Recently STA representatives attended the 28th Annual Small Business Capital Formation Forum presented by the Office of Small Business of the SEC’s Division of Corporate Finance. This was held on November 19, 2009 at the SEC headquarters in Washington, D.C. Attendees included attorneys from many securities law firms, one brokerage firm market maker, two transfer agents, representatives from PinkSheets, small capital investment advisors and investor relations firms. All were in attendance to discuss and make recommendations to the Office of Small Business regarding policies for small businesses to create capital going forward.
The morning session included opening remarks by Chairman Mary L. Shapiro with continuing remarks by Commissioner Troy Paredes and panel discussion topics: The State of Small Business Capital Formation and Academic Perspectives on the SEC’s “Accredited Investor” Definition. After lunch, the attendees divided into four separate Breakout Groups, one of which was the Smaller Publicly Traded Companies Breakout Group.
In that session, there were eight new recommendations made and a re-iteration of last year’s 12 recommendations with an emphasis on three:
- Eliminate the one-third of market capitalization limit for primary offerings by smaller public companies in General Instruction I.B.6(a) of Form S-3 and General InstructionI.B.5(a) of Form F-3;
- Permit forward incorporation by reference for all Form S-1 registration statements
- Implement the rulemaking proposal on Rule 144(i) requested in the petition for rulemaking letter from Feldman, Weinstein & Smith et al, dated October 1, 2008.
Subsequent to that, the STA representatives discussed a current problem causing frustration among smaller issuers and smaller transfer agents. Prior to the Forum, the STA had also written a letter to those in charge of the Forum, documenting the STA concerns about the fact that many of the smaller issuers who make up the client base of our smaller transfer agent members have been denied access by DTC to the DTC FAST system, and in some cases, have been denied DTC eligibility. This problem seems to have been exacerbated by a directive issued by FINRA in January of 2009 which urges its members to exercise due diligence when accepting deposits of small cap companies, having the possibly unintended consequence of causing brokers and clearing corporations to refuse to accept any certificates of these companies.
Previously, at the STA Annual Conference held in October, the STA had distributed a questionnaire to small agent attendees on this topic. Of all of the answers, the most obviously disturbing was that nine separate issuers were actually denied trading ability, via DTC Eligibility, after being granted the ability to trade when their respective registration statements were approved either by FINRA or the SEC. Twelve issuers had been outright denied acceptance into the FAST system, with three reported as still pending. And, of those agents who reported on behalf of their issuers, 37 issuers were having maximum difficulty with brokerages accepting their shares for deposit and trading. This data was shared at the Forum.
The SEC Division of Corporate Finance had not been previously involved in these issues. Authority in these kinds of matters would normally be the responsibility of the Division of Trading and Markets. However, since their Office of Small Business is presently attempting to make recommendations to enhance the trading ability of smaller businesses, the Forum attendees found it relevant.
The STA report sparked quite a bit of discussion at the Breakout Session. Some attendees stated that they had been unable to deposit shares of smaller cap companies into their own brokerage accounts. Even the representatives from one well known small cap company, which completed their own IPO earlier in the year, stated that many of their shareholders had been unable to deposit shares into brokerage accounts. DTC’s actions in denying new companies the ability to trade by denying eligibility after the company’s registration statement had been made effective by the SEC, was viewed as a major concern by all attendees.
Subsequent to this discussion, the Breakout Group made some wider-based general recommendations for small cap companies. Some of the recommendations were as follows:
- The SEC should not apply its proposed new proxy disclosure rules concerning risk disclosures, director qualifications, leadership structure, the board’s role in risk management and conflicts of interest by compensation consultants to small reporting companies
- The SEC should revisit the “penny stock” rules as to whether or not they are too restrictive on some smaller reporting companies
- The SEC should reduce the “notice and access” advance mailing requirement for smaller reporting companies from 40 days to 30 days
- The SEC should monitor issuers’ experience with XBRL carefully (due to technical difficulties experience in the first wave of accelerated filers) and should be prepared to postpone the June 15, 2011 implementation date for smaller reporting companies
- The Breakout Group strongly supports the legislation in the recently introduced Investor Protection Act which contains a permanent exemption for smaller reporting companies from compliance with Section 404(b) of the Sarbanes-Oxley Act (“SOX”) and believes the SEC should support this legislation as well
- Given the perceived increased use of convertible preferred stock in financing smaller reporting companies, the SEC should consider including the meaning of “public float”, for purposes of registration limitation calculations for both outstanding common and convertible preferred equity in a company, that the number of shares of convertible preferred stock would be included on an as-if-converted-to-common-stock basis;
- The SEC should provide an update each year with respect to progress made on the recommendations prepared by the prior year’s SEC Forum on Small Business Capital Formation approximately one month prior to the current year’s Forum
- Using the SEC’s authority with regard to self-regulatory organizations covered by the Exchange Act, the SEC’s Office of Small Business Policy, together with the SEC’s Division of Trading and Markets, should immediately require from DTC understandable and transparent rules and standards with strict timeframes for consideration of applications for trading eligibility with DTC and the similar rules and standards should be adopted by DTC with respect to providing electronic book-entry transfer services for smaller public companies.
The STA supports this last recommendation and hopes to see the SEC make it a priority.