[Federal Register Volume 60, Number 131 (Monday, July 10, 1995)]
[Proposed Rules]
[Pages 35642-35645]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-16388]



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SECURITIES AND EXCHANGE COMMISSION
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.

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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.

 
[[Page 35643]]

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

    \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)].
    \4\ The 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.
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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.

    \6\ See Exchange Act Section 12(g) [15 U.S.C. 78l(g)] and Rule 
12g-1.
    \7\ E.g., the proxy requirements of Section 14, the Williams Act 
and the short-swing profit provisions of Section 16 of the Exchange 
Act.
    \8\ Release No. 34-18647 (April 15, 1982) [47 FR 17046].
    \9\ Release No. 34-23406 (July 8, 1986) [51 FR 25360].
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    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

    \10\ The 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).
    \11\ Securities 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.
    \12\ Pursuant to Schedule D to the NASD's By-Laws, 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.
    \14\ Rules 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.
    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

    \15\ See Securities Act Release 6605 (September 30, 1985) [50 FR 
41162].
    \16\ The 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).
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    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 

[[Page 35644]]
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.

    \20\ At present, approximately 1,670 reporting issuers have less 
than $10 million in assets.
    \21\ At present, approximately 975 of the approximately 1,670 
reporting issuers that have less than $10 million in assets have 
securities that are traded either on an exchange or NASDAQ.
    \22\ Companies 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.
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    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

    \23\ Release 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.
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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. 

[[Page 35645]]
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.

    \24\ See Release 33-6605 (September 30, 1985) [50 FR 41162].
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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
    1. 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.
* * * * *
    2. 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.
* * * * *
    3. The authority citation for Part 249 continues to read, in part, 
as follows:

    Authority: 15 U.S.C. 78a, et seq., unless otherwise noted.
* * * * *
    4. 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]

    5. 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