Last week, the SEC’s Advisory Committee on Small and Emerging Companies (the “Committee”)¹ met to discuss its recommendations for improving access to capital for small and emerging companies. Specifically, the Committee discussed four draft recommendations in which it considers public comments received from interested parties. First, in an effort to increase liquidity and promote analyst coverage, the Committee approved its initial recommendation that the SEC create rules allowing smaller exchange-listed registrants to increase the tick size² for their exchange-traded equity securities. The Committee also modified its initial recommendation by encouraging the SEC to establish an ongoing pilot program to analyze the effects of tick size expansion over several years. An important reason for the modified recommendation is to ensure that the pilot program would not contain a sunset provision, which could otherwise have a limiting effect; the Committee was concerned that issuers and the investment community would not be willing to invest in a short-term measure.³

The Committee also recommended that the SEC formulate rules encouraging the creation of a separate U.S. equity market (or markets) for new, public small and emerging companies. Investor participation would be limited to sophisticated investors, and to foster innovation and growth, the rules would subject small and emerging companies to less stringent regulatory requirements. The Committee also encouraged the Commission to modify existing SEC rules and regulations to help increase liquidity (e.g., modify/expand Regulation A and Rule 506 offerings).

Further, the Committee approved its third draft recommendation related to the expansion of accommodations currently afforded to (1) smaller reporting companies⁴ (SRCs) and (2) emerging growth companies.⁵ Under this recommendation, the current definition of an SRC would be modified to include issuers with a public float of $250 million or less (or issuers with revenues of $100 million or less — such as debt-only registrants — if market capitalization cannot be calculated). Issuers meeting the Committee’s proposed definition would be:

• Exempt from proxy and executive compensation disclosure requirements (e.g., say-on-pay, say-on-frequency, and golden-parachute votes) under current and anticipated Dodd-Frank rulemaking.
• Allowed, like SRCs, to provide scaled disclosures related to financial reporting and executive compensation.

In addition, the Committee recommended that the SEC consider (1) reviewing existing rules pertaining to smaller reporting companies; (2) providing additional exemptions, phase-in periods, or both, for existing disclosure requirements and new rules that may be burdensome for issuers to comply with (e.g., XBRL reporting requirements); and (3) reducing the requirements for filing exhibits related to material contracts.⁶

Finally, the Committee approved a draft statement urging the SEC to share with Congress the Committee’s belief that certain types of disclosure requirements, such as the conflict minerals rules, are not within the scope of the SEC’s mission, and that the costs of complying with such rules consequently outweigh the benefits. The Committee’s statement recommends that the SEC exempt small businesses from these and similar provisions of the Dodd-Frank Act.

[1] Established in the fall of 2011, the Committee focuses on the interests and priorities of small business and smaller public companies with a public float of $250 million or less. The Committee, which is advisory in nature, does not have any decision-making authority. Its objective is to make recommendations to the SEC on issues such as (1) capital formation through private placements and public securities offerings, (2) trading in the securities of small and emerging and small publicly traded companies, and (3) public reporting requirements of such companies.

[2] The tick size represents the minimum price movement of a traded stock (e.g., if the minimum price movement is $0.01, the tick size is equal to one cent).

[3] In addition, the Committee acknowledged and supported a February 5, 2013, roundtable discussion on tick sizes (or “decimalization”) because it believes that the discussion will help guide the SEC’s related rulemaking. See the SEC’s press release on the roundtable for more information.

[4] As defined in Item 10(f) of Regulation S-K.

[5] As defined in Title I of the Jumpstart Our Business Startups (JOBS) Act.

[6] As required in Item 601(b)(10) of Regulation S-K.