This Securities Briefing provides an overview of the SEC’s final rules to:
This Securities Briefing is intended only as a summary of the SEC’s final rules discussed and you are encouraged to review the full text of the final rules.
The SEC has adopted rules reducing the holding period under Rules 144 and 145 to six months for “restricted securities” of reporting companies substantially in the form proposed. In general, “restricted securities” are securities acquired from the issuer in a transaction not involving a public offering. The reduced six-month holding period is not extended to restricted securities of non-reporting companies. The SEC’s final rules also, among other things, reduce the resale restrictions for restricted securities held by non-affiliates, change the manner of sale restrictions for resales of equity securities by affiliates, eliminate the manner of sale restrictions and increase the volume limitations for debt securities held by affiliates, increase the Form 144 filing thresholds, codify several SEC staff interpretative positions on Rule 144 issues and modify certain provisions of Rule 145.
The SEC believes that shortening the holding period will increase the liquidity of privately sold securities and decrease the cost of capital for reporting companies without harming investor protection. Based on the SEC’s observation of market reaction to the 1997 reduction of the Rule 144 holding periods, the SEC is now comfortable that a six-month holding period is a reasonable indication that an investor has assumed the economic risk of investment in the securities of reporting companies which is one of the underlying principals of Rule 144. The SEC does not believe that the markets of non-reporting companies have sufficient information or safeguards to justify reducing the holding period for securities of non-reporting companies.
The revisions to Rules 144 and 145 are effective February 15, 2008 but are applicable to securities acquired before or after the effective date.
The final rules reduce the holding period under Rule 144(d) to six months for restricted securities of reporting companies held by affiliates and non-affiliates. Affiliates and non-affiliates may resell restricted securities of reporting companies after holding them for six months, subject to the other applicable conditions of Rule 144. The final rules do not change the existing one-year holding period for restricted securities of non-reporting companies.
Reporting companies eligible for reduced six-month holding period. The reduced six-month holding period is available to only those reporting companies that have been subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) for at least 90 days before the proposed Rule 144 sale and which have filed all the reports required by the Exchange Act (other than Form 8-K reports) during the preceding 12 months (or for such shorter period that the reporting company has been required to file such reports).
Proposed tolling provision was not adopted. The SEC had proposed adopting a tolling provision to address hedging transactions because they shift the economic risk of investment away from the holder of the securities which is contrary to Rule 144’s underlying principals. The SEC was persuaded by the comment letters that adding a tolling provision would “unduly complicate Rule 144” and cause shareholder or brokers to “incur significant costs to monitor hedging positions.” These results would be contrary to the underlying purposes of the revisions to streamline Rule 144 and reduce the costs of raising capital. The SEC stated in the adopting release that it will reconsider the tolling provision issue if it observes “abuse relating to the hedging activities of holders of restricted securities.”
The SEC has decided that the economic risk of investment in restricted securities held by non-affiliates is sufficiently demonstrated once the applicable holding period has been satisfied. This being the case, the SEC believes it is appropriate to “reduce the complexity of resale restrictions that may inhibit sales by, and impose costs, on non-affiliates.” To implement these objectives, the SEC’s final rules permit non-affiliates to:
In all cases, the holder of the restricted securities must not have been an affiliate of the issuer of the securities during the three months prior to the resale under Rule 144. The SEC’s final release contains the following helpful table that summarizes the revisions to the resale restrictions under Rule 144:
Affiliate or person selling on behalf of an affiliate
During six-month holding period - no resales under Rule 144 permitted.
After six-month holding period - may resell in accordance with all Rule 144 requirements including:
During one-year holding period - no resales under Rule 144 permitted.
After one-year holding period - may resell in accordance with all Rule 144 requirements including:
As discussed elsewhere in this Securities Briefing, the final rules no longer impose manner of sale restrictions on resales of restricted securities by non-affiliates or the resale of debt securities by affiliates. Manner of sale restrictions continue to apply to resales of equity securities by affiliates under the final rules, but with the following changes:
The SEC’s final rules adopted the proposed amendments to Rule 144 to eliminate the manner of sale limitations imposed by Rule 144(f) for resales of debt securities held by affiliates in the form proposed. Also as proposed, the SEC’s final rules define the term debt securities to include non-participatory preferred stock and asset-backed securities. Amended Rule 144 (a) defines non-participating preferred stock as non-convertible capital stock entitled to a preference on payment of dividends and in distribution of assets on liquidation, dissolution, or winding up of the issuer, but not entitled to participate in the issuer’s residual earnings or assets. The SEC’s rationale for adopting these changes is based on its conclusion (after studying the issue since 1997) that the risk of abusive selling efforts and compensation is much lower in the fixed income securities market than in the equity securities market.
In response to comments, the SEC’s final rules increase the Rule 144(e) volume limitations for debt securities. As amended, Rule 144(e)(2) permits the resale of debt securities by affiliates in an amount not to exceed 10 percent of the principal amount of the tranche (or class if the securities involved are non-participating preferred stock or asset-backed securities) when taken together with all sales of such securities by the affiliate during the preceding three months.
The existing Form 144 filing thresholds have been in place since 1972 and require a Form 144 to be filed for sale transactions involving more than 500 shares or $10,000 within a three-month period. In the 2007 proposing release, the SEC proposed increasing these thresholds to transactions involving 1,000 shares or $50,000. In response to comments, the SEC’s final rules increase the Form 144 filing thresholds to 5,000 shares or $50,000. While the SEC solicited comment on how to coordinate the filing deadlines for Forms 144 and 4 in the proposing release, the SEC has decided to defer taking any action on this subject in the final rules. However, the SEC indicated that it intends to issue a separate release in the future that will provide “greater flexibility” to affiliates for satisfying the Form 4 and Form 144 filing requirements.
As proposed, the SEC’s final rules amending Rule 144 codify several Staff positions issued by the Division of Corporate Finance relating to Form 144 in an effort to make them “more transparent and readily available to the public.” The Staff positions now codified include, among others, the following interpretations:
The SEC has adopted amendments to Rule 145 in the form proposed as follows:
A copy of the final SEC rules revising Rules 144 and 145 is available on the SEC’s website at www.sec.gov by selecting Final Rule: Revisions to Rules 144 and Rule 145 or by going to http://www.sec.gov/rules/final/2007/33-8869.pdf
The SEC has amended Form S-3 to expand the eligibility of primary offerings for smaller companies to enhance their ability to access the public securities markets. The Form S-3 is a short form registration statement that allows companies to incorporate much of the required information from their existing SEC filings. Prior to the amendments, Form S-3 was available only to those companies that complied with reporting requirements on a timely basis for at least one year and had a minimum public float of at least $75 million. The amendments to Form S-3 remove the $75 million public float requirement, provided that the registrant meets the other requirements of Form S-3.
In the final release, the SEC noted the following factors, among others, as motivation for the amendments:
Given these and other factors, the SEC has amended the Form S-3 eligibility requirements to permit certain smaller companies to use Form S-3 for primary offerings of their securities, whether or not they satisfy the minimum $75 million public float requirement, if they satisfy the other requirements of Form S-3.
The amendments to the eligibility requirements of Form S-3 are effective January 28, 2008.
Under the new General Instruction I.B.6 to Form S-3, companies with less than $75 million in public float can register primary offerings of their securities on Form S-3 if they satisfy the following conditions:
Other eligibility requirements. The other eligibility conditions listed under Instruction I.A of Form S-3 include, among others, the following:
Listed Securities Only and One-Third Cap. In the proposing release, the amendments to Form S-3 would have been available to all companies with securities trading in a public market, including those quoted on the Over-the-Counter Bulletin Board and Pink Sheets. The final amendment limited the Form S-3 eligibility to only those companies registered on a national securities exchange. The SEC noted that the exchange registration requirement was included to provide an additional level of protection to investors. Exchanges have listing rules and procedures, such as minimum public float, minimum number of public shareholders, shareholder approval of specified matters, the independence of boards and committees, and strong corporate governance standards, which should mitigate the effects of expanding the number of companies that are eligible to use the Form S-3.
The proposing release would have also limited the amount of securities that could be offered in a twelve-month period under Form S-3 to 20% of the company’s public float. The final amendment increased that cap to one-third of a company’s public float. The SEC raised the cap in response to comments that suggested the 20% cap would limit the usefulness of the rule. To ensure that the one-third cap is respected, the SEC adopted a corresponding amendment to Rule 401(g) of the Securities Act of 1933, to provide that “violations of the one-third cap would also violate the requirements as to proper form under Rule 401 even though the registration statement previously had been declared effective.”
Calculation of one-third limitation on amount of securities that may be sold. According to the SEC’s final release, the calculation of the one-third limitation on the amount of securities that can be sold under Form S-3 is a two-step process. First, determine the registrant’s public float immediately prior to the intended sale. A registrant’s public float is computed using the price at which its common equity was last sold, or the average of the bid and asked prices of its common equity, in the principal market for the common equity as of a date within 60 days prior to the date of sale. Second, compare the public float number to the aggregate amount (gross proceeds) of all sales of securities in a primary offering registered under Form S-3 in the previous 12-month period, including the amount of the intended sale, to determine if the one-third limitation would be exceeded.
The SEC indicated that it selected a one-third cap in order to balance the needs of a company to raise capital through primary offerings and the impact of such offerings in markets that are thinly traded. The SEC also emphasized that the one-third cap is a flexible limitation because it is calculated based on the public float immediately prior to the contemplated sale as opposed to being fixed at the time the Form S-3 is filed. As a result, the amount of securities a company may sell under Form S-3 increases as its public float increases, but that amount would also decrease if the company’s public float decreases. The final release includes a number of examples to illustrate the operation of the one-third cap imposed by new General Instruction I.B.6.
Elimination of one-third limitation on amount of securities that may be sold. New General Instruction I.B.6 removes the one-third cap on the number of securities that may be sold under Form S-3 if the registrant’s public float increases to $75 million or more after the Form S-3’s effective date. The SEC structured new General Instruction I.B.6 in this manner to reflect the current operation of General Instruction I.B.1 (i.e., Form S-3 registrants that satisfy the $75 million public float threshold at the time the Form S-3 is filed are not subject to restrictions on the amount of securities that may be sold under the Form S-3 even if their public float falls below $75 million after the Form S-3’s effective date).
A copy of the final SEC rules revising Form S-3 eligibility for smaller companies is available on the SEC’s website at www.sec.gov by selecting Final Rule: Revisions to the Eligibility Requirements for Primary Securities Offerings on Forms S-3 and F-3 or by going to http://www.sec.gov/rules/final/2007/33-8878.pdf
Attorneys on the Securities Team include:
J.C. Anderson (612) 632-3002
Lindley S. Branson (612) 632-3024
Maxwell J. Bremer (612) 632-3056
Christopher A. Carlisle (612) 632-3033
Barry F. Clegg (612) 632-3220
Gene H. Hennig (612) 632-3202
Alyssa J. Hirschfeld (612) 632-3316
Inchan Hwang (612) 632-3310
Julia S. Offenhauser (612) 632-3067
Douglas M. Ramler (612) 632-3324
Michael P. Sullivan, Jr. (612) 632-3350
Daniel R. Tenenbaum (612) 632-3050
Mark D. Williamson (612) 632-3379
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This newsletter is a periodic publication of Gray, Plant, Mooty, Mooty & Bennett, P.A. that should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general information purposes only, and you are urged to consult legal counsel concerning your situation and any specific legal questions you may have.
Copyright. 2007. All rights reserved.
Gray, Plant, Mooty, Mooty & Bennett, P.A.
This article is provided for general informational purposes only and should not be construed as legal advice or legal opinion on any specific facts or circumstances. You are urged to consult a lawyer concerning any specific legal questions you may have.
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