On January 6, 2012, the Advisory Committee on Small and Emerging Companies established by the Securities and Exchange Commission (“SEC”) recommended that the SEC take immediate action to permit general solicitation and general advertising in private offerings of securities under Rule 506 of Regulation D where securities are sold only to accredited investors. Relaxing the current restrictions on general solicitation and advertising would facilitate the ability of companies to raise capital from accredited investors, who are generally viewed as able to fend for themselves. For example, relaxing these restrictions would make it easier for companies to publicize their financing plans and seek funding from investors without any pre-existing relationship.
Rule 506 of Regulation D provides a widely-used safe harbor from the registration requirements of the Securities Act of 1933 for qualifying private offerings. Under current Rule 506, neither the issuer nor any person acting on the issuer’s behalf may offer or sell securities by any form of “general solicitation or general advertising,” and securities sold pursuant to Rule 506 may only be sold to “accredited investors” or persons who, either alone or with a representative, have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of a prospective investment.
The Advisory Committee is of the view that the restrictions on general solicitation and advertising prevent many privately held small businesses and smaller public companies from gaining sufficient access to capital sources and thereby materially limit their ability to raise capital through private offerings. The Advisory Committee noted that the investor protections afforded by the existing restrictions on general solicitation and general advertising are not necessary in private offerings where the securities are sold solely to accredited investors. Because the concepts of general solicitation and advertising are vague, the prohibition increases compliance and diligence costs for issuers of securities who seek to avoid potential activities that might be deemed to constitute general solicitation or advertising and thereby destroy the availability of the Rule 506 safe harbor.
On June 16, 2010, the conference committee reconciling the House and Senate versions of the federal financial reform bill agreed to include in the final reform legislation the House provision that provides an exemption on compliance with Sarbanes-Oxley Act (SOX) Section 404(b) for companies with less than $75 million in market capitalization.
Under the provisions of SOX 404, publicly reporting companies and their independent auditors are each required to report on the effectiveness of internal control over financial reporting. Section 404(a) requires all public companies to assess the effectiveness of their internal control over financial reporting, while Section 404(b) requires independent auditors to report on management’s assessment. On October 2, 2009, the Securities and Exchange Commission (SEC) granted its latest deferral for compliance with SOX 404(b), providing non-accelerated filers, those companies with a public float below $75 million, with a reprieve from the auditor attestation until annual reports for fiscal years ending on or after June 15, 2010 are filed. At the time of that deferral, the SEC was adamant that it would not be granting any further extensions for compliance with SOX 404(b).
The inclusion of the exemption in the final reform legislation would permanently exempt the auditor attestation requirement and significantly reduce the anticipated compliance burdens of smaller reporting companies. Disclosure of management attestations on internal control over financial reporting would continue to be required for smaller reporting companies.
On October 2, 2009, the Securities and Exchange Commission (SEC) announced a nine-month deferral on Sarbanes-Oxley Act (SOX) Section 404(b) compliance for the smallest publicly reporting companies. Under the provisions of SOX 404, public companies and their independent auditors are each required to report on the effectiveness of company internal controls. All publicly reporting companies are currently required to disclose a report on management’s assessment of internal controls; however, only reporting companies with a public float of $75 million or above are required to disclose an attestation report provided by an independent auditor. The extension granted by the SEC will provide non-accelerated filers, those companies with a public float below $75 million, with a reprieve from independent auditor attestations until annual reports for fiscal years ending on or after June 15, 2010 are filed. Although the SEC has not published the final rule providing for the extension, based on prior extensions, we believe the extended deadline only applies to independent auditor attestations. Consequently, disclosure of management attestations on internal control continues to be required.
Prior to the October 2 announcement, the deadline for the independent auditor disclosure in annual reports for the smallest publicly reporting companies was fiscal years ending on or after December 15, 2009. The previous extension, granted in January 2008, was put in place to allow the SEC’s Office of Economic Analysis to complete a study of whether additional guidance provided to company managers and auditors in 2007 was effective in reducing the costs of compliance. This study was published recently, less than three months before the December 15 deadline, and, as a result, the SEC determined that additional time was appropriate and reasonable so the smallest publicly reporting companies and their auditors could better plan for the required attestation.