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SEC Proposes Amendments to Smaller Company Capital - Raising Rules
June 7, 2007
On May 23, 2007 the Securities and Exchange Commission proposed a series of six measures to modernize and improve its capital raising and reporting requirements for smaller companies. Although the SEC has not yet released the text of the proposals, it stated in a press release that the proposals include:
- A new system of securities regulation for smaller public companies;
- Modified eligibility requirements so companies with a public float below $75 million can take advantage of the benefits of shelf registration;
- A new Regulation D 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;
- New Exchange Act exemptions for compensatory employee stock options; and
- Electronic filing of Form D (the form filed by companies making certain private or limited offerings).
In its press release, the SEC provided a brief overview of the proposals, which we have summarized below. We will provide a more detailed analysis of the proposals after the SEC releases the actual text of the proposals.
New System of Securities Regulation for Smaller Public Companies
The SEC stated that the proposed amendments would simplify the disclosure and reporting requirements for smaller companies, fold the current Regulation S-B disclosure requirements for smaller companies into the disclosure requirements of Regulation S-K, and expand eligibility for the Commission’s scaled disclosure and reporting requirements for smaller companies by making the scaled requirements available to all companies with up to $75 million in public float. Under the current rules the scaled disclosure system is available only to companies with revenues less than $25 million and a public float of less than $25 million.
Modified Eligibility Requirements relating to Shelf Registration
The SEC proposed to amend Form S-3 and Form F-3 to allow companies that do not meet the current $75 million public float requirements of the forms to register primary offerings of their securities. Companies 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 that they:
- 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.
New Regulation D Limited Offering Exemption
The proposed amendments to Regulation D would create a new exemption from Securities Act registration for sales to a new category of qualified purchasers. The new exemption would permit the issuer to engage in limited advertising. In addition, the proposed amendments would:
- expand the current category of “accredited investors” by adding an investments-owned standard to the current total assets and net worth standards;
- 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. Under the current rules the “bad boy” disqualification provisions apply only to offerings made under Rule 505 (for offerings of less than $5 million).
Shortened Holding Periods under Securities Act Rule 144 and Amendments to Rule 145
Rule 144 provides an exemption from the registration requirements of the Securities Act for certain resales of restricted securities, subject to holding periods. The proposed amendments to Rule 144 would:
- Shorten the holding period for restricted securities of reporting companies from one year to six months, subject to a provision that tolls the holding period for up to six months if the security holder is engaged in certain hedging transactions;
- Allow resales of restricted securities by non-affiliates of reporting companies after six months (up to 12 months if there is hedging) and by non-affiliates of non-reporting companies after 12 months; and
- For affiliates’ sales, raise the thresholds that trigger Form 144 filing requirements and eliminate the manner of sale limitations with respect to debt (but not equity) securities.
The SEC also proposed amendments to Rule 145 that would eliminate certain restrictions on resales of securities by parties to certain business combinations and their affiliates.
New Exchange Act Exemptions for Compensatory Employee Stock Options
Under current rules, unless it obtains a no-action letter from the SEC, a company that has 500 or more option holders and at least $10 million in assets on the last day of its fiscal year is required to register under the Exchange Act and become a reporting company. Thus, with the growth in broad-based employee stock option plans, privately held companies can find themselves required to register prior to the time they intend to go public. The SEC has proposed an exemption from this Exchange Act registration requirement for compensatory employee stock options.
Electronic Filing of Form D
Companies making private or limited offerings under Regulation D are required to make a filing with the SEC on Form D. Unlike many of the filings required by the SEC, Form D is a paper filing. The proposed amendments would simplify and update Form D and require electronic filings.
The comment period for the proposals will end 60 days after their publication in the Federal Register. We will publish additional information regarding the proposals after the SEC releases the text of the proposals.