[Federal Register Volume 61, Number 91 (Thursday, May 9, 1996)]
[Rules and Regulations]
[Pages 21354-21356]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-11625]




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Part VI





Securities and Exchange Commission





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17 CFR Parts 230, 240 and 249



Relief From Reporting by Small Issuers; Exemption for Certain 
California Limited Issues; Final Rules

  Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules 
Regulations  

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249

[Release No. 34-37157; File No. S7-16-95]
RIN 3235-AG48


Relief From Reporting by Small Issuers

AGENCY: Securities and Exchange Commission.

ACTION: Final rules.

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SUMMARY: The Commission is announcing the adoption of revisions to 
Rules 12g-1, 12g-4 and 12h-3 under the Securities Exchange Act of 1934, 
which will increase the number of issuers not subject to the 
registration and reporting requirements of the Exchange Act, by 
increasing the total assets threshold from $5 million to $10 million.

EFFECTIVE DATE: The rule amendments will be effective on May 9, 1996.

FOR FURTHER INFORMATION CONTACT: Richard K. Wulff, Office of Small 
Business Policy, Division of Corporation Finance at (202) 942-2950 or 
James R. Budge, Office of Disclosure Policy, Division of Corporation 
Finance, at (202) 942-2910.

SUPPLEMENTARY INFORMATION: On June 27, 1995,1 the Commission 
published for comment proposed amendments to Rules 12g-1, 12g-4 and 
12h-3 2 under the Securities Exchange Act of 1934.3 These 
proposals were designed to increase the number of issuers classified as 
exempt from the registration and reporting provisions of the Exchange 
Act by changing the total asset threshold from $5 million to $10 
million. Conforming changes also were proposed to be made to Form 
15.4 Having considered the comments received, the Commission is 
adopting the revisions as proposed.5
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    \1\ Release No. 33-7186 (June 27, 1995) [60 FR 35642] 
(``Proposing Release''). The comment letters received are available 
for inspection and copying at the Commission's public reference 
room, 450 Fifth Street, N.W., Washington, D.C. 20549. Please refer 
to File Number S7-16-95.
    \2\ 17 CFR 240.12g-1, 240.12g-4 and 240.12h-3.
    \3\ 15 U.S.C. 78a et seq.
    \4\ 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)].
    \5\ As explained more fully below, the proposed changes to 
certain of the Commission's definitions of a ``small entity'' for 
purposes of the Regulatory Flexibility Act [5 U.S.C. 601-612] have 
not been adopted.
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I. Discussion

    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). Pursuant to its authority under Section 12(h) 
of the Exchange Act,8 the Commission has increased the amount on 
two occasions: from $1 million to $3 million in 1982,9 and from $3 
million to the current $5 million in 1986.10
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    \6\ See Exchange Act Section 12(g) and Rule 12g-1.
    \7\ E.g., the proxy requirements of Section 14 [15 U.S.C. 78n] 
and the short-swing profit provisions of Section 16 of the Exchange 
Act [15 U.S.C. 78p].
    In addition, any entity, including an issuer, must register 
under the Exchange Act as a transfer agent if it performs the 
function of a transfer agent with respect to any security which is 
registered under Section 12 of the Exchange Act or which would be 
required to be registered except for the exemptions provided by 
subsection 12(g)(2)(B) or (g)(2)(G). 15 U.S.C. 78q-1(c)(1). As a 
result of the revisions adopted in this release, the number of 
entities, including issuers, that can perform transfer agent 
functions without registration with the Commission may increase.
    \8\ 15 U.S.C. 78l(h).
    \9\ Release No. 34-18647 (April 15, 1982) [47 FR 17046].
    \10\ Release No. 34-23406 (July 8, 1986) [51 FR 25360].
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    The proposal to increase the asset threshold to $10 million was 
designed, in part, to increase the utility of the Commission's small 
offering exemptions, such as Regulation A, a principal benefit of which 
is that companies conducting such offerings do not automatically become 
subject to Exchange Act reporting. The Commission has long recognized 
that the cost of compliance with Exchange Act reporting requirements is 
relatively greater for smaller companies than for larger ones.11 
The amendments adopted today are designed to strike the appropriate 
balance between such costs and investors' needs for the information 
required in Exchange Act reports. Commenters generally agreed that this 
change would be beneficial for smaller companies and would be 
consistent with investor protection. In light of the foregoing, the 
Commission finds that the increase in the asset threshold is not 
inconsistent with the public interest or the protection of investors 
and is adopting the rule changes as proposed.
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    \11\ See Release No. 33-6605 (September 30, 1985) [50 FR 41162].
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    Under today's revision to Rule 12g-1, an issuer now will 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.12 This revision does not change existing 
requirements that securities traded on national exchanges 13 or 
the National Association of Securities Dealers Automated Quotation 
System (``Nasdaq'')14 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 (``Securities Act'')15 
will 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 revisions also 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 do not change the other tests for 
such termination and suspension.16 Finally, the description of 
Form 15 is being amended to indicate that the total assets criterion is 
$10 million. These new thresholds should make the exemptive, 
termination and suspension provisions more useful to small businesses 
and lower their costs of compliance with the federal securities laws.
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    \12\ This modification to Rule 12g-1 retains the standard with 
respect to foreign private issuers, which provides that if a foreign 
private issuer has securities quoted in an automated interdealer 
quotation system it remains subject to registration under Section 
12(g).
    \13\ 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.
    \14\ 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.
    \15\ 15 U.S.C. 77a et seq.
    \16\ 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 a fiscal year in 
which a Securities Act registration statement relating to the class 
of securities becomes effective. The revisions amend Rules 12g-4 and 
12h-3 to change the asset test from $5 million to $10 million.
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    There are approximately 650 issuers with between $5 million and $10 
million in total assets that report with the Commission. Had the new 
asset threshold previously 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

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these 650, approximately 540 are traded on an exchange or Nasdaq, and 
approximately 110 are not.
    Today's rule changes affect the asset threshold for entering and 
exiting reporting, but do not affect the other criteria under the rules 
for determining when a company may cease reporting. Consequently, the 
effect on currently reporting companies is modest, with approximately 
10 companies becoming eligible to cease reporting at this time; 17 
about another 20 companies could terminate their reporting obligations 
if they decided to delist their securities from an exchange or Nasdaq.
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    \17\ These issuers would be able to terminate their registration 
because they have:
    --Assets between $5 and $10 million;
    --No securities traded on an exchange or Nasdaq;
    --No current 15(d) reporting obligation arising from registering 
a securities offering in the last year;
    --In each of the last three fiscal years, assets not exceeding 
$10 million; and
    --Between 300 and 500 shareholders.
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    While the number of companies that would be able to stop reporting 
is relatively small, the rule should provide significant benefits for 
small, growing companies. These companies will have more flexibility to 
raise equity capital and grow before becoming subject to the 
Commission's reporting requirements.

II. Regulatory Flexibility Act Definitions

    The Commission proposed to modify the definitions of ``small 
entity'' for purposes of the Regulatory Flexibility Act by raising the 
total assets level to $10 million.18 In the intervening period 
since the proposals were published, Congress has enacted amendments to 
the Regulatory Flexibility Act.19 The Commission has determined 
not to adopt these proposed rule revisions at this time, but will give 
them further consideration once it has had an opportunity to evaluate 
fully these recent statutory changes.
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    \18\ The definitions are found at 17 CFR 230.157, 17 CFR 240.0-
10, and 17 CFR 260.0-7.
    \19\ See the Small Business Regulatory Fairness Act of 1996, 
Pub. L. 104-121, 110 Stat. 847 (1996), signed by the President on 
March 29, 1996.
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III. Effective Date

    The Commission has determined to make the rule changes effective on 
May 9, 1996, the date of publication in the Federal Register. Early 
effectiveness is appropriate under the Administrative Procedure Act 
inasmuch as the raising of these thresholds ``grants or recognizes an 
exemption'' 20 from registration and reporting requirements to a 
larger class of companies than existed under previous requirements.
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    \20\ 5 U.S.C. 553(d)(1).
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IV. Future Initiatives

    Some commenters recommended further revision of the reporting 
thresholds. For example, one commenter suggested the adoption of an 
exemption for small business issuers whose public float or trading 
activity is so low as to show insufficient market interest. Another 
recommended eliminating the shareholder numerical test from the various 
rules. The Commission has considered these suggestions and has 
determined to evaluate them further in connection with future 
initiatives undertaken by the Commission as it implements 
recommendations of the reports of the Task Force on Disclosure 
Simplification,21 and the Advisory Committee on the Capital 
Formation and Regulatory Processes.22 The work of both of these 
groups has been dedicated to reassessing and reforming the federal 
securities disclosure regime where necessary and appropriate in the 
public interest and consistent with investor protection.
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    \21\ The Task Force on Disclosure Simplification was organized 
in August 1995 to review forms and rules relating to capital-raising 
transactions, periodic reporting pursuant to the Exchange Act, proxy 
solicitations, and tender offers and beneficial ownership reports 
under the Williams Act. Its goal was to identify where the 
disclosure process could be simplified and, consistent with investor 
protection, to make regulation of capital formation more efficient. 
Following a seven-month review, the Task Force completed its report, 
including a number of recommendations, which the Commission 
authorized for publication on March 5, 1996. This report is 
available for inspection and copying at the Commission's public 
reference room. It also is available through the Commission's 
Internet web site [http://www.sec.gov].
    \22\ The Securities and Exchange Commission Advisory Committee 
on the Capital Formation and Regulatory Processes was established in 
February 1995. See Release No. 33-7135 (February 17, 1995) [60 FR 
9415]. The objective of the Committee is to assist the Commission in 
evaluating the efficiency of the regulatory process relating to 
public offerings of securities, secondary market trading and 
corporate reporting. The Committee's focus has been the development 
of a company registration system for adoption by the Commission, 
which would allow eligible companies to offer and sell securities 
relying on a more company-focused, as opposed to transaction-
focused, system. The Committee plans to issue a report containing 
its recommendations in the near future.
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V. Cost-Benefit Analysis

    The Commission solicited comment to assist in its evaluation of the 
costs and benefits that might result from the possible increase in the 
assets threshold. Several commenters, while not addressing the 
solicitation of comment specifically, supported the proposal as part of 
the Commission's efforts to reduce both the regulatory burden and the 
costs of raising capital and compliance for small issuers. The 
Commission continues to believe that as a result of this action, 
compliance burdens will be decreased without significant impact upon 
the needs of investors, as it stated in the proposing release. As 
required by Section 23(a) of the Exchange Act, the Commission has 
specifically considered the impact these rulemaking actions would have 
on competition and has concluded that they would not impose a 
significant burden on competition not necessary or appropriate in 
furtherance of the purposes of the Exchange Act.

VI. Final Regulatory Flexibility Analysis

    The Commission has prepared a final 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. A summary 
of the corresponding Initial Regulatory Flexibility Analysis was 
included in the Proposing Release. A copy of the final regulatory 
flexibility analysis may be obtained by contacting James R. Budge, 
Division of Corporation Finance, U.S. Securities and Exchange 
Commission, 450 Fifth Street NW., Washington, DC 20549 at (202) 942-
2910.

VII. Statutory Basis

    The amendments to the Commission's rules and form are being adopted 
by the Commission pursuant to Sections 12, 13, 15 and 23(a) of the 
Securities Exchange Act.

List of Subjects in 17 CFR Parts 240 and 249

    Reporting and recordkeeping requirements, Securities.

Text of the Amendments

    Accordingly, Title 17, Chapter II of the Code of Federal 
Regulations is amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

    1. 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, 
78q, 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.

* * * * *
    2. The authority citation for Part 249 continues to read, in part, 
as follows:


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    Authority: 15 U.S.C. 78a, et seq., unless otherwise noted;
* * * * *
    3. 17 CFR Parts 240 and 249 are amended by removing the reference 
to ``$5 million'' and adding in its place ``$10 million'' in the 
following sections:

(a) 17 CFR 240.12g-1
(b) 17 CFR 240.12g-4(a)(1)(ii)
(c) 17 CFR 240.12g-4(a)(2)(ii)
(d) 17 CFR 240.12h-3(b)(1)(ii)
(e) 17 CFR 240.12h-3(b)(2)(ii)
(f) 17 CFR 249.323(a)

    Dated: May 1, 1996.

    By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 96-11625 Filed 5-9-96; 8:45 am]
BILLING CODE 8010-01-P