The Securities and Exchange Commission recently adopted three significant amendments to the federal securities regulations that are good news for smaller reporting companies for the year ahead.
The reforms –- part of an effort to ease capital-raising, reporting and disclosure requirements for these companies -– expand the number of reporting companies eligible to provide scaled disclosure, shorten the holding period for securities issued in private placements, and create a new exemption from registration requirements for a class of stock options issued under stock option plans. Certain portions of these new rules likely will have significant impact on smaller companies.
Expanded eligibility for scaled disclosure
Recognizing the substantial costs in both time and money to comply with reporting requirements imposed by federal securities regulations, the SEC is providing relief to smaller companies. Previously, smaller companies whose revenues and aggregate securities value in the hands of public investors are less than $25 million have been eligible to comply with disclosure standards that are much less detailed that those required of larger companies. For example, these smaller companies do not have to provide an executive compensation discussion and analysis and are subject to reduced financial disclosure requirements.
The new SEC rules now allow more smaller companies -– those whose aggregate securities value in the hands of public investors is less than $75 million or, if a company does not have a calculable public equity float, with revenues of less than $50 million in its last fiscal year – to take advantage of the scaled disclosure requirements as well.
With this new rule, it is estimated that approximately 1,600 additional companies (approximately 13 percent of companies that filed annual reports with the SEC in 2006) will have the opportunity to take advantage of the scaled disclosure requirements as a result of this change in the regulations. That means a significant cost and time savings for many small companies.
Shortened holding periods for privately placed securities
Previously, investors acquiring securities in private placements from issuers have been required to hold the securities for at least one year before being able to resell the securities into the public markets, subject to certain restrictions, and two years before being able to resell into the public markets without restriction. The amended rules shorten the waiting period to just six months if the issuer is a reporting company (subject only to the requirement that there is current public information regarding the issuer available), and one year if the issuer is not a reporting company.
Companies will benefit from this change because the companies” privately placed securities will be more liquid. Investors are likely to accept smaller discounts for these securities thereby reducing the cost of raising capital. The reduction in the holding periods will also facilitate capital raising because the increased liquidity is likely to attract more investment in privately-placed equity from investors who will not have to commit to a long-term investment. The shortened holding periods may also result in fewer investors demanding resell registration rights, which translates into additional reductions in the cost of raising capital.
Compensatory employee stock options exemption
Companies frequently use stock options as a method to attract, retain and motivate employees, directors and consultants. Under the old rules, any class of equity securities, including stock options, held by 500 or more record holders was required to be registered under the Securities Exchange Act of 1934 if the company had assets in excess of $10 million at the end of its most recently completed fiscal year. The consequences of such registration are very significant and include the requirement to file annual and quarterly periodic reports with the SEC, comply with proxy solicitation rules and short-swing insider trading rules.
The amended rules provide relief from the registration requirements for private companies that have assets in excess of $10 million at the end of their most recently completed fiscal year and have granted compensatory employee stock options to 500 or more employees, directors, and consultants. The availability of this exemption is subject to certain specified limitations. In addition to the cost savings (in resources and money), this exemption eliminates a disincentive for companies to use compensatory employee stock options.
These changes, which will be all implemented on or before Feb. 15, show that the SEC is willing to facilitate and simplify capital raising and lower compliance costs for smaller companies. That’s good news for the year ahead if you own, work or invest in such a business.
