SECTION 1
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 5
Title 6

Hasty Introduction

We have completed the offering, but without taking a good look at the preparation of the registration statement, except for an occasional peek at that prepared by others. SEE, for example, Netezza S-1.  As we start down that road, you should understand that we cannot take an in-depth view unless we were (condition contrary to fact) willing to spend every day and all day until the end of the semester engaged in that process. Our task was not made easier by the fact the Commission in an open meeting on November 15, 2007 adopted effective February 4, 2008[ some very significant changes to the preparation of registration statements. We will attempt to limit our discussion of what was in effect prior to the changes, as we are interested in what is now required. 

PART I -- Preparation of Registration Statement

 The registration statement typically is drafted by counsel to the issuer, generally the would be registrant’s outside counsel or counsel engaged specially for this purpose. The first draft is sent to the underwriter and the underwriters counsel, followed by the first of several drafting sessions. The drafting sessions are attended by the respective counsel as well as in-house counsel for the company, one or more of the company’s principal officers (e.g. CFO and or COO), one or more of the investment bankers representing the lead underwriter, at some stage one or more representatives of the accounting firm auditing the financial statements to be included in the registration statement. Counsel preparing the registration statement doesn’t draft the registration statement in a vacuum, but will obtain information from company personnel, will have reviewed pertinent documents, board minutes, and the like and have conducted extensive due diligence. Counsel for the underwriter before the first drafting session in addition to reviewing the issuer’s draft will have examined relevant corporate documents, talked to the firm’s investment bankers working on the offering and undertaken a substantial amount of due diligence. Due diligence is an art form that we don’t get into at least for now, but counsel with the responsibility in this area needs to be an artist. The Securities Act prospectus, which is Part I of the registration statement, typically is a carefully prepared and cautiously phrased ("turgid," according to some) document reviewed in the case of an IPO microscopically by the Commission's staff and emerging ultimately as a document which, in the words of Justice Rehnquist, "in accord with the congressional purposes, specifically requires prominent emphasis be given . . . to material adverse contingencies." Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975)

Before we get to the first drafting session, counsel and other participants have to take into account a number of considerations that are important, but in some instances are collateral to the preparation of the registration statement. We itemize some of them below:

Counsel engaged to prepare the registration statement may have had little involvement with the company’s prior legal related history. Companies often reach the IPO stage with a questionable compliance history and counsel may need to open some closed doors to spot potential problem areas and assure that they are under control before getting too far down the road. Although counter to how things work in the real world, we don’t look at raising capital in exempt transactions preliminary to going public until we have gone public. We assume that has already taken place without our input, but we need to know about it at this point if for no other reason, Form S-1, Part II, Item 15 Recent Sales of Unregistered Securities. That item requires inclusion of the information specified by Item 701 of Regulation S—K. Item 701 of Regulation S-K. Item 701 requires disclosure, among other things, of the unregistered securities sold within the past three years, the date of sales, the cash and other consideration received, "the section of the Securities Act or the rule of the Commission under which exemption from registration was claimed and state briefly the facts relied upon to make the exemption available." It is hard to believe, but apparently in what is or was scheduled to be one of the largest IPOs in history, Google in conjunction with the offering filed a separate registration statement covering a rescission offering for securities sold in violation of the Securities Act involving the grant of options to current and former employees and consultants. SEE Google Rescission S-1. The other alternative, is to disclose a contingent liability under Section 12(a)(1) of the Securities Act to purchasers of the unregistered securities who may for a period of 12 months have the right to rescind the transaction and recover the purchase price of the securities. 

Keeping Your Distance From the Analyst

Continuing in the proceed with caution vein we note in passing that as a result of the Internet Bubble and revelations that analysts preparing research reports and making recommendations often were expressing privately or to preferred clients of the firm opinions directly contrary to the recommendations in their research report. Sarbanes Oxley required the SROs to adopt rules designed to separate research and research analysts from investment banking. The rules that the exchanges and the Nasdaq were required to adopt provide, among other things, research analysts and research department personnel engaged in the preparation of research reports cannot be subject to supervision or control of the investment banking department of the firm. NYSE Rule 472(b)(1); Nasdaq Rule 2711(b)(1). A research analyst is “prohibited from participating in efforts to solicit investment banking business,” period. This includes but is not limited to “participating in meetings to solicit investment banking business (e.g. ‘pitch meetings’) of prospective investment banking clients.” This also precludes other communications with prospective investment banking clients for the purpose of soliciting investment banking business. This, however, does not preclude a research analyst from communicating with non-research personnel or with the company, “the sole purpose of which is due diligence.” NYSE Rule 472(b)(5); Nasdaq Rule 2711(c)(4) The NASD  adopted an amendment to Rule 2711 that expressly preclude a research analyst  from participating in a roadshow or communication with a customer or prospective customer in the presence of investment banking personnel.  Specifically, Section 2711(c)(5) provides as follows: "
(5)  A research analyst is prohibited from directly or indirectly
(A) participating in a road show related to an investment banking services transaction; and
(B) engaging in any communication with a current or prospective customer in the presence of investment banking department personnel or company management about an investment banking services transaction.

Your Professional Responsibility

Similarly, we only have time in passing to mention Section 307 of SOX and the rules adopted by the Commission implementing Section 307 imposing on attorneys appearing and practicing before the Commission who have evidence of a material violation of the securities law or breach of fiduciary duty to go up the corporate ladder to the ultimate authority if necessary to keep an issuer from violating the securities laws or breaching a fiduciary duty. Determining your responsibility in this regard may be a bit stressful in the context of CEOs (and or underwriters) that may not understand applicable disclosure standards in this context. This is not a course in Sarbanes-Oxley as such and we can do little more than alert you to your responsibilities as failure to meet them can result, among other things, in the Commission initiating a Rule 102(e) proceeding to disqualify you from appearing and practicing before the Commission.
See Securities Law Handbook § 1:37. REGULATION OF ATTORNEYS

Say Hello and Goodbye to EDGAR

EDGAR (Electronic Data Gathering, Analysis, and Retrieval—the SEC’s electronic filing system. Substantially all filings including the ’33 Act registration statement (including all exhibits) and amendments have to be made on EDGAR. In all probability, we will depend upon the financial printer to make the electronic filings, although there is no reason why a law firm should not have people in its word processing department capable of doing so. We don’t have time to get into it, but at least will (1) go to the EDGAR filing website (https://www.edgarfiling.sec.gov) and (2) to a filing on the EDGAR database, take a quick look and run.

Effective June 30, 2003, The three reports (Forms 3, 4, and 5) filed pursuant to Section 16(a) by officers, directors, and ten percent beneficial shareholders of issuers with a class of equity securities registered under the Exchange Act had to be submitted on the OnlineForms Edgar Filing website created by the Commission with the URL https://www.onlineforms.edgarfiling.sec.gov. Reliance probably (although not necessary to do so) will be placed on a private vendor to make these filings, Although it is the responsibility of the insider to file the appropriate form time, the company will probably attempt to make or arrange to make the filings for the insider. The company is required, if it has a company website, to post on its website all Forms 3, 4, and 5 filed with respect to its equity securities by the end of the business day after the filing. The form must remain available on the website for at least a 12-month period.

Getting Access Codes: The insiders not only have to file the Form 3 and other Section 16(a) reports on EDGAR, but to do so each insider must file a Form ID in order to obtain the necessary access codes if s/he des not have such codes. The Commission as of April 26, 2004 required that the Form ID be filed electronically, which has actually made the process more difficult than when it previously was filed by fax. The Commission created a separate website for the filing of the Form ID, the EDGAR Filer Management website (https://www.filermanagement.edgarfiling.sec.gov) at which site and on which site the Form ID must be completed and transmitted. In addition, within two business days before or two business days after transmitting the Form ID electronically, a paper copy manually signed and notarized must be sent to the Commission by FAX. There is more, but we will not get into it.

Registering the class of securities under the Exchange Act

Registration Under the Exchange Act. Registering the securities under the Exchange Act, which is a prerequisite to being listed on the National Stock Market or any other stock market for that matter, must take place more or less concurrently with the registration under the Securities Act. We explore in greater depth '34 Act registration in subsequent assignments, but assume for our immediate purposes that the security is going to be listed on an exchange or Nasdaq and will be registered under the Exchange Act concurrently with registration under the Exchange Act. There is a simplified registration procedure available on Form 8-A that permits registration of securities under Section 12(g) (over the counter securities including securities listed on Nasdaq) or 12(b)of the Exchange Act (securities listed on a national securities exchange) to become effective concurrently with effectiveness under the Securities Act. Fortunately Form 8-A is relatively easy to prepare, but must be taken care in a manner that permits it to become effective concurrently with the Securities Act Registration Statement. SEE SalesForce.com Form 8-A .
 

Introduction to Plain English

The Commission in recent years has a fetish for what it calls plain English. We will spend a smidgen (excuse me, small amount) of time using some of the pre-approved vernacular (there he goes again) in drafting the cover page et al. In the meantime, a cursory look at Staff Legal Bulletin No 7.
Basic financial statements

The standardization of financial statements involved moving the general instructions as to the financial statements to be included out of the individual forms into a Article 3 of Regulation S-X and making them applicable to all disclosure documents calling for financial statements of registrants other than smaller reporting companies. The appropriate form (See  Form S-1 Item 11(e)) call for financial statements meeting the requirements of Regulation S-X.. Section 3-01 of Article 3 of Regulation S-X calls for consolidated balance sheets as of the end of each of the two most recent fiscal years. Section 3-02 requires audited statements of income and audited statements of cash flow for each of the three fiscal years preceding the date of the most recent audited balance sheet being filed. . See S-1 registration statement of ADNUXIS filed on August 21, 2007 Balance sheet.; statememt of income, and cash flow. The financial statements called for in the registration statement of a smaller reporting company are set forth in Article 8 of Regulation S-X and basically are the same except only two years of audited statements of income and cash flow are required.

The Commission also adopted uniform aging requirements relating to financial statements included in registration statements filed under the Securities Acts. The age limitations on financial statements play an important role in scheduling the preparation of a registration statement and in coordinating the efforts of those involved in the process. The aging requirements are for the most part related to the filing of audited financial statement as of the end of the last  fiscal year on a Form 10-K and quarterly unaudited financial statements in the Form 10-Q for each of the first three fiscal quarters of the year. Although an IPO on Form S-1 is typically filed by a non-reporting company, but if you think in terms of when they would have to filed a Form 10-K in relationship to the end of the last fiscal year if they were a reporting company and when they would have filed a Form 10-Q for the interim period(s) fiscal quarters that have elapsed since the end of their fiscal year, it will be helpful in determining the aging requirements. The timing for non-accelerated filers (which must companies are when they do an IPO as there is no market in their stock; hence, their float cannot be determined for this purpose) they would have to file their Form 10-K within 90 days of the end of the fiscal year and their Form 10-Q for each of the first three quarters of the fiscal year within 45 days of the end of the fiscal year. Assuming that at the measuring date (date of filing or expected effective date as applicable) more than 90 day ha elapsed since the end of the fiscal year you know that they have to include the panoply of audited financial statements as of the end of the last fiscal year. If the measuring date is June 15, you know if they were a reporting company and a non-accelerated filer they would have had to file a Form 10-Q for the end of the first quarter and not the second quarter. Accordingly, they have to include interim unaudited financial staements as of the end of that quarter. If on the other hand, the measuring date is on September 1, 45 days have elapsed since June 30. the end of the fiscal quarter and if they were a reporting company they would have to had filed a Form 10-Q as of the end of the second fiscal quarter. Accordingly, they have to include interim unaudited financial statements as of June 30. The sticky aging issue is when the measuring date is within  90 days after the end of the fiscal year. We discuss the financial statement aging requirements on the assumption that the registrant is a non-accelerated filer. We would do the same if it were a large accelerated filer or an accelerated filer except an accelerated filer has to file a Form 10-K within 75 days of the end of the fiscal year and a large accelerated filer has to file a Form 10-K within 60 days of the end of the fiscal year and both have to file a Form 10-Q within 40 days. We assume that such registrants are reporting companies at the time the registration statement is filed. If they have filed their Form 10-K and 10-Q timely, they would essentially include those financial statements in the registration statement and they would have complied with the aging requirement. The sticky period for them is when the measuring period is within 75 days of the end of their fiscal year for accelerated filers and 60 days for large accelerated filers. We describe the aging requirements below for an non-accelerated filer, keeping in mind that they are different for accelerated and large accelerated filers.

Since each amendment to the registration statement constitutes a new filing for this purpose, the aging requirements must be met at the time of the initial filing and at the time each amendment is filed including the final amendment on which the registration statement becomes effective, and at the effective date. The aging requirements are interrelated to the time within which a public company must file an annual report on Form 10-K (within 90 days after the end of the fiscal year with respect to non-accelerated filers; 75 days in the case of accelerated filers and 60 days in the case of large accelerated filers) and quarterly reports on Form 10-Q (within 45 days after the end of each of the first three quarters in the case of non-accelerated filers and 40 days in the case of accelerated and large accelerated filers.).

If the filing of the registration statement is made within 45 days of the end of the fiscal year and audited financial statements are not available for the last fiscal year, the audited balance sheets may be as of the end of the two preceding fiscal years and an interim balance sheet at least as current as the end of the registrant’s third fiscal quarter of the last fiscal year. Regulation S-X, Rule 3-01(b). In that event, unaudited statements of income and cash flows for the period from the date of the last audited balance sheet to the date of the interim balance sheet must be included and also for the corresponding period of the prior fiscal year. Regulation S-X, Rule 3-01(b)  If at the date of filing is between 45 and 90 (or 45 and 60 in the case of a large accelerated filer; 45 and 75 in the case of an accelerated filer) and audited statements as of the end of the fiscal year are not available, the foregoing also is applicable, but only if the company is a ’34 Act reporting company; reasonably expects to report ordinary income after taxes for the last fiscal year and did so for one of the two preceding fiscal years. Regulation S-X, Rule 3-01(c).  If registrant cannot meet those criteria during the 45-90 (45-60 or 45-75, as applicable), the registrant must wait until its audited financial statements for the end of the last fiscal year are available before filing the Securities Act registration statement. This means in the case of an IPO, which ordinarily would not be a reporting company and would not be an accelerated filer, if filed more than 45 days after the end of the fiscal year and 90 days after the end of the fiscal year that it is a dead period and it cannot file a registration statement until it has available audited financial statements as of the end of its last fiscal year.

 Smaller reporting companies have essentially the same aging requirements as to the age of the financial statements and ordinarily should be non-accelerated filers (annual report within 90 days of end of fiscal year; quarterly reports within 45 days of end of each of first three quarters) for this purpose. Regulation S-X, Rule 8-08.               

We assume that the registration statement is filed more than 90 days after the end of the fiscal year (or 60 in the case of a large accelerated filer or 75 in the case of an accelerated filer) with an audited balance sheet as of the end of the last fiscal year and the preceding fiscal year and three years of consolidated audited statements of income and cash flow. If the filing is made subsequent to 134 days from the end of the registrant’s fiscal year (129 days in the case a large accelerated filer or accelerated filer) (Regulation S-X, Rule 3-01(i)(2)), the financial statements must include an unaudited balance sheet as of 135 days of the filing (130 days in the case of a large accelerated or accelerated filer). Regulation S-X, Rule 3-01(e). There also must be filed unaudited statements of income and cash flow for the period from the end of the audited balance sheet date and the date of the interim balance sheet and the corresponding period of the prior fiscal year.Regulation S-X, Rule 3-02(b), 17 C.F.R. § 210.3-02(b).

To illustrate: In the case of an IPO, the registrant has a calendar year fiscal year and files the registration statement on August 1, 200x with audited balance sheets as of the end of its fiscal year for 200x-1 and 200x-2 and audited statements of income and cash flow for fiscal years 200x-1, 200x-2 and 200x-3. August 1, 200x is more than 134 days (129 for large accelerated and accelerated filers) from the end of its fiscal year. We assume it included an unaudited balance sheet as of the end of the preceding fiscal year and as of the end of the first quarter (March 31, 200x) and unaudited statements of income and cash flow for the first quarter and the comparable period of 200x-1. At August 1, 200x, based on the interim statements filed, the financial statements are (April 30 days; May 31 days, June 30 days and July 31 days) 122 days old and current. If filed on August 20 they would have been 141 days old and clearly dated because over 134 days old. In that event, the registrant would update its audited statements by including an interim unaudited balance sheet as of the end of its second fiscal quarter (June 30, 200x) and interim unaudited income and cash flow statements for the period commencing January 1, 200x through June 30, 200x and for the comparable period of the prior year.

Take another look at S-1 registration statement of ADNUXIS filed on August 21, 2007 Balance sheet.; statememt of income, and cash flow

To continue our illustration assume registrant is ready to file the amendment on which it expects to go effective. This brings into play Regulation S-X, Rule 3-12(a) (and 3-12(g), which it references), making the "expected effective" date the critical date. We assume that the reasonable expectation is that it will become effective within a day or two after the filing and to be cautious we assume three days after. The filing is to be made on November 15, 200x ; hence the expected effective date is November 18, 200x. Our financial statements as discussed above included interim statements as of June 30, 200x. Under  Regulation S-X, Rule 3-12(a) if our financial statements are more than 135 (130 in the case of accelerated and large accelerated filers) at the expected filing date they must be updated. From June 30 to November 18 is (July and August 31 each; September 30, October 31 plus 18) are 141days old. Accordingly, they have to be updated, which we do by including an interim balance sheet as of the end of the third quarter (September 30, 200x) and unaudited income and cash flow statements for the nine month period from the end of the last fiscal year to September 30, 200x and for the comparable period of the prior fiscal year. See financial statements included in 3PAR, Inc. amendment filed November 15, 2007, the same date it went effective..

 Whenever unaudited interim statements are required, they need be in no more detail than is required by the instructions to Form 10-Q, which means that a reporting company can, if it so chooses, use its Form 10-Q to satisfy interim requirements. Regulation S-X, Rules 3-01, 3-02 and 3-12. An issuer allowed to utilize audited statements as of the preceding fiscal years as outlined above, must use audited statements as of the end of the last fiscal year if they become available prior to the anticipated effective date .

.

We need to consider one more matter before we embark on the preparation of the registration statement. How many shares are to be offered and at what price? Good question, because no one knows for sure since there has been no market in this stock, time elapses from the beginning to the end, market reception is unpredictable, and markets are fragile. That means we need flexibility. We do have the general parameters that we have to meet in order to be listed on Nasdaq as a National Market security. SEE Listing Standards.We can add shares by pre-effective amendments if willing to pay the additional filing fee and delay the offering, but delaying an offering does not improve the company’s image. Share cannot be added by a post-effective amendment; only by a new registration statement which now is a limited alternative. In order to properly size the offering, we need to know how to calculate the filing fee, the amount of which is not insignificant. The filing fee changes every fiscal year (October 1) or as soon thereafter plus five days as the Commission’s appropriation is approved, which can be several months later. The process involved in establishing the fee is a long story that you don’t need to know except you must be up to date on the current fee. The fee is X dollars per million of aggregate offering price of securities registered. The current filing fee is $117.70  (for fiscal 2005, that began October 1, 2004 except it did not go into effect until December 12, 2004) per million of the aggregate offering price of securities registered (multiply the aggregate offering price by 0.000267000). The Commission announced on April 30, 2005 that the fee rate will decrease to $107.00 per million from the current rate of $117.70 per million as of the beginning of the 2006 fiscal year (commencing October 1, 2005) subject to the usual caveat that it will not become effective until 5 days after Congress approves its 2006 fiscal year appropriation. . See Commission's First  Fee Advisory for fiscal 2006.

Regulation S-K, Item 501(b)(3), Instruction 1 requires registrants not subject to the periodic reporting provisions of the Exchange Act immediately prior to the filing of the registration statement, to include on the outside front cover page of the prospectus a "bona fide estimate of the range of the maximum offering price and the maximum number of shares or other units of securities to be offered, or a bona fide estimate of the principal amount of debt securities to be offered. If the registration statement becomes (or is to become) effective with a Rule 430A prospectus and at pricing the underwriter determines that it will be able to sell more shares than are covered by the registration statement, this traditionally has posed a problem in that once a registration statement becomes effective additional shares could be offered only pursuant to a new registration statement, which involves a significant delay. If the registration statement is not to become effective until the following day, one solution, albeit a distasteful one, would be to delay effectiveness and file a pre-effective amendment to the registration statement to include additional shares. Effective June 1995, the Commission adopted several rule amendments designed to address this and related issues. Rule 457 was amended to eliminate the need to set forth the number of shares or other units of securities on the cover page of the registration statement. The calculation of the fee table on the cover page of the S-1 registration statement looks like this—

The footnote reference to  Rule 457(o) tells the story. DO NOT include number of shares registered or the per unit price. Size the offering by the aggregate dollar amount of the offering and we can adjust the number of shares and price within that outside limit. The calculation of the registration fee may be based upon the maximum aggregate offering price of all of the securities listed in the fee table. Thus, for example, if there is less demand than projected for the shares resulting in a lower price than what was contemplated when the registration statement was filed, at pricing, it may be determined to add additional shares up to the maximum aggregate offering price without delaying the effective date or filing a new registration statement to cover the additional shares. The converse of this situation may also be provided for by using an aggregate offering price in the fee table (and paying the additional filing fee) in excess of that contemplated at the time of the registration statement was filed. If based on the selling effort during the waiting period the price of the shares is increased at pricing, there may be flexibility to do so without the need to delay effectiveness or to file a registration statement reflecting a higher aggregate offering price. If the issuer is willing to pay the cost in additional fee, provision can be made for about any scenario by using a high enough aggregate offering price. The unused fee (based on the aggregate offering price of the securities actually sold) is not refunded, but can be applied on future offerings.

Rule 462(b), added by the June 1995 amendments, provides additional flexibility in pricing by allowing registrant, under appropriate circumstances, to register additional securities after a registration statement has become effective by filing an "abbreviated registration statement" that becomes effective immediately upon filing. This procedure is available if (i) the registration statement registers additional securities of the same class as securities included in a registration statement for the same offering previously declared effective; (ii) the registrant files the new registration statement prior to the time confirmations are sent; and (iii) the new registration statement "registers additional securities in an amount and at a price that together represent no more than 20% of the maximum aggregate offering price set forth for each class of securities in the ‘Calculation of Registration Fee’ table in such earlier registration statement."

An abbreviated registration statement consists of the facing page; an incorporation by reference of the contents of the earlier registration statement; necessary opinions and consents (which may be incorporated by reference under certain circumstances); the signature page; and, if desired, price-related information omitted from the previous registration statement in reliance on Rule 430A. An accommodation also was made for the payment of filing fees in respect of such filings that permits payment of the filing fee the next business day after filing the abbreviated registration statement if the registrant certifies at the time of filing the registration statement that it has given wire transfer instructions to its bank or wire transfer service and specified other conditions are met. Opinions and consents included in abbreviated registration statements may be incorporated by reference from the previous registration statement relating to the offering, provided that the opinions and consents filed with the previous registration statement expressly provide for such incorporation. "[I]nformation necessary to update disclosure contained in the earlier registration statement as a result of the increase may be reflected in a form of prospectus filed under Rule 424(b)."

PART II. The New Integrated Disclosure System

We do not at this point discuss the integrated disclosure system at length, but we must sketch limited aspects. The integrated disclosure system attempts to standardize disclosure as between Securities Act registration statements and reports filed under the Exchange Act by '34 Act reporting companies to the extent they both call for substantially the same disclosure such as describe the company's business.  If we had time, which we don’t, we would attempt to understand the obsolete separate disclosure system for small business issuers replaced by the new disclosure regimen for Smaller Reporting Companies (SRC or SRCs). We will only say of the old system for small business issuers that it was an integrated disclosure system in which the common disclosure for Securities Act and Exchange Act disclosure was included in Regulation S-B (in contrast to Regulation S-K for other issuers) and had its own forms for ’34 Act reports—Form 10-KSB annual report (rather than Form 10-K for other issuers) and Form 10-QSB (rather than Form 10-Q for other issuers). Financial statement requirements were included in Item 310 of Regulation S-B rather than in Regulation S-X, applicable to other issuers. Separate forms were available for small business issuers to register securities under the Securities Act—Form SB-1 for offerings up to $10 million and Form SB-2 for offerings over $10 million. The concept was to have a simplified disclosure system available to small business issuers. The integrated disclosure system for small business issuers never really took off; in part because investors tended to look upon companies relying on the SB forms as speculative issuers.

From one perspective the new approach is not that dramatic. The concept of small business issuer is replaced by smaller reporting company, increasing by approximately 42% the number of issuers eligible to rely on scaled less extensive disclosure. The Regulation S-B items that were deemed different from the Regulation S-K counterparts are moved into Regulation S-K as separate subparagraphs with a “Smaller Reporting Companies” header. The Regulation S-B item 310 financial statements with some changes are moved into a new Article 8 of Regulation S-X and are available only to a smaller reporting company. A smaller reporting company on an a la carte basis can with one exception select the scaled disclosure (basically the old Regulation S-B disclosure), using the same forms as other issuers. The content of that disclosure is described in the smaller reporting company subparagraphs of Regulation S-K and Article 8 of Regulation S-X. For lack of a better term we will refer to issuers that do not qualify as smaller reporting companies as larger reporting companies (LRC's). Regulation S-B is no more and Forms 10-KSB, Form 10-QSB, SB-1 and SB-2 are no more. We will try not to mention them again. What remains are Regulations S-K and S-X, Forms 10-K (annual report under the Exchange Act), Form 10-Q (quarterly report under the Exchange Act, Form 8-K (current reports under the Exchange Act), Form S-1 (registration of IPOs under the Securities Act and other securities for which another form is not available), Form S-3 (registration of securities under the Securities Act by eligible reporting companies), and other Securities Act registration forms that we do not consider (e.g. Form S-4 to register securities involving a merger or other business combinations. Our task is not made easier by the fact that the Commission On December 19, 2007, the Commission amended Form S-3 to allow smaller reporting companies to use Form S-3 and incorporate its '34 Act reports into the '33 Act registration statement for offerings in limited amounts. See Sec. Act Release No. 8878 (Dec. 19, 2007), 2007 WL 4440399, Form S-3 General Instruction B.6.  That said, the new smaller reporting company regimen impacts several aspects of the approach of a company contemplating going public, as well as companies that already are public companies.

To be eligible under the now extinct definition of a "small business issuer" the company had to (1) "a public float (the aggregate market value of the issuer's outstanding voting and non-voting common equity held by non-affiliates) of less than $25,000,000 and (2) revenues of less than $25 million. The definition of a smaller reporting company"  is an issuer that has "a public float of less than $75 million...computed by multiplying the aggregate worldwide number of shares of its voting and non-voting common equity held by non-affiliates" by the price of the security at the measuring date. There are other details that we overlook for the moment. We do note that the the $75 million public float is also the measure as we discussed at Part 3 for determining the time within which periodic reports must be filed under the Exchange Act and established Section 404 compliance dates for '34 Act reporting companies.  For apparent reasons, this increases the number of companies that can use the scaled disclosure now incorporated into Regulation S-K. According to the estimates included in the Proposing Release this would increase the number of '34 Act reporting companies eligible to use the the lesser disclosure (referred to by the SEC as scaled disclosure) from approximately  3,749 to approximately 4,976 or an increase of 1,227 companies.

For companies that are public companies and their stock for example is traded on the Nasdaq Stock Exchange once stock held by non-affiliates is determined it is not difficult to determine the company's public float. A somewhat difficult problem may be determining the stock held by affiliates in contrast to stock held by non-affiliates. Recall the standards for listing on  Nasdaq as Capital Market securities. Under the standards to be listed as a Capital Market security, which are the minimum standards for listing on Nasdaq, unless a company has net earnings of $750,000 during the last or two of the three most recent fiscal years, it must have publicly held shares of $15 million.[1] Publicly held shares are defined as total shares outstanding, less any shares held by officers, directors or beneficial owners of 10% or more.[2] This also determines who must file insider trading reports under Section 16(a) of the Exchange Act.[3] Although there could be differences applying the Rule 405 definition of an “affiliate”, we use this as a working definition of affiliates for the purpose of determining whether an issuer is a smaller reporting company. For the real definition of affiliate see Securties Act Rule 405.

For a company that has not gone public there ordinarily is no trading market and that brings into play some special rules for determining the company's public float. There are special rules, for determining whether an issuer is a smaller reporting company in the case of an initial public offering. The determination is made within 30 days of the date of the filing of the registration statement and is determined by multiplying the number of shares held by non-affiliates at that date and the number of shares covered by the registration statement by the estimated public offering price. The Proposing Release included the following example of making this determination:

·         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 (i.e by persons other than officers, directors, or 10% shareholders per our working definition).

·         Company X files a registration statement covering 4 million shares to be offered at $5. a share.

The public float is 6 million x $5.00 or $30 million; the company is a smaller reporting company, and the company can used scaled disclosure for the public offering. We now know whether or not the company is a smaller reporting company, which will make a significant difference if it is a SRC as to the financial statements and other information included in the registration statement. We will have to wait, however, before we explore the integrated disclosure system; the content of the registration statement, and the scaled disclosure available to a SRC in contrast to other issuers. We will refer to other issuers, coining a phrase in the process, as a larger reporting company (which we define as one that is not a SRC)..

We are back to the concept of an integrated disclosure system which revolves around Regulation S-K. The following table if understood explains how the integrated disclosure system operates and why we cannot separate '34 Act disclosure from disclosure under the Securities Act. We noted in discussing an IPO that a company generally registers the class of the securities under the Exchange Act on Form 8-A so that registration under the Exchange Act and under the Securities Act occur concurrently. See Part 5. We also noted that even if it did not register the class of securities under the Exchange Act, once it makes a registered '33 Act offering of common stock  it becomes subject to the same '34 Act reporting requirements as a result of Section 15(d) of the Exchange Act and will be filing annual reports under the Exchange Act on Form 10-K. We should also note that companies that have a class of common stock registered under the Exchange Act are also subject to the proxy rules; whereas those that file reports pursuant to Section 15(d) are not. We do not consider the proxy rules as such, Rule 14a-3(b) of the proxy rules requires a reporting company to distribute to shareholders what we refer to as a Glossy Annual Report in connection with its annual meeting. Section 15(d) reporting companies do not as they are not subject to the proxy rules. We ignore the proxy rules as such, but not the Glossy Annual Report as it is an integral part of the integrated disclosure system. Finally we add a column for scaled disclosure available to smaller reporting companies on an a la carte basis.   With that said preview the integrated disclosure system in the following table:

INTEGRATED DISCLOSURE TABLE

: *For the Form S-3 Items that reference “Item 12”, reliance is placed in this regard on the ’34 Act reports, in particular the Form 10-K, which along with other ’34 Act reports and the proxy statement of companies that have a class of securities registered under the Securities Act are incorporated by reference by Item 12 of Form S-3. Item 12 by incorporating the ’34 Act reports incorporates by reference considerable information not required in the Form S-1; for example, the disclosure in the Form 10-K relating to internal control over financial reporting.  Item 12(a) S-3 specifically requires incorporation of the filing of the Form 10-K that includes the registrant’s financial statements for the latest fiscal year and all ’34 Act reports filed since the end of its last fiscal year, Item 12(b) requires that going forward in addition to ’34 Act reports the registrant must incorporate all proxy statements and other Section 14 filings. The latter includes all Glossy Annual Reports filed by registrant. Accordingly, for a ’34 Act reporting company filing reports pursuant to Section 13(a) of the Exchange Act, the Form S-3 also incorporates the proxy statement(s) and the Glossy Annual Report. On the other hand, for S-3 registrants that are Section 15(d) reporting companies  it includes only the ’34 Act reports. Securities Act Rule 412(a)[1] permits the registrant to modify or replace any statement incorporated by reference by doing so in the prospectus included as part of the S-3 registration statement. Rule 412(b) provides that the modified statement may, but need not, explicitly state that it modifies or supersedes the prior statement. This may be advisable in some instances (particularly with respect to the Glossy Annual Report), in view of the increased exposure to private actions with respect to representations in a ’33 Act registration statement. See § 12:31. Rule 412 (b) explicitly provides that including a statement that modifies or  supersedes what is stated in the document(s) incorporated by reference “shall not be deemed an admission that the modified or superseded statement, when made, an untrue [or misleading] statement of a material fact.”

**The content of the Glossy Annual Report is prescribed by Exchange Act Rule 14 a-3(b),[2] which is part of the proxy rules. The “Items” shown in the column below are all subparagraphs of Rule 14a-3(b).

***General is a repository for requirements of general application. such as the Commission’s policy on projections and the commission’s policy on securities ratings. It also includes instructions for incorporating documents by reference; disclosure required if non-GAAP financial measures are included in a filed document, and under Item 10(f) a definition of a “smaller reporting companies.” A similar definition of smaller reporting company is included in Securities Act Rule 405 and Exchange Act Rule 12b-2. .

^Rule 14a-3(b)(6) requires the Glossy Annual Report include “a brief description of the business done by the registrant…during the most recent fiscal year” that “in the opinion of management, indicate[s] the general nature and scope of the business of the registrant and its subsidiaries.” Rule 14a-3(b)(7) requires the segmental financial information called for by Item 101(b), (c)(1)(i) and (d) of Regulation S-K.

^^Does not reference Regulation S-K, Item 401 and calls only for the name of each director and executive officer, and “the principal occupation or employment of each such person and the name and principal business of any organization by which such person is employed.
 

^^^Item 404(d) provides that a smaller reporting company “must provide” the information called for by this subparagraph. See Part 12.

This table tells you several  things. First note that all of the forms reference Regulation S-K for a description of the specific disclosure required (except for financial statements that reference Regulation S-X). The Item in the form tells you nothing about the required disclosure (other than the Item title); to determine the content you have to go to Regulation S-K. Second, although Form S-3 is the abbreviated registration form with special eligibility requirements and Form S-1 is available to register securities for which no other form is available under the Securities Act,  Form S-1 and S-3 call for the same Regulation S-K disclosure items. The difference is that Item 12 of Form S-3 permits all but those that are offering related to be incorporated by reference from '34 Act reports  Third, is an integrated disclosure system in that the disclosures called for in the '34 Act Annual Report on Form 10-K reference most of the same Regulation S-K items and Regulation S-X financial statements that are also included in a '33 Act registration statement. An important difference is that a '33 Act registration statement is filed only when a company is making a public offering of securities, whereas a reporting company must file the annual report on Form 10-K within 90 days after the end of each fiscal year if it is a non-accelerated filer (75 days in the case of an accelerated filer and 60 days in the case of large accelerated filers). The annual report on Form 10-K also must include a limited number of other items that we do not list in the above table. Those items include management's annual report on the effectiveness of internal control over financial reporting and the auditor's audit of the company's ICFR. that we discussed in Part 3. Sarbanes-Oxley also added disclosure requirements relating to a code of ethics (Regulation S-K Item 306) and corporate governance (Regulation S-K, Item 407), which are primarily ’34 Act disclosure matters. That in a nutshell is the integrated disclosure system. Of course, knowing that the content of the disclosure is in specific Regulation S-K items and referencing those items by name tells you only the general nature of the disclosure. You have to go to Regulation S-K for the content, something we do in only limited fashion and awaits you when you prepare your first '33 Act registration statement or '34 Act report.

We talked a good deal about the eligibility requirements of Form S-3 in connection with a free writing prospectus as SOR makes those eligibility requirements determinative in some instances of the ability to use a free writing prospectus without delivering a copy of the preliminary prospectus with the free writing prospectus (Rule 433(b)(1) vs. Rule 433(b)(2)). In all Form S-3 categories the issuer must meet the registrant requirements of  I.A.-be a reporting company for at least least 12 months, filed timely all reports during the preceding 12 months, not be in default on dividends etc. To be eligible to make a primary distribution by the issuer the issuer must have a public float of 75 million. General Instruction I.B.1. Under I.B.3. the issuer meeting the registrant requirements can make a secondary distribution (an offering by persons other than the registrant) without meeting the public float requirements. We cannot go in detail, but note that affiliates are limited in selling shares without the shares being registered and only the issuer can file a registration statement. It is not uncommon for issuers to register shares on Form S-3 for such affiliates provided the issuer meets the registrant requirements. A Form S-3 can be used for shelf-offerings by issuers that meet the registrant requirements and the I.B.1. eligibility requirements. Rule 415(a)(x). In a shelf-offering an issuer may register a large number of shares and take them down from time to time from the shelf as market conditions warrant and as an underwriter(s) become available. The real advantage of a Form S-3 for eligible issuers is that it incorporates '34 Act reports that have already been filed before the registration statement is effective and '34 Act reports filed after it becomes effective as long as the offering has not been terminated. Without getting into the details this permits the registration statement and prospectus to remain current provided the issuers files all its '34 Act reports timely (including in addition to the annual report on Form 10-K, but quarterly reports on Form 10-Q for each of the first three quarters and current reports on Form 8-K as events that require reporting on Form 8-K occur).

A registrant eligible to use Form S-3 for a primary distribution, for example, can register common stock, debt securities, and warrants and when the market is right and an underwriter available take down from the shelf the common stock or one of the other securities, file a Rule 424(b) prospectus supplement setting forth the security being offered and the terms of the offering. This, heretofore, however, has been denied to issuers meeting the registrant requirements as to being a reporting company and filing ’34 Act reports if they did not have a public float of $75 million. The Commission on December 19, 2007 adopted  General Instruction I.B.6. to Form S-3 affording a smaller reporting company access to Form S-3 (and F-3 for foreign private issuers) for registering equity or debt securities for primary offerings on Form S-3 without meeting the $75 million public float requirement of General Instruction B.1. In addition to the registrant requirements, however, the smaller reporting company must have a common stock listed on a national securities exchange (e.g. Nasdaq, AMEX, Acra) and aggregate offerings on Form S-3 cannot exceed one third of its public float during any 12 consecutive months.  We do not pursue how this is determined assuming a shelf-offering as the public float literally floats  in that it is measured as of a date within 60 days of each takedown and the takedown in itself increases the public float as do sales by affiliates in Rule 144 transactions. Suffice it to say this limitation on the amount that can be offered is a significant one, although if during the course of the shelf the public float increases to $75 million the amount that can be offered is unlimited in this respect provided it remains at $75 million (which depends not only on the number of shares held by non-affiliates, but also on the market price of the security the measuring date).