21354 Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules Regulations

1Release No. 33–7186 (June 27, 1995) [60 FR

35642] (‘‘Proposing Release’’). The comment letters

received are available for inspection and copying at

the Commission’s public reference room, 450 Fifth

Street, N.W., Washington, D.C. 20549. Please refer

to File Number S7–16–95.

2 17 CFR 240.12g–1, 240.12g–4 and 240.12h–3.

3 15 U.S.C. 78a et seq.

4 17 CFR 249.323. Form 15 is filed by an issuer

to notify the Commission that it is terminating its

registration under Section 12(g) of the Exchange Act

[15 U.S.C. 78l(g)] or suspending its reporting under

Section 15(d) [15 U.S.C. 78o(d)].

5As explained more fully below, the proposed

changes to certain of the Commission’s definitions

of a ‘‘small entity’’ for purposes of the Regulatory

Flexibility Act [5 U.S.C. 601–612] have not been

adopted.

6See Exchange Act Section 12(g) and Rule 12g–

1.

7E.g., the proxy requirements of Section 14 [15

U.S.C. 78n] and the short-swing profit provisions of

Section 16 of the Exchange Act [15 U.S.C. 78p].

In addition, any entity, including an issuer, must

register under the Exchange Act as a transfer agent

if it performs the function of a transfer agent with

respect to any security which is registered under

Section 12 of the Exchange Act or which would be

required to be registered except for the exemptions

provided by subsection 12(g)(2)(B) or (g)(2)(G). 15

U.S.C. 78q–1(c)(1). As a result of the revisions

adopted in this release, the number of entities,

including issuers, that can perform transfer agent

functions without registration with the Commission

may increase.

8 15 U.S.C. 78l(h).

9Release No. 34–18647 (April 15, 1982) [47 FR

17046].

10Release No. 34–23406 (July 8, 1986) [51 FR

25360].

11See Release No. 33–6605 (September 30, 1985)

[50 FR 41162].

12This modification to Rule 12g–1 retains the

standard with respect to foreign private issuers,

which provides that if a foreign private issuer has

securities quoted in an automated interdealer

quotation system it remains subject to registration

under Section 12(g).

13Securities traded on a national securities

exchange must be registered under the Exchange

Act pursuant to Section 12(b) [15 U.S.C. 78l(b)] of

that Act.

14Pursuant to Schedule D to the NASD’s ByLaws, securities traded on the Nasdaq system must

be registered pursuant to Section 12 of the

Exchange Act, CCH NASD Manual para. 1803.

15 15 U.S.C. 77a et seq.

16Rules 12g–4 and 12h–3 currently allow for

termination of registration of a class of securities

under Section 12(g) and suspension of the duty to

file reports under Section 15(d) when the class of

securities is held of record by less than 300 persons,

or by less than 500 persons where the total assets

of the issuer have not exceeded $5 million on the

last day of each of the issuer’s three most recent

fiscal years. Also, the Section 15(d) reporting

obligation cannot be suspended under Rule 12h–3

for a fiscal year in which a Securities Act

registration statement relating to the class of

securities becomes effective. The revisions amend

Rules 12g–4 and 12h–3 to change the asset test from

$5 million to $10 million.

SECURITIES AND EXCHANGE

COMMISSION

17 CFR Parts 240 and 249

[Release No. 34–37157; File No. S7–16–95]

RIN 3235–AG48

Relief From Reporting by Small Issuers

AGENCY: Securities and Exchange

Commission.

ACTION: Final rules.

SUMMARY: The Commission is

announcing the adoption of revisions to

Rules 12g–1, 12g–4 and 12h–3 under the

Securities Exchange Act of 1934, which

will increase the number of issuers not

subject to the registration and reporting

requirements of the Exchange Act, by

increasing the total assets threshold

from $5 million to $10 million.

EFFECTIVE DATE: The rule amendments

will be effective on May 9, 1996.

FOR FURTHER INFORMATION CONTACT:

Richard K. Wulff, Office of Small

Business Policy, Division of Corporation

Finance at (202) 942–2950 or James R.

Budge, Office of Disclosure Policy,

Division of Corporation Finance, at

(202) 942–2910.

SUPPLEMENTARY INFORMATION: On June

27, 1995,1 the Commission published

for comment proposed amendments to

Rules 12g–1, 12g–4 and 12h–3 2 under

the Securities Exchange Act of 1934.3

These proposals were designed to

increase the number of issuers classified

as exempt from the registration and

reporting provisions of the Exchange

Act by changing the total asset threshold

from $5 million to $10 million.

Conforming changes also were proposed

to be made to Form 15.4 Having

considered the comments received, the

Commission is adopting the revisions as

proposed.5

I. Discussion

Under the current rules, an issuer that

has 500 or more record holders of a

class of equity securities and total assets

of $5 million or more must register its

securities under the Exchange Act.6

Issuers that must register are required to

comply with the periodic reporting and

other provisions applicable to public

companies contained in the Exchange

Act.7 The asset threshold was originally

set at $1 million in Section 12(g).

Pursuant to its authority under Section

12(h) of the Exchange Act,8 the

Commission has increased the amount

on two occasions: from $1 million to $3

million in 1982,9 and from $3 million to

the current $5 million in 1986.10

The proposal to increase the asset

threshold to $10 million was designed,

in part, to increase the utility of the

Commission’s small offering

exemptions, such as Regulation A, a

principal benefit of which is that

companies conducting such offerings do

not automatically become subject to

Exchange Act reporting. The

Commission has long recognized that

the cost of compliance with Exchange

Act reporting requirements is relatively

greater for smaller companies than for

larger ones.11 The amendments adopted

today are designed to strike the

appropriate balance between such costs

and investors’ needs for the information

required in Exchange Act reports.

Commenters generally agreed that this

change would be beneficial for smaller

companies and would be consistent

with investor protection. In light of the

foregoing, the Commission finds that the

increase in the asset threshold is not

inconsistent with the public interest or

the protection of investors and is

adopting the rule changes as proposed.

Under today’s revision to Rule 12g–1,

an issuer now will not be required to

register under Section 12(g) until it has

500 or more record holders of a class of

equity securities and total assets of $10

million or more.12 This revision does

not change existing requirements that

securities traded on national

exchanges 13 or the National Association

of Securities Dealers Automated

Quotation System (‘‘Nasdaq’’)14 be

registered pursuant to Section 12 of the

Exchange Act. In addition, a company

that conducts a public offering

registered under the Securities Act of

1933 (‘‘Securities Act’’)15 will continue

to be subject to reporting pursuant to

Section 15(d) of the Exchange Act

unless the company becomes eligible to

suspend such reporting. The revisions

also raise the asset threshold for

termination of Section 12(g) registration

and suspension of Section 15(d)

reporting from $5 million to $10

million, but do not change the other

tests for such termination and

suspension.16 Finally, the description of

Form 15 is being amended to indicate

that the total assets criterion is $10

million. These new thresholds should

make the exemptive, termination and

suspension provisions more useful to

small businesses and lower their costs

of compliance with the federal

securities laws.

There are approximately 650 issuers

with between $5 million and $10

million in total assets that report with

the Commission. Had the new asset

threshold previously been in effect,

these companies would not have been

required to register and report with the

Commission, unless they had

voluntarily decided to do so, either

because their securities are traded on a

national securities exchange or Nasdaq,

or because they chose to conduct a

Securities Act registered offering. Of
Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules Regulations 21355

17These issuers would be able to terminate their

registration because they have:

—Assets between $5 and $10 million;

—No securities traded on an exchange or Nasdaq;

—No current 15(d) reporting obligation arising

from registering a securities offering in the last year;

—In each of the last three fiscal years, assets not

exceeding $10 million; and

—Between 300 and 500 shareholders.

18The definitions are found at 17 CFR 230.157,

17 CFR 240.0–10, and 17 CFR 260.0–7.

19See the Small Business Regulatory Fairness Act

of 1996, Pub. L. 104–121, 110 Stat. 847 (1996),

signed by the President on March 29, 1996.

20 5 U.S.C. 553(d)(1).

21The Task Force on Disclosure Simplification

was organized in August 1995 to review forms and

rules relating to capital-raising transactions,

periodic reporting pursuant to the Exchange Act,

proxy solicitations, and tender offers and beneficial

ownership reports under the Williams Act. Its goal

was to identify where the disclosure process could

be simplified and, consistent with investor

protection, to make regulation of capital formation

more efficient. Following a seven-month review, the

Task Force completed its report, including a

number of recommendations, which the

Commission authorized for publication on March 5,

1996. This report is available for inspection and

copying at the Commission’s public reference room.

It also is available through the Commission’s

Internet web site [http://www.sec.gov].

22The Securities and Exchange Commission

Advisory Committee on the Capital Formation and

Regulatory Processes was established in February

1995. See Release No. 33–7135 (February 17, 1995)

[60 FR 9415]. The objective of the Committee is to

assist the Commission in evaluating the efficiency

of the regulatory process relating to public offerings

of securities, secondary market trading and

corporate reporting. The Committee’s focus has

been the development of a company registration

system for adoption by the Commission, which

would allow eligible companies to offer and sell

securities relying on a more company-focused, as

opposed to transaction-focused, system. The

Committee plans to issue a report containing its

recommendations in the near future.

these 650, approximately 540 are traded

on an exchange or Nasdaq, and

approximately 110 are not.

Today’s rule changes affect the asset

threshold for entering and exiting

reporting, but do not affect the other

criteria under the rules for determining

when a company may cease reporting.

Consequently, the effect on currently

reporting companies is modest, with

approximately 10 companies becoming

eligible to cease reporting at this time; 17

about another 20 companies could

terminate their reporting obligations if

they decided to delist their securities

from an exchange or Nasdaq.

While the number of companies that

would be able to stop reporting is

relatively small, the rule should provide

significant benefits for small, growing

companies. These companies will have

more flexibility to raise equity capital

and grow before becoming subject to the

Commission’s reporting requirements.

II. Regulatory Flexibility Act

Definitions

The Commission proposed to modify

the definitions of ‘‘small entity’’ for

purposes of the Regulatory Flexibility

Act by raising the total assets level to

$10 million.18 In the intervening period

since the proposals were published,

Congress has enacted amendments to

the Regulatory Flexibility Act.19 The

Commission has determined not to

adopt these proposed rule revisions at

this time, but will give them further

consideration once it has had an

opportunity to evaluate fully these

recent statutory changes.

III. Effective Date

The Commission has determined to

make the rule changes effective on May

9, 1996, the date of publication in the

Federal Register. Early effectiveness is

appropriate under the Administrative

Procedure Act inasmuch as the raising

of these thresholds ‘‘grants or recognizes

an exemption’’ 20 from registration and

reporting requirements to a larger class

of companies than existed under

previous requirements.

IV. Future Initiatives

Some commenters recommended

further revision of the reporting

thresholds. For example, one

commenter suggested the adoption of an

exemption for small business issuers

whose public float or trading activity is

so low as to show insufficient market

interest. Another recommended

eliminating the shareholder numerical

test from the various rules. The

Commission has considered these

suggestions and has determined to

evaluate them further in connection

with future initiatives undertaken by the

Commission as it implements

recommendations of the reports of the

Task Force on Disclosure

Simplification,21 and the Advisory

Committee on the Capital Formation

and Regulatory Processes.22 The work of

both of these groups has been dedicated

to reassessing and reforming the federal

securities disclosure regime where

necessary and appropriate in the public

interest and consistent with investor

protection.

V. Cost-Benefit Analysis

The Commission solicited comment

to assist in its evaluation of the costs

and benefits that might result from the

possible increase in the assets threshold.

Several commenters, while not

addressing the solicitation of comment

specifically, supported the proposal as

part of the Commission’s efforts to

reduce both the regulatory burden and

the costs of raising capital and

compliance for small issuers. The

Commission continues to believe that as

a result of this action, compliance

burdens will be decreased without

significant impact upon the needs of

investors, as it stated in the proposing

release. As required by Section 23(a) of

the Exchange Act, the Commission has

specifically considered the impact these

rulemaking actions would have on

competition and has concluded that

they would not impose a significant

burden on competition not necessary or

appropriate in furtherance of the

purposes of the Exchange Act.

VI. Final Regulatory Flexibility

Analysis

The Commission has prepared a final

regulatory flexibility analysis in

accordance with 5 U.S.C. 603 regarding

the changes to Exchange Act Rules 12g–

1, 12g–4, and 12h–3 and the description

of Form 15. A summary of the

corresponding Initial Regulatory

Flexibility Analysis was included in the

Proposing Release. A copy of the final

regulatory flexibility analysis may be

obtained by contacting James R. Budge,

Division of Corporation Finance, U.S.

Securities and Exchange Commission,

450 Fifth Street NW., Washington, DC

20549 at (202) 942–2910.

VII. Statutory Basis

The amendments to the Commission’s

rules and form are being adopted by the

Commission pursuant to Sections 12,

13, 15 and 23(a) of the Securities

Exchange Act.

List of Subjects in 17 CFR Parts 240 and

249

Reporting and recordkeeping

requirements, Securities.

Text of the Amendments

Accordingly, Title 17, Chapter II of

the Code of Federal Regulations is

amended as follows:

PART 240—GENERAL RULES AND

REGULATIONS, SECURITIES

EXCHANGE ACT OF 1934

PART 249—FORMS, SECURITIES

EXCHANGE ACT OF 1934

1. The authority citation for Part 240

continues to read, in part, as follows:

Authority: 15 U.S.C. 77c, 77d, 77g, 77j,

77s, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c,

78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p, 78q,

78s, 78w, 78x, 78ll(d), 79q, 79t, 80a–20, 80a–

23, 80a–29, 80a–37, 80b–3, 80b–4 and 80b–

11, unless otherwise noted.

* * * * *

2. The authority citation for Part 249

continues to read, in part, as follows:
21356 Federal Register / Vol. 61, No. 91 / Thursday, May 9, 1996 / Rules Regulations

1The rule is being added as Regulation CE (for

coordinated exemptions), 17 CFR 230.1001, rather

than as Regulation CA, as proposed.

2 15 U.S.C. 77c(b).

3 15 U.S.C. 77a et seq.

4Cal. Corporations Code Section 25102(n).

5 17 CFR 230.144.

6Release No. 33–7185 (June 27, 1995) [60 FR

35638] (‘‘proposing release’’).

7This is the maximum dollar amount permitted

under the Commission’s Section 3(b) exemptive

authority.

8 17 CFR 230.501–230.508.

9The letters and comment summary are available

for inspection and copying in the Commission’s

public reference room. Refer to File No. S7–15–95.

10Chapter 828, Statutes of 1994 (Senate Bill

1951—Killea), adding subdivision (n) to

Corporations Code Section 25102.

11Section 3, Senate Bill 1951.

12 15 U.S.C. 80a-1 et seq.

13Officers and directors of corporate issuers (or

persons performing similar duties); general partners

and trustees, where the issuer is a partnership or

a trust; small business investment companies;

business development companies subject to the

Investment Company Act; private venture capital

companies exempted from the Investment Advisers

Act of 1940 [15 U.S.C. 80b–1 et seq.]; entities

comprised of accredited investors; banks; savings

and loan associations; insurance companies;

Investment Company Act companies; non-issuer

pension or profit-sharing trusts; and, organizations

(corporations, business trusts or partnerships)

described in Section 501(c)(3) of the Internal

Revenue Code [26 U.S.C. 501(c)(3)] with assets of

more than $5 million. Individuals with a net worth

of $1 million or annual income of more than

$200,000 also are qualified purchasers under the

California exemption. All these persons would

qualify as ‘‘accredited investors’’ under Rule 501(a)

[17 CFR 230.501(a)].

14These persons must also satisfy one of the

following additional suitability standards: (1) They

must have, alone or with the assistance of a

professional advisor, the capacity to protect their

own interests; (2) they must have the ability to bear

the economic risk of the investment; or (3) the

investment must not exceed 10 percent of the

person’s net worth. These criteria also apply to

individuals who have a net worth of over $1 million

or annual income exceeding $200,000.

15 15 U.S.C. 78a et seq.

Authority: 15 U.S.C. 78a, et seq., unless

otherwise noted;

* * * * *

3. 17 CFR Parts 240 and 249 are

amended by removing the reference to

‘‘$5 million’’ and adding in its place

‘‘$10 million’’ in the following sections:

(a) 17 CFR 240.12g–1

(b) 17 CFR 240.12g–4(a)(1)(ii)

(c) 17 CFR 240.12g–4(a)(2)(ii)

(d) 17 CFR 240.12h–3(b)(1)(ii)

(e) 17 CFR 240.12h–3(b)(2)(ii)

(f) 17 CFR 249.323(a)

Dated: May 1, 1996.

By the Commission.

Jonathan G. Katz,

Secretary.

[FR Doc. 96–11625 Filed 5–9–96; 8:45 am]

BILLING CODE 8010–01–P

SECURITIES AND EXCHANGE

COMMISSION

17 CFR Part 230

[Release No. 33–7285; File No. S7–15–95]

RIN 3235–AG51

Exemption for Certain California

Limited Issues

AGENCY: Securities and Exchange

Commission.

ACTION: Final rules.

SUMMARY: In order to reduce regulatory

burdens associated with certain offers

and sales of securities, the Securities

and Exchange Commission

(‘‘Commission’’) today is adopting a

new exemption from its registration

requirements for limited offerings of up

to $5 million that are exempt from

qualification under a 1994 California

state securities law.

EFFECTIVE DATE: The effective date of

Rule 1001 and the amendment to Rule

144 will be effective June 10, 1996.

FOR FURTHER INFORMATION CONTACT:

Richard K. Wulff, Office of Small

Business Policy, Division of Corporation

Finance, at (202) 942–2950 or James R.

Budge, Office of Disclosure Policy,

Division of Corporation Finance, at

(202) 942–2910, 450 Fifth Street, N.W.,

Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: The

Commission today is adopting, as

proposed, new Rule 1001 1 under

Section 3(b) 2 of the Securities Act of

1933 (‘‘Securities Act’’). 3 The new rule

exempts from the registration

requirements of the Securities Act offers

and sales up to $5 million that are

exempt from state qualification under

paragraph (n) of Section 25102 of the

California Corporations Code. 4

Securities Act Rule 144 5 also has been

amended to include securities issued in

reliance upon Rule 1001 in the

definition of ‘‘restricted securities.’’

I. Introduction

In June 1995, pursuant to its authority

to provide exemptions for small

offerings under Section 3(b) of the

Securities Act, the Commission

proposed a new rule 6 designed to assist

small businesses’ capital raising ability

by creating a federal exemption for

offerings of up to $5 million 7 that meet

the qualifications of a California

exemption. The California law provides

an exemption from state law registration

for offerings made to specified classes of

qualified purchasers that are similar, but

not the same as, accredited investors

under Regulation D.8 Certain methods of

general solicitation are permitted under

the California law.

The Commission received ten

comment letters, which generally were

supportive of the proposals.9 The

Commission believes that the California

exemption has the potential to facilitate

small business capital raising. It is

anticipated that the new rule will result

in compliance cost savings for small

businesses and others because

qualifying issuers will be exempt from

both state qualification and federal

registration. At the same time, the

exemption assures adequate protections

to investors. Therefore, the Commission

is exercising its exemptive authority in

Section 3(b) to provide a parallel federal

exemption for the California exemption

by adopting new Rule 1001.

II. The California Exemption

On September 26, 1994, an exemption

from the issuer transactions

qualification provisions of the California

Corporations Code became effective.10

The provision was specifically designed

‘‘to facilitate the ability of small

companies to raise capital to finance

their growth.’’ 11

The exemption generally is limited to

issuers that are California corporations

or any other form of business entity

organized in that state, including

partnerships and trusts. In addition,

non-California organized businesses

may use the exemption if they can

attribute more than 50 percent of

property, payroll and sales to California

and if more than 50 percent of

outstanding voting securities of the

issuer are held of record by persons

having addresses in California. It is not

available for offerings relating to a

rollup transaction, nor may it be used by

‘‘blind pool’’ issuers or investment

companies subject to the Investment

Company Act of 1940 (the ‘‘Investment

Company Act’’). 12

Sales under the exemption must be

effected only to qualified purchasers

who buy for investment purposes and

not for redistribution. A qualified

purchaser is defined as:

• Designated professional or

institutional purchasers or persons

affiliated with the issuer; 13

• Certain relatives residing with

qualified purchasers;

• Promoters;

• Any person purchasing more than

$150,000 of securities in the offering; 14

• Entities whose equity owners are

limited to officers, directors and any

affiliate of the issuer;

• Reporting companies under the

Securities Exchange Act of 1934 (the

‘‘Exchange Act’’), 15 if the transaction