On May 23, 2007, the Securities and Exchange Commission announced that it will soon propose several rule changes affecting public companies. These new issuer-friendly proposals would:
• add an exemption from Securities Act registration requirements for sales of securities to a new category of “qualified purchasers” in which limited advertising may be used;
• provide exemptions for compensatory employee stock options so Exchange Act registration requirements would not be triggered solely by compensation decisions;
• shorten holding periods under Securities Act Rule 144 for restricted securities to reduce the cost of capital and to increase access to capital;
• eliminate the presumptive underwriter requirement in Rule 145;
• allow smaller companies to use shelf registration statement Forms S-3 and F-3; and
• require the electronic filing of Form D.
Changes to Regulation D to Facilitate Capital Procurement
• The rule proposals would create an exemption from Securities Act registration under a new Rule 507 for sales of securities to a new class of purchasers, “Rule 507 qualified purchasers,” to which limited, tombstone-like advertising could be used by issuers to raise capital.
?? The proposed definition of “Rule 507 qualified purchaser” would include:
- Individuals who own $2.5 million in investments or have annual individual income of $400,000 or aggregate income of $600,000 with their spouses.
- Institutional investors which own $10 million in investments.
- Any director, executive officer or general partner of the issuer, without regard to a monetary threshold.
• A new category would be added to the list of accredited investors--an “investments-owned” standard of $750,000 for individuals and $5 million for institutions.
• Several new categories of entities would be added to the list of approved accredited investors.
• These changes would increase the pool of capital available to companies that make exempt offerings under Regulation D.
• Under the proposed rules, an allowance for inflation adjustment would be applied to the definition of “accredited investor” starting in 2012.
• The integration safe harbor in Regulation D would be shortened from six months to 90 days.
A New Exemption for Compensatory Stock Option Plans from Registration
• Under current rules, compensatory stock options are considered a separate class of securities, and must be registered if they are held by more than 500 holders.
• The SEC’s proposal would exempt private non-reporting issuers from crossing the 500 shareholder threshold for registration under Section 12(g) of the Exchange Act as a result of the issuance of shares to employees under a compensatory stock option plan.
• The proposed rules would also exempt from Section 12(g) registration requirements employee stock options issued by issuers that have registered under Section 12 of the Exchange Act the class of securities underlying the compensatory stock options.
Changes to Rule 144 Holding Periods for Restricted Stock
• The newly proposed rules would shorten the holding period for restricted securities of reporting companies to six months (or 12 months if the security holder is engaged in certain hedging transactions).
• The process by which non-affiliates could sell shares would also be substantially simplified by allowing resales of restricted securities by non-affiliates of reporting companies after a six-month holding period (12 months if there is hedging) and by non-affiliates of non-reporting companies after a 12-month holding period without additional requirements.
• The SEC is also considering whether to allow Section 16 insiders to fulfill their Rule 144 reporting requirements and reduce duplicative paperwork by timely filing a Form 4.
Changes to Rule 145 Presumptive Underwriter Requirement
• The SEC proposes to eliminate the presumptive underwriter requirement in Rule 145.
• Rule 145 now requires that all affiliates of the target in a merger have their shares legended and restricted under the volume and method of sale limits of Rule 144.
• This restriction would be eliminated for all but shell companies.
Eligibility to Use Forms S-3 and F-3 for Smaller Companies
• Under the proposed rules, companies that do not meet the current public float requirements of Forms S-3 and F-3 ($75 million) may make primary offerings using these Forms, provided such companies:
?? Have been timely filing reports for one year;
?? Don’t sell more than 20% of their public float in primary offerings on these Forms over a one-year period;
?? Meet the other eligibility requirements of the applicable Form; and
?? Are not shell companies.
Mandatory Electronic Filing of Form D
• The proposed rules would require the electronic filing of a revised and simplified Form D.