-year period.
If the amendments are adopted, members of the Corporation Finance staff noted that it would mark the first time in 15 years that the SEC has modified the public float eligibility requirements for primary offerings on Form S-3.
Other proposed amendments relate to Rule 145, amendments to Exchange Act Rule 12h-1, and Regulation D.
Comments on the proposals are due within 60 days of their publication in the Federal Register.
The Commission is also soliciting comment on whether to permit affiliates of issuers that are subject to the filing requirements of Section 16 of the Exchange Act to satisfy their Form 144 filing requirements instead by timely filing a Form 4.
The SEC said the full text of the releases on these items will be posted to its Web site as soon as possible.
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