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SECURITIES AND EXCHANGE COMMISSION
17 CFR PARTS 210, 228, 239 and 249
RELEASE NOS. 33-7355; 34-37802; INTERNATIONAL SERIES NO. 1021
FILE NO. S7-19-95
RIN 3235-AG47
STREAMLINING DISCLOSURE REQUIREMENTS RELATING TO SIGNIFICANT
BUSINESS ACQUISITIONS
AGENCY: Securities and Exchange Commission.
ACTION: Final rules.
SUMMARY: The Commission is adopting revisions to its rules that
will streamline requirements with respect to financial statements
of significant business acquisitions in filings made under the
Securities Act of 1933 and the Securities Exchange Act of 1934.
EFFECTIVE DATE: The rule revisions are effective [30 days after
publication date].
FOR FURTHER INFORMATION CONTACT: Douglas Tanner, (202) 942-2960,
Associate Chief Accountant, Office of Chief Accountant, or Walter
Van Dorn, (202) 942-2990, Special Counsel, Office of
International Corporate Finance, Division of Corporation Finance,
U.S. Securities and Exchange Commission, Washington, D.C. 20549.
SUPPLEMENTARY INFORMATION: The Commission is adopting amendments
to the following rules and forms under the Securities Act of 1933
(the "Securities Act")-[1]- and the Securities Exchange Act
of 1934 (the "Exchange Act")-[2]- concerning financial
---------FOOTNOTES----------
-[1]- 15 U.S.C. 77a et seq.
-[2]- 15 U.S.C. 78a et seq.
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statements of acquired (or to be acquired) businesses: Rule 3-05
of Regulation S-X,-[3]- Item 310 of Regulation S-
B,-[4]- Item 17 of Form S-4,-[5]- Item 17 of Form F-
4,-[6]- and General Instructions and Item 7 of Form 8-
K.-[7]-
I. INTRODUCTION
On June 27, 1995, the Commission published for comment
proposed revisions to rules and forms that would streamline
reporting requirements concerning financial statements of
acquired and to be acquired businesses and require quarterly
reporting of unregistered equity offerings.-[8]- The
proposals were intended to reduce impediments to registered
offerings and address certain problematic practices involving
unregistered sales of equity securities of domestic reporting
companies purportedly in reliance on Regulation S.-[9]- A
significant number of sales under Regulation S have been
---------FOOTNOTES----------
-[3]- 17 CFR 210.3-05.
-[4]- 17 CFR 228.310.
-[5]- 17 CFR 239.25.
-[6]- 17 CFR 239.34.
-[7]- 17 CFR 249.308.
-[8]- Securities Act Release No. 7189 (June 27, 1995)
[60 FR 35656] (the "Proposing Release").
-[9]- 17 CFR 230.901-904. Regulation S was adopted by
the Commission in 1990 to clarify the
extraterritorial application of the registration
requirements of the Securities Act. See Release
No. 33-6863 (Apr. 24, 1990) [55 FR 18306].
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attributed to the inability of issuers to meet the registration
disclosure requirement of providing audited financial statements
of significant businesses acquired or likely to be
acquired.-[10]- The Commission is today adopting
amendments to those requirements. In a companion release issued
today, the Commission is also adopting certain amendments
regarding requirements for reporting unregistered sales of equity
securities, including sales made under Regulation S.-[11]-
The amendments adopted today will allow companies in most
circumstances to provide information about significant
acquisitions in Securities Act registration statements on the
same basis as for Exchange Act reporting. The amendments
eliminate in most cases the impediment of obtaining audited
financial statements for a business acquisition more promptly
than otherwise would be required. That requirement may have
caused companies to forgo public offerings and to undertake
private or offshore offerings. As discussed more completely in
Section II, the amended rules provide that financial statements
of a business acquired within the preceding 74 days or expected
to be acquired in the future need not be furnished in connection
with most initial and repeat offerings under the Securities Act
if the business falls below a 50% significance level. Those
---------FOOTNOTES----------
-[10]- See "Recent Problems Arising Under Regulation S,"
Insights, Volume 98, Number 8, August 1994.
-[11]- Release No. 34-37801 (Oct. 10, 1996).
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financial statements will continue to be required to be filed in
most cases on Form 8-K subsequent to the offering. In addition,
as discussed more completely in Section III, the Commission is
raising the thresholds of significance that determine whether
financial statements of an acquired business must be provided in
filings made under either the Securities Act or the Exchange Act,
and the number of years for which historical financial statements
must be furnished. Audited financial statements of acquired
businesses for one, two or three years were required under the
former rules for businesses significant at the 10%, 20%, and 40%
levels, respectively. The amended rules raise those thresholds
to 20%, 40%, and 50%, respectively.
II. WAIVER OF FINANCIAL STATEMENTS FOR CERTAIN PENDING AND
RECENTLY COMPLETED BUSINESS ACQUISITIONS IN REGISTRATION
STATEMENTS AND PROXY STATEMENTS
The amendments adopted today will eliminate in most
circumstances the requirement to include in Securities Act
registration statements audited financial statements for probable
business acquisitions or for business acquisitions that were
consummated 74 or fewer days before a registered offering of
securities.-[12]- Although the proposed rules would have
permitted omission of those financial statements in all
---------FOOTNOTES----------
-[12]- See revisions to Rule 3-05 of Regulation S-X and
Item 310(c) of Regulation S-B [17 CFR 210.3-05 and
17 CFR 228.310.(c)]. The date of an offering is
specified as the date of a final prospectus or
prospectus supplement relating to the offering as
filed with the Commission pursuant to Rule 424(b)
[17 CFR 230.424(b)] under the Securities Act.
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circumstances other than offerings by "blank check
companies,"-[13]- the rules as adopted provide that
financial statements of probable and recently consummated
business acquisitions will continue to be required in
registration statements of any issuer if the acquisition would be
significant above the 50% level using the tests that have been
previously established.-[14]- As was permitted prior to
today's amendments, registered offerings that are not primarily
of a capital raising nature and certain private placements may go
forward without financial statements of an acquired business,
regardless of its significance, until 75 days following the
acquisition.-[15]-
The Commission received nineteen comment letters on the
Proposing Release, of which seventeen generally supported
conforming the disclosure requirements under the Exchange Act and
the Securities Act for significant business acquisitions.
Although some commenters recommended that offerings be allowed to
proceed without limitation as to the size of the business
---------FOOTNOTES----------
-[13]- A "blank check company" is defined in 230.419 of
Regulation C [17 CFR 230.419(a)(2)].
-[14]- The significance of an acquired business is
evaluated based on: (i) the amount of the
issuer's investment in the acquired business; (ii)
the total assets of the acquired business; and
(iii) the pre-tax income of the acquired business,
all as compared to the comparable items in the
registrant's most recent audited annual financial
statements. [See 17 CFR 210.1-02(w) and 17 CFR
228.310(c)(2).]
-[15]- See Instruction 2 to Item 7 of Form 8-K.
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acquisition, most commenters favored limiting the waiver of
financial statements to acquisitions below some particular
significance level. Among the commenters supporting a limit, the
recommended thresholds for disclosure varied greatly, ranging
from 10% to 80%.
As adopted, the amendments to Rule 3-05 of Regulation S-X
and Item 310 of Regulation S-B require inclusion of the audited
financial statements in registration statements only if the
pending or recent acquisition exceeds the 50% significance level.
The Commission believes it is an appropriate policy to strive to
remove obstacles to proceeding with registered offerings despite
pending or recent acquisitions, but recognizes that an
acquisition could be so large relative to an issuer that
investors would need financial statements of the acquired
business for a reasoned evaluation of any primary capital raising
transaction by the issuer. The selection of the 50% significance
level reflects a weighing of conflicting considerations in the
light of comments received on the proposal.
The amended rules do not require the financial statements of
businesses below the 50% significance level to be included in
registration statements until 75 days after consummation of the
acquisition, although registrants may choose to do so on a
voluntary basis. Under the proposal, the requirement to furnish
financial statements in registration statements would have been
automatically waived until the 75th day unless the financial
statements were readily available at an earlier time, which was
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similar to the requirement for Exchange Act reporting
purposes.-[16]- Eight commenters criticized the term
"readily available" as vague and unworkable. In that regard,
several commenters observed that, although an acquired business's
financial statements may have been audited previously, filing of
the financial statements may be delayed while consents and
representations are obtained, due diligence procedures are
performed, pro forma information is prepared, and compliance with
all filing requirements is ascertained. While some issuers may
choose to complete promptly all steps necessary to file the
financial statements well in advance of the 75th day deadline,
others may schedule these activities solely to ensure that the
financial statements can be filed by the final date due. Because
of the discretion exercisable by issuers, the "readily available"
criterion would not appear to result in more prompt filing of
financial statements nor would it be interpreted consistently by
issuers. Accordingly, as adopted, the rule omits the "readily
available" criterion for presenting financial statements during
the 75-day period. A conforming change to the requirements of
Form 8-K also has been adopted.-[17]-
---------FOOTNOTES----------
-[16]- A Form 8-K reporting a significant acquisition is
required to be filed within 15 days of
consummation of the acquisition. If financial
statements of the acquired business are not
available, they are required to be filed by
amendment to the Form 8-K as soon thereafter as
practicable, but not later than 60 days after the
initial report is filed. See General Instructions
and Items 2 and 7(a)(4) of Form 8-K.
-[17]- See revisions to Item 7 of Form 8-K.
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As contemplated by the proposal, today's amendments provide
that the pro forma financial information required by Regulation
S-X to depict the effects of a business acquisition need not be
furnished unless the financial statements of the acquiree are
furnished. Article 11 of Regulation S-X is amended to conform
the significance threshold for providing pro forma financial
statements in connection with business acquisitions to the
minimum 20% significance level in Rule 3-05 and Item 310 of
Regulation S-B.-[18]-
Other than the changes described herein affecting the
financial statements and pro forma information required pursuant
to Rules 3-05 and Article 11 of Regulation S-X and Item 310 of
Regulation S-B, the amendments do not change the information
required in filings with respect to significant acquisitions.
For example, likely effects of a probable or recently consummated
business combination are required to be discussed in Management's
Discussion and Analysis, to the extent material.-[19]- In
addition, an issuer's financial statements must include
disclosures regarding the terms and effects of material business
combinations to the extent required by generally accepted
---------FOOTNOTES----------
-[18]- See revisions to Rule 11-01 of Regulation S-X and
Item 310(c) of Regulation S-B [17 CFR 210.11-01
and 228.310(c)].
-[19]- See Item 303 of Regulations S-K and S-B [17 CFR
229.303 and 228.303].
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accounting principles.-[20]-
The Commission recognizes the difficulty in determining the
disclosure to be made regarding significant transactions and
events that occur in proximity to an issuer's capital raising
activities before complete and reliable information becomes
available. Issuers may conclude in some cases that an offering
must be delayed until significant uncertainties are resolved, or
at least until they are identified fully, while in other cases no
delay is necessary because adequate disclosure can be furnished.
One commenter recommended that a safe harbor be provided for
disclosures pertaining to significant acquisitions until audited
financial statements are available. Since a business acquisition
is not fundamentally different from other significant events
affecting issuers and requiring careful consideration of the
appropriate disclosure to be made in Management's Discussion and
Analysis and the financial statements, the Commission believes it
is not appropriate at this time to address separately the need
for a safe harbor.
A domestic company may proceed with a registered offering of
securities without financial statements of a recent or probable
---------FOOTNOTES----------
-[20]- Material terms, significant accounting policies
applied, and certain summarized pro forma
information must be included with respect to
material business combination in a note to
financial statements for the period in which the
transaction occurs. See paragraphs 95 and 96 of
Accounting Principles Board Opinion No. 16,
"Business Combinations." Comparable summary
disclosure is required in interim financial
statements pursuant to Rule 10-01(b)(4) of
Regulation S-X [17 CFR 210.10-01(b)(4)].
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acquiree in the circumstances described above, but it is required
by Form 8-K to file financial statements of each significant
acquired business within 75 days of consummation of the
acquisition.-[21]- Although the amended rules apply to
offerings of domestic and foreign issuers alike, foreign private
issuers are not subject to quarterly or Form
8-K reporting rules. Several commenters believed that foreign
issuers should be required to file the financial statements
within some specified time after completion of a business
acquisition as a condition for omission of the acquiree's
financial statements in a registration statement under the new
rules. However, a requirement to furnish those financial
statements would modify significantly the foreign private
issuer's interim and current events reporting requirements, which
rely generally on home country standards and already contemplate
that investors in securities of foreign private issuers will not
necessarily receive the information customarily provided by
domestic issuers regarding significant business acquisitions.
Consequently, no amendment to require a special report by foreign
private issuers is adopted.
---------FOOTNOTES----------
-[21]- See Item 2 and Item 7 of Form 8-K [17 CFR
249.308]. Also, under the rules as revised, an
issuer, other than a foreign private issuer, that
omits financial statements of a recently
consummated business combination from its initial
registration statement in reliance on the new
rules must furnish those financial statements, and
related pro forma information, within 75 days of
the consummation of the acquisition under cover of
Form 8-K.
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The Commission also had proposed to eliminate the
requirement that issuers provide in registration statements
audited financial statements of recently acquired businesses
that, in the aggregate, but not individually, are significant at
the 20% level.-[22]- Although a number of commenters
supported elimination of the requirement, several commenters
observed that individually insignificant businesses could be so
numerous as to become material, or could be components of a
broader acquisition plan that is material.
To address these concerns, the amendments adopted today
provide that the acquisition of "related businesses" should be
treated as a single business combination for purposes of
determining the transaction's significance under Rule 3-05 and
the periods for which financial statements of those businesses
are required. The amendment codifies present staff interpretive
practices concerning acquisitions of related businesses. The
amended rule defines related businesses as businesses under
common ownership or management or whose acquisitions are
conditional on each other or on a single common
condition.-[23]-
In addition, the amended rules require one year of audited
---------FOOTNOTES----------
-[22]- Under the former rules, if the businesses in
aggregate exceeded the 20% level under the tests
for significance, the issuer was required to
furnish audited financial statements of the most
recent fiscal year for a majority of the
individually insignificant businesses. See Rule
3-05(b)(i) of Regulation S-X.
-[23]- See revisions to Rule 3-05(a)(3).
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financial statements of a majority of individually insignificant
businesses acquired subsequent to the issuer's latest audited
balance sheet date if, in the aggregate, the businesses are
significant at a level exceeding 50%.-[24]- Accordingly,
the amendment raises the threshold for the requirement to furnish
financial statements of individually insignificant businesses
from the present 20% level to 50%.
Although there may be other circumstances in which investors
would want audited financial statements of individually
insignificant businesses to be provided, the Commission believes
that extending the requirement to other circumstances would
unintentionally impose a costly and unnecessary burden. Existing
rules permit the staff to exercise appropriate discretion where
warranted in determining that financial statements in addition to
those expressly required by a form should be provided for an
adequate presentation of an issuer's financial condition, as well
as to permit the omission of required financial statements where
consistent with investor protection.-[25]-
Consistent with the proposal, the amendments do not modify
the requirement to furnish audited financial statements of a
business to be acquired if securities are being registered in
---------FOOTNOTES----------
-[24]- Instructions to Item 2 of Form 8-K are amended to
clarify that acquisitions of individually
insignificant businesses do not result in a
reporting requirement under that item unless the
businesses are related businesses, as defined.
See revisions to Instruction to Item 2 of Form 8-
K.
-[25]- 17 CFR 210.3-13.
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connection with the acquisition of that business.-[26]- In
such a registration statement, however, the issuer may rely on
the amended rules with respect to omission of other pending or
recently completed acquisitions. The amended rules apply to
proxy statements and registration statements under the Exchange
Act, but do not change the proxy statement requirement of Item 14
of Schedule 14A to provide financial statements of a business to
be acquired.-[27]- Accordingly, the financial statements
of the acquiree will continue to be required in registration
statements and proxy statements delivered to shareholders in
connection with the solicitation of their approval of the
acquisition transaction or other investment decision.-[28]-
The revisions adopted today do not effect Rule 3-14 of
Regulation S-X governing financial statements required for
---------FOOTNOTES----------
-[26]- Forms S-4 and F-4 do provide certain
accommodations with respect to acquirees that are
not reporting companies under the Exchange Act.
See Item 17 in each Form [17 CFR 239.25 and 34].
-[27]- If action is to be taken with respect to a merger,
consolidation, acquisition or similar matters,
financial statements of an acquired business that
is the subject of the action are required pursuant
to Item 14 [17 CFR 240.14a-101.14].
-[28]- The Commission may consider in the future certain
recommendations to modify requirements for
financial statements of nonreporting companies in
registration statements relating to exchange
offers. See Section VI.B.2 of the Report of the
Task Force on Disclosure Simplification, published
by the Commission on March 6, 1996.
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acquired operating real estate properties.-[29]- Several
commenters expressed the view that clarification or modification
of that rule was needed. In the future, the Commission may
address generally disclosure requirements applicable to real
estate partnerships, real estate investment trusts, and similar
types of businesses. Because Rule 3-14 is intended to address
unique features of that industry, such as the "blind pool" type
of offering frequently used in the industry, the Commission has
decided to consider revision of Rule 3-14 in the context of its
evaluation of a more comprehensive disclosure scheme.-[30]-
III. INCREASED SIGNIFICANCE THRESHOLDS FOR ACQUIREE FINANCIAL
STATEMENTS
The rules amended today raise the thresholds at which an
---------FOOTNOTES----------
-[29]- Audited income statements of significant acquired
or to be acquired operating real estate properties
are required to be furnished pursuant to Rule 3-14
of Regulation S-X and Item 310(e) of Regulation S-
B [17 CFR 210.3-14 and 228.310(e)]. The income
statements are required to be presented only for
the most recent fiscal year, regardless of
significance, if the property is not acquired from
a related party and the registrant is not aware of
any material factors relating to the specific
property that would cause the reported financial
information not to be necessarily indicative of
future operating results. The income statements
may exclude items not comparable to the proposed
future operation of the property, such as mortgage
interest, leasehold rental, depreciation,
corporate expenses and federal and state income
taxes.
-[30]- See Section IX.E. of the Report of the Task Force
on Disclosure Simplification, published by the
Commission on March 6, 1996, which discusses
recommendations to streamline and update
requirements of Industry Guide 5 pertaining to
partnerships and REITs.
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acquired business will be considered significant enough to
require the provision of its audited financial statements in
filings made under either the Exchange Act or the Securities Act.
Issuers are required to report under Form 8-K the acquisition of
a significant business within 15 days of consummation of that
transaction. Prior to today's amendments, issuers were required
to furnish audited financial statements of the acquired business
as soon as practicable thereafter, but no later than 60 days
after the initial report on Form 8-K. Audited financial
statements for one, two or three years were required if the
acquired business was significant at the 10%, 20% or 40% levels,
respectively.-[31]- A small business issuer could omit
audited financial statements of an acquired business falling
below the 20% level if they were not readily available, and could
omit under similar circumstances the first of two years of
financial statements required if the acquired business was
between the 20% and 40% significance level. Financial statements
for periods preceding the two most recent fiscal years are not
required in filings by small business issuers.-[32]-
As originally proposed, the rules applicable to businesses
acquired by small business issuers would be extended to all
issuers, except that the present requirement applicable to all
issuers other than small business issuers -- that three years of
---------FOOTNOTES----------
-[31]- See General Instructions and Items 2 and 7 of Form
8-K.
-[32]- See Item 310 of Regulation S-B [17 CFR 228.310].
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audited financial statements must be furnished for acquirees
exceeding the 40% significance level -- would be
retained.-[33]- The Commission requested comment as to the
appropriate significance threshold for determining when financial
statements that are not readily available should be waived.
As discussed above, many commenters criticized the "readily
available" criterion because of the possibility of different
interpretations and, therefore, different levels of disclosure
based on factors such as an issuer's discretionary scheduling of
activities necessary to furnish the financial statements. In
addition, several commenters favored raising the significance
thresholds for required financial statements and believed that a
requirement for readily available financial statements at lower
thresholds was unnecessary. Several commenters expressed the
view that imposition of the costs of providing financial
statements of acquired businesses was justified only at
thresholds higher than those in place currently.
The amendments to Rule 3-05 of Regulation S-X and Item 310
of Regulation S-B adopted today do not include a "readily
available" criterion, and provisions of Item 310 of Regulation S-
B are amended in a conforming fashion to eliminate requirements
to furnish financial statements based on
---------FOOTNOTES----------
-[33]- See old Item 310(c) of Regulation S-B [17 CFR
228.310(c)].
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availability.-[34]- The amended rules provide that audited
financial statements of an acquired business should be furnished
for the most recent fiscal year if the significance of the
acquiree exceeds 20%, for the most recent two years if
significance exceeds 40%, and, except with respect to issuers
making offerings under Regulation S-B and acquired businesses
reporting annual revenues of less than $25 million, for the
latest three years if the significance exceeds 50%. No financial
statements will be required for acquisitions below the 20%
significance threshold.-[35]-
The threshold at which audited financial statements of an
acquired business are required for three years, as required for
the issuer itself (except for small business issuers), has been
raised from 40% to 50% in recognition of the significant burden
imposed by the lower threshold. In addition, consistent with the
criteria for small business issuers, financial statements for
periods preceding the most recent two fiscal years would not be
required for acquired businesses reporting revenues below $25
million.-[36]-
The revised rules are expected to be less subjective in
---------FOOTNOTES----------
-[34]- See revisions to Item 310(c) of Regulation S-B.
Also, a technical correction revises a reference
in Form 8-K to paragraphs of Item 310 of
Regulation S-B. See revisions to the General
Instructions to Form 8-K.
-[35]- See revisions to Rule 3-05 of Regulation S-X and
Item 310(c) of Regulation S-B.
-[36]- See Item 10 of Regulation S-B [17 CFR 228.10].
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their application. Also, they will accomplish the goal of
reducing the burden of providing audited financial statements of
acquired businesses, thereby increasing issuers' flexibility to
make registered offerings without jeopardizing investor
protection. Although investors will receive less information
about some business acquisitions under the revised rules, the
Commission believes that the benefits of the amendments outweigh
that cost.
IV. COST-BENEFIT ANALYSIS
It is expected that the amendments will decrease
registrants' costs and compliance burdens because the instances
in which financial statements of acquired businesses and the
number of years for which such financial statements are required
will be reduced, enabling issuers to avoid the cost of preparing
and auditing those statements. The amendments also are expected
to reduce impediments to sales of securities in registered
offerings, enabling companies the flexibility to raise capital at
a lower cost that may be available through unregistered sales.
V. SUMMARY OF FINAL REGULATORY FLEXIBILITY ANALYSIS
The Commission has prepared a Final Regulatory Flexibility
Analysis pursuant to the requirements of the Regulatory
Flexibility Act,-[37]- regarding the amendments to Rule 3-
05 of Regulation S-X, Item 310 of Regulation S-B, Form S-4 and
Form F-4 and Form 8-K. The analysis notes that these amendments
relating to financial statement requirements for acquired
---------FOOTNOTES----------
-[37]- 5 U.S.C. 603 (1988).
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businesses will provide issuers greater flexibility and
efficiency in accessing the public securities markets.
As stated in the analysis, the amendments would eliminate
certain requirements that a company registering securities under
the Securities Act provide information, including audited
financial statements, in the registration statement about
significant acquisitions from such time as the acquisition is
probable, and provide an automatic waiver in some circumstances
for such financial statements under the Exchange Act. The
reduction in expense, time and effort resulting from the
elimination of this requirement will benefit all entities that
issue securities in the United States, including small entities.
An additional expected benefit of the amendments would be that
offerings may be registered for sale in the United States in
situations where hitherto investors in the United States would
have been excluded due to the time and expense involved in
registration. A resulting increase in registered offerings in
the United States by issuers could be expected to increase ease
of investment for small U.S. entities acting as investors.
As stated in the analysis, the proposed amendments would
eliminate certain requirements that a company registering
securities under the Securities Act provide information in a
registration statement, including audited financial statements,
about significant acquisitions from such time as the acquisition
is probable, and would provide an automatic waiver in some
circumstances for such financial statements under the Exchange
==========================================START OF PAGE 20======
Act.
It is expected that the new rules will decrease reporting,
recordkeeping and compliance burdens for persons that are small
entities, as defined by the Commission's rules. The Commission
is aware of approximately 1,100 reporting companies that
currently satisfy the definition of "small business" under Rule
157. With respect to the amended Securities Act filing
requirements, only small businesses that undertake a registered
offering during the pendency of an acquisition will be affected.
Of the above-referenced 1,100 companies, the Commission staff
estimates that a maximum of approximately 50 companies will be
affected in any single fiscal year. The Commission staff does
not believe any will be negatively affected by these amendments.
With respect to the amended Exchange Act reporting requirements,
the Commission staff does not believe the amendments will have
any significant effect on the such 1,100 companies. Therefore,
the economic impact of the proposed amendments would be only to
lessen the regulatory, reporting, recordkeeping and compliance
burden on all reporting entities, both small and large.
A copy of the Final Regulatory Flexibility Analysis may be
obtained by contacting Walter Van Dorn, Office of International
Corporate Finance, Division of Corporation Finance at (202) 942-
2990, U.S. Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549.
VI. PAPERWORK REDUCTION ACT
In June, 1995, the staff submitted to the Office of
==========================================START OF PAGE 21======
Management and Budget ("OMB") for review proposals to amend the
following information collections: Form 10, Form 8-K, Form S-1,
Form S-2, Form S-3, Form SB-1, Form SB-2, Form 20-F, Form F-1,
Form F-2, and Form F-3. -[38]- These information
collections display an OMB control number and expiration date.
-[39]- The information collections are required to be
filed by companies registering securities under the Securities
Act. The Commission solicited comment on the compliance burdens
associated with the proposals but received no public comment on
the burden estimates.
As discussed in Sections II and III of this release, some
changes to the information collections are being adopted that
differ from the proposed changes to such information collections.
Specifically, audited annual and unaudited interim financial
statements of business acquired or to be acquired will no longer
be required in filings made under the Exchange Act or Securities
Act with respect to individual acquisitions below the 20%
significance level or individually insignificant acquisitions
below the 50% significance level. Only one year of audited
---------FOOTNOTES----------
-[38]- There are no changes regarding the purpose, use or
necessity of the information collections for which
OMB approval was requested, nor are there changes
to the estimates of reporting or recordkeeping
burden expected to result from adoption of the
proposed amendments. See the Proposing Release
for estimates of changes in reporting or
recordkeeping burden.
-[39]- Unless a currently valid OMB number is displayed,
an agency may not sponsor or conduct or require
response to an information collection pursuant to
44 U.S.C. 3506(c)(1)(B).
==========================================START OF PAGE 22======
financial statements, rather than two years, will be required for
acquisitions falling in the 20% to 40% significance levels; and
only two years, rather than three years, of audited financial
statements will be required for acquisitions falling in the 40%
to 50% significance levels. The amendments also permit omission
of audited financial statements of acquired businesses between
the 20% and 50% significance levels from registration statements
and proxy materials in certain circumstances, although those
financial statements will be required at a later date in a Form
8-K. Although some of the differences will increase the total
annual burdens estimated at the proposing stage, other
differences will decrease the burdens estimated at the proposing
stage. The overall effect is that the differences will not
result in any significant changes to the total burden estimates
that were submitted to OMB at the proposing stage.
VII. STATUTORY BASES
The foregoing amendments to the Commission's rules and forms
are being adopted pursuant to sections 2, 3, 4 and 19 of the
Securities Act of 1933 and 3(b), 4A, 12, 13, 14, 15, 16 and 23 of
the Securities Exchange Act of 1934.
List of Subjects in 17 CFR Parts 210, 228, 239, and 249
Accountants, Accounting, Reporting and recordkeeping
requirements, Securities, Small Businesses.
TEXT OF AMENDMENTS
In accordance with the foregoing, Title 17, Chapter II of
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the Code of Federal Regulations is to be amended as follows:
PART 210 - FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL
STATEMENTS, SECURITIES ACT OF 1933, SECURITIES
EXCHANGE ACT OF 1934, PUBLIC UTILITY HOLDING
COMPANY ACT OF 1935, INVESTMENT COMPANY ACT OF
1940, AND ENERGY POLICY AND CONSERVATION ACT OF
1975
1. The authority citation for Part 210 continues to read
as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77aa(25),
77aa(26), 78l, 78m, 78n, 78o(d), 78w(a), 78ll(d), 79e(b), 79j(a),
79n, 79t(a), 80a-8, 80a-20, 80a-29, 80a-30, 80a-37a, unless
otherwise noted.
2. By amending 210.3-05 by revising paragraphs (a)(3) and
(b) to read as follows:
210.3-05 Financial statements of businesses acquired or to
be acquired.
(a) ***
(3) Acquisitions of a group of related businesses that are
probable or that have occurred subsequent to the latest fiscal
year-end for which audited financial statements of the registrant
have been filed shall be treated under this section as if they
are a single business combination. The required financial
statements of related businesses may be presented on a combined
basis for any periods they are under common control or
management. For purposes of this section, businesses shall be
deemed to be related if:
(i) They are under common control or management;
==========================================START OF PAGE 24======
(ii) The acquisition of one business is conditional on the
acquisition of each other business; or
(iii) Each acquisition is conditioned on a single common
event.
* * * * *
(b) Periods to be presented. (1) If securities are being
registered to be offered to the security holders of the business
to be acquired, the financial statements specified in 210.3-01
and 210.3-02 shall be furnished for the business to be acquired,
except as provided otherwise for filings on Form N-14, S-4 or F-4
(239.23, 239.25 or 239.34 of this chapter). The financial
statements covering fiscal years shall be audited except as
provided in Item 14 of Schedule 14A (240.14a-101 of this
chapter) with respect to certain proxy statements or in
registration statements filed on Forms N-14, S-4 or F-4
(239.23, 239.25 or 239.34 of this chapter).
(2) In all cases not specified in paragraph (b)(1) of this
section, financial statements of the business acquired or to be
acquired shall be filed for the periods specified in this
paragraph (b)(2) or such shorter period as the business has been
in existence. The periods for which such financial statements
are to be filed shall be determined using the conditions
specified in the definition of significant subsidiary in
210.1-02(w) as follows:
(i) If none of the conditions exceeds 20 percent, financial
statements are not required. However, if the aggregate impact of
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the individually insignificant businesses acquired since the date
of the most recent audited balance sheet filed for the registrant
exceeds 50%, financial statements covering at least the
substantial majority of the businesses acquired shall be
furnished. Such financial statements shall be for at least the
most recent fiscal year and any interim periods specified in
210.3-01 and 210.3-02.
(ii) If any of the conditions exceeds 20 percent, but none
exceed 40 percent, financial statements shall be furnished for at
least the most recent fiscal year and any interim periods
specified in 210.3-01 and 210.3-02.
(iii) If any of the conditions exceeds 40 percent, but none
exceed 50 percent, financial statements shall be furnished for at
least the two most recent fiscal years and any interim periods
specified in 210.3-01 and 210.3-02.
(iv) If any of the conditions exceeds 50 percent, the full
financial statements specified in 210.3-01 and 210.3-02 shall
be furnished. However, financial statements for the earliest of
the three fiscal years required may be omitted if net revenues
reported by the acquired business in its most recent fiscal year
are less than $25 million.
(3) The determination shall be made by comparing the most
recent annual financial statements of each such business, or
group of related businesses on a combined basis, to the
registrant's most recent annual consolidated financial statements
filed at or prior to the date of acquisition. However, if the
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registrant made a significant acquisition subsequent to the
latest fiscal year-end and filed a report on Form 8-K (249.308
of this chapter) which included audited financial statements of
such acquired business for the periods required by this section
and the pro forma financial information required by 210.11, such
determination may be made by using pro forma amounts for the
latest fiscal year in the report on Form 8-K (249.308 of this
chapter) rather than by using the historical amounts of the
registrant. The tests may not be made by "annualizing" data.
(4) Financial statements required for the periods specified
in paragraph (b)(2) of this section may be omitted to the extent
specified as follows:
(i) Registration statements not subject to the provisions of
230.419 of this chapter (Regulation C) and proxy statements need
not include separate financial statements of the acquired or to
be acquired business if it does not exceed any of the conditions
of significance in the definition of significant subsidiary in
210.1-02 at the 50 percent level, and either:
(A) The consummation of the acquisition has not yet
occurred; or
(B) The date of the final prospectus or prospectus
supplement relating to an offering as filed with the Commission
pursuant to 230.424(b) of this chapter, or mailing date in the
case of a proxy statement, is no more than 74 days after
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consummation of the business combination, and the financial
statements have not previously been filed by the registrant.
(ii) An issuer, other than a foreign private issuer
required to file reports on Form 6-K, that omits from its initial
registration statement financial statements of a recently
consummated business combination pursuant to paragraph (b)(4)(i)
of this section shall furnish those financial statements and any
pro forma information specified by Article 11 of this chapter
under cover of Form 8-K (249.308 of this chapter) no later than
75 days after consummation of the acquisition.
(iii) Separate financial statements of the acquired business
need not be presented once the operating results of the acquired
business have been reflected in the audited consolidated
financial statements of the registrant for a complete fiscal year
unless such financial statements have not been previously filed
or unless the acquired business is of such significance to the
registrant that omission of such financial statements would
materially impair an investor's ability to understand the
historical financial results of the registrant. For example, if,
at the date of acquisition, the acquired business met at least
one of the conditions in the definition of significant subsidiary
in 210.1-02 at the 80 percent level, the income statements of
the acquired business should normally continue to be furnished
for such periods prior to the purchase as may be necessary when
added to the time for which audited income statements after the
purchase are filed to cover the equivalent of the period
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specified in 210.3-02.
(iv) A separate audited balance sheet of the acquired
business is not required when the registrant's most recent
audited balance sheet required by 210.3-01 is for a date after
the date the acquisition was consummated.
3. By amending 210.11-01 by revising paragraphs (b) and
(c) to read as follows:
210.11-01 Presentation requirements.
* * * * *
(b) A business combination or disposition of a business
shall be considered significant if:
(1) A comparison of the most recent annual financial
statements of the business acquired or to be acquired and the
registrant's most recent annual consolidated financial statements
filed at or prior to the date of acquisition indicates that the
business would be a significant subsidiary pursuant to the
conditions specified in 210.1-02(w), substituting 20 percent for
10 percent each place it appears therein; or
(2) The business to be disposed of meets the conditions of a
significant subsidiary in 210.1-02(w).
(c) The pro forma effects of a business combination need not
be presented pursuant to this section if separate financial
statements of the acquired business are not included in the
filing.
* * * * *
PART 228 - INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS
ISSUERS
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4. The authority citation for Part 228 continues to read
as follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s,
77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn,
77sss, 78l, 78m, 78n, 78o, 78w, 78ll, 80a-8, 80a-29, 80a-30, 80a-
37, 80b-11, unless otherwise noted.
5. By amending 228.310 by revising paragraphs (c) and
(d)(1), removing paragraph (d)(2), and redesignating paragraph
(d)(3) as paragraph (d)(2), to read as follows:
228.310(c) (Item 310) Financial Statements.
* * * * *
(c) Financial Statements of Businesses Acquired or to be
Acquired. (1) If a business combination accounted for as a
"purchase" has occurred or is probable, or if a business
combination accounted for as a "pooling of interest" is probable,
financial statements of the business acquired or to be acquired
shall be furnished for the periods specified in paragraph (c)(3)
of this Item.
(i) The term "purchase" encompasses the purchase of an
interest in a business accounted for by the equity method.
(ii) Acquisitions of a group of related businesses that are
probable or that have occurred subsequent to the latest fiscal
year-end for which audited financial statements of the issuer
have been filed shall be treated as if they are a single business
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combination for purposes of this section. The required financial
statements of related businesses may be presented on a combined
basis for any periods they are under common control or
management. A group of businesses are deemed to be related if:
(A) They are under common control or management;
(B) The acquisition of one business is conditional on the
acquisition of each other business; or
(C) Each acquisition is conditioned on a single common
event.
(iii) Annual financial statements required by this
paragraph (c) shall be audited. The form and content of the
financial statements shall be in accordance with paragraphs (a)
and (b) of this Item.
(2) The periods for which financial statements are to be
presented are determined by comparison of the most recent annual
financial statements of the business acquired or to be acquired
and the small business issuer's most recent annual financial
statements filed at or prior to the date of acquisition to
evaluate each of the following conditions:
(i) Compare the small business issuer's investments in and
advances to the acquiree to the total consolidated assets of the
small business issuer as of the end of the most recently
completed fiscal year. For a proposed business combination to be
accounted for as a pooling of interests, also compare the number
of common shares exchanged or to be exchanged by the small
business issuer to its total common shares outstanding at the
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date the combination is initiated.
(ii) Compare the small business issuer's proportionate share
of the total assets (after intercompany eliminations) of the
acquiree to the total consolidated assets of the small business
issuer as of the end of the most recently completed fiscal year.
(iii) Compare the small business issuer's equity in the
income from continuing operations before income taxes,
extraordinary items and cumulative effect of a change in
accounting principles of the acquiree to such consolidated income
of the small business issuer for the most recently completed
fiscal year.
Computational note to paragraph (c)(2): For purposes of
making the prescribed income test the following guidance should
be applied: If income of the small business issuer and its
subsidiaries consolidated for the most recent fiscal year is at
least 10 percent lower than the average of the income for the
last five fiscal years, such average income should be substituted
for purposes of the computation. Any loss years should be omitted
for purposes of computing average income.
(3) (i) If none of the conditions specified in paragraph
(c)(2) of this Item exceeds 20%, financial statements are not
required. If any of the conditions exceed 20%, but none exceeds
40%, financial statements shall be furnished for the most recent
fiscal year and any interim periods specified in paragraph (b) of
this item. If any of the conditions exceed 40%, financial
statements shall be furnished for the two most recent fiscal
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years and any interim periods specified in paragraph (b) of this
item.
(ii) The separate audited balance sheet of the acquired
business is not required when the small business issuer's most
recent audited balance sheet filed is for a date after the
acquisition was consummated.
(iii) If the aggregate impact of individually insignificant
businesses acquired since the date of the most recent audited
balance sheet filed for the registrant exceeds 50%, financial
statements covering at least the substantial majority of the
businesses acquired shall be furnished. Such financial
statements shall be for the most recent fiscal year and any
interim periods specified in paragraph (b) of this Item.
(iv) Registration statements not subject to the provisions
of 230.419 of this chapter (Regulation C) and proxy statements
need not include separate financial statements of the acquired or
to be acquired business if it does not meet or exceed any of the
conditions specified in paragraph (c)(2) of this Item at the 50
percent level, and either:
(A) The consummation of the acquisition has not yet
occurred; or
(B) The effective date of the registration statement, or
mailing date in the case of a proxy statement, is no more than 74
days after consummation of the business combination, and the
financial statements have not been filed previously by the
registrant.
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(v) An issuer that omits from its initial registration
statement financial statements of a recently consummated business
combination pursuant to paragraph (c)(3)(iv) of this section
shall furnish those financial statements and any pro forma
information specified by paragraph (d) of this Item under cover
of Form 8-K (249.308 of this chapter) no later than 75 days
after consummation of the acquisition.
(4) If the small business issuer made a significant business
acquisition subsequent to the latest fiscal year end and filed a
report on Form 8-K which included audited financial statements of
such acquired business for the periods required by paragraph
(c)(3) of this Item and the pro forma financial information
required by paragraph (d) of this Item, the determination of
significance may be made by using pro forma amounts for the
latest fiscal year in the report on Form 8-K rather than by using
the historical amounts of the registrant. The tests may not be
made by "annualizing" data.
(d) Pro Forma Financial Information. Pro forma information
showing the effects of the acquisition shall be furnished if
financial statements of a business acquired or to be acquired are
presented.
* * * * *
PART 239 - FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1993
6. The authority citation for Part 239 continues to read
in part as follows:
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AUTHORITY: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77sss, 78c,
78l, 78m, 78n, 78o(d), 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 79l
,79m, 79n, 79q, 79t, 80a-8, 80a-29, 80a-30 and 80a-37, unless
otherwise noted.
* * * * *
7. By revising paragraph (b)(7) of Item 17 of Form S-4
(referenced in 239.25) to read as follows:
Note: Form S-4 does not and these amendments will not
appear in the Code of Federal Regulations.
Form S-4
* * * * *
Item 17. Information with Respect to Companies Other Than S-3 or
S-2 Companies.
* * * * *
(b) * * *
(7) Financial statements as would have been required to be
included in an annual report furnished to security holders
pursuant to Rules 14a-3(b)(1) and (b)(2) (240.14a-3 of this
chapter) or Rules 14c-3(a)(1) and (a)(2) (240.14c-3 of this
chapter), had the company being acquired been required to prepare
such a report; Provided, however, that the balance sheet for the
year preceding the latest full fiscal year and the income
statements for the two years preceding the latest full fiscal
year need not be audited if they have not previously been
audited. In any case, such financial statements need only be
audited to the extent practicable. If this Form is used for
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resales to the public by any person who with regard to the
securities being reoffered is deemed to be an underwriter within
the meaning of Rule 145(c) (230.145(c) of this chapter), the
financial statements of such companies must be audited for the
fiscal years required to be presented pursuant to paragraph
(b)(2) of Rule 3-05 of Regulation S-X (17 CFR 210.3-05).
* * * * *
8. By revising paragraph (b)(5) of Item 17 of Form F-4
(referenced in 239.34) to read as follows:
Note: Form F-4 does not and these amendments will not
appear in the Code of Federal Regulations.
Form F-4
* * * * *
Item 17. Information with Respect to Foreign Companies Other
Than F-3 or F-2 Companies.
* * * * *
(b) * * *
(5) Financial statements as would have been required to be
included in an annual report on Form 20-F (17 CFR 249.220f) had
the company being acquired been required to prepare such a
report; Provided, however, that the balance sheet for the year
preceding the latest full fiscal year and the income statements
for the two years preceding the latest full fiscal year need not
be audited if they have not previously been audited. In any
case, such financial statements need only be audited to the
extent practicable. If this Form is used for resales to the
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public by any person who with regard to the securities being
reoffered is deemed to be an underwriter within the meaning of
Rule 145(c) (230.145(c) of this chapter), the financial
statements of such companies must be audited for the fiscal years
required to be presented pursuant to paragraph (b)(2) of Rule 3-
05 of Regulation S-X (17 CFR 210.3-05).
* * * * *
PART 249 - FORMS, SECURITIES EXCHANGE ACT OF 1934
9. The authority citation for Part 249 continues to read
in part as follows:
Authority: 15 U.S.C. 78a, et seq., unless otherwise noted;
* * * * *
10. By amending Form 8-K (referenced in 249.308) by
removing Instruction 2, by revising paragraph C.3 of the General
Instructions, revising Instruction 4 of Item 2, and revising
paragraph (a)(4) and Instruction 1 of Item 7 to read as follows:
Note: Form 8-K does not and these amendments will not
appear in the Code of Federal Regulations
Form 8-K
* * * * *
GENERAL INSTRUCTIONS
* * * * *
C. Application of General Rules and Regulations
* * * * *
3. A "small business issuer," defined under Rule 12b-2 of
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the Exchange Act (240.12b-2 of this chapter), shall refer to the
disclosure items in Regulation S-B (17 CFR 228.10 et seq.) and
not Regulation S-K. If there is no comparable disclosure item in
Regulation S-B, a small business issuer need not provide the
information requested. A small business issuer shall provide the
information required by Item 310 (c) and (d) of Regulation S-B in
lieu of the financial information required by Item 7 of this
Form.
* * * * *
Item 2. Acquisition or Disposition of Assets.
* * * * *
Instructions.
* * * * *
4. An acquisition or disposition shall be deemed to involve
a significant amount of assets (i) if the registrant's and its
other subsidiaries' equity in the net book value of such assets
or the amount paid or received therefor upon such acquisition or
disposition exceeded 10 percent of the total assets of the
registrant and its consolidated subsidiaries, or (ii) if it
involved a business (see 210.11-01(d)) which is significant (see
210.11.01(b)). Acquisitions of individually insignificant
businesses are not required to be reported pursuant to this item
unless they are related businesses (see 210.3-05(a)(3)) and are,
in the aggregate, significant.
* * * * *
Item 7. Financial Statements and Exhibits.
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* * * * *
(a) * * *
(4) Financial statements required by this item may be filed
with the initial report, or by amendment not later than 60 days
after the date that the initial report on Form 8-K must be filed.
If the financial statements are not included in the initial
report, the registrant should so indicate in the Form 8-K report
and state when the required financial statements will be filed.
The registrant may, at its option, include unaudited financial
statements in the initial report on Form 8-K.
* * * * *
Instructions. 1. During the period after a registrant has
reported a business combination pursuant to Item 2 above until
the date on which the financial statements specified by Item 7
above must be filed, the registrant will be deemed current for
purposes of its reporting obligations under Section 13(a) or
15(d) of the Securities Exchange Act of 1934. With respect to
filings under the Securities Act of 1933, however, registration
statements will not be declared effective and post-effective
amendments to registrations statements will not be declared
effective unless financial statements meeting the requirements of
Rule 3-05 of Regulation S-X ( 210.3-05 of this chapter) are
provided. In addition, offerings should not be made pursuant to
effective registrations statements or pursuant to Rules 505 and
506 of Regulation D ( 230.501 through 506 of this chapter),
where any purchasers are not accredited investors under Rule 5-
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01(a) of that Regulation, until the audited financial statements
required by Rule 3-05 of Regulation S-X ( 210.3-05 of this
chapter) are filed. Provided, however, that the following
offerings or sales of securities may proceed notwithstanding that
financial statements of the acquired business have not be filed:
(a) offerings or sales of securities upon the conversion of
outstanding convertible securities or upon the exercise of
outstanding warrants or rights;
(b) dividend or interest reinvestment plans;
(c) employee benefit plans;
(d) transactions involving secondary offerings; or
(e) sales of securities pursuant to Rule 144 (230.144 of
this chapter).
* * * * *
By the Commission.
Jonathan G. Katz,
Secretary
October 10, 1996