[Federal Register Volume 61, Number 203 (Friday, October 18, 1996)]
[Rules and Regulations]
[Pages 54506-54509]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-26560]



[[Page 54505]]


_______________________________________________________________________

Part III





Securities and Exchange Commission





_______________________________________________________________________



17 CFR Part 210, et al.



Periodic Reporting of Unregistered Equity Sales; and Streamlining 
Disclosure Requirements Relating to Significant Business Acquisitions; 
Final Rules and Offshore Press Conferences, Meetings With Company 
Representatives Conducted Offshore and Press Related Materials Released 
Offshore; Proposed Rule

  Federal Register / Vol. 61, No. 203 / Friday, October 18, 1996 / 
Rules and Regulations  

[[Page 54506]]



SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 228, 229 and 249

[Release No. 34-37801; International Series No. 1020; File No. S7-19-
95]
RIN 3235-AG47


Periodic Reporting of Unregistered Equity Sales

AGENCY: Securities and Exchange Commission.

ACTION: Final rules.

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SUMMARY: The Commission is adopting revisions to forms under the 
Securities Exchange Act of 1934 and Regulations S-K and S-B to require 
registrants to report recent sales of equity securities that have not 
been registered under the Securities Act of 1933. The revisions are 
designed, in part, to address abusive practices in connection with the 
sale of equity securities by domestic companies in purported Regulation 
S offerings by requiring more disclosure about such sales in a timely 
fashion.

EFFECTIVE DATE: The revisions are effective November 18, 1996.

FOR FURTHER INFORMATION CONTACT: Walter Van Dorn, Office of 
International Corporate Finance, Division of Corporation Finance, U.S. 
Securities and Exchange Commission, Washington, D.C. 20549, (202) 942-
2990.

SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to the 
following forms under the Securities Exchange Act of 1934 \1\ to 
require periodic disclosure of unregistered equity offerings: Form 10-
Q, \2\ Form 10-QSB, \3\ Form 10-K, \4\ Form 10-KSB \5\ and Form 8-K. 
\6\ In addition the Commission is amending the following Rules: Item 
701 \7\ of Regulation S-K \8\ and Item 701 \9\ of Regulation S-B \10\.
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    \1\ 15 U.S.C. 78a et seq. (the ``Exchange Act'').
    \2\ 17 CFR 249.308a.
    \3\ 17 CFR 249.308b.
    \4\ 17 CFR 249.310.
    \5\ 17 CFR 249.310b.
    \6\ 17 CFR 249.308.
    \7\ 17 CFR 229.701.
    \8\ 17 CFR Part 229.
    \9\ 17 CFR 228.701.
    \10\ 17 CFR Part 228.
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I. Discussion

A. Introduction and Summary

    Today the Commission is adopting amendments to its rules and forms 
applicable to U.S. reporting companies \11\ to require timely 
disclosure of unregistered sales of equity securities. The amendments 
were proposed in June 1995. \12\ They are designed to address concerns 
that the current rules do not require adequate and timely disclosure to 
shareholders and the markets of unregistered offerings of equity 
securities, particularly those made in reliance upon Regulation S \13\, 
the safe harbor for offshore sales, and Section 4(2) \14\, the private 
placement exemption. As a result, shareholders and the markets have 
been unaware of the potential dilution or the effects on the financial 
condition of the issuer that these unregistered sales can cause. 
Moreover, the lack of a specific disclosure requirement may be 
permitting the abusive practices \15\ of some U.S. issuers selling 
common equity offshore purportedly in reliance upon Regulation S to 
occur without notice to the market of such offerings. For example, 
without a timely disclosure requirement, issuers have been able to sell 
shares offshore at a substantial discount to the U.S. market price, and 
the shares have been resold in the U.S. markets before the U.S. markets 
have been made aware of potential significant dilution or effects on 
the financial condition of the issuer of such transactions.
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    \11\ The new disclosure requirements apply to U.S. reporting 
companies and foreign companies not using the foreign integrated 
disclosure system.
    \12\ Securities Act Release No. 7189 (June 27, 1995) [60 FR 
35656] (the ``Proposing Release'').
    \13\ 17 CFR 230.901-904.
    \14\ 15 U.S.C. 77d(2).
    \15\ For a description of such practices, see Securities Act 
Release No. 7190 (June 27, 1995) [60 FR 35663] (the ``Regulation S 
Interpretive Release'').
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    The amendments are being adopted substantially as proposed, with 
one important change. In the proposal, the rules generally would have 
required quarterly reporting of exempt equity sales (e.g., Regulation S 
and private placements). As adopted, quarterly reporting will be 
required for exempt equity sales other than those made in reliance on 
Regulation S. The Commission believes that quarterly reporting of most 
exempt equity sales will provide adequate and timely disclosure. Most 
exempt sales by reporting companies involve private placements. In 
those cases, the securities cannot be freely resold into the public 
markets until a significant period of time after sale. Consequently, 
quarterly reporting should provide sufficient notice.\16\
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    \16\ Under Rule 144, the safe harbor for resales of 
``restricted'' securities (including privately placed securities), 
resales into the public markets cannot be made until at least two 
years after the sale by the issuer or an affiliate. Although the 
Commission proposed to reduce these time periods (see Securities Act 
Release No. 7187), even under a shortened time period quarterly 
reporting would still result in disclosure before the securities 
could be resold without registration into the public markets.
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    For Regulation S sales, however, current reporting on Form 8-K will 
be required within 15 days of their occurrence. The Commission believes 
that quarterly reporting would not be timely enough for Regulation S 
sales because, under the current 40-day Regulation S restricted period 
for sales of equity securities by domestic reporting companies, the 
restricted period could expire, and securities could be resold in the 
U.S. market (assuming an exemption is available), before disclosure is 
made. Several commenters supported a Form 8-K filing requirement.\17\
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    \17\ Twenty-four letters of comment were received in response to 
the Proposing Release, 16 of which responded specifically to 
questions relating to quarterly reporting of sales of unregistered 
sales of equity securities. Five commenters stated that unregistered 
offerings of equity securities should be reported on Form 8-K. These 
comment letters, together with a Summary of Comments prepared by 
Commission staff, are available for inspection and copying in the 
Commission's Public Reference Room, 450 Fifth Street, N.W., 
Washington D.C. 20549. Persons seeking these materials should make 
reference to File No. S7-19-95.
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    The Commission is currently considering whether to revise the 
issuer safe harbor for sales of equity securities by domestic reporting 
companies under Regulation S, including possibly lengthening the 
restricted period.\18\ If the restricted period for sales of equity 
securities pursuant to Regulation S is changed, the Commission intends 
to consider revising the periodic disclosure requirement for Regulation 
S sales adopted in this release.
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    \18\ See Securities Act Release No. 7190 (June 27, 1995).
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B. Description of Amendments

1. Disclosure Required
    Under the new requirements, the following information about 
unregistered sales of equity securities \19\ will be required to be 
disclosed for the applicable reporting period:
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    \19\ ``Equity security'' is defined in Rule 3a11-1 [17 CFR 
240.3a11-1]. It includes convertible and exchangeable securities, 
warrants, options and other types of equity-related securities.
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    * the title and amount of securities sold, and the date of the 
transaction
    * the name of the underwriter or placement agent
    * the consideration received
    * persons or classes of persons to whom the securities were sold
    * the exemption from registration claimed
    * in the case of convertible or exchangeable securities, warrants 
and options, the terms of conversion or exercise.
    With the exception of the last disclosure item, this information is

[[Page 54507]]

currently required to be disclosed in certain Securities Act filings 
pursuant to Item 701 of Regulation S-K and Regulation S-B. In response 
to the Commission's request for comment in the Proposing Release, one 
commenter suggested that such information in addition to that currently 
listed in Item 701 would be helpful to investors. The additional 
information required is disclosure of pricing information for the 
underlying common equity when convertible securities, warrants and 
similar securities are sold. In those situations, information about the 
conversion or exercise price is important to shareholders and the 
market place since it shows the potential dilutive effects of 
conversion or exercise. Item 701 of Regulation S-K and Regulation S-B 
will be amended to require that this additional information be provided 
in filings of annual, periodic or current reports under the Exchange 
Act.
    Several commenters opposed the requirement that the names of 
persons to whom the securities were sold be disclosed. Item 701 would 
continue to provide companies with an option to describe the person or 
persons to whom the securities were sold by class (for example, to an 
accredited investor), as opposed to the names of individual investors.
2. Timing of Disclosure
    Information about unregistered sales of equity securities (except 
those made under Regulation S) will be required to be provided in an 
issuer's Quarterly Report on Form 10-Q or 10-QSB for sales during the 
issuer's first three fiscal quarters, and in the Annual Report on Form 
10-K or 10-KSB for sales made during the final fiscal quarter. 
Information about sales made in reliance upon Regulation S will be 
required to be reported pursuant to new Item 9 of Form 8-K and filed 
within 15 days of the sale. The Form 8-K filing will be required if the 
issuer claims reliance on Regulation S under Item 701 of Regulation S-
K, even if reliance on other possible bases for the unregistered sale 
also could be claimed.

C. Effective Date of Amendments

    The amendments will be effective November 18, 1996. Sales that 
occur prior to the effective date, but for which a report is not due 
until after the effective date, must be reported on the appropriate 
form. For example, an exempt private placement occurring before the 
effective date must be reported on the Form 10-Q covering the quarter 
if that form has not been filed before the effective date. A sale of 
equity securities pursuant to Regulation S occurring before the 
effective date must be reported on Form 8-K if the Regulation S sale 
was made within 15 days before the effective date.

II. Cost-Benefit Analysis

    The new requirement to disclose sales of unregistered equity 
securities is expected to increase modestly registrants' costs and 
compliance burdens. That requirement should not significantly increase 
the burden on company resources, since most registrants are required to 
gather such information in connection with the preparation of audited 
and unaudited financial statements. To the extent the requirement 
results in any additional expense, it is justified in view of the 
material information that will be made available to investors in a 
timely manner.

III. Summary of Final Regulatory Flexibility Analysis

    The Commission has prepared a Final Regulatory Flexibility Analysis 
pursuant to the requirements of the Regulatory Flexibility Act,20 
regarding the amendments. The new rules with respect to disclosure of 
recent sales of unregistered securities are intended to provide 
investors with more timely and complete information regarding changes 
in outstanding securities of public companies.
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    \20\ 5 U.S.C. 603 (1988).
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    Small U.S. entities that file current or quarterly reports will be 
affected by the proposed amendments to the extent that they offer 
equity securities in unregistered offerings. To the extent small U.S. 
entities are affected by the proposed amendments, the investors in such 
small entities are expected to benefit from the increased information 
required to be provided.
    The analysis also indicates that the amendments to the rules and 
forms modestly increase reporting, recordkeeping and compliance 
requirements. These requirements should not significantly increase the 
burden on company resources, since such information will be readily 
available, as the transaction in question would have been completed 
within the prior fiscal quarter, or, in the case of Form 8-K reporting, 
within the prior 15 days.
    The term ``small business,'' as used with reference to an issuer 
for purposes of the Regulatory Flexibility Act, is defined by Rule 157 
21 under the Securities Act as an issuer whose total assets on the 
last day of its most recent fiscal year were $5 million or less and who 
is engaged or proposing to engage in small business financing. The 
Commission is aware of approximately 1,100 Exchange Act reporting 
companies that currently satisfy the definition of ``small business'' 
under Rule 157. Because these rules will affect issuers that sell 
securities in unregistered offerings, and in the majority of situations 
no reporting with the Commission of unregistered security offerings 
currently is required, little information is available to the 
Commission that would make it possible to estimate the number of small 
issuers that will be affected by these amendments. However, 
approximately 11,400 issuers are subject to Exchange Act reporting 
requirements, and, based on discussions with intermediaries and other 
participants in the Regulation S market, the Commission staff estimates 
that approximately 500 of such issuers may conduct Regulation S 
offerings of equity securities per year. The Commission staff further 
estimates that approximately 250 such issuers are ``small businesses'' 
under Rule 157.
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    \21\ 17 CFR 230.157.
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    As stated in the analysis, the economic impact of the new rules is 
expected to be small, particularly in view of the additional 
information and protection to be provided to investors. In part, to 
minimize the recordkeeping and reporting burden, and corresponding 
economic impact, on small entities and others, the Commission has 
decided to require that unregistered sales of securities (other than 
sales in reliance on Regulation S) be reported on a quarterly basis. 
Only sales of securities which were not registered in reliance on 
Regulation S are proposed to be reported within 15 days.
    A copy of the Final Regulatory Flexibility Analysis may be obtained 
by contacting Walter Van Dorn, Office of International Corporate 
Finance, Division of Corporation Finance, U.S. Securities and Exchange 
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, (202) 942-
2990.

IV. Paperwork Reduction Act

    In June, 1995, the staff submitted to the Office of Management and 
Budget (``OMB'') for review proposals to amend the following 
information collections under the Exchange Act to require periodic 
disclosure of unregistered equity offerings: Form 10-Q, Form 10-QSB, 
Form 10-K and Form 10-KSB.22

[[Page 54508]]

These information collections display an OMB control number and 
expiration date.23 The information collections are required to be 
filed by registrants subject to the Exchange Act reporting requirements 
and are publicly available. The Commission solicited comment on the 
compliance burdens associated with the proposals but received no public 
comment on the burden estimates.
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    \22\ There are no changes regarding the purpose, use or 
necessity of the information collections for which OMB approval was 
requested, nor are there changes to the estimates of reporting or 
recordkeeping burden expected to result from adoption of the 
proposed amendments. See the Proposing Release for estimates of 
changes in reporting or recordkeeping burden.
    \23\ Unless a currently valid OMB number is displayed, an agency 
may not sponsor or conduct or require response to an information 
collection pursuant to 44 U.S.C. Sec. 3506(c)(1)(B).
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    In response to public comments received on the Proposing Release, 
as discussed in Section I.A of this release, in addition to adopting 
changes to the information collections listed in the preceding 
paragraph, the Commission also is adopting changes to Form 8-K to 
require current reporting on Form 8-K of Regulation S sales within 15 
days after their occurrence. Form 8-K contains ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995.24 The Commission is submitting the revision 
to Form 8-K to OMB for review.
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    \24\ 44 U.S.C. 3501 et seq.
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    The title of the affected information collection is ``Form 8-K.'' 
The likely respondents to Form 8-K generally are all issuers reporting 
under the Exchange Act that are not foreign private issuers. Currently, 
an estimated 11,400 respondents file 21,000 Forms 8-K per year for a 
total annual burden of 105,000 hours. The Commission believes that the 
same number of respondents will file Form 8-K after the revision 
described in this release becomes effective, but those making 
Regulation S sales will file Form 8-K more frequently, resulting in an 
increased number of total burden hours. Since there currently is not 
any Exchange Act reporting requirement when Regulation S sales are 
made, the Commission has no basis for estimating the increase in the 
Form 8-K total burden hours expected to result from this rulemaking.
    Persons desiring to submit comments on the collection of 
information requirements should direct them to the Office of Management 
and Budget, Attention: Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Washington, 
D.C. 20503, and should also send a copy of their comments to Jonathan 
G. Katz, Secretary, Securities and Exchange Commission, 450 5th Street, 
N.W., Washington, D.C. 20549 with reference to File No. S7-19-95. OMB 
is required to make a decision concerning the collections of 
information between 30 and 60 days after publication, so a comment to 
OMB is best assured of having its full affect if OMB receives it within 
30 days of publication.

V. Statutory Bases

    The amendments to the Commission's rules and forms are being 
adopted pursuant to sections 3(b), 4A, 12, 13, 14, 15, 16 and 23 of the 
Securities Exchange Act.

List of Subjects in 17 CFR Parts 228, 229 and 249

    Reporting and recordkeeping requirements, and Securities.

Text of Amendments

    In accordance with the foregoing, Title 17, Chapter II of the Code 
of Federal Regulations is amended as follows:

PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS

    1. The authority citation for part 228 continues to read as 
follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 
77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 77sss, 
78l, 78m, 78n, 78o, 78w, 78ll, 80a-8, 80a-29, 80a-30, 80a-37, 80b-
11, unless otherwise noted,

    2. By amending Sec. 228.701 by adding paragraph (e) to read as 
follows:


Sec. 228.701  (Item 701) Recent sales of unregistered securities.

* * * * *
    (e) If the information called for by this paragraph (e) is being 
presented on Form 8-K, Form 10-QSB, Form 10-Q, Form 10-KSB or Form 10-K 
(Secs. 249.308, 249.308b, 249.308a, 249.310b or 249.310) under the 
Exchange Act, and where the securities sold by the registrant are 
convertible or exchangeable into equity securities, or are warrants or 
options representing equity securities, disclose the terms of 
conversion or exercise of the securities.

PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES 
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND 
CONSERVATION ACT OF 1975--REGULATION S-K

    3. The authority citation for part 229 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 
77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 77nnn, 
77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79e, 79n, 
79t, 80a-8, 80a-29, 80a-30, 80a-37, 80b-11, unless otherwise noted,
* * * * *
    4. By amending Sec. 229.701 by adding paragraph (e) before the 
Instructions to read as follows:


Sec. 229.701  (Item 701) Recent sales of unregistered securities.

* * * * *
    (e) Terms of conversion or exercise. If the information called for 
by this paragraph (e) is being presented on Form 8-K, Form 10-QSB, Form 
10-Q, Form 10-KSB or Form 10-K (Secs. 249.308, 249.308b, 249.308a, 
249.310b or 249.310) under the Exchange Act, and where the securities 
sold by the registrant are convertible or exchangeable into equity 
securities, or are warrants or options representing equity securities, 
disclose the terms of conversion or exercise of the securities.
* * * * *

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

    5. The authority citation for part 249 continues to read in part as 
follows:

    Authority: 15 U.S.C. 78a, et seq., unless otherwise noted;
* * * * *
    6. By amending Form 8-K (referenced in Sec. 249.308) by adding a 
sentence to the end of General Instruction B.1 and by adding Item 9 to 
read as follows:

    Note: Form 8-K does not and these amendments will not appear in 
the Code of Federal Regulations
Form 8-K
* * * * *
GENERAL INSTRUCTIONS
* * * * *
B. Events To Be Reported and Time for Filing of Reports
    1. * * * A report on this form pursuant to Item 9 is required to be 
filed within 15 calendar days after the date of sale.
* * * * *
INFORMATION TO BE INCLUDED IN THE REPORT
* * * * *
    Item 9. Sales of Equity Securities Pursuant to Regulation S.
    Furnish the information required by Item 701 of Regulation S-B 
(Sec. 228.701 of this chapter) as to all equity securities of the 
registrant sold by the registrant that were not registered under the 
Securities Act in reliance upon Regulation S under the Securities Act.
* * * * *

[[Page 54509]]

    7. By amending Form 10-Q (referenced in Sec. 249.308a) by adding 
paragraph (c) to Item 2 of Part II prior to the Instruction to read as 
follows:

    Note: Form 10-Q does not and these amendments will not appear in 
the Code of Federal Regulations
Form 10-Q
* * * * *
Part II
    Item 2. Changes in Securities.
* * * * *
    (c) Furnish the information required by Item 701 of Regulation S-K 
(Sec. 229.701 of this chapter) as to all equity securities of the 
registrant sold by the registrant during the period covered by the 
report that were not registered under the Securities Act other than 
unregistered sales made in reliance on Regulation S.
* * * * *
    8. By amending Form 10-QSB (referenced in Sec. 249.308b) by adding 
paragraph (c) to Item 2 of Part II prior to the Instruction to read as 
follows:

    Note: Form 10-QSB does not and these amendments will not appear 
in the Code of Federal Regulations
Form 10-QSB
* * * * *
Part II
* * * * *
    Item 2. Changes in Securities.
* * * * *
    (c) Furnish the information required by Item 701 of Regulation S-B 
(Sec. 228.701 of this chapter) as to all equity securities of the 
registrant sold by the registrant during the period covered by the 
report that were not registered under the Securities Act other than 
unregistered sales made in reliance on Regulation S.
* * * * *
    9. By amending Form 10-K (referenced in Sec. 249.310) by revising 
Item 5 of Part II to read as follows:

    Note: Form 10-K does not and these amendments will not appear in 
the Code of Federal Regulations
 Form 10-K
* * * * *
Part II
* * * * *
    Item 5. Market for Registrant's Common Equity and Related 
Stockholder Matters.
    Furnish the information required by Item 201 of Regulation S-K 
(Sec. 229.201 of this chapter) and Item 701 of Regulation S-K 
(Sec. 229.701 of this chapter) as to all equity securities of the 
registrant sold by the registrant during the period covered by the 
report that were not registered under the Securities Act other than 
unregistered sales made in reliance on Regulation S. Provided that if 
the Item 701 information previously has been included in a Quarterly 
Report on Form 10-Q or 10-QSB (Sec. 249.308a or 249.308b of this 
chapter) it need not be furnished.
* * * * *
    10. By amending Form 10-KSB (referenced in Sec. 249.310b) by 
revising Item 5 of Part II to read as follows:

    Note: Form 10-K does not and these amendments will not appear in 
the Code of Federal Regulations
Form 10-KSB
* * * * *
Part II
* * * * *
    Item 5. Market for Common Equity and Related Stockholder Matters.
    Furnish the information required by Item 201 of Regulation S-B and 
Item 701 of Regulation S-B as to all equity securities of the 
registrant sold by the registrant during the period covered by the 
report that were not registered under the Securities Act other than 
unregistered sales made in reliance on Regulation S. Provided that if 
the Item 701 information previously has been included in a Quarterly 
Report on Form 10-Q or 10-QSB it need not be furnished.
* * * * *
    Dated: October 10, 1996.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-26560 Filed 10-17-96; 8:45 am]
BILLING CODE 8010-01-P