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SECURITIES AND EXCHANGE COMMISSION
17 CFR PARTS 228, 229 AND 249
RELEASE NO. 34-37801; INTERNATIONAL SERIES NO. 1020
FILE NO. S7-19-95
RIN 3235-AG47
PERIODIC REPORTING OF UNREGISTERED EQUITY SALES
AGENCY: Securities and Exchange Commission
ACTION: Final Rules.
SUMMARY: The Commission is adopting revisions to forms under the
Securities Exchange Act of 1934 and Regulations S-K and S-B to
require registrants to report recent sales of equity securities
that have not been registered under the Securities Act of 1933.
The revisions are designed, in part, to address abusive practices
in connection with the sale of equity securities by domestic
companies in purported Regulation S offerings by requiring more
disclosure about such sales in a timely fashion.
EFFECTIVE DATE: The revisions are effective [30 days after
publication in the Federal Register].
FOR FURTHER INFORMATION CONTACT: Walter Van Dorn, Office of
International Corporate Finance, Division of Corporation Finance,
U.S. Securities and Exchange Commission, Washington, D.C. 20549,
(202) 942-2990.
SUPPLEMENTARY INFORMATION: The Commission is adopting amendments
to the following forms under the Securities Exchange Act of 1934
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-[1]- to require periodic disclosure of unregistered equity
offerings: Form 10-Q, -[2]- Form 10-QSB, -[3]- Form
10-K, -[4]- Form
10-KSB -[5]- and Form 8-K. -[6]- In addition the
Commission is amending the following Rules: Item 701 -[7]-
of Regulation S-K -[8]- and Item 701 -[9]- of
Regulation S-B -[10]-.
I. DISCUSSION
A. Introduction and Summary
Today the Commission is adopting amendments to its rules and
forms applicable to U.S. reporting companies -[11]- to
require timely disclosure of unregistered sales of equity
---------FOOTNOTES----------
-[1]- 15 U.S.C. 78a et seq. (the "Exchange Act").
-[2]- 17 CFR 249.308a.
-[3]- 17 CFR 249.308b.
-[4]- 17 CFR 249.310.
-[5]- 17 CFR 249.310b.
-[6]- 17 CFR 249.308.
-[7]- 17 CFR 229.701.
-[8]- 17 CFR Part 229.
-[9]- 17 CFR 228.701.
-[10]- 17 CFR Part 228.
-[11]- The new disclosure requirements apply to U.S.
reporting companies and foreign companies not
using the foreign integrated disclosure system.
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securities. The amendments were proposed in June 1995.
-[12]- They are designed to address concerns that the
current rules do not require adequate and timely disclosure to
shareholders and the markets of unregistered offerings of equity
securities, particularly those made in reliance upon Regulation S
-[13]-, the safe harbor for offshore sales, and Section
4(2) -[14]-, the private placement exemption. As a result,
shareholders and the markets have been unaware of the potential
dilution or the effects on the financial condition of the issuer
that these unregistered sales can cause. Moreover, the lack of a
specific disclosure requirement may be permitting the abusive
practices -[15]- of some U.S. issuers selling common equity
offshore purportedly in reliance upon Regulation S to occur
without notice to the market of such offerings. For example,
without a timely disclosure requirement, issuers have been able
to sell shares offshore at a substantial discount to the U.S.
market price, and the shares have been resold in the U.S. markets
before the U.S. markets have been made aware of potential
---------FOOTNOTES----------
-[12]- Securities Act Release No. 7189 (June 27, 1995)
[60 FR 35656] (the "Proposing Release").
-[13]- 17 CFR 230.901-904.
-[14]- 15 U.S.C. 77d(2).
-[15]- For a description of such practices, see
Securities Act Release No. 7190 (June 27, 1995)
[60 FR 35663] (the "Regulation S Interpretive
Release").
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significant dilution or effects on the financial condition of the
issuer of such transactions.
The amendments are being adopted substantially as proposed,
with one important change. In the proposal, the rules generally
would have required quarterly reporting of exempt equity sales
(e.g., Regulation S and private placements). As adopted,
quarterly reporting will be required for exempt equity sales
other than those made in reliance on Regulation S. The
Commission believes that quarterly reporting of most exempt
equity sales will provide adequate and timely disclosure. Most
exempt sales by reporting companies involve private placements.
In those cases, the securities cannot be freely resold into the
public markets until a significant period of time after sale.
Consequently, quarterly reporting should provide sufficient
notice. -[16]-
For Regulation S sales, however, current reporting on Form
8-K will be required within 15 days of their occurrence. The
Commission believes that quarterly reporting would not be timely
enough for Regulation S sales because, under the current 40-day
---------FOOTNOTES----------
-[16]- Under Rule 144, the safe harbor for resales of
"restricted" securities (including privately
placed securities), resales into the public
markets cannot be made until at least two years
after the sale by the issuer or an affiliate.
Although the Commission proposed to reduce these
time periods (see Securities Act Release No.
7187), even under a shortened time period
quarterly reporting would still result in
disclosure before the securities could be resold
without registration into the public markets.
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Regulation S restricted period for sales of equity securities by
domestic reporting companies, the restricted period could expire,
and securities could be resold in the U.S. market (assuming an
exemption is available), before disclosure is made. Several
commenters supported a Form 8-K filing requirement. -[17]-
The Commission is currently considering whether to revise
the issuer safe harbor for sales of equity securities by domestic
reporting companies under Regulation S, including possibly
lengthening the restricted period. -[18]- If the
restricted period for sales of equity securities pursuant to
Regulation S is changed, the Commission intends to consider
revising the periodic disclosure requirement for Regulation S
sales adopted in this release.
B. Description of Amendments
1. Disclosure Required
---------FOOTNOTES----------
-[17]- Twenty-four letters of comment were received in
response to the Proposing Release, 16 of which
responded specifically to questions relating to
quarterly reporting of sales of unregistered sales
of equity securities. Five commenters stated that
unregistered offerings of equity securities should
be reported on Form 8-K. These comment letters,
together with a Summary of Comments prepared by
Commission staff, are available for inspection and
copying in the Commission's Public Reference Room,
450 Fifth Street, N.W., Washington D.C. 20549.
Persons seeking these materials should make
reference to File No. S7-19-95.
-[18]- See Securities Act Release No. 7190 (June 27,
1995).
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Under the new requirements, the following information about
unregistered sales of equity securities -[19]- will be
required to be disclosed for the applicable reporting period:
* the title and amount of securities sold, and the date of the
transaction
* the name of the underwriter or placement agent
* the consideration received
* persons or classes of persons to whom the securities were
sold
* the exemption from registration claimed
* in the case of convertible or exchangeable securities,
warrants and options, the terms of conversion or exercise.
With the exception of the last disclosure item, this
information is currently required to be disclosed in certain
Securities Act filings pursuant to Item 701 of Regulation S-K and
Regulation S-B. In response to the Commission's request for
comment in the Proposing Release, one commenter suggested that
such information in addition to that currently listed in Item 701
would be helpful to investors. The additional information
required is disclosure of pricing information for the underlying
common equity when convertible securities, warrants and similar
securities are sold. In those situations, information about the
conversion or exercise price is important to shareholders and the
market place since it shows the potential dilutive effects of
---------FOOTNOTES----------
-[19]- "Equity security" is defined in Rule 3a11-1 [17
CFR 240.3a11-1]. It includes convertible and
exchangeable securities, warrants, options and
other types of equity-related securities.
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conversion or exercise. Item 701 of Regulation S-K and
Regulation S-B will be amended to require that this additional
information be provided in filings of annual, periodic or current
reports under the Exchange Act.
Several commenters opposed the requirement that the names of
persons to whom the securities were sold be disclosed. Item 701
would continue to provide companies with an option to describe
the person or persons to whom the securities were sold by class
(for example, to an accredited investor), as opposed to the names
of individual investors.
2. Timing of Disclosure
Information about unregistered sales of equity securities
(except those made under Regulation S) will be required to be
provided in an issuer's Quarterly Report on Form 10-Q or 10-QSB
for sales during the issuer's first three fiscal quarters, and in
the Annual Report on Form 10-K or 10-KSB for sales made during
the final fiscal quarter. Information about sales made in
reliance upon Regulation S will be required to be reported
pursuant to new Item 9 of Form 8-K and filed within 15 days of
the sale. The Form 8-K filing will be required if the issuer
claims reliance on Regulation S under Item 701 of Regulation S-K,
even if reliance on other possible bases for the unregistered
sale also could be claimed.
C. Effective Date of Amendments
The amendments will be effective [insert date - 30 days from
date of publication]. Sales that occur prior to the effective
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date, but for which a report is not due until after the effective
date, must be reported on the appropriate form. For example, an
exempt private placement occurring before the effective date must
be reported on the Form 10-Q covering the quarter if that form
has not been filed before the effective date. A sale of equity
securities pursuant to Regulation S occurring before the
effective date must be reported on Form 8-K if the Regulation S
sale was made within 15 days before the effective date.
II. COST-BENEFIT ANALYSIS
The new requirement to disclose sales of unregistered equity
securities is expected to increase modestly registrants' costs
and compliance burdens. That requirement should not
significantly increase the burden on company resources, since
most registrants are required to gather such information in
connection with the preparation of audited and unaudited
financial statements. To the extent the requirement results in
any additional expense, it is justified in view of the material
information that will be made available to investors in a timely
manner.
III. SUMMARY OF FINAL REGULATORY FLEXIBILITY ANALYSIS
The Commission has prepared a Final Regulatory Flexibility
Analysis pursuant to the requirements of the Regulatory
Flexibility Act, -[20]- regarding the amendments. The new
rules with respect to disclosure of recent sales of unregistered
---------FOOTNOTES----------
-[20]- 5 U.S.C. 603 (1988).
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securities are intended to provide investors with more timely and
complete information regarding changes in outstanding securities
of public companies.
Small U.S. entities that file current or quarterly reports
will be affected by the proposed amendments to the extent that
they offer equity securities in unregistered offerings. To the
extent small U.S. entities are affected by the proposed
amendments, the investors in such small entities are expected to
benefit from the increased information required to be provided.
The analysis also indicates that the amendments to the rules
and forms modestly increase reporting, recordkeeping and
compliance requirements. These requirements should not
significantly increase the burden on company resources, since
such information will be readily available, as the transaction in
question would have been completed within the prior fiscal
quarter, or, in the case of Form 8-K reporting, within the prior
15 days.
The term "small business," as used with reference to an
issuer for purposes of the Regulatory Flexibility Act, is defined
by Rule 157 -[21]- under the Securities Act as an issuer
whose total assets on the last day of its most recent fiscal year
were $5 million or less and who is engaged or proposing to engage
in small business financing. The Commission is aware of
approximately 1,100 Exchange Act reporting companies that
currently satisfy the definition of "small business" under Rule
---------FOOTNOTES----------
-[21]- 17 CFR 230.157.
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157. Because these rules will affect issuers that sell
securities in unregistered offerings, and in the majority of
situations no reporting with the Commission of unregistered
security offerings currently is required, little information is
available to the Commission that would make it possible to
estimate the number of small issuers that will be affected by
these amendments. However, approximately 11,400 issuers are
subject to Exchange Act reporting requirements, and, based on
discussions with intermediaries and other participants in the
Regulation S market, the Commission staff estimates that
approximately 500 of such issuers may conduct Regulation S
offerings of equity securities per year. The Commission staff
further estimates that approximately 250 such issuers are "small
businesses" under Rule 157.
As stated in the analysis, the economic impact of the new
rules is expected to be small, particularly in view of the
additional information and protection to be provided to
investors. In part, to minimize the recordkeeping and reporting
burden, and corresponding economic impact, on small entities and
others, the Commission has decided to require that unregistered
sales of securities (other than sales in reliance on Regulation
S) be reported on a quarterly basis. Only sales of securities
which were not registered in reliance on Regulation S are
proposed to be reported within 15 days.
A copy of the Final Regulatory Flexibility Analysis may be
obtained by contacting Walter Van Dorn, Office of International
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Corporate Finance, Division of Corporation Finance, U.S.
Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, (202) 942-2990.
IV. PAPERWORK REDUCTION ACT
In June, 1995, the staff submitted to the Office of
Management and Budget ("OMB") for review proposals to amend the
following information collections under the Exchange Act to
require periodic disclosure of unregistered equity offerings:
Form 10-Q, Form 10-QSB, Form 10-K and Form 10-KSB. -[22]-
These information collections display an OMB control number and
expiration date. -[23]- The information collections are
required to be filed by registrants subject to the Exchange Act
reporting requirements and are publicly available. The
Commission solicited comment on the compliance burdens associated
with the proposals but received no public comment on the burden
estimates.
In response to public comments received on the Proposing
Release, as discussed in Section I.A of this release, in addition
---------FOOTNOTES----------
-[22]- 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.
-[23]- 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).
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to adopting changes to the information collections listed in the
preceding paragraph, the Commission also is adopting changes to
Form 8-K to require current reporting on Form 8-K of Regulation S
sales within 15 days after their occurrence. Form 8-K contains
"collection of information" requirements within the meaning of
the Paperwork Reduction Act of 1995. -[24]- The Commission
is submitting the revision to Form 8-K to OMB for review.
The title of the affected information collection is "Form 8-
K." The likely respondents to Form 8-K generally are all issuers
reporting under the Exchange Act that are not foreign private
issuers. Currently, an estimated 11,400 respondents file 21,000
Forms 8-K per year for a total annual burden of 105,000 hours.
The Commission believes that the same number of respondents will
file Form 8-K after the revision described in this release
becomes effective, but those making Regulation S sales will file
Form 8-K more frequently, resulting in an increased number of
total burden hours. Since there currently is not any Exchange
Act reporting requirement when Regulation S sales are made, the
Commission has no basis for estimating the increase in the Form
8-K total burden hours expected to result from this rulemaking.
Persons desiring to submit comments on the collection of
information requirements should direct them to the Office of
Management and Budget, Attention: Desk Officer for the
Securities and Exchange Commission, Office of Information and
---------FOOTNOTES----------
-[24]- 44 U.S.C. 3501 et seq.
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Regulatory Affairs, Washington, D.C. 20503, and should also send
a copy of their comments to Jonathan G. Katz, Secretary,
Securities and Exchange Commission, 450 5th Street, N.W.,
Washington, D.C. 20549 with reference to File No. S7-19-95. OMB
is required to make a decision concerning the collections of
information between 30 and 60 days after publication, so a
comment to OMB is best assured of having its full affect if OMB
receives it within 30 days of publication.
V. STATUTORY BASES
The amendments to the Commission's rules and forms are being
adopted pursuant to sections 3(b), 4A, 12, 13, 14, 15, 16 and 23
of the Securities Exchange Act.
List of Subjects in 17 CFR Parts 228, 229 and 249
Reporting and recordkeeping requirements, and Securities.
TEXT OF AMENDMENTS
In accordance with the foregoing, Title 17, Chapter II of
the Code of Federal Regulations is amended as follows:
PART 228 - INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS
ISSUERS
1. 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,
2. By amending 228.701 by adding paragraph (e) to read as
follows:
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228.701 (Item 701) Recent sales of unregistered securities.
* * * * *
(e) If the information called for by this paragraph (e) is
being presented on Form 8-K, Form 10-QSB, Form 10-Q, Form 10-KSB
or Form 10-K (249.308, 249.308b, 249.308a, 249.310b or 249.310)
under the Exchange Act, and where the securities sold by the
registrant are convertible or exchangeable into equity
securities, or are warrants or options representing equity
securities, disclose the terms of conversion or exercise of the
securities.
PART 229 - STANDARD INSTRUCTIONS FOR FILING FORMS UNDER
SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF
1934 AND ENERGY POLICY AND CONSERVATION ACT OF
1975 -- REGULATION S-K
3. The authority citation for Part 229 continues to read
in part as follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s,
77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj,
77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78w, 78ll(d),
79e, 79n, 79t, 80a-8, 80a-29, 80a-30, 80a-37, 80b-11, unless
otherwise noted,
* * * * *
4. By amending 229.701 by adding paragraph (e) before the
Instructions to read as follows:
229.701 (Item 701) Recent sales of unregistered securities.
* * * * *
(e) Terms of conversion or exercise. If the information
called for by this paragraph (e) is being presented on Form 8-K,
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Form 10-QSB, Form 10-Q, Form 10-KSB or Form 10-K (249.308,
249.308b, 249.308a, 249.310b or 249.310) under the Exchange Act,
and where the securities sold by the registrant are convertible
or exchangeable into equity securities, or are warrants or
options representing equity securities, disclose the terms of
conversion or exercise of the securities.
* * * * *
PART 249 - FORMS, SECURITIES EXCHANGE ACT OF 1934
5. The authority citation for Part 249 continues to read
in part as follows:
Authority: 15 U.S.C. 78a, et seq., unless otherwise noted;
* * * * *
6. By amending Form 8-K (referenced in 249.308) by adding
a sentence to the end of General Instruction B.1 and by adding
Item 9 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
A. * * *
B. Events to be Reported and Time for Filing of Reports
1. * * * A report on this form pursuant to Item 9 is
required to be filed within 15 calendar days after the date of
sale.
* * * * *
INFORMATION TO BE INCLUDED IN THE REPORT
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* * * * *
Item 9. Sales of Equity Securities Pursuant to Regulation S.
Furnish the information required by Item 701 of Regulation
S-B (228.701 of this chapter) as to all equity securities of the
registrant sold by the registrant that were not registered under
the Securities Act in reliance upon Regulation S under the
Securities Act.
* * * * *
7. By amending Form 10-Q (referenced in 249.308a) by
adding paragraph (c) to Item 2 of Part II prior to the
Instruction to read as follows:
Note: Form 10-Q does not and these amendments will not
appear in the Code of Federal Regulations
Form 10-Q
* * * * *
Part II
Item 2. Changes in Securities.
* * * * *
(c) Furnish the information required by Item 701 of
Regulation S-K (229.701 of this chapter) as to all equity
securities of the registrant sold by the registrant during the
period covered by the report that were not registered under the
Securities Act other than unregistered sales made in reliance on
Regulation S.
* * * * *
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8. By amending Form 10-QSB (referenced in 249.308b) by
adding paragraph (c) to Item 2 of Part II prior to the
Instruction to read as follows:
Note: Form 10-QSB does not and these amendments will not
appear in the Code of Federal Regulations
Form 10-QSB
* * * * *
Part II
* * * * *
Item 2. Changes in Securities.
* * * * *
(c) Furnish the information required by Item 701 of
Regulation S-B (228.701 of this chapter) as to all equity
securities of the registrant sold by the registrant during the
period covered by the report that were not registered under the
Securities Act other than unregistered sales made in reliance on
Regulation S.
* * * * *
9. By amending Form 10-K (referenced in 249.310) by
revising Item 5 of Part II to read as follows:
Note: Form 10-K does not and these amendments will not
appear in the Code of Federal Regulations
Form 10-K
* * * * *
Part II
* * * * *
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Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
Furnish the information required by Item 201 of Regulation
S-K (229.201 of this chapter) and Item 701 of Regulation S-K
(229.701 of this chapter) as to all equity securities of the
registrant sold by the registrant during the period covered by
the report that were not registered under the Securities Act
other than unregistered sales made in reliance on Regulation S.
Provided that if the Item 701 information previously has been
included in a Quarterly Report on Form 10-Q or 10-QSB (249.308a
or 249.308b of this chapter) it need not be furnished.
* * * * *
10. By amending Form 10-KSB (referenced in 249.310b) by
revising Item 5 of Part II to read as follows:
Note: Form 10-K does not and these amendments will not
appear in the Code of Federal Regulations
Form 10-KSB
* * * * *
Part II
* * * * *
Item 5. Market for Common Equity and Related Stockholder
Matters.
Furnish the information required by Item 201 of Regulation
S-B and Item 701 of Regulation S-B as to all equity securities of
the registrant sold by the registrant during the period covered
by the report that were not registered under the Securities Act
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other than unregistered sales made in reliance on Regulation S.
Provided that if the Item 701 information previously has been
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included in a Quarterly Report on Form 10-Q or 10-QSB it need not
be furnished.
* * * * *
By the Commission.
Jonathan G. Katz,
Secretary
October 10, 1996