In March 2005, the Advisory Committee on Smaller Public Companies was chartered by the Commission to assess the current regulatory system for smaller companies under the federal securities laws and to make recommendations for changes. The Charter directed the Advisory Committee to conduct its work with a view to furthering the Commission's investor protection mandate and to consider whether the costs imposed by the current regulatory system for smaller companies are proportionate to the benefits, to identify methods of minimizing costs and maximizing benefits, and to facilitate capital formation by smaller companies. I will describe a group of three separate rulemakings that stem from the Final Report of the Advisory Committee. The three proposals, which are similar, but not identical to, recommendations in the Advisory Committee's Final Report, are described as follows.
First, The Division of Corporation Finance recommends that the Commission propose amendments to its disclosure and reporting requirements under the Securities Act and the Exchange Act that would increase the number of companies eligible for the Commission's scaled disclosure and reporting requirements for smaller reporting companies. The Commission's current regulatory scheme for small businesses, adopted in 1992, modifies some of the disclosure requirements for these companies. This should not be thought of as lesser disclosure, but rather as scaling our requirements to the characteristics of smaller companies, to assure that the burdens of regulation are commensurate with the benefits.
The proposals would expand this system by allowing most companies with a common equity public float of less than $75 million to qualify for the smaller company requirements, up from $25 million for most companies today. The proposals also would combine for most purposes the "small business issuer" and "non-accelerated filer" categories of smaller companies in our current rules into a new category of "smaller reporting companies." In addition, the proposals would simplify the regulations by integrating the disclosure requirements for smaller reporting companies, which currently are contained in Regulation S-B, into Regulation S-K. The five specific "SB" forms would be rescinded. Smaller reporting companies, which would file registration statements and Exchange Act reports on the Commission's regular forms, would 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. We believe this proposal, which substantially implements one of the Advisory Committee recommendations, would benefit smaller companies while retaining appropriate disclosure standards for investor protection.
The Division next recommends that the Commission propose amendments to Form S-3 and Form F-3 that would revise the eligibility requirements of those forms so that companies with a public float below $75 million can take advantage of the benefits of shelf registration, subject to a restriction on the amount of securities those companies may sell in any one-year period. The amendments are intended to allow smaller public companies that have been timely filing their reports for at least one year to benefit from the greater flexibility and efficiency in accessing the public securities markets afforded by Form S-3 and Form F-3.
Specifically, the Division recommends that the Commission amend the instructions to Form S-3 and Form F-3 to allow companies with less than $75 million in public float to register primary offerings of their securities on those forms, provided such companies:
If the amendments are adopted as proposed, this would be the first time in 15 years that the Commission has modified the public float eligibility requirements for primary offerings on Form S-3 (and, with respect to Form F-3, the first time in 13 years).
Next, we are recommending that the Commission propose two new exemptions from the registration provisions of Exchange Act Section 12(g) for compensatory employee stock options. Under Section 12(g) of the Exchange Act, an issuer with 500 or more holders of record of a class of equity security and assets in excess of $10 million at the end of its most recently ended fiscal year must register that class of equity security, unless an exemption is available. Stock options are a separate class of equity security under the Exchange Act. Thus, an issuer with 500 or more option holders and more than $10 million in assets is required to register that class of options.
Given differences in the nature of the trading markets and the amount of publicly available information between issuers that file Exchange Act reports and those that do not, we recommend that you propose separate exemptions for these different types of issuers. The exemptions would apply only to an issuer's compensatory employee stock options and would not extend to the class of securities underlying those options.
The first exemption would apply to compensatory employee stock options issued under written compensatory stock option plans of a non-reporting issuer if:
We also recommend you propose a separate exemption for compensatory employee stock options of issuers that subject to Exchange Act reporting. In this case, option holders would have access to the issuer's publicly filed Exchange Act reports. In addition, Exchange Act Sections 14 and 16 would apply to the options and the securities issuable on exercise of those options.
The Division further recommends that the Commission publish proposals to amend Regulation D and Form D to refine them so that they conform better to the realities of modern market practices and technologies without compromising investor protection. Regulation D is heavily relied upon by smaller companies to raise capital, although it is available to and used by companies of all sizes. A major focus of our recommendations is the reduction of unnecessary regulatory burdens on companies that rely on Regulation D.
Specifically, we recommend that you propose to establish a new exemption from the registration provisions of the Securities Act in Rule 507 of Regulation D. The new exemption would allow most issuers to sell their securities without registration and engage in limited, tombstone-like advertising so long as they sell only to a new category of investors called "Rule 507 qualified purchasers." Our 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. The $2.5 million in investments threshold is based upon the Commission's December 2006 proposal for accredited investors in private pooled investment vehicles. Institutional investors generally would qualify if they own $10 million in investments. Institutional investors not subject to a monetary threshold to qualify as accredited investors similarly could qualify as Rule 507 qualified purchasers without regard to a monetary threshold. Likewise, any director, executive officer, or general partner of the issuer could qualify as a Rule 507 qualified purchaser without regard to a monetary threshold.
We also recommend proposing revisions to the existing "accredited investor" definition in Regulation D. We recommend adding an alternative way to qualify for accredited investor status — in addition to the current total assets, net worth and income standards, there would be a new "investments-owned" standard of $750,000 for individuals and $5 million for institutions. In addition, we recommend adding several new categories of entities to the list of approved accredited investors. These proposals would increase the number of investors qualified as accredited investors and increase the pool of capital available to companies that engage in exempt offerings relying on Regulation D. We also recommend proposing to adjust for inflation the thresholds for accredited investors and Rule 507 qualified purchasers in Regulation D on a going forward basis, starting on September 1, 2012.
Our last recommended changes to Regulation D are to decrease the timeframe for the integration safe harbor in Regulation D from six months to 90 days and to provide uniform, updated "bad actor" disqualifications for all offerings under Regulation D, to prevent offerings involving recidivists from being made using Regulation D. Currently, disqualification provisions are only in Rule 505.
We also recommend that the Commission, in a separate release, propose rules to mandate electronic filing of Form D and to refine and simplify the form. Form D is a notice required to be filed by companies that have sold securities without registration under the Securities Act based on a claim of exemption under Regulation D or Section 4(6) of the Act. The current version of Form D was developed jointly by the Commission and state securities regulators in the mid-1980s as a uniform federal and state form. It continues to be accepted by many states to satisfy their filing requirements, and has played a significant role in eliminating duplicative and unnecessary burdens of dual federal and state securities regulation. The vast majority of Form D filings are made by private companies.
Form D filings were intended to serve important data collection objectives. They contain basic information about the issuer, the offering and the exemption claimed. The data is used by regulators in enforcement activities. It also enables the Commission to evaluate the effectiveness of Regulation D as a capital-raising device and to tailor its rules to provide appropriate support for both capital formation and investor protection.
Currently, Form D filings may be made only on paper. They are one of the Commission's few remaining paper filings. The Commission received approximately 25,000 Form D filings last year.
The interactive, online filing system that the staff intends to develop for electronic Form D filings would be accessible from any computer with Internet access. Filers could input data, which would be tagged automatically and easily searchable by regulators and members of the public who may choose to view it. Improvements to the Commission's rules resulting from better information availability of Form D information could result in significant benefits to companies that rely on Regulation D exemptions, especially smaller companies, as well as to investors.
The final release that we are presenting for your consideration this morning proposes amendments to Rules 144 and 145 of the Securities Act. We recommend that the Commission propose to shorten the Rule 144 holding period applicable to restricted securities from one year to six months, where the issuer of the securities is subject to Exchange Act reporting obligations and has been for at least 90 days before the sale of the securities. Security holders with restricted securities of non-reporting companies would continue to be required to hold their securities for one year before any public resale, consistent with the existing requirements. We believe that shortening the holding period in this manner would increase the liquidity of privately sold securities, reduce the liquidity discount for the securities and thus decrease the cost of capital for issuers.
We further recommend that the Commission propose to reintroduce a tolling provision that suspends the holding period while the security holder has a short position or has entered into a put equivalent position with respect to the securities in connection with the proposed six-month holding period for restricted securities of reporting companies. This is due to the recognition that the shorter holding period could make it significantly easier and less costly to enter into hedging arrangements. However, the proposed tolling provision would not apply if the security holder has held the securities for one year or more, regardless of any hedging activity, so that the effect of the proposed tolling provision would be no more restrictive than the existing provisions. Accordingly, the proposed tolling provision would in no event require a security holder relying on Rule 144 to hold their securities for more than one year prior to public resale of the securities.
We also recommend that the Commission propose to substantially simplify compliance with Rule 144 by a person who is not an affiliate of the issuer and has not been an affiliate for three months prior to the sale of the securities. Currently, a non-affiliate is required to comply with all the conditions of Rule 144 for an additional year after the holding period is met. Only then is a non-affiliate able to resell securities freely and without any restriction. Under the proposed amendments, a non-affiliate with restricted securities of a non-reporting company could resell freely after the requisite one-year holding period is met. A non-affiliate with restricted securities of an Exchange Act reporting company could resell freely after meeting the six-month holding period (subject to the tolling provision) as long as current information regarding the issuer of the securities is publicly available, as required by Rule 144(c). The current public information requirement would be applicable for up to one year after the acquisition of the securities. We believe that these proposals reduce the complexity of Rule 144 for non-affiliates as well as further increase the liquidity of restricted securities.
In addition, with respect to sales by affiliates, we recommend that the Commission propose to eliminate the manner of sale limitations with respect to debt securities, raise the thresholds triggering a Form 144 filing requirement, and codify several staff positions relating to Rule 144. We believe that the combined effect of our proposals to eliminate the Form 144 notice requirements for non-affiliates and raise the Form 144 filing thresholds would be to significantly decrease the number of Form 144 filings that are required to be filed annually.
We also recommend that the Commission solicit comment on whether to coordinate Form 144 filing requirements with Form 4 filing requirements. Under the proposed amendments to Rule 144, only affiliates are required to file the notice of a proposed sale of securities on Form 144, and many of these affiliates are also required to file a Form 4 under Section 16 of the Exchange Act to report changes in beneficial ownership of their securities. In order to reduce duplicative paperwork requirements on individuals who are required to file both Form 144 and Form 4, we recommend that the Commission solicit comment on whether to revise the filing deadline for Form 144 to coincide with the filing deadline for Form 4 and to permit affiliates subject to Section 16 requirements to, at their option, satisfy their Form 144 filing requirement by timely filing a Form 4 reporting the sale of securities. The proposing release also solicits comment on whether the Commission should revise Item 701 of Regulation S-K to require additional disclosure about the resale status of securities issued in unregistered transactions at the time the company first issues the securities.
Finally, we recommend that the Commission propose to eliminate the presumptive underwriter provision in Rule 145 except with regard to transactions involving shell companies. Under the proposed amendments, only a party to a Rule 145(a) transaction involving shell companies, other than business combination related shell companies, or an affiliate of the party, would be deemed a presumed underwriter of the transaction. Those deemed presumed underwriters are permitted to resell their securities under the provisions in Rule 145(d). We recommend that the Commission propose to harmonize the resale restrictions in Rule 145(d) with the resale restrictions for securities of shell companies as proposed in Rule 144.
http://www.sec.gov/news/speech/2007/spch050207jww.htm