The SEC recently announced proposals to improve capital formation for smaller public companies. In some respects, these proposals pick up where securities offering reform left off. Securities offering reform modified the registration, communication and offering process – bringing regulation more in line with market realities. The largest public companies, well-known seasoned issuers (WKSIs), benefited the most from those changes. The new proposals expand the eligibility requirements for the use of a short-form registration statement (Form S-3), simplify the reporting requirements for small business issuers (creating a new issuer category: smaller reporting companies), and make scaled or reduced disclosure requirements available to these smaller reporting companies.
Two proposed changes affect all issuers accessing the US capital markets: revisions that shorten the holding period under Rule 144 of the Securities Act and the adoption of a new exemption under Regulation D, permitting limited advertising for private placements made to a newly defined investor class, called Rule 507 purchasers. Shortening the Rule 144 holding period and modifying Regulation D will facilitate capital raising by reducing the illiquidity discount applied to restricted securities and by expanding the pool of available capital.
These measures are helpful; however, they do not provide the kind of broad-based reforms to the regulation of exempt offerings necessary to address technological advances and evolving market dynamics. Also, as part of its proposal to shorten the Rule 144 holding period, the SEC announced that it would reintroduce tolling. This means that a security holder's holding period would be tolled or suspended if the security holder has a short position or has entered into a put equivalent position with respect to the restricted securities. Historically, the SEC had stayed away from making assessments regarding economic risk (that is, how much risk is enough risk). It will be interesting to see how the SEC's final release defines risk allocation in this context. It will be even more interesting to see how the derivatives market reacts.
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