As noted in  yesterday’s blog, the SEC has issued an Order instituting  proceedings  under Section 19(b)(2)(B) of the Exchange Act to determine whether to disapprove a proposal to amend Sections 312.03(b) and 312.04 (shareholder approval) of the NYSE Listed Company Manual.  The proposal would exempt from the NYSE’s shareholder approval requirements early stage companies that seek to issue, subject to audit committee approval, shares, for cash, to related parties, affiliates of related parties or entities in which a related party has a substantial interest. An “early stage company” would be defined as a company that has not reported revenues greater than $20 million in any two consecutive fiscal years since its incorporation. Under the proposal, the shareholder approval requirements of Sections 312.03(c) (issuance of 20% or more of shares) and 312.03(d) (change in control) would continue to apply.

As the rules currently stand, shareholder approval is required prior to the issuance of shares, when, among other circumstances,  the number of shares to be issued to one of the parties identified above exceeds either 1% of the number of shares of common stock or 1% of the voting power outstanding before the issuance.

This certainly appears to be an unusual action by the SEC. The SEC had received no comments on the proposal either when it was first published or when the comment period was extended. But because of the legal and policy issues involved, the SEC instituted “disapproval proceedings” to encourage comments to inform the SEC’s analysis.  Notwithstanding the title, the Order contends that the proceedings do not mean that the SEC has reached any conclusions. Rather, the SEC is seeking input on whether the proposal is consistent with the Exchange Act requirement that the rules of the securities exchanges be designed to, among other things, prevent fraud and manipulation,  promote just and equitable principles of trade and  protect investors and the public interest.  The proposal would allow shares to be issued, even at a discount, to related parties, without shareholder approval, and the SEC questions whether audit committee approval of these types of potentially dilutive transactions should suffice.