[Federal Register Volume 61, Number 91 (Thursday, May 9, 1996)]
[Rules and Regulations]
[Pages 21354-21356]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-11625]
[[Page 21353]]
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Part VI
Securities and Exchange Commission
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17 CFR Parts 230, 240 and 249
Relief From Reporting by Small Issuers; Exemption for Certain
California Limited Issues; Final Rules
Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules
Regulations
[[Page 21354]]
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 240 and 249
[Release No. 34-37157; File No. S7-16-95]
RIN 3235-AG48
Relief From Reporting by Small Issuers
AGENCY: Securities and Exchange Commission.
ACTION: Final rules.
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SUMMARY: The Commission is announcing the adoption of revisions to
Rules 12g-1, 12g-4 and 12h-3 under the Securities Exchange Act of 1934,
which will increase the number of issuers not subject to the
registration and reporting requirements of the Exchange Act, by
increasing the total assets threshold from $5 million to $10 million.
EFFECTIVE DATE: The rule amendments will be effective on May 9, 1996.
FOR FURTHER INFORMATION CONTACT: Richard K. Wulff, Office of Small
Business Policy, Division of Corporation Finance at (202) 942-2950 or
James R. Budge, Office of Disclosure Policy, Division of Corporation
Finance, at (202) 942-2910.
SUPPLEMENTARY INFORMATION: On June 27, 1995,1 the Commission
published for comment proposed amendments to Rules 12g-1, 12g-4 and
12h-3 2 under the Securities Exchange Act of 1934.3 These
proposals were designed to increase the number of issuers classified as
exempt from the registration and reporting provisions of the Exchange
Act by changing the total asset threshold from $5 million to $10
million. Conforming changes also were proposed to be made to Form
15.4 Having considered the comments received, the Commission is
adopting the revisions as proposed.5
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\1\ Release No. 33-7186 (June 27, 1995) [60 FR 35642]
(``Proposing Release''). The comment letters received are available
for inspection and copying at the Commission's public reference
room, 450 Fifth Street, N.W., Washington, D.C. 20549. Please refer
to File Number S7-16-95.
\2\ 17 CFR 240.12g-1, 240.12g-4 and 240.12h-3.
\3\ 15 U.S.C. 78a et seq.
\4\ 17 CFR 249.323. Form 15 is filed by an issuer to notify the
Commission that it is terminating its registration under Section
12(g) of the Exchange Act [15 U.S.C. 78l(g)] or suspending its
reporting under Section 15(d) [15 U.S.C. 78o(d)].
\5\ As explained more fully below, the proposed changes to
certain of the Commission's definitions of a ``small entity'' for
purposes of the Regulatory Flexibility Act [5 U.S.C. 601-612] have
not been adopted.
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I. Discussion
Under the current rules, an issuer that has 500 or more record
holders of a class of equity securities and total assets of $5 million
or more must register its securities under the Exchange Act.6
Issuers that must register are required to comply with the periodic
reporting and other provisions applicable to public companies contained
in the Exchange Act.7 The asset threshold was originally set at $1
million in Section 12(g). Pursuant to its authority under Section 12(h)
of the Exchange Act,8 the Commission has increased the amount on
two occasions: from $1 million to $3 million in 1982,9 and from $3
million to the current $5 million in 1986.10
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\6\ See Exchange Act Section 12(g) and Rule 12g-1.
\7\ E.g., the proxy requirements of Section 14 [15 U.S.C. 78n]
and the short-swing profit provisions of Section 16 of the Exchange
Act [15 U.S.C. 78p].
In addition, any entity, including an issuer, must register
under the Exchange Act as a transfer agent if it performs the
function of a transfer agent with respect to any security which is
registered under Section 12 of the Exchange Act or which would be
required to be registered except for the exemptions provided by
subsection 12(g)(2)(B) or (g)(2)(G). 15 U.S.C. 78q-1(c)(1). As a
result of the revisions adopted in this release, the number of
entities, including issuers, that can perform transfer agent
functions without registration with the Commission may increase.
\8\ 15 U.S.C. 78l(h).
\9\ Release No. 34-18647 (April 15, 1982) [47 FR 17046].
\10\ Release No. 34-23406 (July 8, 1986) [51 FR 25360].
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The proposal to increase the asset threshold to $10 million was
designed, in part, to increase the utility of the Commission's small
offering exemptions, such as Regulation A, a principal benefit of which
is that companies conducting such offerings do not automatically become
subject to Exchange Act reporting. The Commission has long recognized
that the cost of compliance with Exchange Act reporting requirements is
relatively greater for smaller companies than for larger ones.11
The amendments adopted today are designed to strike the appropriate
balance between such costs and investors' needs for the information
required in Exchange Act reports. Commenters generally agreed that this
change would be beneficial for smaller companies and would be
consistent with investor protection. In light of the foregoing, the
Commission finds that the increase in the asset threshold is not
inconsistent with the public interest or the protection of investors
and is adopting the rule changes as proposed.
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\11\ See Release No. 33-6605 (September 30, 1985) [50 FR 41162].
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Under today's revision to Rule 12g-1, an issuer now will not be
required to register under Section 12(g) until it has 500 or more
record holders of a class of equity securities and total assets of $10
million or more.12 This revision does not change existing
requirements that securities traded on national exchanges 13 or
the National Association of Securities Dealers Automated Quotation
System (``Nasdaq'')14 be registered pursuant to Section 12 of the
Exchange Act. In addition, a company that conducts a public offering
registered under the Securities Act of 1933 (``Securities Act'')15
will continue to be subject to reporting pursuant to Section 15(d) of
the Exchange Act unless the company becomes eligible to suspend such
reporting. The revisions also raise the asset threshold for termination
of Section 12(g) registration and suspension of Section 15(d) reporting
from $5 million to $10 million, but do not change the other tests for
such termination and suspension.16 Finally, the description of
Form 15 is being amended to indicate that the total assets criterion is
$10 million. These new thresholds should make the exemptive,
termination and suspension provisions more useful to small businesses
and lower their costs of compliance with the federal securities laws.
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\12\ This modification to Rule 12g-1 retains the standard with
respect to foreign private issuers, which provides that if a foreign
private issuer has securities quoted in an automated interdealer
quotation system it remains subject to registration under Section
12(g).
\13\ Securities traded on a national securities exchange must be
registered under the Exchange Act pursuant to Section 12(b) [15
U.S.C. 78l(b)] of that Act.
\14\ Pursuant to Schedule D to the NASD's By-Laws, securities
traded on the Nasdaq system must be registered pursuant to Section
12 of the Exchange Act, CCH NASD Manual para. 1803.
\15\ 15 U.S.C. 77a et seq.
\16\ Rules 12g-4 and 12h-3 currently allow for termination of
registration of a class of securities under Section 12(g) and
suspension of the duty to file reports under Section 15(d) when the
class of securities is held of record by less than 300 persons, or
by less than 500 persons where the total assets of the issuer have
not exceeded $5 million on the last day of each of the issuer's
three most recent fiscal years. Also, the Section 15(d) reporting
obligation cannot be suspended under Rule 12h-3 for a fiscal year in
which a Securities Act registration statement relating to the class
of securities becomes effective. The revisions amend Rules 12g-4 and
12h-3 to change the asset test from $5 million to $10 million.
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There are approximately 650 issuers with between $5 million and $10
million in total assets that report with the Commission. Had the new
asset threshold previously been in effect, these companies would not
have been required to register and report with the Commission, unless
they had voluntarily decided to do so, either because their securities
are traded on a national securities exchange or Nasdaq, or because they
chose to conduct a Securities Act registered offering. Of
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these 650, approximately 540 are traded on an exchange or Nasdaq, and
approximately 110 are not.
Today's rule changes affect the asset threshold for entering and
exiting reporting, but do not affect the other criteria under the rules
for determining when a company may cease reporting. Consequently, the
effect on currently reporting companies is modest, with approximately
10 companies becoming eligible to cease reporting at this time; 17
about another 20 companies could terminate their reporting obligations
if they decided to delist their securities from an exchange or Nasdaq.
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\17\ These issuers would be able to terminate their registration
because they have:
--Assets between $5 and $10 million;
--No securities traded on an exchange or Nasdaq;
--No current 15(d) reporting obligation arising from registering
a securities offering in the last year;
--In each of the last three fiscal years, assets not exceeding
$10 million; and
--Between 300 and 500 shareholders.
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While the number of companies that would be able to stop reporting
is relatively small, the rule should provide significant benefits for
small, growing companies. These companies will have more flexibility to
raise equity capital and grow before becoming subject to the
Commission's reporting requirements.
II. Regulatory Flexibility Act Definitions
The Commission proposed to modify the definitions of ``small
entity'' for purposes of the Regulatory Flexibility Act by raising the
total assets level to $10 million.18 In the intervening period
since the proposals were published, Congress has enacted amendments to
the Regulatory Flexibility Act.19 The Commission has determined
not to adopt these proposed rule revisions at this time, but will give
them further consideration once it has had an opportunity to evaluate
fully these recent statutory changes.
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\18\ The definitions are found at 17 CFR 230.157, 17 CFR 240.0-
10, and 17 CFR 260.0-7.
\19\ See the Small Business Regulatory Fairness Act of 1996,
Pub. L. 104-121, 110 Stat. 847 (1996), signed by the President on
March 29, 1996.
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III. Effective Date
The Commission has determined to make the rule changes effective on
May 9, 1996, the date of publication in the Federal Register. Early
effectiveness is appropriate under the Administrative Procedure Act
inasmuch as the raising of these thresholds ``grants or recognizes an
exemption'' 20 from registration and reporting requirements to a
larger class of companies than existed under previous requirements.
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\20\ 5 U.S.C. 553(d)(1).
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IV. Future Initiatives
Some commenters recommended further revision of the reporting
thresholds. For example, one commenter suggested the adoption of an
exemption for small business issuers whose public float or trading
activity is so low as to show insufficient market interest. Another
recommended eliminating the shareholder numerical test from the various
rules. The Commission has considered these suggestions and has
determined to evaluate them further in connection with future
initiatives undertaken by the Commission as it implements
recommendations of the reports of the Task Force on Disclosure
Simplification,21 and the Advisory Committee on the Capital
Formation and Regulatory Processes.22 The work of both of these
groups has been dedicated to reassessing and reforming the federal
securities disclosure regime where necessary and appropriate in the
public interest and consistent with investor protection.
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\21\ The Task Force on Disclosure Simplification was organized
in August 1995 to review forms and rules relating to capital-raising
transactions, periodic reporting pursuant to the Exchange Act, proxy
solicitations, and tender offers and beneficial ownership reports
under the Williams Act. Its goal was to identify where the
disclosure process could be simplified and, consistent with investor
protection, to make regulation of capital formation more efficient.
Following a seven-month review, the Task Force completed its report,
including a number of recommendations, which the Commission
authorized for publication on March 5, 1996. This report is
available for inspection and copying at the Commission's public
reference room. It also is available through the Commission's
Internet web site [http://www.sec.gov].
\22\ The Securities and Exchange Commission Advisory Committee
on the Capital Formation and Regulatory Processes was established in
February 1995. See Release No. 33-7135 (February 17, 1995) [60 FR
9415]. The objective of the Committee is to assist the Commission in
evaluating the efficiency of the regulatory process relating to
public offerings of securities, secondary market trading and
corporate reporting. The Committee's focus has been the development
of a company registration system for adoption by the Commission,
which would allow eligible companies to offer and sell securities
relying on a more company-focused, as opposed to transaction-
focused, system. The Committee plans to issue a report containing
its recommendations in the near future.
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V. Cost-Benefit Analysis
The Commission solicited comment to assist in its evaluation of the
costs and benefits that might result from the possible increase in the
assets threshold. Several commenters, while not addressing the
solicitation of comment specifically, supported the proposal as part of
the Commission's efforts to reduce both the regulatory burden and the
costs of raising capital and compliance for small issuers. The
Commission continues to believe that as a result of this action,
compliance burdens will be decreased without significant impact upon
the needs of investors, as it stated in the proposing release. As
required by Section 23(a) of the Exchange Act, the Commission has
specifically considered the impact these rulemaking actions would have
on competition and has concluded that they would not impose a
significant burden on competition not necessary or appropriate in
furtherance of the purposes of the Exchange Act.
VI. Final Regulatory Flexibility Analysis
The Commission has prepared a final regulatory flexibility analysis
in accordance with 5 U.S.C. 603 regarding the changes to Exchange Act
Rules 12g-1, 12g-4, and 12h-3 and the description of Form 15. A summary
of the corresponding Initial Regulatory Flexibility Analysis was
included in the Proposing Release. A copy of the final regulatory
flexibility analysis may be obtained by contacting James R. Budge,
Division of Corporation Finance, U.S. Securities and Exchange
Commission, 450 Fifth Street NW., Washington, DC 20549 at (202) 942-
2910.
VII. Statutory Basis
The amendments to the Commission's rules and form are being adopted
by the Commission pursuant to Sections 12, 13, 15 and 23(a) of the
Securities Exchange Act.
List of Subjects in 17 CFR Parts 240 and 249
Reporting and recordkeeping requirements, Securities.
Text of the Amendments
Accordingly, Title 17, Chapter II of the Code of Federal
Regulations is amended as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
1. The authority citation for Part 240 continues to read, in part,
as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg,
77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p,
78q, 78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-
37, 80b-3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *
2. The authority citation for Part 249 continues to read, in part,
as follows:
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Authority: 15 U.S.C. 78a, et seq., unless otherwise noted;
* * * * *
3. 17 CFR Parts 240 and 249 are amended by removing the reference
to ``$5 million'' and adding in its place ``$10 million'' in the
following sections:
(a) 17 CFR 240.12g-1
(b) 17 CFR 240.12g-4(a)(1)(ii)
(c) 17 CFR 240.12g-4(a)(2)(ii)
(d) 17 CFR 240.12h-3(b)(1)(ii)
(e) 17 CFR 240.12h-3(b)(2)(ii)
(f) 17 CFR 249.323(a)
Dated: May 1, 1996.
By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 96-11625 Filed 5-9-96; 8:45 am]
BILLING CODE 8010-01-P
