News from SEC Staffers at ABA Conference

Yesterday I was honored to be included in a panel at the American Bar Association Section of Business Law's spring meeting in Washington (let's not discuss the fun I had fighting my way home to New York in this "spring" weather).

The topic of the panel was "Hot Securities Law Issues for Small Business." Among others, the speakers included David Lynn, Chief Counsel of SEC Corporation Finance, and Gerald Laporte, Director of Small Business Policy for the SEC. Here are some insights garnered principally from the comments of these two gentlemen:

1. David Lynn reported (with a bad cold) on PIPEs and Rule 415. He essentially reiterated their stated position, with nothing really new. During the Q&A section of the panel, I asked him whether they had re-thought their position that any second registration after a limited first one had to wait for the later of 6 months after effectiveness of the first or the sale of substantially all the shares registered in the first registration. He did not suggest that any further thought has gone into the issue, suggesting it had only been two months since the new regime was put in place, and again focused on the issue of whether the second registration can be deemed part of the first or indeed a new transaction.

2. Jerry Laporte reported some rather exciting developments concerning rule-writing that is going on now at the SEC. These include the following:

• Finders. The SEC's Division of Market Regulation at long last appears willing to look at the issue of unregistered finders and private placement broker-dealers, with the possibility of seeking a multi-agency effort to permit NASD registration of these intermediaries in some manner short of full broker-dealer registration.
• Rule 144 Reform. Rule 144 looks ready for a shortening of the period before which investors with unregistered shares can sell publicly, possibly to six months from one year. One also hopes that this Rule 144 reform might just provide some relief to the beleaguered sufferers under the so-called Worm/Wulff letters which do not allow Rule 144 to be available as an exemption to registration for most shareholders of blank checks and shells.
• Regulation S-B to be Eliminated. Regulation S-B, which allows smaller issuers to use different forms in reporting to the SEC (Form 10-KSB instead of Form 10-K for annual reporting for example) will probably be scrapped. Instead, its benefits (such as fewer years of reporting) will be incorporated into the larger disclosure scheme known as Regulation S-K. Also, currently once you hit $25 million in revenues you are out of the S-B system and its benefits. It is expected that number will rise, probably to about $75 million.
• Rule 504 Enforcement Up. He mentioned enforcement activity against questionable use of Rule 504 of Regulation D (in particular in Texas and Minnesota) is being stepped up dramatically. This rule allows raising up to $1 million in a public offering without SEC registration in certain circumstances, but is prohibited by most states.
• Edgar and Form D Updates. Edgar appears ready for an update and upgrade. Also Form D is getting an overhaul for those filing with the SEC after private placements. The Form also is now going to be able to be filed electronically.
• Federal Preemption for all Nasdaq. State "blue sky" regulation is ready to be preempted for all Nasdaq issuers but not for OTCBB issuers, who will still have to review state securities regulation when issuances are taking place.
• Form S-3 to be available for OTCBB. The availability of short-form registration on Form S-3 looks likely for smaller OTCBB issuers, possibly once a year, but only for a primary registration limited to 15-20% of the public float. This won't help PIPE investors in smaller companies.
• More General Solicitation. The hope is to loosen the ban on "general solicitation" (emails, advertising) in private placements limited to larger "super-accredited" investors.
• "Integration" Time to be Reduced. Currently two separate private placements run the risk of being joined as one if they take place within 6 months of each other. It appears the SEC will shorten this period, but it is not clear to what.

The political environment is very favorable for these initiatives which are clearly more friendly towards those involved in capital formation. There's even a rumor that SEC Chairman Cox may throw his hat in the ring for President, and these types of business friendly initiatives would certainly make sense were that true. I also understand that the Chairman's office is very directly involved in the proposals described above, which is somewhat unusual, and good. John White, head of Corporation Finance, has promised to try to have these proposals ready for our "summer reading."