[ by Howard Haykin ]

The Jumpstart Our Business Startups (JOBS) Act was enacted in April 2012.  Since then it's achieved very little of its promise - to create new jobs by facilitating fund-raising by small and middle capitalized companies in the United States.  The SEC has had difficulty drafting new rules that would safeguard issuers and investors, alike.  To do so, the SEC must first get a better understanding of "Crowd Funding" and how securities of smaller issuers handle the rigors of trading in the secondary markets. 

The SEC Advisory Committee on Small and Emerging Companies was tasked with investigating some of these issues and recently provided the Commission with reports on its findings.  Each of the 4 completed studies has a separate writeup, that includes recommendations for rulemaking.   Here's an executive summary of the 4 studies  (section headings are hyperlinked to the respective Committee report).

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Recommendations Regarding Trading Spreads for Smaller Exchange-Listed Companies.   The objective of this study was to examine the impact of the transition to trading and quoting securities:  (i) on U.S. securities exchanges in one penny increments, called "decimalization;"   (ii) on the number of IPOs;  (iii)  the impact of decimalization on liquidity for securities of small and middle capitalization companies;  and, (iv)  whether there is sufficient economic incentive to support trading operations in these securities in one penny increments.

THE COMMITTEE RECOMMENDS THAT:

• The SEC adopt rules to increase tick size for smaller exchange-listed companies in the U.S. to allow such companies, on a voluntary basis, to choose their own tick size within a limited range designated by the Commission.

• Rules should not be adopted on a temporary or pilot basis, so as to allow sufficient time for the effects of such rule changes to be evaluated.  However, the SEC should commit to reviewing the effects of the changes in the future and making such adjustments as needed.

Recommendation Regarding Specialized Disclosure Requirements.

THE COMMITTEE RECOMMENDS THAT:

• The SEC, as it deems appropriate, should share with Congressional Committees the Committee's belief that specialized disclosure requirements, particularly those relating to conflict minerals and payments by resource extraction issuers:  (i) are outside of the scope of the mission of the Commission;  (ii) impose disproportionate costs on small businesses without generating information useful for investors to make an informed investment decision;  and,  (iii)   have a negative effect on capital formation.

Recommendations Regarding Disclosure and Other Requirements for Smaller Public Companies.  
 

THE COMMITTEE RECOMMENDS THAT:

• Revision of the definition for "smaller reporting company" in Rule 405 under the Securities Act of 1933, Rule 12b-2 under the Exchange Act, and Item 10 of Regulation S-K to include companies with a public float up to $250 million, or, if unable to calculate the public float, companies with less than $100 million in annual revenues.

• Revision of SEC disclosure and other rules applicable to smaller reporting companies to incorporate exemptions from the following requirements, which are available to emerging growth companies under the JOBS Act:
  • the requirement in Exchange Act Section 14A(a) to conduct shareholder advisory votes on executive compensation and on the frequency of such votes;
  • the requirement in Exchange Act Section 14A(b) to provide disclosure about and conduct shareholder advisory votes on golden parachute compensation;
  • the requirement in Section 953(b) of the Dodd-Frank Act to provide disclosure of the ratio of the median annual total compensation of all employees of the issuer to the annual total compensation of the CEO (when adopted);
  • the requirement in Exchange Act Section 14(i) to provide disclosure of the relationship between executive compensation and issuer financial performance (when adopted);
  • in the case of a new or revised financial accounting standard that has different compliance dates for public and private companies, the requirement to comply with any such financial accounting standard until the date that a private company is required to comply; and
  • any rules of the PCAOB requiring mandatory audit firm rotation or a supplement to the auditor's report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer (auditor discussion and analysis).

• Specification by the SEC that such scaled disclosure and other provisions shall be available to a smaller reporting company for as long as the company meets the revised smaller reporting company definition.

• Revision of the definition of "accelerated filer" in Rule 12b-2 under the Exchange Act to include companies with a public float of $250 million or more, but less than $700 million, as of the last business day of the company's most recently completed 2nd fiscal quarter.  As a result of such revision, the requirement to provide an auditor attestation report under Section 404(b) of the Sarbanes-Oxley Act would no longer apply to companies with public float between $75 million and $250 million.

• Revision of the material contracts exhibit filing requirement in Item 601(b)(10) of Regulation S-K to provide that smaller reporting companies will not be required to file schedules or similar attachments to such exhibits unless such schedules or attachments contain information which is material to an investment decision and which is not otherwise disclosed in the agreement or the disclosure document.

• Revision of SEC rules to provide an exemption for smaller reporting companies from the requirement to submit financial information in XBRL format for periodic reports and other public filings.

• When adopting new disclosure rules, the SEC should consider whether such rules place a disproportionate burden on smaller reporting companies in terms of the cost of, and time spent on, compliance with such requirements, and if so, provide for exemptions from or phase-in periods for such new rules for smaller reporting companies.

Recommendation Regarding Separate U.S. Equity Market for Securities of Small and Emerging Companies

THE COMMITTEE RECOMMENDS THAT:

• The SEC should facilitate and encourage creation of a separate U.S. equity market or markets that would facilitate trading by accredited investors in the securities of small and emerging companies, and such small and emerging companies would be subject to a regulatory regime strict enough to protect such investors but flexible enough to accommodate innovation and growth by such companies.

Committee Members.    The following individuals are on the SEC Advisory Committee on Small and Emerging Companies: 

• David Bochnowski
• Paul Maeder*
• John Borer, III
• Kathleen McGowan
• Dan Chace
• Catherine Mort *
• Milton Chang
• Karyn Smith
• Joseph "Leroy" Dennis *
• Charlie Sundling *
• Stephen Graham
• Timothy Walsh
• Shannon Greene
• Gregory Yadley
• M. Christine Jacobs
• Kara Jenny
• Steven LeBlanc *
• Richard Leza *

* Not present at the meeting held on February 1, 2013.

Official Observers for the Committee: 

• Heath Abshure
• Sean Greene