By O. Jean Strickland
As the Wall Street Journal reports, on September 8, 2016, the House of Representatives (“House”) passed H.R. 2357 – Title I—Accelerating Access to Capital. Should this bill become law, it will direct the Securities and Exchange Commission (“SEC”) to revise Form S–3, which provides a streamlined process for access to capital markets, to give access to this streamlined process to much smaller companies. Specifically, the bill directs the SEC to “1) [allow] microcap companies traded on an exchange to issue an unlimited number of shares using shelf registration in a 12-month period; and 2) [permit] unlisted microcap companies, including those listed on the ‘pink sheets,’ with less than $75 million in common equity to sell up to 1/3 of the market value of its common equity using shelf registration in a 12-month period.”
Effective January 28, 2008, the SEC adopted revisions to the eligibility requirements for these “short form” filings commenting that it was “not prepared . . . to abandon [its] longstanding prerequisite . . . [to] allow unlimited use of this form for primary offerings by companies who do not have at least $75 million in public float [shares traded by the general public].” The SEC expressed the rationale that “a company’s disclosure in its registration statement can be streamlined to the extent that the market has already taken that information into account.” Recognizing public float as an approximate measure of whether the market has taken information into account, the SEC stated that “companies with a smaller market capitalization as a group have a comparatively smaller market following than larger, well-seasoned issuers and are more thinly traded.”
The SEC and the minority views on H.R. 2357 both express concern for balancing market access with protection of investors. Each notes that smaller public companies are more prone to fraud and financial reporting errors. Therefore, reducing notice requirements to the SEC and facilitating speedier access to capital markets for such smaller companies does not appear to be maintaining the proper balance with respect to investor protection.
Hopefully, the Senate will exercise better judgment and vote down this bill.