SEC Adopts New Requirements With Respect to Modernization of Smaller Company Capital-Raising and Disclosure Requirements

December 3, 2007

By: Penny Somer-Greif and Frank C. Bonaventure, Jr.

The Securities and Exchange Commission ("SEC") recently adopted certain of the proposed revisions to its capital-raising and disclosure rules that were discussed in our May 31, 2007 Client Alert, as discussed below.

Amendments to Disclosure and Reporting Requirements

As proposed, the SEC adopted new and amended rules ("final rules") that combined the existing "small business issuer" and "non-accelerated filer" categories into a new category of "smaller reporting companies." Smaller reporting companies will include issuers with a public equity float of less than $75 million or, for companies without a calculable public float, annual revenues of less than $50 million. Currently, "small business issuers" are issuers with revenues and common equity public float of less than $25 million and "non-accelerated filers" include issuers with a common equity public float of less than $75 million.

Also as proposed, the final rules move the non-financial scaled disclosure requirements from Regulation S-B to Regulation S-K and the scaled financial statement requirements of Item 310 of Regulation S-B into Regulation S-X. Under the final rules, smaller public companies can elect to comply with the scaled disclosure requirements on an item-by-item basis. In other words, for example, in its annual report/proxy statement, a smaller public company could choose to provide three years worth of financial statements and the expanded Management’s Discussion and Analysis disclosure required by other reporting companies, but provide only that level of executive compensation disclosure required of smaller public companies (as currently set forth in Item 402 of Regulation S-B).

The final rules also eliminate the SEC’s existing "SB" forms, although current "SB" filers will be able to use these forms until their next annual report on Form 10-K or 10-KSB. Thereafter, smaller public companies will file their periodic reports using the same forms as other issuers, but utilizing the scaled disclosure provisions of amended Regulation S-K to the extent they choose to do so. The SEC staff has indicated that it will issue guidance on how to prepare filings under the new system.

The final rules will be effective 30 days after their publication in the Federal Register. It is currently unclear how the final rules will impact companies that would be considered S-K filers under the current rules but smaller public companies under the final rules. We anticipate that this will be addressed in the adopting release for the final rules.

Revisions to Rules 144 and 145

As proposed, the SEC also adopted amendments to Rules 144 and 145 under the Securities Act of 1933.

The amendments to Rule 144 will shorten the holding period for restricted securities of Securities and Exchange Act of 1934 ("Exchange Act") reporting companies from one year to six months, and permit non-affiliates of reporting companies to freely resell restricted securities after holding the securities for six months subject only to the Rule 144(c) public information requirement. The amendments also shorten the Rule 144(k) holding period from two years to one year, which will allow non-affiliates of both reporting and non-reporting companies holding restricted securities to freely resell their securities after holding the shares for one year. In other words, non-affiliates of reporting companies will be able to resell their restricted securities, subject only to the public information requirement, after holding the securities six months. Non-affiliates of both reporting and non-reporting companies will be able to freely resell their restricted securities (i.e., have any restrictive legend removed from their stock certificates) after holding such restricted securities for one year.

Affiliates of reporting companies will still be subject to the public information, manner of sale, volume limitation and Form 144 requirements of Rule 144, but will be permitted to resell their restricted securities in compliance with these provisions after six months, as opposed to the current one-year rule. Further, the amendments revise the manner of sale requirements for equity securities and eliminate them for debt securities, and relax the volume limitations for debt securities.

Finally, the amendments to Rule 144 increase the threshold for filing a Form 144 from 500 shares or $10,000 to 5,000 shares or $50,000.

The proposed tolling provision that would suspend the Rule 144 holding period while the security holder was engaged in certain hedging transactions was not adopted.

The amendments to Rule 145 eliminate the presumptive underwriter provisions of Rule 145, except with respect to shell companies, and revise the resale provisions of Rule 145(d).

The amendments to Rules 144 and 145 will be effective 60 days after their publication in the Federal Register.

Exemption for Exchange Act Registration of Compensatory Stock Options

Finally, the SEC adopted amendments to Exchange Act Rule 12h-1 to provide exemptions from Section 12(g) registration for compensatory stock options. The options must be issued in connection with written compensation plans that comply with the requirements of the exemptions, and extend only to the options themselves, not the securities underlying such options. The amendments to Rule 12h-1 will be effective upon publication in the Federal Register.

This memorandum contains only a general summary of the amended rules discussed herein and should not be construed as providing legal advice. The above summary is based on SEC press releases and statements. The adopting releases with respect to the rules and amendments discussed in this memorandum will contain important additional information. We will distribute a memorandum providing a more comprehensive discussion of the changes after the adopting releases are posted by the SEC.

If you have any questions about the information in this Memorandum, please contact Frank C. Bonaventure at 410-347-7305 / fcbonaventure@ober.com or Penny Somer-Greif at 410-347-7341 / psomergreif@ober.com.