Our “Summer Reading” Courtesy of the SEC

Greetings blogees from the City of Brotherly Love where I am to visit my issue (as we lawyers say).

SEC Division of Corporation Finance chief John White promised back in April that the new proposals to help smaller public companies would be ready for our “summer reading.” True to his word, after the May 23 announcement of the highlights of the rule proposals, five of the six rule proposals can now be found on the SEC website at http://www.sec.gov/rules/proposed.shtml.

The proposals are:

1. Smaller Reporting Company Regulatory Relief and Simplification - this is the elimination of Regulation S-B and migration of all issuers to the original Regulation S-K disclosure system and forms while maintaining scaled disclosure for smaller public companies

2. Exemption of Compensatory Employee Stock Options from Registration under Section 12(g) of the Securities Exchange Act of 1934 - this allows a private company to issue many hundreds of options to employees without accidentally crossing the line requiring them to become a reporting company.

3. Electronic Filing and Simplification of Form D - they are proposing to streamline Form D in Regulation D transactions and to permit its filing electronically.

4. Revisions to Rule 144 and Rule 145 to Shorten Holding Period for Affiliates and Non-Affiliates- this is the big one which shortens the Rule 144 holding period in most cases to six months. The proposal includes significant relief from the Worm/Wulff restrictions on holders of shell shares, suggesting that they can use Rule 144 no later than six months after a reverse merger.

5. Revisions to the Eligibility Requirements for Primary Securities Offerings on Forms S-3 and F-3 - also big, this permits any reporting company to do a “shelf registration” of shares to be issued in the future, but only a primary offering of up to 20% of the company’s float in any 12-month period.

The last proposal, relating to a new class of “super accredited” investor and allowing limited advertising and solicitation, should be out in the next few days.

If I have not said it enough before, one cannot overstate the importance and significance of these proposals to the PIPE and reverse merger worlds, as well as all smaller public issuers. While Rule 415 is still a factor (see most recent blog entry below), this is indeed the dawn of a new era in the small and microcap world.

Now we have a job to do faithful blogees. Two things. First, we must make sure that the SEC receives as many helpful comments as possible. The comment procedure for each proposal is listed right below the actual proposal on the SEC site, and in general we have 60 days from when the proposals are published in the Federal Register (assume you must finish by mid-late August).

Some may comment on the fact that they are proposing tolling the 144 holding period for any time that a holder is hedging the stock, which could hurt some PIPE players. Others may feel that limitation on the proposed S-3 availability for one year after being a shell is worthy of comment. Still others may suggest that an adjustment to and codification of the Rule 415 interpretation accompany these dramatic proposals. The Worm/Wulff relief, while dramatic, seems to suggest that some should have the ability to sell in as little as 90 days, but in fact 144 does not in practicality kick in until 6 months. This should be clarified.

Second, and this is the real big one. We all have to step up and make sure that those whose abuse of the rules and system led to the crackdown on the penny stock world 17 years ago do not, once again, rear their heads to ruin it for all of us. This is part of what caused the Rule 415 mess in the first place; the fact that a few extreme players took things too far, resulting in the SEC taking action that hurt everyone, even those playing well with others.

I remember as a kid in sleepaway camp that everyone in the bunk or group was expected to be responsible for everyone else. If one kid misbehaved, the entire bunk was punished. Was that fair? Not totally. Did it encourage strong group support and dynamics? Yes. Do we need to do that on Wall Street? No. However, unfortunately regulators often take an approach that swings a pendulum far in a direction opposite where a problem occurred (e.g. Sarbanes-Oxley) to hurt a much larger group than the group which was bad.

The SEC’s resources are limited. My hope is that each of us who want to preserve not only the ability to get these proposals passed, but to make sure that the SEC does not regret doing so, will stay on the high road. Do your best to avoid doing business with shady characters. Do background checks on potential business partners. Be careful of Footnote 32 shells which look legitimate (see prior entries). If you see an extreme player, don’t hesitate to contact the SEC; their Enforcement Division will take anonymous tips.

As we expand what some are calling the golden age of reverse mergers and APOs, there is more than enough money to be made in taking companies public without cutting corners and breaking the rules. High road, high road, high road folks.

Leave a comment