[Federal Register Volume 60, Number 131 (Monday, July 10, 1995)]
[Proposed Rules]
[Pages 35642-35645]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-16388]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 230, 240, 249 and 260
[Release Nos. 33-7186; 34-35895; 39-2333; File No. S7-16-95]
RIN Number 3235-AG48
Relief From Reporting by Small Issuers
AGENCY: Securities and Exchange Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Commission is publishing proposals designed to reduce
burdens on small business by doubling the asset threshold that subjects
companies to registration and periodic reporting under the Securities
Exchange Act of 1934 (the ``Exchange Act'') from $5 million to $10
million.
DATES: Comments should be submitted to the Commission on or before
September 8, 1995.
[[Page 35643]]
ADDRESSES: All comments concerning the proposed rules should be
submitted in triplicate to Jonathan G. Katz, Secretary, Securities and
Exchange Commission, 450 Fifth Street NW., Washington, DC 20549 and
should refer to File Number S7-16-95. Comment letters will be available
for inspection and copying in the Commission public reference room at
the same address.
FOR FURTHER INFORMATION CONTACT: Richard K. Wulff, Office of Small
Business Policy, Division of Corporation Finance, (202) 942-2950.
SUPPLEMENTARY INFORMATION: The Commission is publishing for comment
proposed amendments to Rules 12g-1, 12g-4 and 12h-3 1 under the
Exchange Act.2 These amendments would increase the total asset
threshold for Exchange Act registration and reporting from $5 million
to $10 million. The Commission also is proposing conforming amendments
to the description of Form 15 3 and to certain of the Commission's
definitions of the term ``small entity'' 4 under the Regulatory
Flexibility Act.5
\1\ 17 CFR 240.12g-1, 240.12g-4 and 240.12h-3.
\2\ 15 U.S.C 78a et seq.
\3\ 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)].
\4\ The definitions are found at 17 CFR 230.157; 17 CFR 240.0-
10; and 17 CFR 260.0-7.
\5\ 5 U.S.C. 601 et seq.
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I. Current Requirements and Proposed Revisions
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) of the Exchange Act. The Commission has
increased the amount on two occasions: from $1 million to $3 million in
1982,8 and from $3 million to the current $5 million in
1986.9 As a part of its continuing efforts to reduce regulatory
burdens on smaller companies, the Commission is now proposing to raise
this asset threshold to $10 million.
\6\ See Exchange Act Section 12(g) [15 U.S.C. 78l(g)] and Rule
12g-1.
\7\ E.g., the proxy requirements of Section 14, the Williams Act
and the short-swing profit provisions of Section 16 of the Exchange
Act.
\8\ Release No. 34-18647 (April 15, 1982) [47 FR 17046].
\9\ Release No. 34-23406 (July 8, 1986) [51 FR 25360].
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Under the proposed revision to Rule 12g-1, an issuer would 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.10 This revision would not change requirements
that securities traded on national exchanges 11 or the National
Association of Securities Dealers Automated Quotation System
(``NASDAQ'') 12 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 (the ``Securities Act'')
13 would 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 proposals also would 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 would
not change the other tests for such termination and suspension.14
\10\ The proposed modification to Rule 12g-1 would retain the
standard with respect to foreign private issuers providing that if a
foreign private issuer has securities quoted in an automated
interdealer quotation system it would remain subject to registration
under Section 12(g).
\11\ 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.
\12\ 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.
\13\ 15 U.S.C. 77a et seq.
\14\ 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 fiscal year in
which a Securities Act registration statement relating to the class
of securities becomes effective. The proposals would amend Rules
12g-4 and 12h-3 to change the asset test from $5 million to $10
million.
The Commission has long recognized that the cost of compliance with
Exchange Act reporting requirements is relatively greater for small
companies than for larger ones; 15 similarly, the Commission
continuously examines and refines its securities registration
exemptions under the Securities Act in an effort to lower the cost of
raising capital for small business.16 For example, in 1992 as a
part of the Commission's Small Business Initiatives the Commission used
the full amount of its Securities Act Section 3(b) 17 exemptive
authority to increase the amount that may be raised in a Regulation A
18 exempt small offering from $1.5 million to $5 million. However,
under the current Section 12(g) threshold, a company that is not traded
on an exchange or NASDAQ, and has not conducted a registered public
offering, can nevertheless become subject to the Exchange Act
registration and reporting expense even though the company has
conducted only one, or a limited number of, exempt small offerings. For
example, a company that conducts an exempt Regulation A offering and
raises the full $5 million permitted under the rule would likely be
required to register under Section 12(g) under the current $5 million
asset test (assuming it has the requisite number of shareholders). This
is so even though a principal benefit of the Regulation A exemption is
that, unlike a Securities Act registered transaction, it does not give
rise to an Exchange Act reporting obligation. This burden appears to
significantly reduce the utility of the small offering exemptions for
small companies. The increase to $10 million in the Section 12(g)
threshold proposed today should better enable companies to use the
small offering exemptions without becoming subject to Exchange Act
reporting.19
\15\ See Securities Act Release 6605 (September 30, 1985) [50 FR
41162].
\16\ The Commission's Small Business Initiatives and Additional
Small Business Initiatives adopted in 1992 and 1993 were designed to
reduce both Securities Act and Exchange Act compliance burdens for
small business. Release Nos. 33-6949 (July 30, 1992) [57 FR 36442]
and 6996 (April 28, 1993) [58 FR 26509].
\17\ 15 U.S.C. 77c(b).
\18\ 17 CFR 230.251-230.263.
\19\ In 1992, the Commission requested Congress to raise the
ceiling for its small offering exemptive authority under Section
3(b) of the Securities Act to $10 million. See S. 2518, 102d Cong.,
2d Sess. (1992).
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There currently are approximately 670 issuers with between $5
million and $10 million in total assets that report with the
Commission.20 Had the proposed increase in the asset threshold
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 the 670, approximately
550 are traded on an exchange or NASDAQ.21 A number of these
[[Page 35644]]
companies would become eligible to terminate registration and reporting
if the proposals are adopted, if they chose to do so, assuming the
number of shareholders does not exceed the applicable limits for
termination.22 Of course, many of these companies may continue to
report by choice in order to retain their ability to trade on an
exchange or NASDAQ or as a result of additional registered public
offerings, so the Commission cannot predict with any certainty the
number of issuers whose Exchange Act registration and reporting
requirements that may terminate as a result of the increase in the
total assets criterion from $5 million to $10 million.
\20\ At present, approximately 1,670 reporting issuers have less
than $10 million in assets.
\21\ At present, approximately 975 of the approximately 1,670
reporting issuers that have less than $10 million in assets have
securities that are traded either on an exchange or NASDAQ.
\22\ Companies that take steps to reduce the number of
shareholders in order to deregister, or otherwise engage in a Rule
13e-3 transaction [17 CFR 240.13e-3] with a view to deregistration,
are reminded of the need to comply with the ``going private''
regulations.
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Comment is requested on whether the proposed increase in the
Section 12(g) asset threshold is appropriate and useful for small
businesses. Is $10 million in assets the appropriate level for
subjecting companies that have not otherwise voluntarily entered the
reporting system to this system? Should the increase be smaller than
that proposed, e.g., $7.5 million, or greater, e.g., $15 million.
Commenters are asked to specifically discuss their reasons for any
suggested amount.
II. Proposed Revisions to Regulatory Flexibility Act Definitions
The Commission is simultaneously proposing technical conforming
amendments to the definition of a small entity for purposes of the
Regulatory Flexibility Act. A small entity is currently defined as an
issuer whose total assets on the last day of its most recent fiscal
year were $5 million or less, where the entity is not an investment
company. Under the proposals the total assets criterion would be
increased to $10 million to conform with the total asset criterion
proposal for purposes of entering into or exiting from Exchange Act
registration and reporting requirements.23
\23\ Release Nos. 33-6380, 34-18452, 35-22371, 39-639, 1C-12194
and 1A-791, (January 28, 1982) [47 FR 5215]. The proposals would
thus continue the parity that exists between the definition of a
small entity for purposes of the Regulatory Flexibility Act and the
concept of a small issuer for purposes of Exchange Act reporting and
registration requirements. Rule 157(a) under the Securities Act,
Rule 0-10(a) under the Exchange Act and Rule 0-7 under the Trust
Indenture Act of 1939 would be affected by the proposed conforming
modifications to the definition of a small entity for purposes of
the Regulatory Flexibility Act. The proposed modifications would not
affect the definition of a small entity for purposes of the
Regulatory Flexibility Act found in Rule 0-10 under the Investment
Company Act of 1940, Rule 0-7 under the Investment Advisers Act of
1940, or Rule 110 under the Public Utility Holding Company Act of
1935, as such Acts contain definitions of a small entity for
purposes of the Regulatory Flexibility Act that do not relate to a
total asset criterion.
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III. Request for Comment
Any interested persons wishing to submit written comments on the
proposed increase in the reporting threshold as explained in this
release are invited to do so by submitting them in triplicate to
Jonathan G. Katz, Secretary, U.S. Securities and Exchange Commission,
450 Fifth Street NW., Washington, DC 20549. Comment is requested from
the point of view of the public interest and the issuers that would be
affected; comments should address any possible effects on investor
protection resulting from the proposed increase in the threshold. The
Commission further requests comments on any competitive burdens that
might result from the adoption of the proposals. Comments on this
inquiry will be considered by the Commission in complying with its
responsibilities under Section 19(a) of the Securities Act and Section
23 of the Exchange Act. Comment letters should refer to File Number S7-
16-95. All comments received will be available for public inspection
and copying in the Commission's public reference room, 450 Fifth Street
NW., Washington, DC 20549.
IV. Cost-Benefit Analysis
To assist the Commission in its evaluation of the costs and
benefits that may result from the proposed increase in the threshold
discussed in this release, commenters are requested to provide views
and data relating to any costs and benefits associated with these
proposals. It is expected that compliance burdens will decrease with
respect to issuers who qualify for the proposed higher threshold,
inasmuch as issuers below the threshold will not have to register and
report pursuant to the requirements of the Exchange Act and issuers
that are currently reporting but who would otherwise now be below the
threshold may choose to opt out of their reporting requirements.
V. Summary of Initial Regulatory Flexibility Analysis
The Commission has prepared an initial 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, as well as to Regulatory Flexibility Act definitions of ``small
entity.'' Among other things, the analysis notes that these proposals
are intended to reduce the cost of compliance with the Exchange Act
reporting requirements, which is relatively greater for small companies
than for larger issuers.
The proposals would not increase the Exchange Act reporting burden
for any issuer and no additional recordkeeping or reporting will be
required except a certification/notification to the Commission of the
termination of any issuer's reporting duties under cover of Form 15.
Such a filing may require the skills of a professional familiar with
the securities laws, and some services by management, but does not
require any recordkeeping or reporting beyond that already required by
the Exchange Act.
The analysis indicates that a number of alternatives were
considered in crafting the proposals, including the establishment of
differing compliance or reporting requirements for small businesses,
the clarification, consolidation or simplification of rules for small
entities, the use of performance rather than design standards, and
exemption from coverage of Commission rules for small entities. As more
fully explained in the analysis, there is no better alternative to
simplify, consolidate or better accommodate small business entities
than the chosen approach, which is specifically designed to reduce
regulatory burdens on small issuers.
A copy of the initial regulatory flexibility analysis may be
obtained by contacting Twanna M. Young, Division of Corporation
Finance, U.S. Securities and Exchange Commission, 450 Fifth Street NW.,
Washington, DC 20549 at (202) 942-2950.
VI. Statutory Basis
The amendments to the Commission's rules and form are being
proposed by the Commission pursuant to Section 19 of the Securities
Act; Sections 12, 13, 15 and 23(a) of the Securities Exchange Act; and
Section 319 of the Trust Indenture Act of 1939.
Section 12(h) of the Exchange Act authorizes the Commission to
exempt any issuer, or class of issuers, from Section 12(g) upon a
finding that, by reason of the number of public investors, amount of
trading interest in the securities, the nature and extent of the
activities of the issuer, income or assets of the issuer, or otherwise,
that such action is not inconsistent with the public interest or the
protection of investors. The proposal today recognizes that the
relatively higher cost of reporting for small issuers must be weighed
against the need for reporting.
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The Commission historically has focused on the importance of continuous
reporting when there is a trading market, where investors have an
expectation that companies will provide continuous reports under the
Commission's continuous reporting system, and has found the absence of
such a market support for the conclusion that small companies should be
given the opportunity to avoid the cost of continuous reporting.24
Today's proposal is consistent with this approach since companies with
securities traded on an exchange or NASDAQ would continue to be subject
to Section 12 registration and reporting, and the expectation of
investors in companies traded in such markets that these companies will
continue to be subject to periodic reporting would not be altered. In
addition, the proposal furthers the policies of Section 3(b) of the
Securities Act to allow small offerings to be conducted without
subjecting the issuer to registration under Section 12 of the Exchange
Act.
\24\ See Release 33-6605 (September 30, 1985) [50 FR 41162].
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List of Subjects in 17 CFR Parts 230, 240, 249 and 260
Reporting and recordkeeping requirements, Securities.
Text of Proposals
In accordance with the foregoing, Title 17, Chapter II of the Code
of Federal Regulations is proposed to be amended as follows:
PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
PART 260--GENERAL RULES AND REGULATIONS, TRUST INDENTURE ACT OF
1939
1. The authority citation for Part 230 continues to read, in part,
as follows:
Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77s, 77sss, 78c,
78l, 78m, 78n, 78o, 78w, 78ll(d), 79t, 80a-8, 80a-29, 80a-30, and
80a-37, unless otherwise noted.
* * * * *
2. 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,
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.
* * * * *
3. The authority citation for Part 249 continues to read, in part,
as follows:
Authority: 15 U.S.C. 78a, et seq., unless otherwise noted.
* * * * *
4. The authority citation for Part 260 continues to read as
follows:
Authority: 15 U.S.C. 77eee, 77ggg, 77nnn, 77sss, 78ll(d), 80b-3,
80b-4, and 80b-11.
Parts 230, 240, 249, and 260 [Amended]
5. 17 CFR Parts 230, 240, 249 and 260 are amended by removing the
reference to ``$5 million'' and adding in its place ``$10 million'' in
the following sections:
(a) 17 CFR 230.157(a)
(b) 17 CFR 240.0-10(a)
(c) 17 CFR 240.12g-1
(d) 17 CFR 240.12g-4(a)(1)(ii)
(e) 17 CFR 240.12g-4(a)(2)(ii)
(f) 17 CFR 240.12h-3(b)(1)(ii)
(g) 17 CFR 240.12h-3(b)(2)(ii)
(h) 17 CFR 249.323(a)
(i) 17 CFR 260.0-7
Dated: June 27, 1995.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-16388 Filed 7-7-95; 8:45 am]
BILLING CODE 8010-01-P
