SEC Approves Reduction in Rule 144 Holding Period

At an open hearing yesterday, the Securities and Exchange Commission approved three of the six proposals relating to improving the regulatory environment for smaller public companies. The remaining three proposals are expected to be addressed (and presumably approved) in the near future. The changes were touted by SEC Chairman Cox as showing the Commission’s “focus on removing obstacles of growth” for smaller companies, and in the words of SEC Division of Corporation Finance John White, their desire to “promote the growth and vitality of smaller public companies.” These changes are the SEC’s response to recommendations of its Advisory Committee on Smaller Public Companies.

Here is a brief summary of the two most important changes, based on the staff presentations at the SEC hearing. The final adopting releases are not yet available.

Rule 144 Goes to Six Months- No Tolling for Hedging

The SEC approved a significant change in the holding period under Rule 144, reducing the various existing holding periods to six months. Affiliates can sell after holding six months but will be subject to volume limitations as currently. Non-affiliates can sell without volume limitations after holding six months, but the company will need to remain current in its SEC filings for the next six months, and after one year non-affiliates can sell without limits regardless of whether the SEC filings are current. Holding periods for non-reporting companies will remain at one year.

In a significant change from the Commission’s proposal announced in May, they will not require holders to toll or stop the holding period for any period in which the holder is engaged in certain hedging activities.

In addition, Form 144 was eliminated for non-affiliates, and the threshold for affiliates has been raised to being required only if the sale is for at least 5,000 shares or $50,000.

The staff mentioned codifying certain staff interpretations, presumably including the so-called Worm/Wulff letters, but unfortunately the details were not discussed at the hearing – we will need to wait for the final adopting release itself, which may take a number of days or even weeks.

The staff also did not mention whether or not the new rules will be retroactive, but we are hopeful that they will be.

John White indicated the staff believes that the reduced Rule 144 holding period will lead to a significant reduction in the discount on the sale of restricted securities in transactions such as PIPEs.

Regulation S-B to be Scrapped; Scaled Disclosure Available to More

As proposed in May, the SEC has approved migrating all small business filers to the larger Regulation S-K system, eliminating the SB forms including Forms 10-QSB, 10-KSB, SB-2 and 10-SB. However, the scaled disclosure currently available will remain and be codified in Regulation S-K. Finally, all filers with a public float of under $75 million will be eligible for scaled disclosure, increasing by thousands the number of companies that will be eligible.

The proposal suggested that the $75 million public float number be indexed for inflation, but based on comments they have decided not to index the amount.

For the transition, companies will be able to keep using the existing SB forms for the next year, or migrate back to Regulation S-K sooner. They have prepared a “plain English” booklet to help the 3500 companies currently reporting under Regulation S-B understand and ease the transition.