TheCorporateCounsel.net

The summer reading just keeps on coming from the SEC, with last week bringing two more releases geared toward reducing regulatory burdens for smaller companies. Under proposed changes to rules and forms outlined in last Friday’s proposing release, a significantly expanded category of “smaller reporting companies” could benefit from reduced disclosure and reporting requirements that would be integrated into the big company rules and forms. Regulation S-B as we know it today, along with the associated S-B forms, would be eliminated under these proposals.

The SEC’s proposed changes to the reporting requirements for smaller public companies come out of specific recommendations from the Advisory Committee on Smaller Public Companies. The Advisory Committee had raised concerns that, among other things, the current definition of “small business issuer” picks up only the smallest companies, and that Regulation S-B and the S-B forms carry with them a stigma making life difficult for small business issuers using the system. The SEC did not fully embrace the Advisory Committee’s recommendation to establish a tiered disclosure regime for microcap and smallcap companies, opting instead to extend scaled-back disclosure and reporting requirements to essentially those companies that fall under the definition of “non-accelerated filer.” A new proposed term “smaller reporting company” will be defined to include companies with a public float of less than $75 million, or revenues below $50 million if the issuer cannot calculate its public float. As with some other recent SEC proposals, the dollar thresholds in the definition will be automatically adjusted for inflation on a 5-year timetable.

Under the proposals, Regulation S-B would be folded into Regulation S-K by expanding the relevant S-K items to include a scaled down version for smaller reporting companies, with some slight tweaking of the current S-B requirements along the way. The reduced financial statement requirements under Item 310 of Regulation S-B would remain intact and would be extended to the broader group of smaller reporting companies. If adopted, these proposed changes could result in a very long, and perhaps a little more complicated, version of Regulation S-K. An interesting component of the proposed changes is that smaller reporting companies could choose, on an “a la carte” basis, whether to comply with regular or modified S-K requirements. As a result, a company could choose in a particular filing to comply with the full-blown Item 101 of S-K requirement for its description of business, while in the same filing providing executive compensation disclosure under the stripped-down smaller reporting company requirement. Transitioning into and out of smaller reporting company status would be easier to determine than under current small business requirements, by essentially following the current model for accelerated filer status. The proposed rule and form changes will be out for a 60-day comment period.

Proposed Registration Relief for Employee Stock Options

The SEC also published its proposing release for two new Exchange Act registration exemptions for compensatory employee stock options. As with the S-B proposals, this idea also comes out of the Advisory Committee report. I think that these proposals should be welcome news for companies that are not yet public (and don’t want to be public just yet, or ever for that matter) and that use stock options as a means of compensating employees. It can be quite a shock to find out that you are all of the sudden a public company just because you granted options to 500 or more employees. I know from experience that it can be even more of a shock to try to get a no-action letter from the Staff in order to avoid the registration requirements.

Under the proposed exemptions, the SEC would eliminate the need for companies faced with this uncomfortable situation to either avoid crossing the 500 holder threshold or seek individual no-action relief. An exemption for companies that are not already reporting would be conditioned on the compensatory nature of options that are granted to eligible Rule 701 option plan participants, restrictions on transferability, and the delivery of risk and financial information required by Rule 701 when the $5 million threshold is exceeded. For reporting companies, a proposed exemption would be available so that the compensatory employee stock options would not give rise to an independent obligation to register those securities under the Exchange Act. The SEC notes in the proposing release that public reporting companies may be “unclear” regarding the need to comply with Exchange Act Section 12(g) for compensatory employee stock options, so the exemption would provide some welcome relief for a problem that many quite possibly did not know that they have.

The SEC is soliciting comments for 60 days on these proposals, so hopefully they could be in place before the next round of mandatory Exchange Act registrations surface for companies with a fiscal year ending on December 31.

Reverse Mergers: Latest Developments

Join us tomorrow for a DealLawyers.com webcast – “Reverse Mergers: Latest Developments” – to hear David Feldman of Feldman, Weinstein & Smith, Tim Keating of Keating Investments and Nanette Heide and Michael Dunn of Seyfarth Shaw discuss the latest issues in the area of reverse mergers.

– Dave Lynn