- Changes to a rule intended to
help small private companies with financing could result in discouraged
businesses, according to attorneys.
- Sarah Johnson, CFO.com
- September 25, 2007
Participants in a Securities and Exchange Commission roundtable
criticized proposed rule changes that the SEC claims would make it
easier for small companies to raise capital.
Earlier this year, the SEC proposed adjustments to several rules
under Regulation D, a 25-year-old guideline used to determine whether
private offerings are exempt from SEC registration. Under the proposed
changes, private issuers would be able to solicit sales of securities
through limited advertising to so-called "large accredited investors,"
who are considered sophisticated or wealthy enough not to need the
SEC's protection. Currently, all private offerings made through a
general solicitation or widespread advertising are not eligible to
receive the registration exemption.
The SEC has also cut in half a safe-harbor timeline that excludes
concurrently offered securities from receiving the Regulation D
exemption. According to the SEC, this rule was put in place so that
companies could not split one offering that would not be entitled to
the exemption into multiple offerings that would. The SEC has reduced
the safe harbor from six months to 90 days. In addition, the commission
has proposed making the form for these filings electronic and requiring
additional disclosures from the companies that use it.
While praising the ideas raised in the proposed changes, the
participants in Monday's annual SEC small-business forum took issue
with how companies would be able to comply. For example, Marc
Morgenstern, managing partner at Blue Mesa Partners, said similar terms
in the rules could be easily misinterpreted and could have "very
mischievous consequences." In particular, he felt wording could be
misconstrued by non-lawyers and went against the commission's drive for
using plain English in regulations and company disclosures. "I think
the SEC is straying from its own mission," he said.
Gregory Yadley, a partner at Shumaker Loop & Kendrick LLP, also
wondered if the allowance for some written advertising for
sophisticated investors was even feasible. Could it work for companies
that are not well-established? And what would happen if it didn't work?
"In 30 to 40 days [of advertising], you could burn through a lot of
cash and then would you go back to the humdrum, the accredited
investors? Maybe not," he said. "That's a huge problem we need to deal
with."
Still, panelist Steven Bochner, a partner at Wilson Sonsini Goodrich
& Rosati, praised the proposed exemption for securities sold to
"large accredited investors" as a modest yet positive step. "Hopefully
what it does is improve capital formation, improve efficiency, and
allow the right kind of investors to more effectively get in contact
with one another without impeding investor protection," he said.
The SEC defines large accredited investors as individuals who own at
least $2.5 million in investments or earn $400,000 in annual income.
Organizations with assets equal to $10 million would fit in this
category. Those considered simply "accredited investors" basically have
half of those amounts.
The American Bar Association also voiced its opposition to portions
of a related SEC proposal that makes changes to the form companies fill
out to receive the Regulation D exemption. The commission has proposed
making the form electronic and requiring companies to include their
revenue range. However, according to the ABA, small, private companies
will likely decide to opt out of including their revenue number, which
could result in a "negative implication" against the issuer and hurt
the integrity of the commission's information-gathering.
Indeed, William Venema, an attorney for Epstein Becker Green
Wickliff & Hall, told CFO.com he predicts the changes to the form
could deter small companies from using Regulation D altogether. He
fears that by making it electronic, the forms could be made more
accessible for the general public and the companies' competitors.
Currently, the paper forms are only available at the SEC's
headquarters. "A lot of private issuers could end up saying, 'Whoa, I'm
not going to let some competitor know how much money I'm raising,'" and
decide to forgo getting the exemptions, he said. That result, he notes,
would be the opposite of the regulation's intent, which is to help
smaller businesses with capital formation.
The SEC is collecting public comment on the Regulation D proposal
until October 9 and stopped taking feedback for the corresponding form
changes earlier this month. The SEC Advisory Committee on Smaller
Public Companies had proposed similar changes in its report released
last year.
Taking another suggestion from the committee, the SEC has also
proposed exempting private companies from registering their
compensatory employee stock options with the commission. During
Monday's roundtable, participants generally supported this proposal.
Under current rules, companies with 500 or more employees, directors,
and consultants who receive compensatory stock options have to register
if they have more than $10 million in assets — even if they are a
private company. To meet repeated requests by private issuers to update
this rule, since 1992 the SEC has been sending no-action letters to
those companies that met certain conditions and did not register the
securities.
In its comment letter to the SEC, the ABA is asking the commission
to pull back on some of the requirements in its proposal. "The
extensive list of conditions . . . makes the proposed relief burdensome
and, in some cases, unattainable as a practical matter," wrote Keith
Higgins, chairman of ABA's Committee on Federal Regulation of
Securities.
CFO.com
