06/11/07

Proposed SEC Modernization of Smaller Company Capital-Raising and Disclosure Requirements

Frank C. Bonaventure
410-347-7305
fcbonaventure@ober.com

Penny Somer-Greif
410-347-7341
psomergreif@ober.com

To Our Clients and Friends:

The Securities and Exchange Commission ("SEC") has recently proposed revisions to its capital-raising and disclosure rules that would particularly impact smaller companies. The following summary of these proposals is based on SEC press releases and statements discussing the proposals, as the proposals themselves are not yet available. As with any governmental proposals, the SEC proposals may never be adopted or may be adopted in substantially different form. We wanted, however, to keep you up to date.

Amendments to Disclosure and Reporting Requirements
Under the first set of proposals, the SEC would combine for most purposes "small business issuers" (i.e. those with revenues and common equity public float of less than $25 million) and "non-accelerated filers" (i.e. issuers with a common equity public float of less than $75 million) into a new category of "smaller public companies." Most smaller public companies would be eligible to take advantage of the smaller company reporting requirements that are available today to small business issuers.

In addition, the proposals would integrate the disclosure requirements of Regulation S-B into Regulation S-K and eliminate all of the "SB" forms. Smaller public companies would file registration statements and reports under the Securities Exchange Act of 1934 ("Exchange Act") on the SEC’s regular forms and "would be able to choose on an item-by-item basis whether to take advantage of the scaled disclosure requirements or provide the same disclosure as larger companies." We do not anticipate any substantive changes to the amount or type of information that small business issuers are currently required to provide as a result of the proposed revisions.

The proposals would also amend Forms S-3 and F-3 so that companies (other than shell companies) with a public float below $75 million would be able to "take advantage of the benefits of shelf registration." Such companies, however, would be limited to registering the amount of securities they may sell in a one-year period and could not sell more than the equivalent of 20% of their public float in primary registered offerings on Form S-3 or F-3 in any one-year period. Companies currently eligible to use Forms S-3 or F-3 have no limits as to the amount they can register, although such shelf registration statements can generally only be used for three years after their initial effective date.

Next, the proposals would include two new exemptions for compensatory employee stock options from the registration requirements of the Exchange Act. Under Section 12(g) of the Exchange Act companies with 500 or more record holders of a class of its equity securities and more than $10 million in assets generally must register that class of securities under the Exchange Act. Since stock options constitute a separate class of equity security, a company with more than 500 option holders and $10 million in assets is currently required to register the options under the Exchange Act and, as a result, would become subject to the Exchange Act’s periodic and other reporting requirements.

Under the proposals, non-reporting companies would be eligible for an exemption from registration of compensatory stock options as a class under the Exchange Act if:

• The options are issued pursuant to a written compensatory stock plan;
• Eligible option holders are limited to employees, directors, consultants and advisors;
• The options and shares underlying them are restricted as to transfer; and
• Option holders and those receiving shares are provided risk and financial information similar to that which would be required in an offering under Rule 701 if securities sold in reliance on Rule 701 exceeded $5 million in a 12-months period.

A separate exemption for reporting issuers would allow these issuers to avoid registering compensatory stock options as a separate class under the Exchange Act, though this would not impact their Exchange Act reporting obligations.

Proposed Amendments to Regulation D
The next set of proposals would amend Regulation D and Form D "so that they conform better to the realities of modern market practices and technologies without compromising investor protection." These proposals would:

• Establish a new "Rule 507" exemption for sales of securities to a new category of "Rule 507 qualified purchasers" that would allow for limited, tombstone ad-like advertising;
• Add to the existing "accredited investor" definition a new "investments-owned" standard of $750,000 for individuals and $5 million for institutions and several new categories of entities;
• Adjust for inflation the numerical thresholds for accredited investors and Rule 507 qualified purchasers;
• Decrease the integration safe harbor for private placements from six months to 90 days;
• Apply the "bad actor" disqualifications currently applicable to Rule 505 offerings to all offerings under Regulation D; and
• Refine and simplify and mandate electronic filing of Form D.

Revisions to Rules 144 and 145
The final set of proposals would:

• Shorten the Rule 144 holding period for restricted securities of Exchange Act reporting companies from one year to six months (subject to a six-month tolling period for certain hedging transactions);
• Shorten the holding period for non-affiliates of non-reporting companies holding restricted securities from two years to one year;
• Eliminate the manner of sale limitations in Rule 144 with respect to debt securities and increase the thresholds for filing a Form 144; and
• Eliminate the presumptive underwriter provisions of Rule 145, except with respect to shell companies.

This memorandum contains only a general summary of the proposals discussed herein and should not be construed as providing legal advice. The information in this memorandum is based on press releases and other public statements issued by the SEC. The releases with respect to the proposals discussed in this memorandum will contain important additional information. Further, it is our understanding that the proposals are unlikely to be adopted without substantial changes or in a quick timeframe as has been the case for the recent rules adopted with respect to disclosure of executive compensation and management’s report on internal control over financial reporting. If you have any questions about the information in this Memorandum, please contact Frank C. Bonaventure at 410-347-7305 or via e-mail at fcbonaventure@ober.com or Penny Somer-Greif at 410-347-7341 or psomergreif@ober.com.

Ober, Kaler, Grimes & Shriver

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