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U.S. Securities and Exchange Commission

Proposed Modernization Of Smaller Company Capital — Raising and Disclosure Requirements


Washington, D.C., May 23, 2007 — The Securities and Exchange Commission today proposed a series of six measures to modernize and improve its capital raising and reporting requirements for smaller companies. Many of the proposals address key recommendations made by the SEC’s Advisory Committee on Smaller Public Companies in its final report. They include:

  • A new system of securities regulation for smaller public companies that would make scaled regulation available to a much larger group of smaller public companies;
  • Modified eligibility requirements so companies with a public float below $75 million can take advantage of the benefits of shelf registration;
  • A new exemption from Securities Act registration requirements for sales of securities to a newly defined category of “qualified purchasers” in which limited advertising would be permitted;
  • Shortened holding periods under Securities Act Rule 144 for restricted securities to reduce the cost of capital and to increase access to capital;
  • New exemptions for compensatory employee stock options so Exchange Act registration requirements would not be triggered solely by a company’s compensation decisions; and
  • Electronic filing of the form filed by companies making private or limited offerings to ease burdens for filers and make the information filed more readily available.

“This focus on capital formation and the removal of obstacles to the growth of smaller companies goes hand-in-hand with our responsibility to protect investors,” said SEC Chairman Christopher Cox. “It’s investors who are injured and whose money is lost when the small businesses in which they invest can’t get affordable access to new capital.”

“As we all recognize, smaller companies are critical players for our capital markets and for the U.S. economy more broadly. By proposing to rationalize the regulations that apply to capital raising and public reporting by smaller companies, as well as by adopting guidance for management evaluations of internal control under SOX 404 in an earlier action today, the Commission has again confirmed its commitment to the health and robustness of this important segment of our markets,” said John W. White, Director of the SEC’s Division of Corporation Finance. “Companies of all sizes will be able to benefit from the proposed revisions and updates to Rule 144 which should enhance the ease and efficiency with which public companies access the private markets.”

Additional information about each of the proposals:

Smaller Reporting Company Regulatory Relief and Simplification

The proposed amendments would:

  • expand eligibility for the Commission’s scaled disclosure and reporting requirements for smaller companies by making the scaled requirements available to all companies with up to $75 million in public float;
  • simplify the Commission’s disclosure and reporting requirements for smaller companies eligible to use them—small business issuers and non-accelerated filers—by combining for most purposes the current two categories of smaller companies into one category called “smaller reporting companies;”
  • simplify the Commission’s disclosure and reporting requirements for smaller reporting companies by integrating current Regulation S-B disclosure requirements for smaller companies into the disclosure requirements of Regulation S-K; and
  • rescind the Commission’s “SB” forms for smaller companies.

Revisions to the Eligibility Requirements for Primary Securities Offerings on Forms S-3 and F-3

The proposed amendments to Form S-3 and Form F-3 would revise the eligibility requirements of those forms to allow companies that do not meet the current public float requirements of the forms to nevertheless register primary offerings of their securities, subject to a restriction on the amount of securities those companies may sell pursuant to the expanded eligibility standard 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, companies with less than $75 million in public float would be able to register primary offerings of their securities on Form S-3 or F-3, provided such companies:

  • do not sell more than the equivalent of 20% of their public float in primary offerings registered on Form S-3 or Form F-3, as applicable, over any one-year period;
  • meet the other eligibility conditions for the use of Form S-3 or Form F-3, as applicable; and
  • are not “shell companies” and have not been shell companies for at least 12 months before filing the registration statement.

Exemption of Compensatory Employee Stock Options from Registration under Section 12(g) of the Exchange Act

The Commission is proposing two amendments to Exchange Act Rule 12h-1. These amendments would:

  • Provide an exemption for private non-reporting issuers from Exchange Act Section 12(g) registration for compensatory employee stock options issued under employee stock option plans; and
  • Provide an exemption from Section 12(g) registration for compensatory employee stock options issued by issuers that have registered under Section 12 of the Exchange Act the class of securities underlying the compensatory stock options.

New Regulation D Limited Offering Exemption

The proposed amendments would:

  • Establish a new exemption from the Securities Act registration provisions in new Rule 507 of Regulation D for sales of securities to a new category of qualified purchasers, “Rule 507 qualified purchasers,” with respect to which the issuer could engage in limited advertising;
  • Add an investments-owned standard to the current total assets and net worth standards under which investors can qualify as “accredited” in other Regulation D offerings;
  • Provide for adjustments to the definition of “accredited investor” in Regulation D to account for inflation, with the first adjustments to occur in five years;
  • Shorten the integration safe harbor in Regulation D from six months to 90 days; and
  • Apply uniform, updated disqualification provisions to all offerings under Regulation D.

Electronic Filing of Form D

The proposed amendments would:

  • Mandate the electronic filing of the information required by Form D using a new online filing system that would be accessible using the Internet and that would automatically capture and tag data items;
  • Revise and update the Form D information requirements; and
  • Simplify and restructure Form D.

Revisions to Securities Act Rules 144 and 145

The proposed amendments to Rule 144 would:

  • Shorten the holding period for restricted securities of reporting companies to six months and reintroduce a provision that tolls the holding period for up to six months while the security holder is engaged in certain hedging transactions;
  • Substantially simplify compliance by allowing resale of restricted securities by non-affiliates of reporting companies after satisfying a six-month holding period (up to 12 months if there is hedging) and by non-affiliates of non-reporting companies after satisfying a 12-month holding period – with no additional requirements;
  • For affiliates’ sales, raise the thresholds that trigger Form 144 filing requirements and also eliminate the manner of sale limitations with respect to debt securities;
  • Simplify and streamline the Preliminary Note to and other parts of Rule 144; and
  • Codify certain staff interpretations relating to Rule 144.

In addition, the Commission solicits comment on whether to permit affiliates of issuers that are subject to the filing requirements of Section 16 of the Exchange Act to satisfy their Form 144 filing requirements instead by timely filing a Form 4.

The proposed amendments to Rule 145 would:

  • Eliminate the presumptive underwriter provision except with regards to transactions involving blank check or shell companies; and
  • Revise the resale provisions of Rule 145(d).

Comments on these proposals should be received by the Commission within 60 days of their publication in the Federal Register.

The full text of the detailed releases concerning these items will be posted to the SEC Web site as soon as possible.

Additional materials: Video of Chairman's Statement
 Windows Media Player (15 MB)
 MPEG-4 (11 MB)



Modified: 05/25/2007