September 19, 2007
FELDMAN WEINSTEIN AND SMITH LLP
420 Lexington Avenue
New York, NY 10170
September 17, 2007
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090
Attention: Nancy M. Morris, Secretary
Via e-mail: firstname.lastname@example.org
Re: File No. S7-15-07, Securities and Exchange Commission Release Nos. 33-8819 34-56013 39-2447, RIN 3235-AJ86, Smaller Reporting Company Regulatory Relief and Simplification
Ladies and Gentlemen:
Feldman Weinstein and Smith LLP has the following comments on the Staff's proposed Smaller Reporting Company Regulatory Relief and Simplification.
Our law firm represents issuers, investment banks and institutional investors primarily in business combination and financing transactions, including reverse merger and PIPE transactions, giving our attorneys a front-row seat in observing the challenges which the current rules impose on smaller public issuers. Overall, the proposal appears to further the Commission's goal of helping smaller public companies raise necessary capital on a timely basis and at a lower cost of capital than the current regulations permit. We believe that the following points could result in further improvements:
Raise the Cut-Off for Definition of Smaller Public Company
We agree with other commenters that the Commission should consider adopting the proposal of the Advisory Committee on Smaller Public Companies to allow scaled disclosure for those with up to $787 million of equity market capitalization. These companies represent the lowest six percent (6%) of all companies in terms of market cap. Many of these companies are involved in rapid growth, and the ability to reduce the costs of compliance would seem to be appropriate.
Give Smaller Public Companies a Choice of Forms
It has always been true that a small business issuer had the choice of using the forms specified in Regulation S-B or S-K. Over the last 15 years professionals and executives in smaller companies have grown comfortable with the S-B forms. If an issuer chose to use the S-K forms, however, it was subject to the broader disclosure requirements of that regime.
We propose offering smaller public companies a choice. We suggest leaving Regulation S-B and the S-B forms in place, allowing an issuer to continue to use those forms if it chooses. In addition, the Commission can go forward with the amendments to Regulation S-K to permit scaled disclosure on S-K forms if the issuer chooses. Assuming the Commission did not intend to make any changes to the substantive disclosure requirements for smaller companies, it should not be difficult to harmonize the changes. If a concern exists, a default can be that to the extent there is a conflict between Regulation S-B and the amendments to Regulation S-K, one or the other would control.
Our experience is that issuers we deal with generally do not feel tainted by using the S-B forms. In truth, moving everyone back to the S-K forms but then requiring that a box be checked on those forms indicating the company is a smaller public company would likely have the same risk of taint as using the S-B forms.
In addition, respectfully we do not agree with the argument that this relief is necessary to avoid having lawyers and accountants learn two disclosure systems. By retaining scaled disclosure, even within Regulation S-K advisors will effectively still have to learn two systems.
This concern, apparently based on anecdotal reports, to our knowledge is not widespread, and does not seem to justify requiring all small and microcap market participants to learn a new system.
If the Commission is not inclined to allow two systems, maybe a trial period of three years with both would make sense, after which it could be determined whether in fact issuers voluntarily migrate back to Regulation S-K. If a significant number in fact do so, then the Commission's theory would be proven. If not, it might consider going back to the current S-B regime.
For Real Relief, Allow Exclusion of Non-Material Information
In our Managing Partner David Feldman's testimony to the Advisory Committee in 2005, he suggested replacing Regulation S-B with a Regulation D-type disclosure for unaccredited investors. This would mandate retaining the forms, and including all the information that would be required to be in the comparable report or registration statement, but could exclude information which is not material. We still believe this is worth considering.
The Commission might be concerned that this leaves issuers in charge of deciding what information is material. But there are many instances within current Regulation S-B where issuers must do exactly that, in places where the issuer must disclose, for example, litigation if material.
One could still retain the requirement on certain items to retain all information, such as in Management's Discussion and Analysis of Financial Condition or Plan of Operation, or in Executive Compensation. But the slavish requirement to answer every item, regardless of whether a reasonable investor would consider the information important, is one of the ways smaller issuers waste time and money in their compliance obligations.
Limiting disclosure to material information would be a major step forward in recognizing the unique needs of smaller issuers, making it more attractive for them to consider going public and obtaining all the benefits thereof, make capital formation easier, make the U.S. securities markets more competitive and in no way jeopardize investor protection, as the only information not provided is that which is not material.
We are extremely pleased to see the Commission turn its attention to adopting a number of the recommendations made by the Advisory Committee on Smaller Public Companies.
In general, the proposal (as well as its five companion proposals which relate primarily to implementation of the Committees recommendations) will provide an extremely significant advance in striking a more appropriate balance between careful regulation and removing unnecessary impediments to capital formation. From the proposed shortened holding periods for Rule 144, to the suggested improvements in Regulation D and broader availability of short-form registration, these are truly the changes that all participants in the small and microcap markets have been awaiting at least since the establishment of the Committee.
Thank you for your consideration of our comments in this matter.
Feldman Weinstein and Smith LLP
420 Lexington Avenue, Suite 2620
New York, NY 10170