DRAFT RECOMMENDATIONS

From: Laporte, Gerald

Sent: Friday, January 27, 2012, 6:11 PM

Cc:

Subject: Recommendations for Consideration at Feb. 1 Meeting

Dear Advisory Committee Member:

At the request of Co-Chairs Steve Graham and Chris Jacobs, we are sending you the 

attached draft recommendations to be considered at the meeting of the SEC Advisory 

Committee on Small and Emerging Companies at its meeting next Wednesday, February 

1, in Washington. We hope to see you there.

Gerry

Gerald J. Laporte

Chief, Office of Small Business Policy

Division of Corporation Finance

U.S. Securities and Exchange Commission
Draft: 1/27/2012

2

SECURITIES AND EXCHANGE COMMISSION

ADVISORY COMMITTEE ON 

SMALL AND EMERGING COMPANIES

Washington, DC 20549-3628

February 1, 2012

The Honorable Mary L. Schapiro

Chairman

U. S. Securities and Exchange Commission

100 F Street, N.E.

Washington, DC 20549-1070

Dear Chairman Schapiro:

As you know, the Securities and Exchange Commission organized the Advisory 

Committee on Small and Emerging Companies to provide the Commission with advice 

on the Commission’s rules, regulations, and policies with regard to its mission of 

protecting investors, maintaining fair, orderly, and efficient markets, and facilitating 

capital formation, as they relate to the following: 

(1) capital raising by emerging privately held small businesses and publicly 

traded companies with less than $250 million in public market capitalization;

(2) trading in the securities of such businesses and companies; and 

(3) public reporting and corporate governance requirements to which such

businesses and companies are subject.

On behalf of the Advisory Committee, we are pleased to submit the enclosed 

recommendations to the Commission on registration requirements and reporting 

obligations under the Securities Exchange Act of 1934. 

We and the other members of the Advisory Committee are prepared to provide any 

additional assistance that the Commission or its staff may request with respect to these

recommendations.

Respectfully submitted on behalf of the Committee,

Stephen M. Graham M. Christine Jacobs

Committee Co-Chair Committee Co-Chair

Members of the Committee:
Draft: 1/27/2012

3

David A. Bochnowski

John J. Borer, III

Dan Chase

Milton Chang

Joseph "Leroy" Dennis

Stephen M. Graham

Shannon L. Greene

M. Christine Jacobs

Kara B. Jenny

Steven R. LeBlanc

Richard L. Leza

Paul Maeder 

Kathleen A. McGowan 

Catherine V. Mott

Karyn Smith 

Dan Squiller

Charlie Sundling

Timothy Walsh

Gregory C. Yadley

 

Official Observers:

A. Heath Abshure

Sean Greene

Enclosure

cc: Commissioner Elisse Walter

Commissioner Luis Aguilar

Commissioner Troy A. Paredes

Commissioner Daniel M. Gallagher

Meredith B. Cross

Lona Nallengara

Elizabeth Murphy

Gerald J. Laporte

Jennifer Zepralka
Draft: 01/27/2012

4

U.S. Securities and Exchange Commission

Advisory Committee on Small and Emerging Companies

Recommendations Regarding Registration Requirements and

Reporting Obligations under the Securities Exchange Act of 1934

[•], 2012

AFTER CONSIDERING THAT:

1. Under Section 12(g) of the Securities Exchange Act of 1934 (the “Exchange Act’) 

and the rules of the Securities and Exchange Commission (the “Commission”) 

thereunder, a company is required to register a class of its equity securities and is 

subject to a reporting obligation under Section 12(g) of the Exchange Act if, at the 

end of the company’s fiscal year, the securities are held of record by 500 or more 

persons and the company has total assets exceeding $10 million;

2. A company becomes subject to a reporting obligation, under Section 15(d) of the 

Exchange Act, upon effectiveness of a registration statement relating to an 

offering of the company’s securities under the Securities Act of 1933;

3. Under Section 12(g)(4) of the Exchange Act and Rule 12g-4 thereunder, a

company that has a class of securities registered under Section 12(g) may 

terminate that registration and suspend its reporting obligation when the number 

of holders of record of that class falls below 300 or, alternatively, when the 

number of holders of record of that class falls below 500 and the company’s 

assets have not exceeded $10 million at the end of each of its last three fiscal 

years;

4. Under Rule 12g5-1 under the Exchange Act and Commission staff interpretations, 

the definition of “held of record” includes only those persons who are registered 

as shareholders on the records maintained by a company, which means that a 

broker-dealer or other securities intermediary that holds securities of a company 

would be registered on the records of the company as only one holder even if it 

holds securities of that company on behalf of a large number of clients, each of 

whom would be a beneficial owner;

5. Section 15(d) of the Exchange Act and Rule 12h-3 of the Commission’s 

Exchange Act rules provide for the suspension of a company’s Section 15(d) 

reporting obligation under the same thresholds as those that apply to suspending a 

Section 12(g) reporting obligation;

6. The Advisory Committee is concerned that, under the current thresholds that 

trigger Exchange Act registration and reporting, some private companies may be 

required to register and begin reporting sooner than desired and at a time in a 
Draft: 01/27/2012

5

company’s development that is not the most advantageous to the company or its 

shareholders, or companies may be driven to manage their capital raising or 

equity compensation activities to avoid registration in ways that may not be in the 

company’s or its security holders’ best interests;

7. The Advisory Committee also is concerned that public companies have been able 

to cease reporting under the Exchange Act – referred to as “going dark” – while 

their securities continue to be actively traded publicly, leaving shareholders and 

investors with little or no information, because ownership through securities 

intermediaries has resulted in fewer than 300 holders of record of the class of 

securities, even though the number of beneficial owners may be far greater;

8. The Advisory Committee believes that the characteristics that are most relevant in 

connection with a determination of whether a company should be subject to 

reporting obligations have changed since the enactment of Section 12(g), and that 

the current triggers and thresholds for registration and reporting under the 

Exchange Act may no longer be the correct tests by which a determination should 

be made as to whether a company should be required to register and report under 

the Exchange Act;

9. The Advisory Committee has considered whether the thresholds for Exchange Act 

registration and reporting, as well as for terminating registration and suspending 

reporting, should be adjusted, including whether a test based on the number of 

beneficial holders, rather than a test based on the number of holders of record,

should be considered, whether the size of the assets test should be reconsidered, 

and whether a new standard or standards should be used to determine whether a

company is required to register and report, or to terminate registration and 

suspend reporting, under the Exchange Act;

10. The staff of the Commission currently is undertaking a comprehensive study of 

the registration and reporting requirements under the Exchange Act, which 

includes, among other things, a consideration of the questions described in 

paragraph 9, above; and

11. The Commission has authority under Section 12(h) of the Exchange Act to 

exempt companies from the registration requirements of Section 12(g) and 

reporting obligations under Section 15(d), if the Commission finds that the action 

is not inconsistent with the public interest and protection of investors, and the 

Commission also has broad exemptive authority with respect to requirements of 

the Exchange Act under Section 36 of that statute.

THE ADVISORY COMMITTEE RECOMMENDS that 

1. The Commission take action immediately to amend its registration and reporting 

rules under the Exchange Act to adopt a rule, pursuant to which:

• a company’s obligation to register and begin public reporting would not be 

triggered until it had a class of securities held by [1000] or more beneficial 

owners; and
Draft: 01/27/2012

6

• a company that is currently obligated to file reports with the Commission 

could not cease public reporting until the number of beneficial owners of the 

class of securities that subjects the company to reporting is less than [500];

2. The Commission staff include in the study of the registration and reporting 

requirements under the Exchange Act, a preliminary assessment of the effects of 

the above-referenced rule changes; and 

3. After completion of the staff study and an analysis of findings thereunder, the 

staff of the Commission would be required to evaluate the registration and 

reporting rules under the Exchange Act and to recommend to the Commission 

further amendments and modifications of such rules based on the findings of such 

staff study.
Draft: 01/27/2012

7

SECURITIES AND EXCHANGE COMMISSION

ADVISORY COMMITTEE ON 

SMALL AND EMERGING COMPANIES

Washington, DC 20549-3628

February 1, 2011

The Honorable Mary L. Schapiro

Chairman

U. S. Securities and Exchange Commission

100 F Street, N.E.

Washington, DC 20549-1070

Dear Chairman Schapiro:

As you know, the Securities and Exchange Commission organized the Advisory 

Committee on Small and Emerging Companies to provide the Commission with advice 

on the Commission’s rules, regulations, and policies with regard to its mission of 

protecting investors, maintaining fair, orderly, and efficient markets, and facilitating

capital formation, as they relate to the following: 

(4) capital raising by emerging privately held small businesses and publicly 

traded companies with less than $250 million in public market capitalization;

(5) trading in the securities of such businesses and companies; and 

(6) public reporting and corporate governance requirements to which such 

businesses and companies are subject.

On behalf of the Advisory Committee, we are pleased to submit the enclosed 

recommendation to the Commission on improving access to the public markets for small 

and emerging companies. 

We and the other members of the Advisory Committee are prepared to provide any 

additional assistance that the Commission or its staff may request with respect to this 

recommendation.

Respectfully submitted on behalf of the Committee,

Stephen M. Graham M. Christine Jacobs

Committee Co-Chair Committee Co-Chair
Draft: 01/27/2012

8

Members of the Committee:

David A. Bochnowski

John J. Borer, III

Dan Chase

Milton Chang

Joseph "Leroy" Dennis

Stephen M. Graham

Shannon L. Greene

M. Christine Jacobs

Kara B. Jenny

Steven R. LeBlanc

Richard L. Leza

Paul Maeder 

Kathleen A. McGowan 

Catherine V. Mott

Karyn Smith 

Dan Squiller

Charlie Sundling

Timothy Walsh

Gregory C. Yadley

 

Official Observers:

A. Heath Abshure

Sean Greene

Enclosure

cc: Commissioner Elisse Walter

Commissioner Luis Aguilar

Commissioner Troy A. Paredes

Commissioner Daniel M. Gallagher

Meredith B. Cross

Lona Nallengara

Elizabeth Murphy

Gerald J. Laporte

Jennifer Zepralka
Draft: 01/27/2012

9

U.S. Securities and Exchange Commission

Advisory Committee on Small and Emerging Companies

Recommendation Regarding Improving Access to the 

Public Markets for Small and Emerging Companies

February 1, 2011

AFTER CONSIDERING THAT:

12. Small and emerging companies could significantly benefit from modifications to 

the rules and regulations of the Securities and Exchange Commission 

(“Commission”) affecting access to the capital markets afforded to small and 

emerging companies;

13. Modifications to these rules and regulations can help facilitate the development 

and growth of small and emerging companies, which may help rebuild the initial 

public offering market in the United States and encourage economic growth and 

job creation; 

14. Any such modifications should be made keeping in mind investor protections 

afforded by any existing rules or regulations or that may be necessary in 

connection with any new rules or regulations;

15. Presently, Regulation A, or the “Conditional Small Issues Exemption,” provides 

an exemption from the registration requirements under the Securities Act of 1933, 

as amended (the “Securities Act”), for public offerings of up to $5 million in any 

12-month period by non-reporting companies pursuant to which securities can be 

offered publicly, are eligible to trade freely immediately after the offering in the 

over-the-counter market without any restrictions on the types of investors that can 

participate in the offering;

16. The volume of Regulation A offerings has been immaterial in recent years, with 

only 24 Regulation A offering statements being filed with the Commission in 

each of 2009 and 2010, and only three Regulation A offerings being qualified by 

the Commission in each of those years;

17. Proponents for regulatory change to facilitate capital formation for small and 

emerging companies have asserted that the Regulation A $5 million offering 

limitation is too low for Regulation A to be a viable tool for capital formation for 

small and emerging companies, particularly in light of the lack of a state “blue 

sky” exemption for Regulation A offerings, effectively preventing companies 

from taking advantage of rapidly changing means to access and communicate 

with potential investors;
Draft: 01/27/2012

10

18. The traditional sources of equity capital, which include private equity, venture 

capital and “angel” capital investors, have been unavailable to many small 

business owners and entrepreneurs seeking “seed capital” to fund a developing 

business or an “idea;”

19. The internet, in particular “social media” websites, provides a potential new tool 

through which small business owners and entrepreneurs can identify investors and 

raise seed capital;

20. Crowdfunding — the use of social media websites to solicit investments from a 

large number of individuals that, in general, make investments of smaller dollar 

amounts — has been asserted as a cost-effective method through which small 

businesses and other entrepreneurs can raise relatively smaller amounts of equity;

21. The current exemptions from the registration requirements of the Securities Act 

do not permit offers and sales of securities in the manner contemplated by a 

crowdfunding offering; and

22. Any exemption from the registration requirements of the Securities Act that 

permits crowdfunding must contain robust investor protections designed to 

prevent fraud, which is the necessary if crowdfunding as a capital raising tool is to 

succeed.

THE ADVISORY COMMITTEE RECOMMENDS that:

1. The Commission develop and implement a new exemption for offerings by 

[reporting and non-reporting companies], that is modeled on terms and conditions 

of Regulation A, but that provides for public offerings of up to $50 million 

annually.

2. The new exemption should, as required under Regulation A, require issuers to 

prepare, file with the Commission and provide to potential investors an offering 

statement pursuant to requirements established by the Commission, and the 

Commission, in connection with identifying the requirements for such offering 

statement shall consider additional disclosure requirements necessary for the 

protection of investors in light of the increased offering cap, including the 

requirement for audited financial statements.
Draft: 01/27/2012

11

3. The Commission should consider additional investor protections for the new 

exemption, including public filings of offering statements, periodic reporting for 

companies that have completed an offering pursuant to the new exemption and 

“bad actor” disqualification provisions.

4. In developing the terms and conditions of the new exemption, the Commission 

should appropriately calibrate the requirements of the new exemption taking into 

account the relatively smaller size and more limited resources of the companies 

that will take advantage of the new exemption.

5. The Staff of the Commission review and consider the various proposals offered 

for an exemption from the registration requirements of the Securities Act to 

permit crowdfunding, including any investor protection ideas developed by the 

Staff, and recommend to the Commission as to whether the Commission should 

consider implementing such an exemption and, if so recommended, the terms and 

conditions of such an exemption.