The SEC Adopts Smaller Reporting Company Regulatory Relief and Simplification
On November 15, 2007, the SEC voted to eliminate Regulation S-B as well as all forms “SB,” and integrate Regulation S-B’s operative provisions into Regulation S-K. In addition, the SEC voted to combine the definitions of “Small Business Issuer” and “Non-Accelerated Filer” into a single category of companies called “Smaller Reporting Companies.”
Pursuant to the Release, an issuer would qualify for “Smaller Reporting Company” status if it has a public float of less than $75 million1, or, for those companies that cannot calculate their public float, yearly revenues of less than $50 million.2 Investment companies and asset backed issuers will still be excluded from being able to qualify as a Smaller Reporting Company.
In contrast to Regulation S-B, all foreign private issuers who otherwise meet the float/revenue requirements will now be able to qualify as Smaller Reporting Companies. However, if a qualifying foreign private issuer chooses to prepare its financial statements pursuant to the scaled disclosures available under Item 310, such foreign private issuer must do so in accordance with U.S. GAAP.
As all Forms SB will no longer be available, a Smaller Reporting Company will be required to check a box on the front of the form it is filing with the SEC to indicate that it qualifies for Smaller Reporting Company status.
For scaled disclosure purposes, the old Regulation S-B requirements have generally been integrated into the corresponding Item in Regulation S-K. As such, companies that qualify as Smaller Reporting Companies will be able to utilize scaled disclosures similar to those allowed under Regulation S-B.
Revised Regulation S-K allows companies qualifying as Smaller Reporting Companies to pick and choose for each disclosure Item whether to use the standard or scaled disclosure, and to vary its choice of disclosure between each periodic report. The one exception to this rule is that a company’s financial statements must be prepared in the same manner consistently for the entirety of the fiscal year.
Transition To and From Smaller Reporting Company Status
Transition to and from Smaller Reporting Company status will follow the model currently used to determined “accelerated filer” status. A company will lose eligibility to claim Smaller Reporting Company status in the first fiscal year following a fiscal year in which the company’s public float exceeds $75 million as of the last business day of the second fiscal quarter, or, alternatively, when its revenues for the fiscal year exceed $50 million.
Conversely, a company that previously did not qualify for Smaller Reporting Company status will not become eligible for scaled disclosures until the first fiscal year following a fiscal year in which the company’s public float falls below $50 million as of the last business day of the second fiscal quarter, or, alternatively, when its revenues for the fiscal year fall below $40 million.
The SEC Adopts Revisions to Rules 144 and 145; Regulation S
On November 15, 2007, the SEC voted to revise Rule 144 to shorten the holding period of restricted securities prior to resale and to revise Rule 145 to eliminate most instances of a presumed underwriter under Rule 145(a). These changes will apply retroactively to securities acquired before the effective date and thereafter.
Revisions to Rule 144
Revised Rule 144 establishes a shortened waiting period for both affiliates and non-affiliates of reporting companies and non-reporting companies with respect to restricted securities.
With respect to reporting companies, an affiliate of a reporting company is now allowed to begin resales of restricted securities of such company after a six-month holding period, so long as such affiliate complies with all other Rule 144 requirements. A non-affiliate of a reporting company may begin resales of restricted securities after a six-month holding period, subject only to current information of the issuer being publicly available. Following a one-year holding period, non-affiliates are permitted to resell restricted securities without being subject to any other Rule 144 requirements, so long as such non-affiliate has not been an affiliate for at least three months prior to the sale.
For non-reporting companies, the holding period for restricted securities for both affiliates and non-affiliates has been reduced to one year. After such one year holding period, affiliates are allowed to begin resales subject to all other Rule 144 requirements. Following the one-year holding period, non-affiliates of nonreporting companies may resell restricted securities without complying with any other Rule 144 requirements.
Summary Table of Changes to Rule 144 Holding Periods
Modification of Manner of Sale Limitations for Equity Securities
Revised Rule 144 permits the resale of equity securities, outside of “brokers’ transactions,” through riskless principal transactions in which trades are executed at the same price, exclusive of any explicitly disclosed markup or markdown, commission equivalent or other fee, and the rules of the applicable self-regulatory organization permit the transaction to be reported as riskless.
Elimination of Manner of Sale Limitations for Debt Securities
Revised Rule 144(f) eliminates manner of sale limitations with respect to debt securities, including nonparticipating preferred stock and asset-backed securities (where the predominant purchasers are institutional investors).
Volume Limitations for Debt Securities
Revised Rule 144(e) permits the resale of debt securities so long as the amount being sold does not exceed 10% of a tranche (or class when the securities are non-participatory preferred stock), together with all sales of securities from the same tranche sold for the account of the selling security holder within a 3 month period.
Increase in Form 144 Filing Thresholds
Under revised Rule 144, only affiliates are required to file a Form 144 when selling restricted securities. In addition, the threshold for when an affiliate will be required to file Form 144 has been increased to sales of 5,000 shares or $50,000 within a three-month period, whichever is less.
Codification of Certain Staff Positions with Respect to Rule 144
The SEC has codified into Rule 144 several staff positions and interpretations, including:
- Securities acquired pursuant to Section 4(6) of the Securities Act are “restricted securities” pursuant to Rule 144(a)(3).
- Holders of restricted securities may tack on the holding period of the previous owner from whom the current holder obtained such restricted securities in connection with transactions made solely to form a holding company.
- The holding period for restricted securities acquired from an issuer through a cashless conversion or exchange for other securities of the same issuer, is deemed to have commenced as of the date the securities surrendered in the cashless conversion or exchange were first acquired. However, if the securities surrendered did not, by their terms, permit cashless conversion or exchange, the holding period of the newly acquired securities is deemed to have commenced as of the date the surrendered securities were amended to allow for a cashless conversion or exchange.
- The holding period for securities acquired upon a cashless exercise of options or warrants is deemed to have commenced as of the date the corresponding options or warrants were first acquired. However, if the corresponding options or warrants did not, by their terms, permit cashless exercise, the holding period of the newly acquired securities is deemed to have commenced as of the date the warrants or options were amended to allow for cashless exercise.
- For purposes of calculating the Rule 144(e) volume limitation, restricted securities pledged by a single pledgor to two or more separate pledgees will not be aggregated when resold by the individual pledgees, so long as they are not acting in concert. However, sales will be aggregated as to a pledgor and a pledgee.
- Holders of restricted securities of a company that is, or was, a non-reporting shell company will not be able to rely on Rule 144 to resell such securities unless: (i) the issuer has ceased to be a shell company; (ii) the issuer is now subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act; (iii) the issuer has filed all reports required for the past twelve months, or shorter period it has been required to file; and (iv) at least ninety days have passed since the issuer filed current “Form 10 information” with the SEC reflecting that it is no longer a shell company.
- An affiliate of a company asserting the affirmative defense of Rule 10b5-1(c) may now assert such defense as of the time such affiliate signed a binding contract for sale, instead of when such affiliate executes Form 144.
Amendments to Rule 145
Certain conforming changes relating to Rule 144 have been made to Rule 145. Revised Rule 145 has eliminated the presumed underwriter status for persons who are parties to an exchange of securities in connection with a reclassification of securities, mergers, consolidations, or transfer of assets that are subject to shareholder vote. However, presumptive underwriter status will continue to be applied to shell companies, their affiliates and promoters.
The distribution compliance period in Rule 903(3)(iii) for Category 3 domestic reporting issuers also has been reduced to 6 months under Regulation S.
The SEC Adopts Exemptions of Compensatory Employee Stock Options from Registration
On November 15, 2007, the SEC voted to establish certain exemptions to registration for employee stock options of both reporting companies and non-reporting companies. These exemptions are effective as of December 7, 2007.
Previously, any company with 500 or more optionholders and more than $10 million in assets was required to register such class of stock options under the Exchange Act, absent an available exemption. Under revised Rule 12h-1, both reporting and non-reporting companies are now exempt from registering such class of stock options, subject to certain conditions and limitations.
Reporting companies with more than $10 million in assets no longer need to register the class of stock options when such class of stock options is held by more than 500 persons, so long as the written compensatory stock option plan is limited to employees, directors, consultants, advisors, participants permitted to be granted stock options under Form S-8, and participants eligible to be granted stock options under Rule 701 of the Securities Act.
Non-reporting companies with more than $10 million in assets no longer need to register the class of stock options when such class of stock options is held by more than 500 persons. This exemption for compensatory stock options applies to all compensatory stock options issued under all written compensatory stock option plans on a combined basis where the securities underlying the compensatory stock options are of the same class of securities of the company, with the exemptive conditions applying to the compensatory employee stock options issued under each option plan. However, this exemption from registration for nonreporting companies is subject to the following conditions and limitations:
- The written compensatory stock option plan must be limited to employees, directors, consultants, and advisors;
- The stock options must be subject to certain restrictions on transferability;
- The company must provide to optionholders the same risk and financial information that is required under Rule 701 of the Securities Act every 6 months, and such information must not be more than 180 days old; and
- The necessary limitations and conditions are included in the written stock plans, as well as the terms of the individual written option agreements or other enforceable written agreement.
For non-reporting companies, the exemptions will not apply to any class of securities received or to be received on exercise of the compensatory employee stock options. In the event the number of holders of the underlying class of securities of a company with more than $10 million in assets exceeds 500 persons (whether through exercise of such stock options or otherwise), it will still be required to register such class of securities.
The SEC Votes to Accept from Foreign Private Issuers Financial Statements prepared in accordance with International Financial Reporting Standards.
On November 15, 2007, the SEC voted to allow foreign private issuers to prepare financial statements in accordance with the English language version of the International Financial Reporting Standards, as published by the International Accounting Standards Board, without reconciliation to U.S. GAAP. These rules amendments will apply to financial statements covering fiscal years ended after November 15, 2007.
The rule amendments allow a foreign private issuer to file financial statements without reconciliation to U.S. GAAP, as previously required under Items 17 and 18 to Form 20-F, so long as such financial statements are prepared in complete compliance with the English language version of IFRS as published by the IASB or in compliance with IFRS as modified by certain requirements of such foreign private issuer’s home country regulator or exchange on which its securities are listed.
In order to be in complete compliance, a foreign private issuer must explicitly state in a prominent footnote to its financial statements that such financial statements are, unreservedly, in compliance with IFRS as published by the IASB, and must also obtain an opinion from an independent auditor that such financial statements comply with IFRS as published by IASB.
If a foreign private issuer is not in complete compliance with IFRS as a result of jurisdictional variations imposed by (i) its home country regulator or (ii) the exchange on which its securities are listed, it is acceptable for such foreign private issuer to disclose compliance with IFRS as modified by certain jurisdictional variations, so long as an audit firm also opines that the financial statements comply with IFRS as modified by certain jurisdictional variations.
If a foreign private issuer either (i) is not in full compliance with IFRS as published by the IASB or (ii) is not in compliance with a jurisdictional variation of IFRS, then such foreign private issuer must continue to reconcile its financial statements with U.S. GAAP.
Finally, although foreign private issuers that comply with IFRS as described above are no longer required to reconcile to U.S. GAAP, such issuers must still respond to those items of Form 20-F that make reference to FASs, FASB interpretations, or other specific pronouncements of U.S. GAAP for definitional purposes, as well as Article 10 of Regulation S-X with regard to financial statements for interim periods when required under Item 8.A.5 of Form 20-F.
The SEC Votes to Continue to Allow Companies to Block Shareholder Proxy-Access Plans from Proxy Statements.
On November 28, 2007, the SEC voted to adopt an amendment to Rule 14a-8(i)(8) of the Exchange Act in order to clarify the SEC’s position that a company may exclude from its proxy statement shareholder proposals that relate to the nomination or election of directors to such company’s board of directors. This amendment will become effective on January 10, 2008.
The amendment to Rule 14a-8(i)(8) was in response to a 2006 decision by the U.S. Court of Appeals for the Second Circuit rejecting the SEC’s position of allowing companies to block shareholder proxy-access plans. As a result of the SEC’s desire to make Rule 14a-8(i)(8) more clear, the amended language of Rule 14a- 8(i)(8) states that a company may exclude a shareholder proposal from its proxy statement if “the proposal relates to a nomination or an election for membership on the company’s board of directors or analogous governing body or a procedure for such nomination or election.”