The SEC approved on Thursday, November 15, 2007, a series of rule changes designed to modernize and improve certain regulations regarding capital-raising, reporting and sales of restricted securities. These amendments will impact smaller public companies, in particular, but also liberalize the reporting requirements applicable to foreign reporting companies and provide relief to non-affi liated holders of restricted securities of all reporting and non-reporting companies.
Smaller Business Issuers
In order to simplify the reporting requirements for smaller companies and provide them with improved access to the capital markets, the SEC replaced the “small business issuer” classifi cation with a broader category. This new category, designated “smaller reporting companies,” comprises reporting companies with less than $75 million in public equity fl oat or, where public fl oat cannot be calculated, less than $50 million in revenues in the last fi scal year. Currently, scaled reporting is available to “small business issuers,” defi ned as U.S. or Canadian companies with revenue and public fl oat of less than $25 million. The SEC’s announcement stated that this expanded category included 1,500 issuers, in addition to those already included under the “small business issuer” classification.
The following changes to current reporting and disclosure requirements would apply to smaller reporting companies:
- The current “SB” forms will be eliminated.
- Scaled non-fi nancial disclosure requirements will be moved to Regulation S-K.
- Scaled fi nancial statement requirements will be amended, including the requirement of two years of balance sheet information rather than one, and will be moved to Regulation S-X.
- Smaller reporting companies will be able to comply with the new scaled disclosure requirements on an item-by-item (à la carte) basis.
These amendments will become effective 30 days after publication of the adopting release.
The SEC has yet to adopt its previously announced proposal to change the availability of Form S-3 for smaller companies, but last week members of the SEC staff informally indicated that they expect the SEC to move forward on that proposal soon, possibly before year-end.
All foreign companies that elect to comply with the SEC’s reporting and disclosure requirements may fi le as “smaller reporting companies” if they provide fi - nancial statements prepared in accordance with U.S. GAAP.
Rule 144 and Rule 145
The SEC also announced signifi cant amendments to existing Rule 144 and Rule 145. The amendments are designed to liberalize many restrictions on resales of restricted securities and securities held by affi liates and to codify various interpretations by the SEC staff.
Rule 144 will be amended to reduce the holding period for sales of restricted securities by non-affi liates of reporting companies from two years to six months (subject only to compliance with the current information requirements of Rule 144(c)). The amendments also will allow non-affi liates of non-reporting companies freely to resell restricted securities after satisfying a 12-month holding period.
The manner of sale requirements currently in effect under Rule 144 will be amended with respect to affi liate sales of equity securities and eliminated with respect to affi liate sales of debt securities. Also, the volume limitations applicable to resale of debt securities by affiliates will be relaxed.
These amendments will become effective 60 days after publication of the adopting release.
Employee Stock Options
Lastly, the SEC announced the creation of two new exemptions for compensatory employee stock options so that the Exchange Act registration requirements will not be triggered solely by a company’s compensation decisions. These amendments will become effective immediately upon publication of the fi nal release.