November 16, 2007

SEC Adopts Major Changes to Rule 144

At yesterday’s open meeting, the SEC adopted the most significant amendments to Rule 144 in over a decade, largely as they were proposed. The SEC decided not to combine Form 4 and Form 144 at this time – even though the concept was favorably received by commenters – but the Staff did say that they will continue to consider the issue and may take it up soon as a separate project. The final rules will not include the proposed provision that would have tolled the holding period for up to six months while a security holder is engaged in hedging transactions. Here are Corp Fin’s opening remarks.

As noted in this press release, under the final rule amendments (to be effective 60 days after publication), the holding period for restricted securities of reporting companies will be shortened to six months. In addition, under the substantially simplified conditions of the amended rule, non-affiliates of reporting companies will be able to freely resell restricted securities after satisfying a six-month holding period (subject only to the Rule 144(c) public information requirement until the securities have been held for one year), while non-affiliates of non-reporting companies will be able to freely resell restricted securities after satisfying a 12-month holding period.

For affiliates’ sales, the SEC amended the manner of sale requirements for equity securities – while eliminating them for debt securities – and relaxed the volume limitations for debt securities. In addition, the Form 144 filing requirements for affiliates’ sales will be raised to 5,000 shares or $50,000. A number of Staff interpretations will be codified as proposed, and the preliminary note to Rule 144 will be streamlined.

In connection with the Rule 144 amendments, Rule 145 will be changed to eliminate the presumptive underwriter provision – except with respect to transactions involving blank check or shell companies. The resale provisions of Rule 145(d) will also be revised.

While the revisions to Rules 144 and 145 will certainly provide much needed relief in terms of liquidity for those purchasing restricted securities, the opening up of the rules may also potentially increase the possibility for non-compliance. As a result, issuers, brokers and transfer agents will need to significantly change – and tighten – their procedures.

We will be providing detailed guidance in The Corporate Counsel over the next few issues on everything you will need to know to address these changes to Rules 144 and 145. Stay tuned…

Smaller Public Company Reporting System and Compensatory Options Exemption Adopted

The SEC also adopted two other components of its efforts to improve the small business regulatory regime. The proposals to drop Regulation S-B – and to expand the universe of smaller reporting companies that may use a scaled reporting regime – were adopted largely as proposed. As a result of these changes, an additional 1,500 smaller companies will now be able to utilize, on an “a la carte” basis, the “scaled” disclosure requirements incorporated into Regulation S-K. The SEC Staff said that it plans to issue a short guide on how to prepare filings under this new regime. These rule changes will be effective 30 days after publication.

Amendments to Exchange Act Rule 12h-1 were also adopted to provide an exemption for private non-reporting issuers from the registration requirements under Exchange Act Section 12(g) for compensatory employee stock options issued under employee stock option plans, as well as an exemption for reporting issuers from Section 12(g) registration for compensatory employee stock options. These rules will be effective immediately upon publication, so that the exemptions can be in place by the end of 2007 for calendar year-end companies. Here is the Staff’s opening statement on all of the small business proposals, including Rule 144.

The Staff indicated that the other small business-oriented proposals are still being actively considered and should come up for adoption soon.

GAAP Reconciliation Eliminated for IFRS Financial Statements

The SEC eliminated the requirement for a US GAAP reconciliation when foreign private issuers file financial statements prepared using International Financial Reporting Standards as issued by the International Accounting Standards Board. Here are Chief Accountant Hewitt’s opening remarks.

As noted in this press release, Chairman Cox also announced that the SEC will hold two roundtables on December 13th and 17th to discuss the concept of permitting US issuers to use either IFRS or US GAAP. For an in-depth discussion of yesterday’s proceedings on the IFRS changes, take a look at Edith Orenstein’s FEI Financial Reporting Blog.

– Dave Lynn