SEC Proposes Lessening Burdens, Increasing Benefits for Smaller Registered Issuers
Commentary by Steven Lofchie
The SEC proposed two new rules to overhaul the public company framework for the registration of securities: one to broaden access to shelf offerings and preempt state securities registration requirements, the other to raise the public float threshold for large accelerated filer status to $2 billion.
The SEC said the reforms were designed to encourage more companies to go and stay public.
The registered offering reform proposal would facilitate capital formation in the public securities markets by making "the ability to conduct shelf offerings available to significantly more issuers, extend certain benefits currently reserved for “well-known seasoned issuers” to a broader set of issuers, and modernize Form S-1 by expanding the ability to incorporate information by reference into that form." The rulemaking "would make conforming changes to the registration, communication, and offering process for certain business development companies and registered closed-end investment companies that register securities," in addition to amending the communication rules "to permit broad-based advertising for certain insurance products." In the rulemaking, the SEC is also proposing "to mitigate the costs and complexity of conducting a registered offering," by preempting State securities law registration and qualification requirements for all registered offerings.
The filer status proposal would raise the public float threshold for an issuer to be deemed a "large accelerated filer" to $2 billion and provide that no issuer will be deemed such a filer until at least 60 months from the time it has gone public. Currently, the large accelerated filer designation under SEA Rule 12b-2 ("Registration and Reporting: Definitions") is triggered by a $700 million public float, 12 months of Exchange Act reporting history, at least one annual report filed, and generally revenues of $100 million or more. Issuers that are within the scope of the definition become subject to additional burdens, including the SOX 404(b) Internal Control over Financial Reporting auditor attestation requirement, compressed filing deadlines and additional disclosure obligations. The proposal would also exempt all non-accelerated filers from the Section 404(b) auditor attestation requirement on internal control over financial reporting.
Comments on both proposals are due 60 days after publication in the Federal Register.
Commentary
The decline in the number of SEC-registered issuers has been going on for a long time, and has been generally perceived to be a problem in that (i) such decline indicates that small issuers do not find "going public" to be a good way to raise money and (ii) the decline in the number of public issuers deprives retail investors of opportunities to invest in a significant number of companies.
While the SEC under Chair Gensler acknowledged the extent of the decline in companies willing to go public, he did not seem to believe that there was a relationship between the increasing burdens imposed on issuers that are public companies and the diminishing numbers of public issuers. His strategy to increase the number of public companies was to suggest new regulations that would make it more difficult for issuers, particularly so-called unicorns, to remain private, rather than to ease the burdens on public companies.
The SEC under Chair Atkins is taking a "the buck stops here" approach to the issue by (i) striving to lower the costs of going public and (ii) facilitating the ability of companies that do go public to raise money, in this case by easing the path to shelf registration and removing the impediments of state regulation. (On additional steps toward easing regulatory burdens, see also SEC Corporation Finance Division Director to Propose Semiannual Reporting.)