On November 15, 2007, the Securities Exchange Commission ("SEC") voted to adopt three measures to streamline the capital formation process for smaller public companies. These measures are expected to significantly reduce the cost of capital for smaller public companies and lessen the reporting burdens faced by them, as well as reduce the liquidity risk for investors who purchase securities of reporting companies privately. The rules implementing these measures will become effective after publication in the Federal Register as noted below.
Amendments to Disclosure Requirements
Currently, only U.S. and Canadian 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. The first measure will eliminate Regulation S-B, and will amend Regulation S-K and Regulation S-X to provide for scaled disclosure requirements that will be available to a new category of "smaller reporting companies." Notably, smaller reporting companies will include companies with a public equity float of less than US$75 million or, if the public equity float is not calculable, revenues of less than US$50 million in the previous fiscal year.
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 financial and non-financial disclosure requirements, or provide the same disclosure as larger companies. The existing small business issuer forms will be rescinded and consolidated with the existing forms applicable to larger public companies. In addition, they will permit all foreign companies to qualify as "smaller reporting companies" if they choose to file registration statements and/or reports under the Securities Exchange Act of 1934 (the "Exchange Act") on the forms mandated for use by U.S. domestic companies.
The effective date for these rules will be 30 days after publication in the Federal Register.
Reduction of Rule 144 Holding Periods
Rule 144 currently provides a "safe harbor" for resales 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.
The second measure will shorten the holding period applicable to restricted securities under Rule 144(d) from one year to six months, where the issuer of the securities has been subject to reporting obligations under the Exchange Act for at least 90 days before the sale of the securities, and would allow persons that are non-affiliates of the issuer for at least three months to freely resell such restricted securities after that six month period without any volume or manner of sale restrictions. Sales will be subject only to the public information requirement under Rule 144(c). In addition, the measure will allow non-affiliates of non-reporting companies to freely resell restricted securities after satisfying a 12-month holding period.
With respect to sales by affiliates, the measure would revise the manner of sale requirements for equity securities and increase the thresholds that trigger Form 144 filing requirements to 5,000 shares or US$50,000.
The proposed amendments to Rule 144 were the subject of a more comprehensive SEC release (Release No. 33-8813) on June 22, 2007. Among other things, the SEC indicated that it was proposing to codify and expand staff interpretations that, since January 2000, had denied the availability of Rule 144 to facilitate the resale of securities issued by an issuer that is, or previously was, a "blank-check company." The proposed amendments to Rule 144 will essentially 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, at least until 90 days after the issuer files information with the SEC (normally on a Form 8-K for a US 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.
These amendments, together with certain parallel amendments to the resale rules applicable in respect of securities issued in connection with business combinations under Securities Act Rule 145, will be effective 60 days after publication in the Federal Register.
Exemption of Compensatory Employee Stock Options from Registration under the Exchange Act
Under Section 12(g) of the Exchange Act, an issuer with 500 holders of record of a class of equity securities and assets in excess of US$10 million at the end of its most recently ended fiscal year must register that class of equity security with the SEC, unless there is an available exemption from registration. Stock options, including stock options issued to employees under stock option plans, are a separate class of equity security under the Exchange Act and, accordingly, an issuer with 500 or more optionholders and more than US$10 million in assets is required to register that class of options under the Exchange Act as there is currently no exemption for compensatory employee stock options.
The third measure provides two new exemptions from the registration provisions of Section 12(g) of the Exchange Act for compensatory employee stock options. First, the measure would provide an exemption from the registration requirements under Section 12(g) of the Exchange Act for compensatory employee stock options issued under written compensatory stock option plans of private, non-reporting companies, provided certain conditions are met. Second, the measure would provide an exemption from Exchange Act Section 12(g) registration for compensatory employee stock options of issuers that are required to file reports under the Exchange Act.