The number of listed or publicly traded companies has been declining for years. This is largely due to unsophisticated individuals making the rules by adding more burdensome compliance requirements that may have a positive intent but end up having a deleterious impact, compelling firms to avoid trading shares on an exchange.
A recent example comes from the prior administration, when the Securities and Exchange Commission sought to burden public firms with opaque environmental-related disclosures that would have crushed IPOs even further. Beyond stretching the responsibility of the SEC far beyond creating efficient markets and capital formation, it became a bit of a caricature, with some calling the SEC the Securities and Environment Commission. While this capital market bullet was dodged, previous transgressions of costly, cumbersome compliance requirements remain.
Today, the Commission has issued a proposed rule update that seeks to address some of the obtuse requirements in place. Amendments have been forwarded regarding registered offerings that seek to improve the “efficiency, flexibility, and cost savings for public companies while maintaining robust investor protections” for market participants and investors.
Additionally, rules regarding required filings have been included that strive to make compliance align more closely with a company’s size.
SEC Chairman Paul Atkins, who has aligned his tenure at the Commission with improving markets, enabling beneficial innovation, and supporting all investors, said they are making IPOs great again.
“These proposals build upon the legislative and regulatory concepts that have proven successful in the past and aim to extend that success to more companies – particularly small and mid-sized companies – and incentivize them to go and stay public. Today’s proposed rulemakings are among the first important steps toward transforming the SEC’s regulatory framework for public companies.”
As outlined by the SEC the amendments proposed aim to modernize the registration process:
- A greater number of public companies would be able to conduct shelf offerings, which allow quicker access to the public capital markets, regardless of the company’s public float.
- More public companies would be able to utilize certain registration and offering communication flexibilities that currently are reserved for companies with a large public float, defined as “well-known seasoned issuers.”
- Broker-dealers would be able to provide research report coverage for a greater number of public companies.
- State securities law registration and qualification requirements would be preempted for all registered offerings, thereby mitigating the costs and complexity of conducting a multi-state registered offering.
- Parity between certain Form N-2 filers and operating companies across registration, offering, and communication provisions would be maintained, and access to broad-based advertising for certain non-variable annuity insurance products would be expanded.
- Other aspects of the registration process would be streamlined, such as the ability to incorporate information by reference into Form S-1.
Emerging Growth Company (EGCs) requirements may receive an upgrade, too. These smaller firms would have to adhere to scaled disclosures and have more time to file reports. As outlined by the SEC:
- The proposed rule amendments would notably raise the threshold for a public company to become a large accelerated filer from $700 million to $2 billion. A company would not become a large accelerated filer for at least 60 months following its
- IPO regardless of its public float, effectively providing it an “IPO on-ramp” to stabilize and grow while benefiting from disclosure scaling and other accommodations.
- All other public companies would be categorized as non-accelerated filers and would benefit from nearly all disclosure scaling and other accommodations currently available to smaller and emerging companies. All non-accelerated filers would also be exempt from the requirement to obtain an auditor’s attestation on their internal control over financial reporting.
- In addition, the proposed rules would establish a subcategory of small non-accelerated filers that would receive an additional 30 days to file their Form 10-K annual reports and an additional five days to file their Form 10-Q quarterly reports. This change is intended to meaningfully reduce the reporting costs for this category of companies, which represent the smallest 18 percent of public companies by assets.
Chair Atkins said this is just the beginning, and they want to improve the public market ecosystem by transforming the regulatory framework currently in place. The Commission is requesting feedback from interested parties on the proposal, which is viewable here.