As we discuss below, the SEC has issued a number of rule proposals that will have a far-reaching impact on capital-raising activities in the public and private arenas and on reporting obligations for public companies. Some of the implications to consider are:
- The SEC is proposing to amend Rule 144 to limit the holding period for restricted securities to six months in many circumstances. Investors and hedge funds who invest in securities will certainly welcome the shortened holding period, and possibly issuers will benefit from a reduced liquidity discount in private placements. However, the rule does not come without a price. Longer holding periods will be required if investors or hedge funds engage in certain hedging activities. Investors and hedge funds will need to carefully consider the calculus involved with an unhedged, shorter holding period, or a longer holding period with a hedge in place.
- The SEC proposes to extend the reporting relief for those who currently qualify as “small business issuers” (those with public float and revenues of less than $25 million) to most public companies with a public float of less than $75 million. Issuers who will benefit from this relief should begin to consider the extent to which they want to take advantage of this relief. Issuers should balance the simplified reporting requirements against benefits that would be derived from maintaining current reporting standards, thereby providing enhanced transparency to investors and projecting the image of a larger company.
- The SEC is proposing certain revisions to Regulation D. In what may prove to be one of the more far-reaching proposals in recent years, the SEC proposes to permit limited advertising when sales are made to “large accredited investors.” Issuers will benefit by a new route to capital. The new proposal can be used in conjunction with Rule 144A, thus providing investors and hedge funds with liquidity for purchases made. Private equity groups may benefit by using the new proposal to raise funds for portfolio companies.
- The SEC is proposing to permit issuers with a public float of less than $75 million to use Form S-3 for primary offerings, so long as issuers do not sell more than 20% of their public float using Form S-3 in 12 calendar months. Issuers will benefit by simplified registration and will avoid steeper liquidity discounts for sales of restricted securities. Investors will benefit by being able to purchase registered securities.
- The SEC is proposing to require all issuers, public and private, to file Form D electronically. The filing of Form D is a requirement of Regulation D. If the proposal becomes effective, there may be a rush while private issuers obtain the necessary access codes from the SEC. Therefore, private issuers who anticipate using Regulation D should monitor the proposal and should make early application for the necessary codes, to prevent any delay in the commencement of a Regulation D offering.