PREVIOUS  Part 15 SMALL COMPANY REGISTERED OFFERINGS      NEXT

HOME
ON LINE LINKS
SEARCH
TABLE CONTENTS

SECTION 2
Forms
Title 2
Title 3
Title 4

SECTION 3
Securities Act
Exchange Act
Sarbanes-Oxley Act
SOX TABLE
Title 5

SECTION 4
'33 ACT Reg
'34 ACT Reg
Reg. S-K
Reg. S-X
 

Title 4
Title 5
Title 6

Introduction

[T]he Commission, driven by the desire of the then White House to make capital markets more accessible to small business issuers, proposed, and, in near record time, adopted on July 30, 1992, a number of Small Business Initiatives (“Initiatives”). The Proposing Release noted that “the Commission has historically recognized the distinct financing concerns of start-up and development stage businesses newly entering the public markets.” The Initiatives included  a separate Regulation S-B (as distinguished from Regulation S-K) integrated disclosure system for Small Business Issuers (“SBIs”), defined as companies with annual revenues of less than $25 million and a public float in its voting securities of less than $25 million. .The were two Securities Act registration forms for small business issuers--  

A registered offering on Form SB-1 made by a small business issuer that had not raised over $10 million using this form during any 12 month period. Very few offerings were made on this form and the reason may have been  the difficulty of finding an underwriter willing to take smaller companies or companies with modest business plans public.

A registered offering on Form SB-2 made by a small business issuer raising in excess of $10 million. The principal difference between registration on Form SB-2 and Form S-1 was  that the former referenced Regulation S-B rather than Regulation S-K for content of disclosure Items and also referenced Regulation S-B rather than Regulation S-X as to the required financial statements.

A small business issuer  filed reports on Form 10-KSB (annual report) and 10-QSB (quarterly report) which referencd Regulation S-B rather than Regulation S-K including S-B Item 310 financial statements, and (4) a company that registered on Form SB-1 for a period of time could file '34 Act reports that were based on Regulation A level disclosure except as to financial statements. The latter was referred to as the transitional disclosure format.

The Commission in an open meeting on November 15, 2007 adopted “three measures to modernize and improve its capital-raising, reporting and disclosure requirements for smaller companies.”[1] The rules (1) made scaled disclosure available to 1,500 additional smaller companies;[2] (2) shortened the holding period under Rule 144,[3] and (3) created two exemptions from registration under the Exchange Act for compensatory stock option plans.[4] Our immediate focus is on scaled disclosure for smaller companies.

The new rules create a “smaller reporting companies” category to replace “small business issuers.” Small business issuers were companies that had a public equity float of less than $25 million and gross revenues of less than $25 million. Smaller reporting companies on the other hand are companies that have a public equity float of less than $75 million.[1] If companies do not have a public float or it cannot be calculated a company is a smaller reporting company if it has revenues below $50 million.[2] We pursue important details further below. Smaller reporting company is defined at three different places, all in substantially the same manner. The definition appears in Rule 405 of the Securities Act as one of the defined terms under the Act;[3] in Rule 12b-2 Exchange Act defined terms,[4] and Item 10(f) of Regulation S-K.[5] We generally reference the Regulation S-K definition as they are all the same, although in a specific context one or the other may be applicable as well.

Regulation S-B is eliminated, but the items that differed from Regulation S-K are moved into Regulation S-K and Regulation S-B, Item 310 relating to financial statements with some modification becomes Article 8 of Regulation S-X. Only smaller reporting companies can utilize the provisions moved into Regulation S-K and Article 8 of Regulation S-X. All the SB forms are eliminated, but smaller reporting companies can utilize the provisions of Regulation S-K applicable to smaller reporting companies in the applicable form. Consistent with the regulations and the Adopting Release, we refer to the disclosure applicable to smaller reporting companies as the scaled disclosure requirements. The overall effect is to preserve the disclosure system previously applicable to small business issuers, but to expand the companies that can rely on it and move the disclosure requirements into Regulation S-K, Regulation S-X and the appropriate forms under the Securities Acts. The principal impact is to increase significantly the number of companies that can rely on scaled disclosure for smaller reporting companies. With limited exceptions, smaller reporting companies can select a la carte the specific scaled disclosure that they choose to rely upon. We also add that the transitional disclosure system based on Regulation A disclosure for certain small business issuers is terminated because it was not used to any extent,[6]eliminating some complexities in the process.

Determining whether an issuer is a smaller reporting company

Companies that were small business issuers on the effective date (February 4, 2008) and that were relying on Regulation S-B have the option to file their next annual report on Form 10-KSB and relying on Regulation S-B disclosure. After filing its next annual report on Form 10-KSB, it will have to file its quarterly and annual reports respectively on Form 10-Q and Form 10-K. Assuming, as will generally be the case, at that time it meets the Regulation S-K, Item 10(f) definition of a smaller reporting company discussed below, it may use scaled disclosure for smaller reporting companies;. Companies that were reporting companies at the effective date (February 4, 2008) and were not small business issuers, in most instances have already determined whether they were accelerated filers for the purpose of filing their annual report for the last fiscal year. That determination is based on whether the issuer’s public float of common stock was $75 million as of the last business day of the most recently completed second fiscal quarter.[1] If it was less than $75 million and not an accelerated filer for that purpose, it also is a smaller reporting company and can elect scaled disclosure in the filing of its next ’34 Act report. Contrary-wise, if it was $75 million and, hence, an accelerated filer, it is not a smaller reporting company and cannot elect scaled disclosure.[2] If a company filed a registration statement under the Securities Act on Form SB-1 or SB-2 before February 4, 2008, and amends the registration statement, the amendment must be filed as an amendment to Form S-1, but the issuer may continue to use the disclosure called for by the SB form until six months after February 4, 2004.[3] We repeat to some extent but expand on Parts 11 and 12 by focusing on scaled disclosure for smaller reporting companies.

Going forward, for most purposes an issuer is a smaller reporting company and eligible to use the scaled disclosure if the public float was less than $75 million on the last business day of most recently completed second fiscal quarter.[4] Public float is determined “by multiplying the aggregate worldwide number of shares of its voting and non-voting common equity held by non-affiliates by the price at which the common equity was last sold, or the average of the bid and asked prices of common equity, in the principal market for the common equity.[5] There are special rules, however, for determining whether an issuer is a smaller reporting company in the case of an initial registration statement filed under the Securities Act (which ordinarily would be an initial  public offering on Form S-1). The determination is made as of a date selected by the issuer that is within 30 days of the date of the filing of the registration statement. The number of shares held by non-affiliates at that date and the number of shares covered by the registration statement are multiplied by the estimated public offering price share at the time of the filing of the registration statement.[6] The Proposing Release included the following example of making this determination.[7]

·        Company X has 50,000,000 shares of common stock outstanding;

·        Company X has 25,000,000 shares of common stock outstanding that are held by non-affiliates;

·        Company X files a Securities Act registration statement for its initial public offering. In that registration statement, Company X registers 7,000,000 shares of common stock to be sold at an estimated offering price of $10 per share; and

·        For purposes of the smaller reporting company definition, Company X's “public float” would be $320,000,000 ((25,000,000 shares + 7,000,000 shares) x $10 per share) and it is not a smaller reporting comppany.

We suggest a different scenario as follows:

·        Company X has 6 million shares outstanding, 2 million of which are held by non-affiliates.

·        Company X files a registration statement covering 4 million shares to be offered at $10. a share.

·        The public float is 6 million x $10 or $60 million; the company is a smaller reporting company, and the company can used scaled disclosure for the public offering.

There are a couple of problems with this formula. First, if registrant relies as many of them do on Rule 457(o),[8] the registration statement fee table does not have to set forth the number of shares covered; it is sufficient if it sets forth the aggregate offering price. Second, the preliminary prospectus does not have to include the offering price; rather it includes the estimated range of the offering price.[9] Third, registration statements are often, if not generally, filed with a preliminary prospectus that doe not include the number of shares being offered or estimated offering price range. The offering price range and number of shares offered frequently are not included until the second or third amendment or even subsequent amendment. Although the preliminary prospectus in the case of an IPO by a non-reporting company cannot be distributed until the range of offering price and estimated maximum number of shares is included,[10] generally such information is not included until the staff comments are received and an amendment(s) filed in response. Fourth, the actual price generally at which offered is not included until after the effective date and the filing of a Rule 424(b)[11] pricing prospectus. Accordingly, registrant will have to make assumptions as to offering price and number of shares to be offered. Such estimates at the time of the initial filing may or may not be realistic, depending upon the reaction of institutional and other investors to the offering.

In view of this, the Commission made one change in the applicable provisions in the final rules for the purpose of going forward after completion of the offering by allowing registrants determined not to be a smaller reporting company to make a redetermination based on the actual offering price and the number of shares actually sold. This will come into play if as a result of the assumptions made the company could not and did not use scaled disclosure but upon completion of the offering based on the offering price and number of shares actually sold qualified as a smaller reporting company, it could elect to be a smaller public company going forward.[12] If, on the other hand, based on its determination at the time of the filing of the registration statement the issuer was a smaller reporting company and prepared the Form S-1 and amendments using scaled disclosure, but as a result of the number of shares offered and/or offering price at the conclusion of the public offering the public float is $75 million or greater, the registrant, provided it made a bona fide estimate at the time, does not have to undo the public offering. The registrant remains a smaller business company until the next annual determination date.[13]

For most newly public companies, the initial determination of whether a public company will be determined in connection with its initial public offering. That determination will remain in effect for the balance of the year.[14] Companies going public and listing on a stock exchange generally arrange for the registration under the Exchange Act[15] and certification of listing on the stock exchange to occur concurrently with the effectiveness of the Securities Act registration statement. Under those circumstances, the determination for purposes of the Securities Act registration will determine whether the company is a smaller reporting company. In the atypical situation, a company may be initially registering a class of equity securities under the Exchange Act without have made a public offering. This may result from the fact the company has made a number of offerings that were exempt under the Securities Act (for example under Regulation A and/or Regulation D). When and if the company has 500 shareholders of record in a class of equity securities and a total of $10 million in assets it will have to register the securities under the Exchange Act within 120 days from the end of the fiscal year. We assume that the security is traded on the pink sheets and the number of shares held by persons other than affiliates is multiplied by the last sale reported by the pink sheets on a date selected within 30 days of the filing of the ’34 Act registration statement on Form 10.[16] If we assume there is no market in the security; hence, the company’s public float is zero, it will be a smaller reporting company if its annual revenues were less than $50 million during the most recently completed fiscal year for which audited financial were available.[17]

The annual determination

We know that the determination of a company’s status as a smaller reporting company is an annual determination. The definition provides in this regard “Whether or not an issuer is a smaller reporting company is determined on an annual basis.”[18] We do not explore the complexities of making a new determination each year other than note that the continued reliance on scaled disclosure requires that it be a smaller reporting company at the applicable measuring date.