SEC Proposes New Rules to Increase Capital Formation in Public Markets and Simplify the Public Company Reporting Framework

On May 19th, the Securities and Exchange Commission proposed two sets of amendments—one expanding the accessibility of smaller reporting companies to financing opportunities and the other simplifying the reporting framework for public companies.

Registered Offering Reform

The SEC proposed major changes to the rules governing registered offerings by public companies, specifically:

• Expanding eligibility of issuers to use Form S-3 (eliminating $75m public float requirement and 12-month reporting history requirement)
• Increasing flexibility for registration and offering communications beyond Well-Known Seasoned Issuers (WKSIs), those issuers with at least a $700 million public float or which have issued at least $1 billion of debt securities in registered offerings
• Modernize Form S-1 to increase ability to incorporate by reference
• Pre-emption of state securities law registration and qualification for registered offerings
• Reducing or eliminating public float and/or seasoning for business development companies (BDCs) and closed-end funds
• Expanding insurance product advertising

Expanding S-3 Eligibility

The effect of the proposed amendments would allow more companies to do shelf offerings (raise capital quickly when market conditions are favorable) and use at-the-market offerings (ATMs).  The amendments eliminate the current requirement that issuers must be reporting under the Securities Exchange Act of 1934 (the “Exchange Act”) for at least 12 months and the current requirement that issuers have a public float of at least $75 million.  Issuers are still required to be current and timely with their Exchange Act reporting.

Extending Enhanced Registration & Communication Benefits

Currently, only WKSIs can take advantage of certain registration and communication benefits, such as: automatic shelf registration, flexible communication with investors, and pay as you go filing fees. The proposed amendments would allow issuers eligible to use Form S-3 and listed on a national securities exchange to access many of the current WKSI benefits.

Form S-1 Revisions

In addition, the proposed amendments would effectively turn Form S-1 into a short-form registration statement that could be used by issuers unable to qualify under the new Form S-3 requirements. Currently, only issuers that have filed a Form 10-K for their most recent fiscal year are eligible to incorporate by reference from previously filed documents. Forward incorporation by reference is available only to smaller reporting companies. The new amendments would eliminate the requirement to have filed a Form 10-K for the most recent fiscal year and expand the ability to forward incorporate by reference to other types of issuers. The aim here appears to be reducing duplicative disclosures and costs for all issuers.

State Securities Laws Preemption

Presently, all issuers that conduct registered offerings but are not listed on a national exchange must comply with state securities law registration and qualification requirements, whereas exchange-listed issuers are preempted from such state blue sky securities laws. The proposed amendments would create a new definition of “qualified purchaser” under Section 18(b)(3) of the Securities Act of 1933, as amended (the “Securities Act”) to include any person to whom securities are offered or sold in a registered offering. Consequently, the securities would be deemed “covered securities” and exempt from state securities laws.  This change is designed to reduce compliance costs and reduce redundant oversight by the states.

Business Development Companies & Closed-End Funds

Like the proposed Form S-3 amendments and related registration and communication reforms described above, the SEC also proposed amendments to permit short-form registration for certain BDCs and registered closed-end funds and to reduce or eliminate applicable seasoning and public float requirements.

Insurance Advertising Products

Consistent with the proposed Form S-3 amendments and related registration and communication reforms described above, the SEC also proposed allowing issuers of registered non-variable annuities to use Rule 482 advertising without prospectus delivery or Form S-3 eligibility, simplifying and standardizing the advertising rules for similar annuity products.

Amendments to Public Company Reporting Framework

Also on May 19th, the SEC proposed changes to simplify the filer status framework for public companies. Currently there are five categories of issuers—large accelerated filers, accelerated filers, non-accelerated filers, smaller reporting companies, and emerging growth companies. These categories are not mutually exclusive and the SEC has proposed amendments to pare down the categories to three:

• Large Accelerated Filers (public float at least $2 billion & 60 months of reporting)
• Non-Accelerated Filers (public float less than $2 billion and/or less than 60 months of reporting)
• Small Non-Accelerated Filers (assets of $35 million or less)

In addition, once a registrant meets either the LAF or NAF status, it would stay in that status for at least two years.

Additionally, the SEC proposed eliminating the requirement for non-accelerated filers to have an auditor’s attestation on its internal control over financial reporting.

Non-accelerated filers would also be extended the same scaled disclosure benefits available to smaller reporting companies and emerging growth companies, such as no say-on-pay or say-when-on-pay votes, no pay versus performance disclosure, and fewer years of financial requirements disclosure.

The new category of small non-accelerated filers would be given an additional 30 days to file their annual reports on Form 10-K and an additional five days to file their quarterly reports on Form 10-Q.

Takeaways

With these proposed amendments, the SEC is responding to the criticism that public companies have been increasingly subject to regulatory action, thereby driving companies to avoid becoming public or going private. Critics of the proposed amendments may argue that the availability of private capital has increased and that relaxing the public company requirements will not affect that reality. However, investors still prize transparency and disclosure afforded by the public market and these changes could lead to increased public company activity.

More fundamentally, the proposed amendments reflect a policy judgment that the public-private divide has become too costly for growth-stage companies to cross. The question is not whether private capital will remain available—it will—but whether the regulatory framework should make the public markets a more viable alternative rather than a last resort. If the amendments reduce friction without materially compromising investor protection, they may help restore the public markets as a more attractive source of capital, particularly for smaller and emerging companies.

Contact Clark Hill

If this development is of interest to your business or if you have questions regarding the content of this alert, please contact any member of Clark Hill’s Capital Markets and Securities group for additional details and strategic guidance.

Victoria Bantz (vbantz@clarkhill.com; 303.943.9279)

Jeny Zarmon (jzarmon@clarkhill.com; 609.785.2918)

Jim Groth (jgroth@clarkhill.com; 312.701.6830)

Randy Katz (rkatz@clarkhill.com; 213.417.5310)

Sander Zagzebski (szagzebski@clarkhill.com; 213.417.5175)

Charles Berry (cberry@clarkhill.com; 480.684.1302)

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