Relief From Reporting by Small Issuers — SEC — US

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. 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.

Federal Register / Vol. 60, No. 131 / Monday, July 10, 1995 / Proposed Rules 35643 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)].
4The 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. 6See Exchange Act Section 12(g) [15 U.S.C. 78l(g)] and Rule 12g–1. 7E.g., the proxy requirements of Section 14, the Williams Act and the short-swing profit provisions of Section 16 of the Exchange Act. 8Release No. 34–18647 (April 15, 1982) [47 FR 17046]. 9Release No. 34–23406 (July 8, 1986) [51 FR 25360]. 10The 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). 11Securities 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. 12Pursuant to Schedule D to the NASD’s ByLaws, 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. 14Rules 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. 15See Securities Act Release 6605 (September 30,
1985) [50 FR 41162].
16The 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). 20At present, approximately 1,670 reporting issuers have less than $10 million in assets. 21At present, approximately 975 of the approximately 1,670 reporting issuers that have less Continued 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
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. 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 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 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

35644 Federal Register / Vol. 60, No. 131 / Monday, July 10, 1995 / Proposed Rules than $10 million in assets have securities that are traded either on an exchange or NASDAQ. 22Companies 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. 23Release 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. 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. 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
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.

Federal Register / Vol. 60, No. 131 / Monday, July 10, 1995 / Proposed Rules 35645 24See Release 33–6605 (September 30, 1985) [50 FR 41162]. 1 15 U.S.C. 77a et seq. 2 17 CFR 230.144. 3 ‘‘Restricted securities’’ are defined in Rule 144(a)(3). See infra Note 7. 4The Commission has established the Advisory Committee on the Capital Formation and Regulatory Processes (the ‘‘Advisory Committee’’), chaired by Commissioner Steven M.H. Wallman. The Advisory Committee is considering fundamental issues relating to the regulatory framework governing the capital formation process, including whether the current system of registering securities offerings should be replaced with a company registration system. The recommendations of the Advisory Committee may result in rule proposals or legislative recommendations that, if endorsed by the Commission, ultimately may address the matters discussed in this release. Under some of the company registration models now being considered by the Advisory Committee, many of the legal distinctions between publicly offered and privately placed securities would be eliminated, including the concept of restricted securities. Securities issued by a company registered with the Commission would be freely tradeable, regardless of the public or private character of the transaction. 5 15 U.S.C. 78p. 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. 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

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.

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.

The authority citation for Part 249
continues to read, in part, as follows:
Authority: 15 U.S.C. 78a, et seq., unless otherwise noted.

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]
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