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| Finance Reform Bill May Affect |
| Reverse Merger Companies |
| By Joshua Sisco |
As is stands, the Senate's financial reform bill may potentially have a negative effect on reverse merger companies and their financing activities.
Most importantly perhaps is the current absence of an exemption for companies with market caps less than $75 million from Section 404(b) of the Sarbanes-Oxley Act of 2002, which requires an outside auditor to review a company's internal controls.
Senator Kay Bailey Hutchinson (R-Texas) is proposing an amendment to the Senate's Restoring American Financial Stability Act of 2010, permanently codifying the exemption for small issuers.
The version of the bill which passed the House of Representatives in December contained the exemption, which gave reverse merger players a reason to be optimistic about the final outcome.
Hutchinson's amendment would also expand upon the yearly exemption that has been doled out by the Securities and Exchanged Commission since 2002 and increase the market cap ceiling for exempt companies from $75 million to $150 million.
Additionally, the Hutchinson amendment is proposing a study examining whether the ceiling for the exemption should be raised as much as $700 million.
"If there is no longer an exemption, it would be a death blow to the small Bulletin Board companies," said Gregg Sichenzia, a partner at the law firm Sichenzia Ross Friedman Ference.
David Feldman, founder of the law firm Feldman LLP, is counseling his clients to prepare for having to meet the requirements of 404(b), but acknowledged that small companies would likely meet "with great difficulty" in doing so.
The current exemption expires June 15 and late last year SEC Chairwoman Mary Schapiro said that it would not be renewed again. Even if it is omitted from the final bill, it is still not certain the SEC won't grant more extensions, Feldman said. The previous chairman, Christopher Cox, said more than once that it would not be renewed, and then it was.
"There will not likely be any more relief from the regulatory realm," according to Bob Benoit, president and director of SOX research at Lord and Benoit, an internal-control compliance firm in Worcester, Mass.
However, Hutchinson's proposal is the first time a member of the Senate has pushed for the change.
Also included in the current Senate bill, which is not in the House version, is a provision that would decrease the scope of Rule 506 of Regulation D of the Securities Act. Rule 506 is an exemption from registration requirements that most companies rely on for private placements.
The rule currently exempts Rule 506-eligible offerings from approval by state securities regulators. However, the Senate bill would give state regulators authority over 506 offerings for up to 120 days after they have closed if the SEC has not reviewed the offering in that amount of time.
While the North American Securities Administrators Association (NASAA) has been an outspoken proponent of returning power to sate securities regulators, it does not support the current proposal.
"Such a process would impede capital formation in the United States, especially in the small business community and would add little to protect investors, "said Texas Securities Commissioner and NASAA President Denise Voigt Crawford in a statement last month.
Crawford told The Reverse Merger Report that issuers would be less likely to use the exemption if these changes were implemented due to the uncertainty surrounding the completion of their financings.
She also said no state even has the resources to review and approve the thousands of Rule 506 offerings filed each year.
Crawford said that "it is fair to say that the 120-day provision will not make it into the final bill."
However, Crawford said she and the other state regulators would like to get the authority to review private placement documents when it is suspected that there is something wrong with a specific offering.
Currently, individual state regulators do not have the power to review the private placement memorandum and other disclosure documents following an investor complaint.
Crawford also said that NASAA is pushing to add the so-called "bad boy" provision into Rule 506, which would prevent people previously convicted of securities fraud from participating in new offerings under Rule 506. |
