Over the past few weeks, the United States Securities and Exchange Commission (the "SEC") has adopted new rules to streamline the capital formation process for smaller public companies. The new rules expand the availability of "small business" filer disclosure, simplify compliance with SEC Rules 144 and 145, and expand the availability of the short form registration statements on Form S-3 and Form F-3. These rules are intended to significantly reduce the cost of capital for smaller public companies, lessen the reporting burdens faced by them and reduce the liquidity risk for investors who purchase securities of reporting companies privately. A summary of these rules is set out below.
Amendments to Small Business Issuer
Currently, only issuers that have revenues of less than US$25 million as well as a market capitalization that does not exceed this amount qualify for the SEC's small business issuer disclosure regime. Such issuers are permitted to file annual, quarterly and current reports on Forms 10-KSB, 10-QSB and 8-K, respectively, and to prepare proxy statements and information statements on Schedules 14A and Schedule 14C, respectively, each of which prescribe that the issuer's disclosure comply with the relevant items of Regulation S-B, rather than the more comprehensive disclosure requirements of Regulations S-K and S-X. In addition, small business issuers may file registration statements under the United States Securities Act of 1933, as amended (the "Securities Act") on Forms SB-1 or SB-2, which similarly prescribe disclosure with reference to Regulation S-B.
Canadian issuers that qualify as small business issuers are eligible to prepare their disclosure documents under the SEC's small business issuer regime as well. Accordingly, some Canadian issuers voluntarily choose to file reports on Forms 10-KSB, 10-QSB and 8-K, in lieu of filing annual reports on Form 20-F and furnishing reports on Form 6-K, particularly since they remain exempt from the SEC's proxy rules so long as they continue to qualify as "foreign private issuers."
Under the new rules, Regulation S-B will be eliminated, and Regulations S-K and S-X will be amended to provide for scaled disclosure requirements currently provided under Regulation S-B, which will be available to a new category of "smaller reporting companies." The existing small business issuer forms will be rescinded and consolidated with existing forms applicable to larger companies.
Current SEC rules distinguish between "non-accelerated" and "accelerated" filers. Non-accelerated filers are issuers with a public float of less than US$75 million, and benefit from longer reporting deadlines for filing annual and quarterly reports with the SEC, but otherwise file the same reports as larger companies (accelerated filers) unless they qualify as small business issuers. Thus, such issuers must file annual, quarterly and current reports on Forms 10-K, 10-Q and 8-K, respectively, and prepare proxy statements and information statements on Schedules 14A and 14C, respectively, with reference to the disclosure requirements of Regulations S-K and S-X.
The new rules essentially combine "non-accelerated" filers with "small business" issuers into a new category of "smaller reporting companies." Thus, companies with a public float of less than US$75 million may comply with the less comprehensive requirements of the new scaled disclosure system contemplated by Regulations S-K and S-X, as amended, which will closely follow the disclosure currently applicable to small business issuers under Regulation S-B.
These changes will significantly expand the range of companies that will be able to choose, on an item-by-item basis, whether to take advantage of the scaled disclosure requirements, or provide the same disclosure as larger companies. In addition, the new rules will permit all foreign issuers to voluntarily file registration statements and periodic reports with the SEC as "smaller reporting companies" if they otherwise qualify, on the forms mandated for use by U.S. domestic companies, provided that any financial statements included in such filings comply with Regulation S-X and are prepared under U.S. generally accepted accounting principles.
These new rules are effective as of February 4, 2008. However, small business issuers will continue to be eligible to use Form 10-QSB (and related forms) during a transitional period ending on October 31, 2008 and Form 10-KSB (and related forms) until March 15, 2009.
Amendments to Rule 144 and Rule 145
Securities Act Rule 144 currently provides a "safe harbour" to facilitate the resale of restricted securities by investors, provided that, among other things: (i) the securities have been held for at least a year; (ii) there is adequate current information about the issuer of the securities in the public domain; (iii) the number of shares sold in any three-month period does not exceed certain volume restrictions; (iv) the securities are sold in ordinary brokers' transactions; and (v) a Form 144 is filed with the SEC if the sale involves more than 500 shares or the aggregate dollar amount of securities sold in any three-month period is greater than US$10,000. These restrictions cease to apply to persons who are not affiliates of the issuer after two years.
Rule 144 has been amended effective February 15, 2008 to shorten the holding period applicable to the resale of restricted securities from one year to six months. Under the amended Rule 144, if the issuer of the securities to be resold has been subject to reporting obligations under the United States Securities Exchange Act of 1934, as amended (the "Exchange Act") for at least 90 days before the sale of the securities, persons who have not been affiliates of the issuer for at least three months will be able to freely resell their restricted securities after a six-month holding period without any volume or manner of sale restrictions, provided that there is adequate current information concerning the issuer in the public domain under Rule 144(c). In addition, Rule 144, as amended, will allow non-affiliates of reporting and non-reporting companies to freely resell restricted securities after satisfying a 12-month holding period.
The amended Rule 144 will likewise be available for resales of equity securities held by affiliates after a six-month holding period, but the current public information requirement, the volume limitations, the manner of sale requirements and the Form 144 filing requirements would continue to apply. However, with respect to resales by affiliates, the manner of sale requirements for equity securities will be revised to permit their resale through riskless principal transactions and to permit a broker to insert bid and ask quotations for the security in an "alternative trading system," provided that certain conditions are met. In addition, the thresholds that trigger Form 144 filing requirements will be increased to 5,000 shares or US$50,000.
The amendments to Rule 144 prevent securities issued by a reporting or non-reporting issuer that is or previously was a "shell company" from being resold pursuant to Rule 144, for at least one year after the issuer files information (the so-called "Form 10 Information") with the SEC (normally on a Form 8-K for a U.S. domestic company) confirming that it has ceased to be a shell company and providing the level of disclosure about the new business that would be appropriate for an initial registration statement under the Exchange Act. This one-year waiting period represents a significant change from the original proposal, announced in November 2007, which contemplated a waiting period of only 90 days after the filing of the Form 10 information with the SEC.
The amendments should greatly simplify compliance with the requirements of Rule 144 for securities of public reporting companies and make it easier for smaller companies to raise capital given the shorter hold periods for resales.
Currently under Securities Act Rule 145, affiliates of a party to a business combination transaction are presumed to be "underwriters" and are subject to certain post-transaction restrictions on resale of securities received in the transaction for up to two years following the transaction. This applies even if the securities issued in the transaction were registered on Form S-4. Effective February 15, 2008, Rule 145 was amended to eliminate this "presumptive underwriter" doctrine unless one of the parties to the transaction is a "shell company" (other than a business combination shell company) and the restricted period for securities issued in these types of transactions has been shortened to conform to the changes to Rule 144 described above.
Summary of Amendments to Rules 144 and 145
The table summarizes the most significant changes to Rules 144 and 145, to take effect on February 15, 2008. Amendments to Forms S-3 and F-3
Effective January 28, 2008, the SEC adopted amendments that allow smaller issuers with less than US$75 million in public float to use short-form registration statements on Form S-3 and Form F-3, with the view to facilitating more efficient access to the public securities markets by such issuers. These forms permit eligible issuers to incorporate by reference into the registration statement the disclosure contained in the issuer's past and future Exchange Act filings, which allows for the automatic updating of the registration statement.
Currently, Forms S-3 and F-3 may only be used for primary offerings (an offering of securities by or on behalf of an issuer for its own account) by issuers that have been public for at least one year, have timely filed all reports required to be filed by them under the Exchange Act for the past 12 months, and have a public float of at least US$75 million. The new rules allow domestic issuers and foreign private issuers to conduct primary offerings on Forms S-3 or F-3, respectively, without regard to the public float requirement, as long as, among other things: (i) the issuer has a class of common equity securities listed on a national securities exchange in the United States; (ii) the issuer does not sell more than one-third of its outstanding public float during a rolling 12-month period prior to the sale; and (iii) the issuer is not a "shell company" and has not been a "shell company" for at least 12 calendar months immediately preceding the filing of the registration statement (unless it has a public float of at least US$75 million).
In addition, the amended Forms S-3 and F-3 permit eligible smaller issuers to register "shelf" offerings, whereby the issuer can register a specified number of its securities for sale in one or more tranches (commonly called "take-downs") on a delayed or continuous basis over a two-year period, at an offering price to be determined at the time of each take-down.