Statement by SEC Commissioner:
Statement before the Open Meeting regarding Smaller Public Companies
Commissioner Paul S. Atkins
U.S. Securities and Exchange Commission
November 15, 2007
Thank you, Mr. Chairman. I am pleased that the Commission is adopting these rule changes that will benefit the investors of smaller public companies. Although sometimes overshadowed by the Fortune 500, smaller public companies and their investors play a vital role in our nation's economy — taking risks, forming new technologies, creating jobs. Given our statutory obligations to foster competition and capital formation, it is critical that we develop a regulatory environment that gives smaller public companies an opportunity to thrive — for it is today's smaller company that may grow into tomorrow's larger company.
I would like to express my gratitude to the many members of the public who have provided input on the SEC's regulation of smaller public companies, including the members of the Advisory Committee on Smaller Public Companies, led by co-chairs Herbert Wander and James Thyen, and the participants at our annual Forum on Small Business Capital Formation. I thank the SEC's Office of Small Business Policy for their excellent support of the Advisory Committee and the Forum.
The first rule on the agenda provides for regulatory relief and simplification for smaller public companies. I support the proposed adoption of this rule, but it is rather ironic for me to be here. The Commission adopted the current Regulation S-B structure in 1992 when I worked here under Chairman Richard Breeden. Chairman Breeden undertook an extensive effort to centralize the disclosure requirements for smaller businesses and try to make them more easily understood and easier to work with. Thus, was created Regulation S-B. At the time, the Commission was concerned that the disproportionately high legal and other costs associated with being public could otherwise discourage smaller companies from providing the benefits of public trading to their shareholders.
So, things have come full circle. Our action today to fold the rules for smaller public companies back into the general rules is a testament to the incredible transformation of our markets over the past 15 years. During that time, investor acceptance and growth of smaller public companies as a market sector (led by the technology industry in particular) has, of course, been nothing short of spectacular. And, with this growth and acceptance we saw technological, competitive, and communication advances make the public offering process much more accessible for smaller public companies.
Our experience over the past 15 years has demonstrated that the differences between Regulations S-K and S-B are no longer as significant. I commend the staff for incorporating Regulation S-B into Regulation S-K in a manner that clearly indicates where smaller companies have separate disclosure and compliance needs and requirements. These rules will make it easier for investors to get the information that they need to evaluate their investment in smaller public companies.
The increase in eligibility for smaller company status to $75 million in public float is long overdue, and it makes sense to link this test to the definition of an accelerated filer. The current $25 million public float and revenue test was set in 1992 and has not been adjusted since. Nevertheless, I am mindful that some comment letters and the Advisory Committee report requested extending relief for companies with an even higher public float. Although we are not taking that step today, I think the Commission must revisit the $75 million threshold. This test is now more than 5 years old and already outdated.
I also support adopting the amendments to Rules 144 and 145. The Commission has acted prudently in examining the effects of the 1997 amendments prior to moving forward with the changes today. For the most part, these changes will vastly simplify the process for the resale of restricted securities and control securities. Nonetheless, it is important that the relief provided today be not subject to abuse. We have seen, particularly in the Rule 504 context under Regulation D, illegal practices that use the rules in an often under-watched corner of the securities markets to defraud investors. I would not like to see the decreasing of the 144 holding periods to lead to increased fraud. It is my hope that the Division, working with its counterparts in the Division of Enforcement, the Office of Compliance, Inspections, and Examinations, and the Office of Economic Analysis, monitors the application of the rule as amended to detect any patterns of abusive practices. I hope that with our increased emphasis on microcap fraud in the Division of Enforcement that we will be able to police this market sector sufficiently.
Finally, I support the exemption from registration of compensatory employee stock options for private companies. As a securities regulator, the SEC should not create rules that favor one form of employee compensation over another. Companies should have flexibility to design appropriate compensation systems that fit their particular circumstances. I noticed that a number of commentators indicated that the Commission should consider extending relief to other compensation devices, such as stock appreciation rights and performance unit, but we have not done so today. If we receive significant numbers of exemptive order requests for these other instruments, I would want to consider extending relief further.
I appreciate very much the efforts of the many SEC staff members who have worked on these rule proposals in the Division of Corporation Finance as well as the Office of the Chief Accountant, the Office of the Economic Analysis, and the Office of the General Counsel. Finally, I extend my thanks to former Division Director Alan Beller, who initiated the efforts to review the regulation of smaller public companies.