SEC Open Meeting--Three Proposals to Benefit Smaller Companies Adopted

By Cydney Posner

Earlier this year, the SEC proposed six new rule modifications, in response to the recommendations of the SEC Advisory Committee on Smaller Public Companies, designed to modernize the process of capital-raising and to provide regulatory relief for smaller companies. Please see the May 23 News Brief. At an open meeting this morning, the SEC adopted, substantially as proposed, three of those proposals. The other three proposals are still on tap.

Smaller Reporting Company Regulatory Relief and Simplification

The SEC voted to adopt amendments to the Securities Act and the Exchange Act to expand the number of companies that qualify for the scaled disclosure requirements for smaller reporting companies. Under the amendments, the scaled requirements would be available for companies with less than $75 million in public equity float or, for companies without a calculable public equity float, annual revenues below $50 million. The SEC decided not to adopt the original proposal to "index" the $75 million eligibility threshold (too complex), but there was some discussion about the need to revisit the threshold in the future. The new category of companies will be called "smaller reporting companies." The "SB" forms and Reg S-B and are being eliminated, with the scaled disclosure requirements integrated into Reg S-K. The new rules retain the provisions that will allow eligible companies to select whether to comply with the scaled or regular reporting requirements on an item-by-item basis. The staff estimated that, as a result of the changes, an additional 1,500 companies would become eligible to use the new scaled disclosure model. The new rules will be come available 30 days after publication in the Federal Register.

Revisions to Rules 144 and 145

The SEC also adopted amendments to Rule 144 (1) to shorten the 144(d) holding period from one year to six months for the resale of restricted securities of companies that have been public reporting companies for at least 90 days, (ii) to reduce the restrictions applicable to resales of restricted securities by non-affiliates of both reporting and non-reporting companies, (iii) to codify several staff interpretations relating to Rule 144 and (iv) to revise the manner of sale requirements, volume limitations and Form 144 filing thresholds. In addition, related amendments to Rule 145 were adopted. While these amendments were adopted substantially as proposed, notably, the new rules do not include the proposal to reintroduce a tolling period in the event the holder engaged in hedging. Public comments suggested that the proposal would be too complex and costly to monitor. However, the staff intends to monitor whether the level of abuse, especially in connection with Rule 504 of Reg D, and may revisit the issue. Other changes initiated as a result of public comments were (i) to eliminate the manner of sale and to relax the volume requirements for debt securities and (ii) to raise the threshold for filing of Forms 144 to more than 5,000 shares or $50,000. The concept of coordinating filing of Form 144 and Form 4 was viewed favorably, but was not implemented because it was too complex.

Exemption of Compensatory Employee Stock Options from Registration under the Securities Exchange Act of 1934

The SEC also adopted amendments to Rule 12h-1 under the Exchange Act to provide exemptions for both private and public reporting companies from the registration requirements of the Exchange Act for compensatory employee stock options. For private companies, the exemption will be available if optionees are limited to employees, directors and consultants to the extent permitted under Rule 701, transferability is restricted and Rule 701-type information is provided (as if in connection with sales of over $5 million in 12 months) The new exemptions do not apply to other forms of equity compensation, but that issue may be reexamined in the future.

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In other matters, the SEC adopted amendments to Form 20-F, Rules 1-02, 3-10 and 4-01 of Reg S-X, Forms F-4 and S-4 and Rule 701 under the Securities Act to accept financial statements prepared in accordance with IFRS as issued by the International Accounting Standards Board without reconciliation to US GAAP when contained in the SEC filings of foreign private issuers.