[Federal Register: January 4, 2008 (Volume 73, Number 3)]
[Rules and Regulations]
[Page 933-983]
[DOCID:fr04ja08-6]

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Part II

Securities and Exchange Commission

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17 CFR Parts 210, 228 et al.

Smaller Reporting Company Regulatory Relief and Simplification; Final
Rule

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 228, 229, 230, 239, 240, 249, 260, and 269

[Release Nos. 33-8876; 34-56994; 39-2451; File No. S7-15-07]
RIN 3235-Aj86

Smaller Reporting Company Regulatory Relief and Simplification

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission is adopting amendments
to its disclosure and reporting requirements under the Securities Act
of 1933 and the Securities Exchange Act of 1934 to expand the number of
companies that qualify for its scaled disclosure requirements for
smaller reporting companies. Companies that have less than $75 million
in public equity float will qualify for the scaled disclosure
requirements under the amendments. Companies without a calculable
public equity float will qualify if their revenues were below $50
million in the previous year. To streamline and simplify regulation,
the amendments move the scaled disclosure requirements from Regulation
S-B into Regulation S-K.

DATES: Effective Date: February 4, 2008, except for amendments Sec.
249.308b and Form 10-QSB, which are effective October 31, 2008, and
amendments Part 228, Sec.  249.310b, and Form 10-KSB, which are
effective March 15, 2009.
    Compliance Dates: For information on compliance, see the
SUPPLEMENTARY INFORMATION section below.

FOR FURTHER INFORMATION CONTACT: Kevin M. O'Neill, Special Counsel, or
Johanna Vega Losert, Attorney-Advisor, Office of Small Business Policy,
Division of Corporation Finance, Securities and Exchange Commission,
100 F Street, NE., Washington, DC 20549-3628,<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION: After the effective date of the rule
amendments, companies currently qualifying as ``small business
issuers'' under Regulation S-B will have the option to file their next
annual report for a fiscal year ending on or after December 15, 2007 on
either Form 10-KSB, using the scaled disclosure requirements in
Regulation S-B, or Form 10-K, using the new scaled disclosure
requirements in Regulation S-K. After a ``small business issuer'' files
that next annual report, it will be required to file quarterly reports
on Form 10-Q and annual reports on Form 10-K, and may elect to comply
with the new scaled disclosure requirements of Regulation S-K.
Companies newly qualifying as ``smaller reporting companies'' will have
the option to use the new scaled Regulation S-K requirements when
filing their next periodic report due after the effective date of the
amendments. These companies will determine eligibility for smaller
reporting company status based on the last business day of their most
recent second fiscal quarter, or based on the alternative initial
registration statement calculation discussed in Section IV. If a
registration statement was filed on an ``SB'' form before the effective
date of the rule amendments, and the company seeks to amend it after
the effective date of the rule amendments, the company must file the
amendment on the appropriate form available to the issuer without an
``SB'' designation. As discussed in Section IV, to provide a transition
period, these issuers will be able to continue using the disclosure
format and content based on the ``SB'' form until six months after the
effective date.
    We are adopting amendments to Regulation S-K,\1\ and rules and
forms under the Securities Act of 1933,\2\ Securities Exchange Act of
1934,\3\ and Trust Indenture Act of 1939.\4\ In Regulation S-K, we are
adopting amendments to Items 10, 101, 102, 201, 301, 302, 303, 305,
401, 402, 404, 407, 503, 504, 512, 601, 701, and 1118.\5\ We are
adopting amendments to Securities Act Rules 110, 138, 139, 158, 175,
405, 415, 428, 430B, 430C, 455, and 502.\6\ Further, we are rescinding
Regulation S-B \7\ and eliminating the forms associated with it, Forms
SB-1, SB-2, 10-SB, 10-QSB, and 10-KSB.\8\ We are amending Securities
Act Forms 0-1, S-1, S-3, S-4, S-8, S-11, 1-A, and F-X,\9\ Exchange Act
Rules 0-2, 0-12, 3b-6, 10A-1, 10A-3, 12b-2, 12b-23, 12b-25, 12h-3, 13a-
10, 13a-13, 13a-14, 13a-16, 13a-20, 14a-3, 14a-5, 14a-8, 14c-3, 14d-3,
15d-10, 15d-13, 15d-14, 15d-20, and 15d-21,\10\ and Exchange Act Forms
0-1, 8-A, 8-K, 10, 10-Q, 10-K, 11-K, 20-F, and SE.\11\ We are amending
Schedules 14A and 14C.\12\ In Regulation S-X,\13\ we are amending Rules
210.3-01, 210.3-05, 210.3-10, 210.3-12, 210.3-14, 210.4-01, and 210.10-
01 and adding a new Article 8 containing thefinancial statement
requirements available to smaller reporting companies.\14\ Finally, we
are amending Trust Indenture Act Rules 0-11, 4d-9, and 10a-5 \15\ and
Section 269.0-1 of the Trust Indenture Act Forms.\16\
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    \1\ 17 CFR 229.10-229.1123.
    \2\ 15 U.S.C. 77a et seq.
    \3\ 15 U.S.C. 78a et seq.
    \4\ 15 U.S.C. 77aaa et seq.
    \5\ 17 CFR 229.10, 229.101, 229.102, 229.201, 229.301, 229.302,
229.303, 229.305, 229.401, 229.402, 229.404, 229.407, 229.503,
229.504, 229.512, 229.601, 229.701, and 229.1118.
    \6\ 17 CFR 230.110, 230.138, 230.139, 230.158, 230.175, 230.405,
230.415, 230.428, 230.430B, 230.430C, 230.455, and 230.502.
    \7\ 17 CFR 228.10-228.703.
    \8\ 17 CFR 239.9, 239.10, 249.210b, 249.308b, and 249.310b.
    \9\ 17 CFR 239.0-1, 239.11, 239.13, 239.25, 239.16b, 239.18,
239.90, and 239.42.
    \10\ 17 CFR 240.0-2, 240.0-12, 240.3b-6, 240.10A-1, 240.10A-3,
240.12b-2, 240.12b-23, 240.12b-25, 240.12h-3, 240.13a-10, 240.13a-
13, 240.13a-14, 240.13a-16, 240.13a-20, 240.14a-3, 240.14a-5,
240.14a-8, 240.14c-3, 240.14d-3, 240.15d-10, 240.15d-13, 240.15d-14,
240.15d-20, and 240.15d-21.
    \11\ 17 CFR 249.0-1, 249.208a, 249.210, 249.308, 249.308a,
239.310, 249.311, 249.220f, and 249.444.
    \12\ 17 CFR 240.14a-101 and 240.14c-101.
    \13\ 17 CFR 210.3-01--210.12-29.
    \14\ 17 CFR 210.3-01, 210.3-05, 210.3-10, 210.3-12, 210.3-14,
210.4-01, 210.10-01, and new Article 8 210.8-01-8-08.
    \15\ 17 CFR 260.0-11, 260.4d-9, and 260.10a-5.
    \16\ 17 CFR 269.0-1.
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Table of Contents

I. Background and Summary
II. Description of Proposed Amendments
III. Discussion of Amendments We Are Adopting
    A. Moving Scaled Disclosure Item Requirements From Regulation S-
B Into Regulation S-K
    B. Moving Smaller Reporting Company Financial Statement
Requirements From Item 310 of Regulation S-B Into New Article 8 of
Regulation S-X; Additional Regulation S-X Changes
    C. Adopting Scaled Disclosure Item Requirements in Regulation S-
K
    1. Overview
    2. Electing Scaled Disclosure Standards on ``A La Carte'' Basis
    D. Eliminating ``SB'' Forms Associated with Regulation S-B
    E. Qualifying Standards for Treatment as ``Smaller Reporting
Company''
    1. Eligibility and Exclusions
    2. Determination Dates
    a. Reporting Companies
    b. Non-Reporting Companies Filing an Initial Registration
Statement
    c. Alternative Revenue Test for Reporting and Non-Reporting
Companies
    d. Entering and Exiting Smaller Reporting Company Status
    F. Miscellaneous
    1. Indexing for Inflation
    2. Eliminating Transitional Small Business Issuer Format
    3. Checking the ``Smaller Reporting Company'' Box
IV. Compliance Dates
V. Paperwork Reduction Act
    A. Background
    B. Summary of Comment Letters and Revisions to the Proposals
VI. Cost-Benefit Analysis

    A. Background
    B. Summary of Rules
    C. Benefits
    D. Costs
VII. Consideration of Impact on the Economy, Burden on Competition
and Promotion of Efficiency, Competition and Capital Formation
VIII. Final Regulatory Flexibility Act Analysis
    A. Reasons for and Objectives of Amendments
    1. The Advisory Committee on Smaller Public Companies
Recommended Scaled Federal Securities Regulation for Smaller
Companies
    2. Expanding Eligibility for Smaller Company Scaled Regulation
Under Amended Regulation S-K
    3. Integrating Substantive Requirements of Regulation S-B Into
Regulations S-K and S-X
    B. Significant Issues Raised by Public Comment
    C. Small Entities Subject to the Final Amendments
    D. Reporting, Recordkeeping, and Other Compliance Requirements
    E. Agency Action to Minimize Effect on Small Entities
IX. Statutory Basis and Text of Amendments

I. Background and Summary

    At an open Commission meeting on May 23, 2007, we approved
publication of eight releases designed to update and improve federal
securities regulations that significantly affect smaller companies and
their investors in today's capital markets.\17\ These releases
reflected our efforts during the past few years to provide responsive
solutions addressing the special characteristics and needs of smaller
companies and their investors. One of the releases (the ``Proposing
Release'') proposed rule amendments intended to provide general
regulatory relief and simplification for smaller companies reporting
under our rules.\18\ In that release, we proposed a series of
amendments to our scaled disclosure and reporting requirements for
smaller reporting companies. The release had three stated objectives:
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    \17\ These releases included (1) Release No. 33-8812 (June 20,
2007) [72 FR 35118] (proposing to expand eligibility requirements of
Forms S-3 and F-3 to permit registration of annual primary offerings
of up to a specified percentage of public float by companies with a
public float of less than $75 million). The Commission voted to
approve this proposal at a December 11, 2007 open meeting (archived
webcast available at http://www.sec.gov/news/openmeetings.shtml);

(2) Release No. 33-8813 (June 22, 2007) [72 FR 36822] (proposing
amendments to Rule 144 to revise the holding period for the resale
of restricted securities, simplify compliance for non-affiliates,
revise the Form 144 filing thresholds, and codify certain staff
interpretations, as well as to amend Rule 145). This proposal was
adopted in Release No. 33-8869 (Dec. 6, 2007) [72 FR 71546]; (3)
Release No. 33-8814 (June 29, 2007) [72 FR 37376] (proposing
revisions to Form D and to mandate electronic filing of Form D). The
Commission voted to approve this proposal at the December 11, 2007
open meeting (archived webcast available at http://www.sec.gov/news/openmeetings.shtml
); (4) Release No. 33-8819 (July 5, 2007) [72 FR

39670] (proposing to increase the number of companies eligible for
our scaled disclosure and reporting requirements for smaller
companies); (5) Release No. 33-8828 (Aug. 3, 2007) [72 FR 45116]
(proposing new Regulation D exemption for offers and sales of
securities to a newly defined category of ``large accredited
investors,'' as well as proposing revisions to the Regulation D
definition of ``accredited investor,'' disqualification provisions,
and integration safe harbor); (6) Release No. 34-56010 (July 5,
2007) [72 FR 37608] (proposing exemptions from requirement to
register class of securities for compensatory stock options granted
by reporting and non-reporting companies). This proposal was adopted
in Release No. 34-56887 (Dec. 3, 2007) [72 FR 69554]; (7) Release
No. 33-8810 (June 20, 2007) [72 FR 35324] (providing interpretive
guidance regarding management's report on internal control over
financial reporting under Section 13(a) or 15(d) of the Securities
Exchange Act of 1934); and (8) Release No. 33-8811 (June 20, 2007)
[72 FR 35346] (requesting additional comment on the definition of a
significant deficiency). The last proposal was adopted in Release
No. 33-8829 (Aug. 3, 2007) [72 FR 44927] (adopting definition of
``significant deficiency'').
    \18\ Release No. 33-8819 (July 5, 2007) [72 FR 39670].
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     Expanding the number of smaller companies eligible to use
scaled disclosure requirements;
     Reducing unnecessary complexity in our regulations by
combining the category of ``small business issuers'' with the category
of ``non-accelerated filers'' to the extent feasible; and
     Simplifying disclosure requirements by moving our scaled
disclosure requirements for smaller companies from Regulation S-B into
Regulation S-K, the integrated disclosure system for other companies.
    Several of the amendments in the Proposing Release had their
genesis in the recommendations made by the Advisory Committee on
Smaller Public Companies in 2006. The Commission had chartered the
Advisory Committee in March 2005 to assess the current regulatory
system for smaller companies under the federal securities laws and make
recommendations for changes.\19\ Among the specific charges of the
Committee was to consider the corporate disclosure and reporting
requirements for smaller companies, including differing regulatory
requirements based on market capitalization, and other measurements of
size or market characteristics.\20\ In its Final Report, the Advisory
Committee made several recommendations relating to scaling securities
regulation for smaller companies and labeled them as priority
items.\21\
    In 2006, 3,395 reporting companies elected to take advantage of our
current scaled disclosure and reporting requirements for small business
issuers by filing their annual reports on Form 10-KSB.\22\ We estimate
that a total of 4,976 companies will be eligible to use our scaled
disclosure requirements under today's amendments, a difference of 1,581
additional companies.\23\ The 1,581 companies would represent about 13%
of the total 11,898 reporting companies that filed annual reports with
us in 2006.
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    \19\ See SEC Advisory Committee on Smaller Public Companies,
Final Report (2006) (``Advisory Committee Final Report''), available
at http://www.sec.gov/info/smallbus/acspc.shtml.

    \20\ Advisory Committee Final Report (p. 1).
    \21\ Advisory Committee Final Report Recommendations II.P.1 (pp.
14-22), IV.P.1 (pp. 60-64), and IV.P.2 (pp. 65-68).
    \22\ As stated in the Proposing Release, these statistics are
based on 2006 data from the Commission's EDGAR (Electronic Data
Gathering, Analysis and Retrieval) filing system.
    \23\ As we noted in the Proposing Release, these statistics are
based on Thomson Financial (Datastream). The data includes available
information on registered public firms trading on the New York Stock
Exchange, the American Stock Exchange, the Nasdaq, the Over-the-
Counter Bulletin Board, and the Pink Sheets and excludes closed end
funds, exchange traded funds, American depositary receipts, and
direct foreign listings.
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    The amendments that we are adopting address the need to revisit and
adjust the Commission's small company policies to reflect changes in
our securities markets as well as changes to the regulatory landscape
since 1992, when the Commission first adopted an integrated scaled
disclosure system for small business in Regulation S-B.\24\ The
Commission adopted Regulation S-B and its associated Forms SB-1 and SB-
2 based upon the success of Form S-18, which was a simplified
registration form for smaller companies under the Securities Act that
preceded Forms SB-1 and SB-2.\25\ Regulation S-B was designed to reduce
compliance costs and improve the ability of start-ups and other small
businesses to obtain financing through the public capital markets.
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    \24\ See Release No. 33-6949 (July 30, 1992) [57 FR 36442].
    \25\ The Commission adopted Forms SB-1 and SB-2 after 10 years
of issuers using Form S-18, an experimental form the Commission
created to benefit small issuers in raising capital. Release No. 33-
6924, p. 40 (Mar. 20, 1992) [57 FR 9768].
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    The amendments we are adopting will result in the substantive
changes highlighted below. The new provisions:
     Establish a category of ``smaller reporting companies''
eligible to use our scaled disclosure requirements. The primary
determinant for eligibility will be that the company have less than $75
million in public float. When a company is unable to calculate public
float, however, such as if it has no common equity outstanding or no

market price for its outstanding common equity exists at the time of
the determination, the standard will be less than $50 million in
revenue in the last fiscal year;
     Move 12 non-financial scaled disclosure item requirements
from Regulation S-B into Regulation S-K.\26\ These scaled requirements
will be available only for smaller reporting companies. The remaining
24 item requirements of Regulation S-B \27\ are substantially the same
as their corresponding Regulation S-K item requirements. We therefore
are not amending them except in one minor instance explained below;
\28\
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    \26\ The 12 scaled item requirements are: (1) Description of
Business (Item 101); (2) Market Price of and Dividends on
Registrant's Common Equity and Related Stockholder Matters (Item
201); (3) Selected Financial Data (Item 301); (4) Supplementary
Financial Information (Item 302); (5) Management's Discussion and
Analysis of Financial Condition and Results of Operations (Item
303); (6) Quantitative and Qualitative Disclosures about Market Risk
(Item 305); (7) Executive Compensation (Item 402); (8) Transactions
with Related Persons, Promoters and Certain Control Persons (Item
404); (9) Corporate Governance (Item 407); (10) Prospectus Summary,
Risk Factors, and Ratio of Earnings to Fixed Charges (Item 503);
(11) Use of Proceeds (Item 504); and (12) Exhibits (Item 601).
    \27\ We did not propose changes to the following items of
Regulation S-K because we believe our analysis showed that the
disclosure standards in these items currently are substantially the
same as the Regulation S-B requirements: (1) Description of Property
(Item 102); (2) Legal Proceedings (Item 103); (3) Description of
Registrant's Securities (Item 202); (4) Changes In and Disagreements
with Accountants on Accounting and Financial Disclosure (Item 304);
(5) Disclosure Controls and Procedures (Item 307); (6) Internal
Control Over Financial Reporting (Item 308); (7) Internal Control
Over Financial Reporting (Item 308T); (8) Directors, Executive
Officers, Promoters and Control Persons (Item 401); (9) Security
Ownership of Certain Beneficial Owners and Management (Item 403);
(10) Compliance with Section 16(a) of the Exchange Act (Item 405);
(11) Code of Ethics (Item 406); (12) Forepart of Registration
Statement and Outside Front Cover Page of Prospectus (Item 501);
(13) Inside Front and Outside Back Cover Pages of Prospectus (Item
502); (14) Determination of Offering Price (Item 505); (15) Dilution
(Item 506); (16) Selling Security Holders (Item 507); (17) Plan of
Distribution (Item 508); (18) Interest of Named Experts and Counsel
(Item 509); (19) Disclosure of Commission Position on
Indemnification for Securities Act Liabilities (Item 510); (20)
Other Expenses of Issuance and Distribution (Item 511); (21) Recent
Sales of Unregistered Securities; Use of Proceeds from Registered
Securities (Item 701); (22) Indemnification of Directors and
Officers (Item 702); and (23) Purchases of Equity Securities by the
Issuer and Affiliated Purchasers (Item 703). In addition, although
we proposed to amend Undertakings (Item 512), we are not adopting
this change because we believe it is clear which undertakings may
and may not apply to a smaller reporting company.
    \28\ See the discussion of Description of Property (Item 102)
below. In addition, we are making technical changes to numerous item
requirements to remove references to Regulation S-B and its
associated ``SB'' forms.
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     Move the scaled financial statement requirements in Item
310 of Regulation S-B into new Article 8 of Regulation S-X, and amend
these requirements to provide a scaled disclosure option for smaller
reporting companies, requiring two years of balance sheet data instead
of one year, and make other minor adjustments after considering
comments we received; \29\
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    \29\ The amendments also rescind Regulation S-B, since all of
its substantive requirements will now be contained in Regulation S-K
or new Article 8 of Regulation S-X.
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     Permit smaller reporting companies to elect to comply with
scaled financial and non-financial disclosure on an item-by-item or ``a
la carte'' basis. As adopted, eligible companies may elect to follow
scaled financial statement requirements or to provide the larger
company financial statement presentation on a quarterly basis, rather
than require companies to elect the full fiscal year's financial
presentation in the first quarterly report of the fiscal year, as was
proposed;
     Eliminate our current ``SB'' forms but allow a phase-out
period for small business issuers transitioning to smaller reporting
company status;
     Combine elements relating to the accelerated filer
definition with qualifying standards for the smaller reporting company
determination and transition provisions to promote uniformity and
consistency with current regulations and, therefore, simplify
regulation;
     Permit all foreign companies to qualify as ``smaller
reporting companies'' if they otherwise qualify and choose to file on
domestic company forms and provide financial statements prepared in
accordance with U.S. Generally Accepted Accounting Principles (``U.S.
GAAP''); and
     Eliminate the transitional small business issuer format.

II. Description of Proposed Amendments

    We proposed an eligibility standard for our scaled disclosure
requirements for ``smaller reporting companies'' to replace the ``small
business issuer'' definition found in Item 10 of Regulation S-B.\30\
Under the proposals, the new definition of ``smaller reporting
company'' would have established eligibility for companies with less
than $75 million in public common equity float. We provided an
alternative revenue test for those companies unable to calculate public
common equity float, basing eligibility on whether the company had
annual revenues of less than $50 million in its last fiscal year. In
contrast, our previous eligibility requirements for ``small business
issuer'' status required that companies have both less than $25 million
in public common equity float and less than $25 million in annual
revenues.
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    \30\ 17 CFR 228.10.
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    Under the proposals, which we are adopting in modified form, each
company would determine its eligibility based on whether the company
is: (1) A reporting company already filing periodic and annual reports;
\31\ (2) a non-reporting company filing a registration statement under
either the Securities Act or Exchange Act; or (3) a reporting or non-
reporting company that had no public float, such as if it had no public
common equity outstanding or no market price for its common equity
existed. A reporting company determining its eligibility as a smaller
reporting company would calculate its public float as of the last
business day of its most recently completed second fiscal quarter. Non-
reporting companies filing a registration statement would calculate
their public float as of a date within 30 days of the date of the
filing of the registration statement.
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    \31\ A reporting company is required to file reports under
Section 13(a) and 15(d) of the Exchange Act. 15 U.S.C. 78m and 15
U.S.C. 78o.
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    Under the proposals, investment companies and asset-backed issuers
would be excluded from eligibility for smaller reporting company
status, as was the case under the definition of ``small business
issuer'' in Regulation S-B.\32\ As proposed, foreign companies could
qualify as smaller reporting companies and provide scaled disclosure if
they elected to use domestic company forms and provide financial
statements prepared in accordance with U.S. GAAP. Removing the
exclusion of foreign companies would make scaled treatment available to
additional smaller companies.\33\
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    \32\ Item 10(a)(1)(iii) of Regulation S-B, 17 CFR
228.10(a)(1)(iii).
    \33\ Item 10(a)(1)(ii) of Regulation S-B only permits U.S. or
Canadian issuers to qualify as ``small business issuers.''
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    We proposed that smaller reporting companies be required to exit
the scaled disclosure system the fiscal year after their public float
rose above $75 million as of the last business day of their second
fiscal quarter.\34\ Smaller reporting companies attempting to establish
eligibility to enter the scaled disclosure system again would be
required to determine that their public float fell below $50 million as
of the last business day of their second fiscal quarter, and would be
able to use scaled disclosure again in the next fiscal year following
the determination, starting

with the first Form 10-Q of the next fiscal year.
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    \34\ The entering and exiting rules in the smaller reporting
company system are modeled after the method of determining
accelerated filer status set forth in Rule 12b-2. 17 CFR 240.12b-2.
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    An objective of our proposals was to simplify and improve our
disclosure and reporting rules for smaller companies by moving the
Regulation S-B disclosure requirements for smaller companies into
Regulation S-K, as recommended by the SEC Advisory Committee on Smaller
Public Companies. As a result of our rulemaking, we identified 13 item
requirements in Regulation S-B that provided scaled disclosure for
smaller companies.\35\ We reasoned that consolidation of the Regulation
S-K and S-B disclosure requirements would provide a more unified set of
rules that would be easier to use. To accomplish this, we proposed to
move item requirements in Regulation S-B containing substantive scaled
non-financial disclosure requirements into Regulation S-K by adding a
new paragraph to the items of Regulation S-K that would contain
separate disclosure standards for smaller reporting companies. We did
not propose any major substantive changes to the items we were moving
from Regulation S-B into Regulation S-K, but sought comment from the
public on substantive changes they would recommend.
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    \35\ See note 26 above.
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    One of the item requirements in Regulation S-B providing scaled
disclosure requirements did not have a similar disclosure item
requirement in Regulation S-K. Consequently, our specific proposals
included adding a new Item 310 in Regulation S-K for financial
statements. Item 310 of Regulation S-K would have set forth the
alternative requirements on form and content of financial statements
for smaller companies that formerly appeared in Item 310 of Regulation
S-B.
    The proposals also allowed a smaller reporting company to choose,
on an item-by-item basis or ``a la carte'' basis, to comply with either
the scaled disclosure and financial reporting requirements made
available in Regulation S-K for smaller reporting companies or the
requirements for other companies in Regulation S-K, when the
requirements for other companies were more rigorous.
    The proposal, like the amendments we are adopting, would rescind
all of our forms designated with the letters ``SB.'' Smaller reporting
companies would be eligible to file on Form S-1, rather than on Form
SB-1 or SB-2 as before, to offer securities to the public. This would
provide a smaller reporting company the ability to incorporate by
reference its previously filed Exchange Act reports if the company
meets the requirements set forth under General Instruction VII of Form
S-1.\36\
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    \36\ General Instruction VII of Form S-1 sets forth the
eligibility criteria to qualify for incorporation by reference. The
registrant must be required to file reports pursuant to Section 13
or Section 15(d) of the Securities Exchange Act of 1934 and must
have filed all reports and materials during the preceding 12 months.
The company must have filed an annual report for its most recently
completed fiscal year. Section D of the instruction disqualifies
companies that, in the past three years, were any of the following:
    (a) A blank check company as defined in Rule 419(a)(2);
    (b) A shell company, other than a business combination related
shell company, each as defined in Rule 405; or
    (c) A registrant for any offering of penny stock as defined in
Rule 3a51-1 under the Exchange Act.
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    Finally, the proposals, like the amendments we are adopting, would
eliminate the ``transitional small business issuer format'' associated
with Form SB-1 and annual reports on Form 10-KSB.\37\ A small business
issuer using the transitional format followed disclosure based on Model
A or B found in Regulation A. These two disclosure models were intended
to ease transition from non-reporting to reporting status for small
business issuers preparing disclosure on initial registration
statements and annual reports. In our Proposing Release we noted,
however, that the number of companies registering on Form SB-1 and
following the disclosure format within Form 10-KSB had significantly
declined over time.\38\
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    \37\ See Proposing Release Release No. 33-8819, pp. 40-41 (July
5, 2007) [72 FR 39680].
    \38\ For example, during the past five years, the Commission has
received only 56 Form SB-1 registration statements. For years 2000
through 2005, two small business issuers out of 56 filed a Form 10-
KSB using the transitional disclosure format.
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    We received 21 comment letters on the proposals,\39\ including six
from public accounting firms. We also received comment letters from
professional and trade associations, a law firm, an associate professor
of finance, two small business owners, and the Small Business
Administration's Office of Advocacy. In general, the comment letters
strongly supported our efforts to simplify our scaled disclosure
requirements for smaller reporting companies and expand eligibility for
them.
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    \39\ The public comments we received are available for
inspection in our Public Reference Room at 100 F Street, NE,
Washington, DC 20549 in File No. S7-15-07, or may be viewed at
http://www.sec.gov/comments/s7-15-07/s71507.shtml.

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III. Discussion of Amendments We Are Adopting

    After considering the public comments, we are adopting the
amendments substantially as we proposed them, with the modifications
discussed below.

A. Moving Scaled Disclosure Item Requirements From Regulation S-B Into
Regulation S-K

    Many of the comment letters supported moving our scaled disclosure
requirements from Regulation S-B into Regulation S-K.\40\ In general,
the comments in these letters viewed moving the requirements as having
a positive impact by reducing complexity and promoting more streamlined
regulation. One letter noted that combining the two disclosure systems
would allow smaller reporting companies to more easily evaluate the
extent of the differences between the requirements for smaller
reporting companies and larger companies and consider which requirement
better meets the needs of their investors.\41\
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    \40\ See, e.g., Letter from the American Bar Association,
Section of Business Law (ABA).
    \41\ See Letter from PricewaterhouseCoopers LLP.
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    A few comment letters opposed moving the scaled disclosure
requirements into Regulation S-K, indicating that having all of the
smaller company rules in one place was convenient for smaller
companies.\42\ These comment letters expressed concern that the
migration into Regulation S-K would increase legal and accounting costs
for smaller companies and make the rules more complex for smaller
companies to understand. A few comment letters suggested providing the
scaled smaller reporting company disclosure requirements in a separate
section of Regulation S-K.\43\
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    \42\ See, e.g., Letters from the Chamber of Commerce and New
York State Society of Certified Public Accountants (NYSSCPA).
    \43\ See, e.g., Letter from KPMG.
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    We are adopting our proposal to move our Regulation S-B scaled
disclosure requirements into Regulation S-K. After considering the
comments, we believe combining the two disclosure systems and setting
out the smaller reporting company scaled item requirements in separate
paragraphs within Regulation S-K is appropriate. We believe our
amendments eliminate redundancies and provide a more streamlined
disclosure system for smaller reporting companies. In response to the
concern that moving the item requirements will create complexity for
smaller companies, we are including an index of

scaled disclosure requirements in the definition of smaller reporting
company at the beginning of Regulation S-K \44\ to highlight items of
the Regulation that contain the scaled disclosure requirements specific
to smaller reporting companies.
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    \44\ See new Item 10(f) of Regulation S-K (Index of Scaled
Disclosure Available to Smaller Reporting Companies).
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    Regulation S-B has 12 non-financial item requirements that provide
scaled disclosure options to smaller reporting companies. Under this
rulemaking, these 12 item requirements are being moved to separate
paragraphs within Regulation S-K. In some cases, smaller reporting
companies are not required to provide disclosures required of larger
companies. For example, while larger companies are required to provide
disclosure under Item 305 on quantitative and qualitative disclosures
about market risk, smaller companies are not currently required to do
so under the same item requirement in Regulation S-B. In cases like
this, we include a paragraph in the relevant item of Regulation S-K
indicating that smaller reporting companies are not required to respond
to the item.
    In addition to the Regulation S-B and S-K differences, the forms
themselves may contain different disclosure requirements for smaller
reporting companies. Currently, Forms 10-SB, 10-KSB and 10-QSB do not
require risk factor disclosure from small business issuers. The
amendments carry this difference in disclosure requirements over to
Forms 10, 10-K and 10-Q by adding instructions indicating that smaller
reporting companies are not required to provide risk factor disclosure
in these Exchange Act forms.

B. Moving Smaller Reporting Company Financial Statement Requirements
From Item 310 of Regulation S-B Into New Article 8 of Regulation S-X;
Additional Regulation S-X Changes

    Several comment letters recommended moving the rules on form and
content of financial statements for smaller reporting companies now in
Item 310 of Regulation S-B into Regulation S-X, rather than into a new
Item 310 of Regulation S-K, as proposed. Several comment letters also
agreed with the Advisory Committee recommendation to require smaller
reporting companies to provide two years of comparative audited balance
sheet data in annual financial statements under these rules, rather
than one year, as is currently required under Regulation S-B.\45\ The
comment letters are persuasive that we should adopt these
recommendations as part of our rule amendments. Accordingly, we are
moving the financial statement rules for smaller reporting companies
into a new Article 8 of Regulation S-X \46\ and will require two years
of comparative audited balance sheet data of smaller reporting
companies. Comparative balance sheets will provide a much more
meaningful presentation for investors without a significant additional
burden on smaller reporting companies, since the earlier year data
should be readily available for the purposes of preparing the other
financial statements.\47\ We also are making technical and language
changes to the rules on form and content of financial statements for
smaller public companies to facilitate their placement in Article 8 of
Regulation S-X rather than in Regulation S-B or Regulation S-K.
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    \45\ We had specifically asked for comments on this
recommendation in the Proposing Release. See Proposing Release
Release No. 33-8819, p. 26 [72 FR 39676].
    \46\ To be codified at 17 CFR 210.8-01--.8-08.
    \47\ Although the earlier year data would be readily available,
auditors must undertake appropriate audit procedures related to the
prior fiscal year.
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    We also are adopting technical amendments to Rule 3-05(b)(2)(iv) of
Regulation S-X that were tied conceptually to the small business issuer
threshold in Regulation S-B that we are replacing with the definition
of smaller reporting company in Regulation S-K. Rule 3-05 of Regulation
S-X requires the inclusion of financial statements of businesses
acquired or to be acquired, so-called ``target companies,'' in
registration statements and Form 8-K reports. The number of years of
audited financial statements to be included for a target company is
determined using the conditions specified in the definition of
significant subsidiary in Rule 1-02(w) of Regulation S-X. If the net
revenues reported by the target company for the latest fiscal year are
less than $25 million and three years of financial statements would
otherwise be required, the earliest of the three fiscal years may be
omitted pursuant to Rule 3-05(b)(2)(iv) of Regulation S-X.
    Several comment letters noted that in light of the $50 million in
revenues threshold proposed for determining a company's qualification
as a smaller reporting company if a company is unable to calculate
public float, the Commission should consider revising this rule to
raise to $50 million the $25 million threshold currently used to limit
to two the periods required for audited financial statements of an
acquired business.\48\ The $25 million threshold was based on the $25
million in revenues standard in Regulation S-B that we are
rescinding.\49\ We are amending this standard to increase the threshold
to $50 million in revenues, as suggested by the commenters.
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    \48\ See, e.g., Letter from Center for Audit Quality (CAQ).
    \49\ In 1996, the Commission adopted revisions to rules that
streamlined requirements with respect to financial statements of
significant business acquisitions in filings made under the
Securities Act and the Exchange Act. The $25 million threshold limit
was intended to be consistent with criteria for small business
issuers. Release No. 33-7355, p. 36 (Oct. 10, 1996).
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C. Adopting Scaled Disclosure Item Requirements in Regulation S-K

1. Overview
    The following is a list of item requirements we are amending in
Regulation S-K to include the substance of the scaled standards for
smaller reporting companies now in the same item number of Regulation
S-B. The adopted amendments are substantially as described in the
Proposing Release, but with the changes discussed below:
    Item 101 (Description of Business). We are adding a new paragraph
(h) to this item to set forth the alternative disclosure standards for
smaller companies that appeared in Item 101 of Regulation S-B.
Generally, the different requirements for smaller reporting companies
under Item 101 involve providing a less detailed description of the
company's business. For example, the Regulation S-K standard for Item
101 requires financial information about segments, which the standard
for smaller reporting companies does not require.\50\ In addition,
smaller reporting companies will be required to provide and disclose
business development activities for only three years, instead of the
five-year disclosure required of larger companies by Item 101 of
Regulation S-K.
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    \50\ Application of U.S. GAAP (FAS 131) may, however, require
segment information in the notes to the financial statements. 17 CFR
229.101(b).
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    We also are implementing additional minor revisions that replace
the reference to Canadian issuers. Since we are making the smaller
reporting company standards available to foreign issuers generally, we
are requiring that these issuers provide disclosure on enforceability
of civil liability against foreign persons. Previously, Item 101 of
Regulation S-B had required this disclosure from Canadian issuers only
because those were the only foreign issuers eligible for Regulation S-B
disclosure standards. The item requirement applicable to smaller
reporting companies also will no longer

refer to the foreign private issuer requirement to disclose whether the
report will include a reconciliation of financial information with U.S.
generally accepted accounting principles, because smaller reporting
companies must provide financial statements prepared in accordance with
U.S. GAAP.
    Item 201 (Market Price of and Dividends on Registrant's Common
Equity and Related Stockholder Matters). We are revising Instruction 6
to paragraph (e) of this Regulation S-K item requirement to reflect
that smaller reporting companies (instead of ``small business
issuers'') are not required to provide a performance graph.
    Item 301 (Selected Financial Data); Item 302 (Supplementary
Financial Information). We are adding a new paragraph (c) to each item
requirement, providing that smaller reporting companies are not
required to present the information required by these item
requirements.
    Item 303 (Management's Discussion and Analysis of Financial
Condition and Results of Operations). As provided in new paragraph (d),
this item sets forth the scaled requirements.\51\ For example, under
this item requirement, smaller reporting companies will:
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    \51\ As discussed below, we are also adding references to two
Industry Guides to this item.
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     Provide only two years of analysis if the company is
presenting only two years of financial statements, instead of the three
years of analysis required of larger companies that are required to
provide three years of financial statements; and
     Not be required to provide tabular disclosure of
contractual obligations.
    Item 305 (Quantitative and Qualitative Disclosures about Market
Risk). New paragraph (e) in this item specifies that smaller reporting
companies are not required to disclose Item 305 information.
    Item 402 (Executive Compensation). New paragraphs (l) through (r)
set forth the alternative standards for smaller reporting companies for
disclosure of compensation of executives and directors that were in
Item 402 of Regulation S-B.\52\ Smaller reporting companies will:
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    \52\ As proposed, the scaled disclosure for this item would have
been in new paragraph (l), but in order to clarify the requirements,
the adopted Item restates the requirements for smaller reporting
companies in several paragraphs.
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     Provide executive compensation disclosure for only three
named executive officers (specifically including the principal
executive officer but not the principal financial officer), rather than
the five required of larger companies;
     Provide the Summary Compensation Table disclosure for only
two years, rather than the three years required of larger companies;
     Not be required to provide a Compensation Discussion and
Analysis;
     Provide only three of the seven tables \53\ required of
larger companies;
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    \53\ These are the Summary Compensation Table, the Outstanding
Equity Awards at Fiscal Year End Table, and the Director
Compensation Table.
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     Provide alternative narrative disclosures; and
     Not be required to include footnote disclosure of the
grant date fair value of equity awards in the Director Compensation
Table.
    Item 404 (Transactions with Related Persons, Promoters and Certain
Control Persons). We are making changes to the introductory text of
paragraph (c)(1), and adding paragraph (d) before the instructions to
this item to change the calculation of total assets for smaller
reporting companies from 1% of their total assets based on the average
of total assets at year end for the last three completed fiscal years
to the last two completed fiscal years. We believe this standard is
more consistent with the two years of financial statements required of
smaller reporting companies. Under new Item 404(d) of Regulation S-K,
smaller reporting companies will: \54\
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    \54\ See Section III.C.2, clarifying that to the extent the
smaller reporting company scaled disclosure requirement is more
rigorous than the same larger company item requirement, smaller
reporting companies will be required to comply with the more
rigorous smaller reporting company requirement.
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     Not be required to disclose policies and procedures for
reviewing related person transactions, which is required of larger
companies;
     Be required to provide disclosure regarding a transaction
where the amount exceeds the lesser of 1% of a smaller company's total
assets or $120,000;
     Be required to provide additional specific information
about underwriting discounts and commissions, and corporate parents;
and
     Be required to provide disclosure regarding promoters and
certain control persons.
    Item 407 (Corporate Governance). New paragraph (g) to Item 407 of
Regulation S-K specifies that smaller reporting companies are:
     Not required to provide Compensation Committee Interlock
and Insider Participation disclosure or a Compensation Committee
Report; and
     Not required to provide an Audit Committee Report until
the first annual report after their initial registration statement is
filed with the Commission and becomes effective.
    Item 503 (Prospectus Summary, Risk Factors, and Ratio of Earnings
to Fixed Charges). New paragraph (e) to this item specifies that
smaller reporting companies need not provide the information required
by paragraph (d) of Item 503 regarding the ratio of earnings to fixed
charges when a registrant issues debt, or the ratio of combined fixed
charges and preference dividends to earnings when a registrant issues
preference equity securities. In addition, we have added instructions
to the risk factor disclosure requirements set forth in Exchange Act
Forms 10, 10-K and 10-Q to indicate that smaller reporting companies
are not required to provide Item 503 risk factor disclosure in these
filings.\55\
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    \55\ See Section III.A above. The Securities Offering Reform
final rule amendments stated that the risk factor disclosure
requirement did not apply to small business issuers filing on Form
10-KSB or Form 10-SB. The amendments we are adopting carry this
difference in disclosure requirements over to the Forms 10, 10-K and
10-Q for smaller reporting companies. See Securities Offering Reform
Release 33-8591 (July 19, 2005) [70 FR 44722, 44786-87].
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    Item 504 (Use of Proceeds). We are revising Instruction 6 to this
item to clarify that new Article 8 of Regulation S-X, rather than the
other articles of Regulation S-X, will govern whether financial
statements of businesses proposed to be acquired must be included in
the filings of smaller reporting companies.
    Item 601 (Exhibits). New paragraph (c) reflects that smaller
reporting companies need not provide Exhibit 12 (Statements re
Computation of Ratios).
    Other Regulation S-K Items. We identified 24 item requirements in
Regulation S-B that were substantially similar or identical to the same
numbered item requirements in Regulation S-K. In these cases, we
determined it was appropriate to require that smaller reporting
companies follow the same item requirements as larger companies. In the
Proposing Release, we identified Item 512 (Undertakings) as a scaled
item requirement for smaller reporting companies; however, we now
believe no change is needed because it is clear which undertakings may
apply to a smaller reporting company's filings. We are, therefore, not
including a new paragraph (m) in Regulation S-K, as proposed.
    In addition, as described below, we are amending Item 102
(Description of Property) of Regulation S-K to include references to
the Industry Guides \56\

noted below and highlighting the requirements of Item 401 (Directors,
executive officers, promoters and control persons). To further maintain
consistency with references to other industry guides in the disclosure
item requirements, we also are adding instructions to Item 303
directing companies' attention to:
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    \56\ The Industry Guides serve as expressions of the policies
and practices of the Division of Corporation Finance. They are of
assistance to issuers, their counsel and others preparing
registration statements and reports, as well as to the Commission's
staff. The Industry Guides are not rules, regulations, or statements
of the Commission. The Commission has neither approved nor
disapproved these interpretations. See Release 33-6384 (Mar. 16,
1982).
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     Industry Guide 3--Statistical disclosure by bank holding
companies; and
     Industry Guide 6--Disclosure concerning unpaid claims and
claim adjustment expenses of property-casualty insurance underwriters.
    The Regulation S-B item requirement on the Description of Property
in Item 102 included detailed instructions specific to small business
issuers engaged in: (1) Significant mining operations; (2) oil and gas
producing activities; and (3) real estate activities. Under Item 102 of
Regulation S-B, mining companies are directed to the information called
for in Industry Guide 7; oil and gas producing issuers are directed to
the information called for in Industry Guide 2; and real estate
companies are directed to the information called for in Industry Guide
5. Regulation S-K, however, does not include any references to these
industry guides. Several commenters suggested that we revise Item 102
of Regulation S-K to include references to industry guides.\57\ We
agree, and are amending Item 102 of Regulation S-K to include
references to the following industry guides:
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    \57\ See, e.g., Letters from KPMG and Grant Thornton.
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     Industry Guide 2--Disclosure of oil and gas operations;
     Industry Guide 4--Prospectus relating to interests in oil
and gas programs;
     Industry Guide 5--Preparation of registration statements
relating to interests in real estate limited partnerships; and
     Industry Guide 7--Description of property by issuers
engaged or to be engaged in significant mining operations.
    Item 401 of Regulation S-K (Directors, executive officers,
promoters and control persons), differs from Regulation S-B in one
respect. Under Regulation S-B, the disclosure pertaining to Federal
bankruptcy laws or state insolvency laws related only to ``any
bankruptcy petition filed by or against any business of which such
person was a general partner or executive officer either at the time of
the bankruptcy or within two years prior to that time.'' \58\ Under
Regulation S-K, disclosure must be provided pertaining to any petitions
filed under the Federal bankruptcy laws or any state insolvency laws
filed by or against a director or officer of the company.\59\ We
believe it is appropriate to require disclosure about a personal
bankruptcy petition filed by or against a director or officer of a
smaller reporting company given that, in light of the generally smaller
level of operations of smaller reporting companies, it may be material
to an evaluation of the ability or integrity of any director or person
to be nominated to become a director or executive officer of the
smaller reporting company. Accordingly, smaller reporting companies now
will be required to comply with the slightly different disclosure
requirement of the Regulation S-K item.
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    \58\ See Item 401(d)(1) of Regulation S-B. 17 CFR 228.401(d)(1).
Under Regulation S-B, issuers provide legal proceedings disclosure
about promoters and control persons for the past five years.
Regulation S-K requires disclosure on legal proceedings for control
persons and promoters for registrants that have not been subject to
the reporting requirements for Section 13(a) or 15(d) of the
Exchange Act for the twelve months immediately before the filing of
the registration statement, report or statement. 17 CFR 229.401(f)
and (g).
    \59\ See Item 401(f)(1) of Regulation S-K. 17 CFR 229.401(f)(1).
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2. Electing Scaled Disclosure Standards on ``A La Carte'' Basis
    Commenters generally supported the proposal to allow smaller
reporting companies to choose compliance with either the smaller
reporting company scaled disclosure requirements or the larger company
disclosure requirements in Regulation S-K on an item-by-item or ``a la
carte'' basis.\60\ One comment letter expressed the view that the
smaller reporting company disclosure requirements would serve as a
baseline that would allow companies to provide any additional
disclosure they deemed important to investors.\61\ Another set of
comments noted that the ``a la carte'' approach is already sanctioned
by disclosure rules generally.\62\ This letter explained that line-item
disclosure requirements generally permit providing more disclosure than
is required by the line items. Additionally, issuers are required to
disclose all material facts that are necessary to make the statements
included in the document not misleading, which may require disclosures
in excess of line item requirements.\63\
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    \60\ See, e.g., Letter from Independent Community Bankers of
America (ICBA).
    \61\ See Letter from Deloitte & Touche LLP (Deloitte).
    \62\ See Letter from ABA.
    \63\ The ABA cited the following in support of this statement:
Sections 11 and 12(a)(2) of the Securities Act and Rule 408 under
the Securities Act, and Rules 10b-5 and 12b-20 under the Exchange
Act.
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    Some accounting firms commenting on the a la carte approach
requested that we address what one commenter referred to as the ``lock-
in'' aspect of the proposal. In the Proposing Release, we explained
that a smaller reporting company would have the option to take
advantage of the smaller reporting company requirements for one, some,
all or none of the item requirements, at its election, in any one
filing. We proposed to require, however, that a smaller reporting
company provide its financial statements on the basis of the scaled
financial statement requirements or the larger company financial
statement requirements for a single fiscal year, and not be permitted
to switch back and forth from one to another in different filings
within a single fiscal year.
    One accounting firm noted that it was unclear how the a la carte
approach would work if issuers were required to elect in the first
quarterly report whether they would follow the scaled financial
statement requirements or the larger company Regulation S-X
requirements in that same fiscal year's annual report on Form 10-K.\64\
According to this letter, making a determination in this manner would
require a smaller reporting company that wants to preserve the option
of following the smaller reporting company requirements in its annual
report on Form 10-K to adhere to the smaller reporting company rules
and not provide any additional information in the first quarterly
report on Form 10-Q. Another accounting firm expressed the concern that
a smaller reporting company might elect to provide more than the
minimum disclosures only in periods when the additional disclosures
tended to be favorable.\65\ These comment letters agreed that the a la
carte approach would work if the Commission clarified that although the
smaller reporting company disclosure and financial statement
requirements would appear to establish the minimum disclosure
requirements, Rule 12b-20 under the Exchange Act \66\ would require
that a smaller reporting company provide any additional

information beyond those minimum disclosure requirements, in order to
avoid a misleading presentation.\67\ The accounting firms suggested
that we encourage smaller reporting companies to provide consistent
disclosures in succeeding periods in order to respond to investor
expectations and allow period-to-period comparisons.
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    \64\ See Letter from BDO Seidman, LLP (BDO).
    \65\ See Letter from Ernst & Young LLP (E&Y).
    \66\ 17 CFR 240.12b-20.
    \67\ See Letters from E&Y and CAQ.
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    The proposals would have required companies to make the
determination whether to report financial statement disclosure on a
scaled basis in the first quarter due after the fiscal year covering
the determination date. After reviewing the suggestions in several
comment letters, however, we believe it is appropriate to permit
smaller reporting companies to choose to comply with both the non-
financial and financial item requirements on an item-by-item basis when
these disclosures are provided consistently and when they are
consistent with the legal requirements under the federal securities
laws, including Securities Act Rule 408 and Exchange Act Rule 12b-20.
Additionally, we stress the importance of providing disclosure that
permits investors to make period-to-period comparisons, whether
quarterly or annually.
    We continue to expect that our staff will evaluate item-by-item
compliance by smaller reporting companies with only the Regulation S-K
requirements applicable to smaller reporting companies, and not with
the requirements applicable to larger companies. This will be the case
even if the company whose filing is being reviewed chooses to comply
with the larger company requirements. Finally, as we noted in the
Proposing Release, the a la carte approach will have no effect on the
legal requirements and liabilities that apply to all disclosures made
by issuers.\68\
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    \68\ Release No. 33-8819, n. 76 p. 33 [72 FR 39678].
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    We are further clarifying that to the extent the smaller reporting
company scaled item requirement is more rigorous than the same larger
company item requirement, smaller reporting companies will be required
to comply with the more rigorous, smaller reporting company item
requirement. Also, we do not believe it is appropriate for a smaller
reporting company to comply with a larger reporting company Regulation
S-K item requirement if that requirement sets a higher threshold
obviating the need for the smaller reporting company to provide
disclosure. For example, unlike the larger company requirement under
Item 404 of Regulation S-K, smaller reporting companies are required to
disclose additional specific information about underwriting discounts
and commissions and corporate parents.\69\ In this case, a smaller
reporting company would be required to provide the additional Item 404
disclosure.
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    \69\ See Instructions to Item 404(d) of Regulation S-K, 17 CFR
229.404(d).
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    Currently, the smaller reporting company requirements under Item
404 of Regulation S-K \70\ present the only instance where the scaled
requirements could be more rigorous than the larger company standard.
This is because a smaller reporting company is required to provide
disclosure on a related person transaction since the beginning of the
company's last fiscal year if the amount involved in the transaction
exceeds the lesser of $120,000 or 1% of the average of the company's
total assets at year end for the last two completed fiscal years. In
contrast, a larger company reporting under the same Item 404 Regulation
S-K requirement is required to provide disclosure on a related person
transaction since the beginning of the last fiscal year if the
transaction exceeds $120,000.\71\ A smaller reporting company's related
person transaction may more easily exceed 1% of the average of the
smaller reporting company's total assets than $120,000, as required for
larger companies under the same item requirement. We believe this may
be the case because 1% of a smaller company's total assets might be
appreciably lower than $120,000.
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    \70\ New Regulation S-K Item 404(d)(1) related person disclosure
requirement for smaller reporting companies.
    \71\ 17 CFR 229.404(a).
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D. Eliminating ``SB'' Forms Associated With Regulation S-B

    While some comment letters appeared to support the elimination of
the forms designated with the letters ``SB'' associated with Regulation
S-B,\72\ along with moving the smaller reporting company requirements
from Regulation S-B into Regulation S-K, others questioned whether this
approach would reduce compliance burdens and lower costs for smaller
companies.\73\ Some of the letters questioning the elimination of the
SB forms recommended a two-year phase-in period to help smaller
companies adjust to the transition. Some letters expressed a general
perception that eliminating the SB forms would lead to increased costs
for smaller reporting companies because Forms 10, 10-K, 10-Q and S-1,
which would be used by smaller companies if the SB forms were
eliminated, appeared to have more item disclosure requirements.\74\ One
commenter stated, however, that eliminating the ``SB'' forms would
provide both time and cost savings to smaller reporting companies that
will be eligible to incorporate information from their previously filed
Exchange Act periodic reports into a Form S-1 registration
statement.\75\ None of the comment letters explained how using Forms
10, 10-K, 10-Q, and S-1 would increase costs for smaller reporting
companies. One letter noted, however, that a smaller company probably
would take longer to go through Form 10-K and Form 10-Q to figure out
exactly what applied to the company and what did not apply in terms of
required disclosures.\76\ In contrast, another comment letter noted
that the elimination of ``SB'' forms would allow smaller reporting
companies to incorporate information from their previously filed
Exchange Act reports into a Form S-1 registration statement, which
would result in time and cost savings to the smaller reporting
company.\77\
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    \72\ See, e.g., Letter from ABA.
    \73\ See, e.g., Letter from Office of Advocacy of the U.S. Small
Business Administration (SBA Advocacy Office).
    \74\ See, e.g., Letter from the International Association of
Small Business Broker Dealers and Advisors (``IASBDA'').
    \75\ See Letter from ABA.
    \76\ See Letter from James J. Angel, Ph.D., CFA (``Prof. James
Angel'').
    \77\ See Letter from ABA.
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    Some of the comment letters apparently misperceived that the SB
forms are simpler and shorter than forms larger companies use. This is
not the case. The SB forms themselves are not necessarily simpler to
use than the forms that larger companies use. The scaling and increased
simplicity for smaller companies generally occurs in the item
requirements of Regulation S-B, rather than the associated SB forms,
and we are moving the item requirements into Regulation S-K with very
few changes.\78\
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    \78\ Moreover, the SB forms are not necessarily substantially
shorter than the comparable forms for larger companies. Form 10-SB
is actually longer, at 4\1/2\ pages, than Form 10, which is less
than 4 full pages long; Form 10-KSB is 11 pages long, while Form 10-
K is 12; Form SB-2 is 5 pages long, while Form S-1 is just over 6
pages, not including instructions on summary prospectuses.
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    Nevertheless, after considering the comments, we have decided not
to eliminate the Exchange Act reporting SB forms immediately, but to
phase them out to ease the transition for smaller companies. We
considered commenters' concerns regarding current small business
issuers moving to the Forms 10-K and 10-Q, and concluded that our
transition schedule will provide an

adequate period for these companies to continue to file reports on
these forms, if they so desire.\79\ Further, to help current small
business issuers make the transition, the Division of Corporation
Finance's Office of Small Business Policy plans to provide an
informational brochure to assist their transition to the new smaller
reporting company form requirements.
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    \79\ See Section IV below on compliance dates.
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E. Qualifying Standards for Treatment as ``Smaller Reporting Company''

    Many of the comment letters in favor of our proposed definition of
``smaller reporting company'' agreed that combining the categories of
non-accelerated filers with small business issuers for purposes of the
definition provided a convenient and simple approach because it tracks
the accelerated filer definition and reduces regulatory complexity.\80\
In the Proposing Release, we reasoned that requiring only a public
float test for most companies to qualify would provide additional
simplicity, consistency and certainty. Eliminating a revenue test also
would broaden the category of eligible companies. Our decision to focus
on a company's non-affiliate common equity market capitalization or
``public float'' was also consistent with the Commission's current
regulatory standards for purposes of Form 10-K, Form S-3, and the
accelerated filer definition. Setting the public float ceiling at $75
million for smaller reporting companies further aligns the smaller
reporting company definition with the non-accelerated filer definition.
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    \80\ See, e.g., Letters from PricewaterhouseCoopers and E&Y.
---------------------------------------------------------------------------

    The Advisory Committee recommended that we require companies to
determine eligibility based on total equity market capitalization
rather than public float. Although the Advisory Committee acknowledged
that the Commission has historically and consistently used public float
as a measurement in analogous regulatory contexts, it stated that
equity market capitalization would better measure total financial
exposure to investors.\81\ The Advisory Committee recommended extending
the Commission's non-financial scaled disclosure requirements, covering
disclosure and reporting, to companies in the lowest 1% of market
capitalization. Some of the comment letters we received on the
Proposing Release agreed with the Advisory Committee equity market
capitalization preference, stating that it was simpler and more widely
understood than the calculation of public float. The majority of
comment letters supported our proposals to require a public float
standard only, agreeing we should require a revenue test only if a
company is unable to calculate public float.
---------------------------------------------------------------------------

    \81\ Advisory Committee Final Report 19.
---------------------------------------------------------------------------

    Several comment letters opposed increasing the public float ceiling
to a level higher than $75 million.\82\ One comment letter explained
that because smaller companies typically do not have a large analyst
following, financial information provided by the company takes on
greater importance in communicating results to investors.\83\ Another
letter noted that to balance protecting investors and promoting capital
formation by small businesses, ``reduced'' disclosures should be
limited to those public companies with relatively limited and less
complex operations.\84\ Most comment letters, however, supported a
higher public float ceiling than $75 million.\85\ Some of these comment
letters argued that many companies with a public float greater than $75
million are still quite small. Several commenters suggested that the
Commission provide scaled regulation to companies with up to $787
million in equity market capitalization, as they seemed to believe the
Advisory Committee had recommended.\86\
---------------------------------------------------------------------------

    \82\ See Letters from PricewaterhouseCoopers and E & Y.
    \83\ See Letter from PricewaterhouseCoopers.
    \84\ See Letter from E&Y.
    \85\ See, e.g., Letters from SBA Advocacy Office and ABA.
    \86\ The Advisory Committee recommended extending the
Commission's scaled disclosure regime to the lowest 6% of total U.S.
equity market capitalization, which would have included companies
with less than $787 million in market capitalization as of March 31
and June 10, 2005. But the Advisory Committee only identified the
rules on form and content of financial statements in Item 310 of
Regulation S-B as appropriate for application to that category of
companies. The Advisory Committee recommended extending the
Commission's other scaled disclosure rules, covering disclosure and
reporting, to companies in the lowest 1% of market capitalization,
which, as explained in the Proposing Release at page 16 [72 FR
39673], is essentially the same group and proposal contained in the
Proposing Release--reporting companies with less than $75 million in
public equity float--which we are adopting with few changes today.
As calculated from data obtained from Thomson Financial
(Datastream), the overlap between reporting companies with $128
million in market capitalization and reporting companies with $75
million in public float is approximately 98%.
---------------------------------------------------------------------------

    We are adopting, as proposed, a definition for ``smaller reporting
companies'' that requires companies to have a public float of less than
$75 million. We believe this standard is appropriately scaled in that
it reduces costs to smaller companies caused by unnecessary information
requirements, consistent with investor protection.
    As adopted, the definition will make eligibility for smaller
reporting company status contingent solely on public float for most
companies. Alternatively, for companies that are unable to calculate
public float, we are, as proposed, providing a revenue test. If a
company has no common equity outstanding or no market price for its
outstanding common equity exists at the time of its eligibility
determination, the company would qualify as a smaller reporting company
if it had less than $50 million in revenues in the last fiscal year.
This is a departure from the dual eligibility test under the Regulation
S-B system, which required separate calculations under public float and
annual revenues. By eliminating the revenue test for most companies,
the new definition of smaller reporting company simplifies and
streamlines the definition while expanding the number of companies
eligible to qualify.
    As adopted, Item 10(f) of Regulation S-K will set forth the
definition for ``smaller reporting company.'' We are further
streamlining the definition and clarifying technical inconsistencies in
the Proposing Release. We are also modifying the proposed introduction
of Item 10, which indicated that smaller reporting companies would be
permitted to choose to comply with either the requirements applicable
to smaller reporting companies or the requirements applicable to other
companies. Companies may make a choice on most of the scaled disclosure
item requirements, unless the requirements for smaller reporting
companies specify that smaller reporting companies must comply with the
smaller reporting company requirements.\87\ If the item requirement
does not require specific compliance, then the smaller reporting
company will be permitted to choose scaled or standard disclosure
requirements.
---------------------------------------------------------------------------

    \87\ See the discussion of Item 404 at the end of Part III.C.2.
---------------------------------------------------------------------------

1. Eligibility and Exclusions
    Currently, under Item 10 of Regulation S-B, small business issuer
eligibility is limited to U.S. and Canadian issuers. This has been the
case since 1992, when we adopted Regulation S-B and its associated
forms and maintained eligibility for small business issuer status for
Canadian companies because these companies had been able to use the
Form SB-2 precursor, Form S-18. As adopted, we are expanding
eligibility for smaller reporting company status to non-U.S.

companies using domestic company forms. Foreign companies will qualify
as smaller reporting companies if they are eligible to file on a form
that permits disclosure based on the standards for smaller reporting
companies, such as Forms S-1, S-3, S-4, 10-Q, and 10-K. Companies
filing on forms available only to ``foreign private issuers,'' such as
Forms F-1, F-3, F-4, and 20-F, will be ineligible for the smaller
reporting company scaled disclosure requirements.
    Several commenters objected to the proposal requiring that Canadian
and other foreign private issuers provide financial statements prepared
according to U.S. GAAP if they want to use the scaled rules available
to smaller reporting companies, which they may use only if they file on
a form available to U.S. domestic companies. Generally, these comment
letters stated that the proposals would eliminate an accommodation
already enjoyed by Canadian companies filing on Form SB-2. Currently,
Canadian companies are permitted to provide Canadian GAAP financial
statements that are reconciled to U.S. GAAP on domestic forms. Some of
the comment letters urged that we consider allowing all foreign private
issuers to provide their own country's GAAP with U.S. GAAP
reconciliation.
    To the extent that a foreign company qualifies as a smaller
reporting company, it may make filings with us on forms available to
domestic U.S. companies if it presents financial statements pursuant to
U.S. GAAP. We continue to believe that because we are extending
eligibility for scaled disclosure on domestic forms to all foreign
issuers, it is important to require that this significantly larger
group of foreign filers provide financial data in accordance with U.S.
GAAP on domestic forms at this time. Other than in limited situations,
foreign filers using domestic forms are required to prepare their
financial statements in accordance with U.S. GAAP. Unlike our filing
forms that are specifically designed for foreign private issuers that
permit the use of financial statements prepared in accordance with
bases of accounting other than U.S. GAAP so long as U.S. GAAP
reconciling information is presented, the disclosure and other
requirements under our domestic filing forms do not contemplate the use
of accounting principles other than U.S. GAAP. We believe eligible
foreign registrants that choose to avail themselves of the option to
provide scaled disclosure should comply fully with the scaled
disclosure and financial statement presentation requirements applicable
to domestic issuers.\88\ Finally, the regulatory scheme for foreign
private issuers on the ``F'' forms is specifically tailored to address
their special circumstances, and we believe the scheme provides the
accommodations most useful to these companies.
---------------------------------------------------------------------------

    \88\ We have published a concept release on whether U.S.
companies should be permitted to use International Financial
Reporting Standards as published by the International Accounting
Standards Board in their filings with the Commission. If we proceed
with proposed rules in this area, we may consider the impact of any
proposal on filers that use scaled disclosure. See Release No. 33-
8831 (Aug. 7, 2007) [72 FR 45600].
---------------------------------------------------------------------------

    We will continue to exclude investment companies, including
business development companies, and asset-backed issuers from
eligibility for scaled treatment under our rules for smaller reporting
companies. We requested comment on these exclusions and received none.
2. Determination Dates
    The smaller reporting company determination dates we are adopting
today are based on three categories of companies: reporting companies
with a public float, non-reporting companies filing a registration
statement, probably an initial registration statement, under either the
Securities Act or the Exchange Act, and reporting or non-reporting
companies without a public float.\89\ We are amending the definition of
smaller reporting company to remove the reference to an issuer having
``no significant public common equity outstanding,'' based on a
commenter's belief that it was confusing. Instead, the definition will
indicate that in the case of an issuer whose public float as calculated
under the definition was zero, most likely because the issuer had no
public common equity outstanding or no market price for its common
equity existed, the issuer must have had annual revenues of less than
$50 million in its last fiscal year.
---------------------------------------------------------------------------

    \89\ See new Item 10(f) of Regulation S-K.
---------------------------------------------------------------------------

    In the case of a reporting company, we are requiring the same
public float calculation currently used to determine accelerated filer
status, $75 million in public float computed by multiplying the
aggregate worldwide number of shares of its voting and non-voting
common equity held by non-affiliates by the price at which the common
equity was last sold, or the average of the bid and asked prices of
common equity in the principal market for the common equity.
a. Reporting Companies
    To determine smaller reporting company eligibility, reporting
companies will follow the accelerated filer determination date in Rule
12b-2 under the Exchange Act--the last business day of a company's
second fiscal quarter.\90\ We believe this approach simplifies
regulation and promotes consistency and uniformity with current
Commission rules. The public float of a reporting company will be
calculated by using the price at which the shares of its common equity
were last sold or the average of the bid and asked prices of such
shares in the principal market for the shares as of the last business
day of the company's second fiscal quarter, multiplied by the number of
outstanding shares held by non-affiliates. We are adopting, as
proposed, a rule providing that if a reporting company determines it
qualifies as a larger reporting company rather than a smaller reporting
company on the last day of its second fiscal quarter, it will be
required to comply with the larger company disclosure standards when it
files its first quarterly report in the fiscal year following the
fiscal year of the determination date. We are permitting larger
reporting companies, however, to opt for the scaled disclosure
requirements beginning with the Form 10-Q covering the second fiscal
quarter corresponding to the measurement date establishing eligibility
as a smaller reporting company.\91\
---------------------------------------------------------------------------

    \90\ New Item 10(f)(2)(i) of Regulation S-K explains how the
determination dates work for companies already filing reports under
the Exchange Act.
    \91\ See Section III.E.2.d below, explaining how a company
enters and exits the smaller reporting company disclosure status.
---------------------------------------------------------------------------

b. Non-Reporting Companies Filing an Initial Registration Statement
    Companies determining eligibility in connection with the filing of
their initial registration statement with the Commission will have to
choose a date within 30 days of filing to determine eligibility.\92\
Under Regulation S-B, we had required companies to choose a public
float calculation during a 60-day window before the filing. We believe
requiring a 30-day window will lead to more accuracy and less
uncertainty for filers, Commission staff, and investors.
---------------------------------------------------------------------------

    \92\ See new Item 10(f)(1)(ii) of Regulation S-K.
---------------------------------------------------------------------------

    The calculation methodology we are adopting for non-reporting
companies varies slightly from the Regulation S-B standard we are
rescinding. The Regulation S-K standards will require computing public
float based on three components:
     Estimated offering price per share at the time of filing
the registration statement;

     Number of shares of common stock outstanding that are held
by non-affiliates before the offering; and
     Number of shares of common stock to be sold at the
estimated offering price.
    As adopted, the rule will require that non-reporting companies base
the calculation on the estimated number of registered shares for
offering to the public. For example, as we illustrated in the Proposing
Release, a company that registers 7,000,000 shares in its initial
public offering will be required to add that number to the total number
of shares held by non-affiliates before the offering. If a company has
25,000,000 shares of common stock outstanding held by non-affiliates
before the offering, it would add the 7,000,000 and 25,000,000 shares
of common stock. The result would mean that the 32,000,000 shares of
common stock outstanding would be multiplied by the estimated offering
price per share in the initial public offering.
    One commenter raised questions regarding the proposed method of
calculation.\93\ This commenter noted that the estimated public
offering price and the number of shares being offered tends to change
during the time between the initial filing of the registration
statement and the final prospectus. The uncertainty raised by the final
estimated public offering price and number of shares being offered
caused the commenter to question whether an issuer would be required to
switch midway through the process from using smaller reporting company
disclosure standards to using more extensive regular disclosure
standards. Conversely, this commenter noted that if the price range
and/or the number of shares being offered decreased, the issuer will
have satisfied a more extensive disclosure standard than it turns out
it was required to satisfy.
---------------------------------------------------------------------------

    \93\ See Letter from ABA.
---------------------------------------------------------------------------

    We considered these comments, and believe it is appropriate to
provide initial public offering registrants the option to recalculate
their public float at the time the company completes the initial public
offering. Our intention in providing this flexibility is to permit (but
not require) these issuers to recalculate their eligibility based on
the results of the initial public offering for purposes of filing the
next periodic report. For example, if an issuer files an initial public
offering registration statement under the Securities Act based on the
larger company Regulation S-K item requirements but then determines
after the close of the initial public offering that its public float is
below $75 million, then this issuer would be a smaller reporting
company and would be eligible to provide scaled disclosure in the first
periodic report due after the initial public offering registration
statement was declared effective.\94\
---------------------------------------------------------------------------

    \94\ See new Item 10(f)(2)(ii) of Regulation S-K.
---------------------------------------------------------------------------

    To address the commenter's concern that a smaller reporting company
would be required to transition its disclosure to the larger company
requirements if its public float rose above $75 million during the pre-
effective stage of the filing, we are clarifying that this would not be
the case if the issuer made a bona fide eligibility determination at
the time it filed the initial public offering registration statement.
The issuer will continue to be a smaller reporting company until its
next annual determination date--the end of its second fiscal quarter.
    With regard to a company's initial registration statement under the
Exchange Act covering a class of securities, the company would
calculate its public float as of a date within a 30-day window of the
registration statement being filed. Because such an Exchange Act
registration statement would not directly affect the issuer's public
float, if an issuer that files such an Exchange Act registration
statement does not have a public float or its public float cannot be
calculated because there is no market price for the issuer's equity
securities, the issuer's eligibility for the scaled disclosure would be
based on its revenue, as proposed.\95\
---------------------------------------------------------------------------

    \95\ See new Item 10(f)(1)(iii) of Regulation S-K.
---------------------------------------------------------------------------

c. Alternative Revenue Test for Reporting and Non-Reporting Companies
    As we stated in the Proposing Release, situations may arise in
which a reporting company would be unable to calculate public float
because it has no public common equity outstanding or no market price
for its common equity exists. As adopted, the definition provides a
third eligibility category to qualify for smaller reporting company
status--companies unable to calculate a public float. To qualify as
smaller reporting companies, this group of companies will be required
to have annual revenues of less than $50 million during the last fiscal
year before filing the registration statement.\96\
---------------------------------------------------------------------------

    \96\ Id.
---------------------------------------------------------------------------

d. Entering and Exiting Smaller Reporting Company Status
    The rules we are adopting on entering and exiting smaller reporting
company status in Item 10 of Regulation S-K are less restrictive than
the Regulation S-B requirements of Item 10. Item 10 of Regulation S-B
currently requires issuers to calculate eligibility based on public
float and revenue levels for two consecutive fiscal years. The
Regulation S-B system had a significantly longer transition period to
enter or exit the smaller company disclosure system.
    We are adopting transition rules for entering and exiting smaller
reporting company status that track the accelerated filer definition.
The Proposing Release suggested that the accelerated filer transition
rules were the same as the smaller reporting company transition
requirements to move back and forth from larger company disclosure
standards to smaller reporting company standards. One comment letter
requested clarification, pointing out that accelerated filers are
required to change to their new status when determining the due date of
the annual report covering the year of the status change, but, as
proposed, the smaller reporting company determination would not take
effect until the first fiscal quarter of the next fiscal year.
    As adopted, the rules provide that a larger reporting company that
determines it is a smaller reporting company as of the last business
day of its most recently completed second fiscal quarter is permitted
to transition to the scaled disclosure requirements in the Form 10-Q
quarterly report corresponding to the determination date's second
fiscal quarter rather than, as proposed, the following fiscal year's
first quarterly report. A smaller reporting company required to
transition to the larger reporting system after its determination date
calculation will not be required to satisfy the larger reporting
company disclosure requirements until the first quarter after the
determination date fiscal year.\97\
---------------------------------------------------------------------------

    \97\ See new Item 10(f)(2)(i) of Regulation S-K.
---------------------------------------------------------------------------

    To illustrate, a larger reporting company with a fiscal year end of
December 31, 2008 that qualified as a smaller reporting company on the
last business day of its most recently completed second fiscal quarter
in 2008 would be able to provide scaled disclosure beginning with the
Form 10-Q for the same second fiscal quarter in which the company
determined its eligibility, which would be due in August 2008.
Conversely, a smaller reporting company with a fiscal year end of
December 31, 2008 that is required to transition out of the scaled
disclosure system into the larger company disclosure system will be
required to do so beginning with the

Form 10-Q for the first fiscal quarter of 2009, which would be due in
May 2009.
    As adopted, once an issuer fails to qualify for smaller company
status, it will remain unqualified unless it determines that its public
float, as calculated in accordance with the definition, was less than
$50 million as of the last business day of its second fiscal quarter.
Where an issuer does not have a public float or no public market for
its common equity securities exists and it has less than $50 million in
revenue, it will qualify to use the scaled disclosure item requirements
until it exceeds $50 million in annual revenue. Once such an issuer
fails to qualify as a smaller reporting company because its revenues
exceed $50 million, that issuer will not become eligible for smaller
reporting company status until it has annual revenues of less than $40
million in its last fiscal year.\98\
---------------------------------------------------------------------------

    \98\ See new Item 10(f)(2)(iii) of Regulation S-K. 17 CFR
229.10(f)(2).
---------------------------------------------------------------------------

F. Miscellaneous \99\
---------------------------------------------------------------------------

    \99\ In addition to the matters discussed in this release, we
are amending a number of rules to eliminate references to Regulation
S-B and the SB forms and to make other technical changes, such as
providing the Commission's current mailing address.
---------------------------------------------------------------------------

1. Indexing for Inflation
    Many comment letters favored the inflation adjustments to the
public float levels and revenue ceilings in the definition of smaller
reporting company, but noted that the accelerated filer definition also
should be indexed in order to keep these two categories aligned. We are
not adopting the indexing proposal, but will consider whether these
suggestions should be the subject of a future rulemaking project to
collectively index several thresholds in current Commission rules.
2. Eliminating Transitional Small Business Issuer Format
    We are eliminating the transitional small business issuer format,
as proposed. No commenters objected to this proposal.
3. Checking the ``Smaller Reporting Company'' Box
    A company that qualifies as a smaller reporting company based on
the appropriate eligibility test under the definition will be required
to check the ``smaller reporting company'' box on the registration
statement or periodic report filed, whether or not it chooses to rely
on the scaled disclosure standards of the amended Regulation S-K
requirements. Several comment letters supported this proposal.\100\
---------------------------------------------------------------------------

    \100\ See, e.g., Letters from CAQ and ABA.
---------------------------------------------------------------------------

IV. Compliance Dates

    Transition for Current Small Business Issuers. We are providing
current small business issuers the option to file their next annual
report for a fiscal year ending on or after December 15, 2007 on either
Form 10-KSB or Form 10-K. A small business issuer may continue to file
its periodic reports using Regulation S-B and the ``SB'' forms until
its next annual report is filed. After a small business issuer files
that next annual report, subsequent periodic reports must be filed on a
form that does not have the ``SB'' designation. This will provide an
optional transition period for companies that were small business
issuers as of the effective date.
    As a result of this transition period, Regulation S-B, Form 10-QSB,
and Form 10-KSB need to be maintained while eligible small business
issuers may continue to use them. Accordingly, while most of the
amendments are effective on February 4, 2008. Form 10-QSB will not be
removed until October 31, 2008 and Regulation S-B and Form 10-KSB will
not be removed until March 15, 2009.
    We are making numerous changes to rules and forms to implement
these rule amendments, including replacing references to small business
issuers with references to smaller reporting companies. During the
optional transition period, small business issuers have the same
reporting obligations as they had before these rule amendments, except
to the extent that they voluntarily move to the new smaller reporting
company system before being required to do so.
    The ``SB'' Securities Act and Exchange Act registration statement
forms, SB-1, SB-2, and 10-SB, will be rescinded on the effective date.
Companies filing a registration statement after this date will be
required to file on the appropriate form without an ``SB'' designation.
If a registration statement was filed on an ``SB'' form before the
effective date, and the company seeks to amend it after the effective
date, the company must file the amendment on a correct form without an
``SB'' designation, but may continue to use the disclosure format and
content based on the ``SB'' form until six months after the effective
date.\101\
---------------------------------------------------------------------------

    \101\ For example, a company that filed on Form SB-2 before the
effective date would be required to file any pre-or post-effective
amendments on Form S-1, but would be able to maintain the item
requirement format of its Form SB-2 for up to six months after the
effective date.
---------------------------------------------------------------------------

    General Transition Provisions. Companies that qualify as smaller
reporting companies after the effective date, whether or not they
currently are small business issuers, will have the option to comply
with the scaled disclosure item requirements for smaller reporting
companies in their registration statements and periodic reports filed
after the effective date. To determine their status after the effective
date, reporting companies will refer to their most recent second fiscal
quarter to calculate public float. In these cases, reporting companies
have already calculated public float for purposes of determining
accelerated filer status and, therefore, no additional computation is
necessary. Current small business issuers will be deemed to qualify as
smaller reporting companies and need not make this calculation.
Companies that recently became reporting companies before the effective
date, but have not yet had a completed second fiscal quarter, will base
eligibility on the public float calculated after the initial public
offering. In all cases, companies that qualify for smaller reporting
company status will continue to have this status until they make their
annual determination at the end of the second fiscal quarter.

V. Paperwork Reduction Act

A. Background

    The amendments contain ``collection of information'' requirements
within the meaning of the Paperwork Reduction Act of 1995
(``PRA'').\102\ As discussed in the Proposing Release, we submitted a
request for approval of the ``collection of information'' requirements
contained in the proposed amendments to the Office of Management and
Budget in accordance with the PRA.\103\ Some of the revisions that we
are making to the original proposal affect these collections of
information, but the revisions do not affect the burden estimates that
we submitted to the OMB in connection with the Proposing Release. The
titles of the collections of information are:\104\
---------------------------------------------------------------------------

    \102\ 44 U.S.C. 3501 et seq.
    \103\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
    \104\ The paperwork burden from Regulation S-K and S-B is
imposed through the forms that are subject to the requirements in
those regulations and is reflected in the analysis of those forms.
To avoid a Paperwork Reduction Act inventory reflecting duplicative
burdens and for administrative convenience, we assign a one-hour
burden to Regulations S-K and S-B.
---------------------------------------------------------------------------

    (1) ``Regulation S-B'' (OMB Control No. 3235-0417);
    (2) ``Regulation S-K'' (OMB Control No. 3235-0071);
    (3) ``Regulation C'' (OMB Control No. 3235-0074);
    (4) ``Form SB-1'' (OMB Control No. 3235-0423);

    (5) ``Form SB-2'' (OMB Control No. 3235-0418);
    (6) ``Form S-1'' (OMB Control No. 3235-0065);
    (7) ``Form S-3'' (OMB Control No. 3235-0073);
    (8) ``Form S-4'' (OMB Control No. 3235-0324);
    (9) ``Form S-8'' (OMB Control No. 3235-0066);
    (10) ``Form S-11'' (OMB Control No. 3235-0067);
    (11) ``Form 1-A'' (OMB Control No. 3235-0286);
    (12) ``Form 10'' (OMB Control No. 3235-0064);
    (13) ``Form 10-SB'' (OMB Control No. 3235-0419);
    (14) ``Form 10-K'' (OMB Control No. 3235-0063);
    (15) ``Form 10-KSB'' (OMB Control No. 3235-0420);
    (16) ``Form 8-K'' (OMB Control No. 3235-0060);
    (17) ``Form 8-A'' (OMB Control No. 3235-0056);
    (18) ``Form 10-Q'' (OMB Control No. 3235-0070);
    (19) ``Form 10-QSB'' (OMB Control No. 3235-0416);
    (20) ``Form 11-K'' (OMB Control No. 3235-0082); and
    (21) ``Form SE'' (OMB Control No. 3235-0327).
    An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a
currently valid OMB control number.
    The hours and costs associated with preparing disclosure, filing
information required by forms, and retaining records constitute
reporting and cost burdens imposed by collection of information
requirements. The information collections related to annual, periodic,
and current reports and registration statements will be mandatory for
larger reporting companies; some of the requirements, however, will be
voluntary for smaller reporting companies. There is no mandatory
retention period for the information disclosed, and the information
disclosed will be made publicly available on the Commission's EDGAR
filing system or in the Commission's public reference room in the case
of a Form 1-A or Form SE filing.
    For purposes of the Paperwork Reduction Act, as adopted, the burden
changes are insignificant for companies that currently meet the small
business issuer definition. We did not receive any comment letters
providing data or other information concerning legal or accounting
costs that would cause us to change our view.
    We adopted existing Regulation S-B to provide an integrated
disclosure system for small business issuers and Regulation S-K to
provide an integrated disclosure system for larger reporting companies.
Forms SB-1, SB-2, S-1, S-3, S-4, S-8, and S-11 are registration
statements that are prepared by eligible issuers to provide investors
with the information they need to make informed investment decisions in
registered offerings. Form 1-A is the form required when a non-
reporting company seeks to use the Regulation A exemption from the
Securities Act. Regulation A is a conditional small issues exemption
available to eligible issuers. Forms 10, 10-SB, 10-K, 10-KSB, 8-K, 8-A,
10-Q, 10-QSB, and 11-K are forms that set forth disclosure requirements
for companies filing reports with the Commission pursuant to the
Exchange Act. Finally, Form SE is a notice to the Commission by an
EDGAR electronic filer that it is filing paper format exhibits.
    Consistent with the information that we previously submitted to the
OMB we estimate that the total increase in burden hours for Form 10-K,
Form 10-Q, Form 10, Form S-1, and Form S-11 will be 7,857,948 and that
the total increase in cost will be $1,114,044,563. These increases are
offset by the total decrease in burden hours for Form 10-KSB, Form 10-
QSB, Form 10-SB, Form SB-1, and Form SB-2 of 7,853,542.5 burden hours
and a total decrease in cost of $1,108,787,363. The net difference
between the increase and decrease is an increase of 4,405.5 burden
hours and a cost of $5,257,200.\105\ The net increase of 4,405.5 burden
hours and costs of $5,257,200 is outweighed by the possible decrease of
356,290 burden hours and costs of $47,479,000 for the 1,581 newly
eligible smaller reporting companies.
---------------------------------------------------------------------------

    \105\ As explained in the Proposing Release, the net difference
arises primarily from the increased burden on real estate companies
that previously could use Form SB-2, but under these amendments
would now be required to use Form S-11, the form tailored to issuers
in the real estate industry.
---------------------------------------------------------------------------

    The table below sets forth our current hourly and cost burden
estimates for Forms 10-K, 10-Q, 10, S-1, and S-11 after these
amendments.\106\
---------------------------------------------------------------------------

    \106\ Collection affected by the rulemaking, but not included in
the table, were either rescinded or their estimated burden was not
changed.

------------------------------------------------------------------------
                Form                    Burden hours      Annual costs
------------------------------------------------------------------------
10-K................................        23,430,170    $3,124,022,763
10-Q................................         4,583,290       513,829,600
10..................................            11,725        14,070,000
S-1.................................           167,912       201,493,800
S-11................................            37,069        44,484,000
------------------------------------------------------------------------

B. Summary of Comment Letters and Revisions to the Proposals

    We requested comment on the Paperwork Reduction Act analysis
contained in the Proposing Release. One commenter \107\ stated that the
substitution of the Regulation S-K disclosure framework would only be
beneficial to small issuers if there were no increase in legal and
accounting costs. The commenter noted that the Commission does not
guarantee that moving the current Regulation S-B disclosure
requirements into Regulation S-K will be more cost effective. The
commenter also disagreed with the Commission's average costs estimates,
stating that costs vary between New York City and smaller communities
throughout the country. Several other commenters \108\ raised similar
concerns that costs may increase as a result of these proposals. None
of these commenters, however, provided any data or other information to
show that legal and accounting costs will increase.
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    \107\ See Letter from the IASBDA.
    \108\ See Letters from SBA Office of Advocacy, Center for
Capital Markets (U.S. Chamber of Commerce), and Prof. James Angel.
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    Our estimates of the average number of hours each entity spends
completing the affected forms, allocation of burden between outside
counsel and internal personnel, and the average hourly rate for outside
securities counsel were obtained by contacting a number of law firms
and other persons regularly involved in completing the forms and
reflect regional variances.

    Commenters who raise a concern about the transition from Regulation
S-B and the ``SB'' forms to Regulation S-K and the ``SK'' forms wanted
us to consider a phase-in period. The amendments, as adopted, will
allow a former ``SB'' filer a choice to file its first annual report on
Form 10-K or Form 10-KSB during the transition period, but thereafter
it will no longer be able to use the ``SB'' forms. For example, after
the effective date of these amendments, an eligible calendar year
company will be able to choose to file its first annual report on Form
10-K or Form 10-KSB. An eligible non-calendar company may file its
quarterly reports on Form 10-Q or Form 10-QSB until its next annual
report due after the effective date of the amendments. That next annual
report may be filed on Form 10-K or Form 10-KSB, but thereafter the
company may no longer use the ``SB'' forms.
    We also received comment letters \109\ expressing concern that
legal and accounting costs will increase as a result of the proposals.
We do not believe that legal or accounting costs should increase since,
small business issuers generally will be providing the same disclosure
as currently filed. In the case of a newly eligible smaller reporting
company that previously filed under Regulation S-K using ``SK'' forms,
the disclosure burden will decrease if the company elects to use the
scaled disclosure available to smaller reporting companies. Otherwise
the issuer may also file roughly the same information as it does
currently. The Commission is providing an index to the scaled
disclosure requirements in new Item 10(f) of Regulation S-K and plans
to publish a brochure to assist smaller reporting companies in
transitioning to the new scaled disclosure requirements.
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    \109\ See Letters from IASBDA, SBA Office of Advocacy, Center
for Capital Markets (U.S. Chamber of Commerce), and Prof. James
Angel.
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    In response to these comments, we decided to revise four items that
were part of the original proposal.
    First, we are persuaded by the letters of the public accounting
firms \110\ that Item 310 should be placed in a separate section within
Regulation S-X, instead of creating a new Item 310 within Regulation S-
K. We agree that having all financial information requirements within
one Regulation seems logical and appropriate.
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    \110\ See Letters from Grant Thornton, BDO, KPMG,
PricewaterhouseCoopers LLP, and CAQ.
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    Second, several commenters \111\ cite the Advisory Committee's
recommendation to require two years of balance sheets to go along with
audited statements of income, cash flows, and changes in stockholders'
equity for each of the latest two fiscal years, as required by
Regulation S-X. We have been convinced by the comment letters and the
Advisory Committee's report that two years of balance sheets will
provide investors with valuable comparative information with minimal
additional costs.
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    \111\ See Letters from Grant Thornton, BDO,
PricewaterhouseCoopers, and CAQ.
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    A third revision will allow a smaller reporting company to provide
its financial statements on an ``a la carte'' basis like the other non-
financial statement disclosure items. This revision differs from the
Proposing Release, where the Commission proposed to require a smaller
reporting company to provide its financial statements on the basis of
Item 310 of Regulation S-K or Regulation S-X for an entire fiscal year,
and not be permitted to switch back and forth from one to the other in
different filings within a single fiscal year. A commenter \112\
pointed out that this inflexibility within the ``a la carte'' system
and requiring a smaller reporting company to ``lock in'' to one
approach or the other when it files its first Form 10-Q for a year
seems contrary to the proposed ``a la carte'' approach. As we proposed,
if a smaller reporting company wanted to preserve the option of
following the smaller reporting company rules in its filings, it
perhaps could not provide the additional information required of larger
companies in its first quarterly report or risk losing the ability to
use the scaled disclosure requirements for the year. As adopted, we
will allow ``a la carte'' disclosure for financial statements so that
smaller reporting companies can provide additional information over and
above the financial disclosure required by Article 8 of Regulation S-X.
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    \112\ See Letter from BDO.
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    The fourth revision requested by commenters \113\ is to amend Rule
3-05 of Regulation S-X. Rule 3-05 provides the requirements for
Financial Statements of Businesses Acquired or to be Acquired, and
paragraph (b)(2)(iv) allows issuers to omit the financial statements
for the earliest of three fiscal years required if the net revenues of
the business to be acquired are less than $25 million. We agree with
the commenters that the $25 million ceiling was related to the small
business issuer definition, and since we are creating a new definition
of smaller reporting company to replace the small business issuer
definition that contains a $50 million revenue ceiling, it is
appropriate to raise the Rule 3-05 ceiling to $50 million.
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    \113\ See Letters from Grant Thornton, KPMG, and CAQ.
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    For purposes of the Paperwork Reduction Act, as adopted, the burden
changes are insignificant for companies that currently meet the small
business issuer definition. We did not receive any comment letters
providing data or other information concerning legal or accounting
costs that would cause us to change our view.

VI. Cost-Benefit Analysis

A. Background

    We have adopted amendments to eliminate our ``SB'' forms and move
the Regulation S-B item requirements into amended Regulations S-K and
S-X. The amendments will amend all relevant rules and forms under the
Securities Act, the Exchange Act, and the Trust Indenture Act to
replace the existing references to ``small business issuer'' to
reference to ``smaller reporting company.'' The new ``smaller reporting
company'' definition will replace the current ``small business issuer''
eligibility standards to allow a greater number of public companies to
provide disclosure based on the scaled disclosure requirements. The new
definition for smaller reporting company will include companies with a
public float of less than $75 million and will therefore be a
significant increase from the $25 million levels for public float and
revenue under the current ``small business issuer'' definition. For
companies without a public float, we are requiring an alternative
ceiling of below $50 million in revenue in the previous year.

B. Summary of Rules

    As noted above, the amendments will eliminate the separate
disclosure framework of Regulation S-B by moving those requirements
into Regulation S-K and the financial disclosure into Regulation S-X.
The new definition for ``smaller reporting company'' will expand the
number of filers that will qualify to provide disclosure under the
scaled item requirements of the current Regulation S-B framework.
Smaller reporting companies and non-accelerated filers will both be
subject to Regulation S-K, but smaller reporting companies will have
the option to provide disclosure on an item-by-item basis according to
the scaled item requirements of amended Regulation S-K. The newly
adopted amendments will allow eligible smaller reporting companies to
do the following:
     Provide three years rather than five years of business
development activities, and not be required to

provide segment disclosure under amended Item 101 of Regulation S-K;
     Not provide disclosure required by Items 301 and 302
relating to selected financial data and supplementary financial
information;
     Provide more streamlined disclosure for management's
discussion and analysis of financial condition and results of
operations found in Item 303 by requiring only two years of analysis if
the company is presenting only two years of financial statements,
instead of three years currently required of larger companies;
     Provide audited balance sheets, audited statements of
income, cash flows and changes in stockholders' equity for each of the
last two fiscal years in new Article 8 of Regulation S-X instead of an
audited balance sheet as of the end of the last two fiscal years and
audited statement of income, cash flows and changes in stockholders'
equity for each of the last three fiscal years as required by other
parts of Regulation S-X;
     Provide disclosure about the chief executive officer and
two other highly compensated executive officers only, rather than the
information for the Chief Executive Officer, Chief Financial Officer
and three other executive officers required of larger registrants;
     Not provide a Compensation Discussion and Analysis
required of larger reporting companies;
     Provide only three of the seven tables (Summary
Compensation, Outstanding Equity Awards, and Director Compensation)
required of larger reporting companies; and
     Not provide disclosure regarding the company's policies
and procedures for approving related person transactions. Smaller
reporting companies will be required, however, to provide disclosure
regarding a transaction where the amount exceeds the lesser of 1% of a
smaller company's total assets or $120,000. They also will be required
to provide additional specific information about underwriting discounts
and commissions and corporate parents. Additionally, smaller reporting
companies will be required to provide disclosure regarding promoters
and certain control persons.

C. Benefits

    As discussed above, the amendments adopted today will promote
regulatory simplification by eliminating all ``SB'' forms and
consolidating the Regulation S-B disclosure item requirements into
Regulation S-K. The integrated Regulation S-K regime will enable a
larger category of public companies to have more flexibility in
tailoring disclosure standards to fit the need of investors and the
realities of their company. We believe investors will benefit from the
scaled disclosure amendments to Regulation S-K because the amendments
allow issuers to make disclosure based on the size, business
operations, and financial condition of the smaller reporting company.
Allowing smaller reporting companies to choose scaled disclosure on an
item-by-item basis allows companies to tailor their disclosure to
reduce costs and thereby benefit shareholders. The increased public
float standards in the definition of smaller reporting company will
allow more companies the flexibility to choose between scaled item
requirements such as financial statement information and executive
compensation disclosure. By doing so, these newly eligible companies
can appropriately determine the information needs of their investors in
light of the costs of providing that information. Thus, moving the
scaled disclosure requirements of Regulation S-B into Regulations S-K
and S-X will provide regulatory flexibility that gives companies the
ability to allocate resources to increased disclosure only in instances
where they believe doing so would provide a benefit to shareholders.
    Eliminating the ``SB'' forms will mitigate any perceived notion
that smaller companies are currently reporting under a completely
different and inferior disclosure framework. If current Regulation S-B
filers are inappropriately penalized by the market for this perceived
notion, as some commenters have suggested, then integrating Regulation
S-B and Regulation S-K should benefit shareholders by decreasing the
company's cost of capital. To the extent that these amendments
eliminate the perceived notion of an inferior disclosure framework, we
believe that these amendments will increase the benefits and in some
instances, reduce the costs of being a public company and will benefit
the capital markets by encouraging private companies to consider
offerings that are registered under the Securities Act or to enter the
Exchange Act reporting system.
    As amended, an integrated disclosure system for all companies
filing forms using Regulation S-K will promote efficiency because
practitioners and investors will refer to one disclosure framework.
Filers and their practitioners will have one consolidated regulation to
find all relevant disclosure item requirements, which will reduce
complexity and improve regulatory efficiencies. Although some
commenters \114\ were concerned that finding the scaled disclosure
provisions in Regulation S-K would be inefficient, the index of scaled
disclosure in new Item 10(f) should mitigate this concern. For some
smaller reporting companies, legal and accounting costs may decrease.
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    \114\ See e.g. Letters from Grant Thornton and BDO.
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    As discussed earlier in this release, we estimate that
approximately 1,581 new companies will have an opportunity to use the
restructured scaled disclosure requirements for smaller reporting
companies and may experience significant burden and cost savings if
they use them.\115\ We assume that approximately 50% of the 1,581
companies (or 790 companies) will use the scaled disclosure
requirements. For purposes of the Paperwork Reduction Act, we estimate
that these 790 smaller reporting companies may save 356,290 internal
burden hours and costs in the amount of $47,479,000 by using the scaled
disclosure requirements. \116\
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    \115\ We estimate that 1,227 companies would be newly eligible
to use the scaled disclosure available to smaller reporting
companies in addition to another 354 companies that currently are
eligible for scaled disclosure but do not use it, resulting in a
total of 1,581 companies. Approximately 1,227 companies have a
public float between $25 and $75 million, in addition to
approximately 354 companies with a public float below $25 million
that currently use the ``SK'' forms rather than the ``SB'' forms.
    \116\ This estimate of a decrease in the compliance burden by
356,290 hours is based upon 790 responses by companies using regular
Regulation S-K disclosure x 1,723 internal hours per company =
1,361,170 hours minus 790 responses by companies x 1,272 internal
hours per company = 1,004,880 hours for smaller reporting companies
and a decrease in the annual cost by $47,479,000 (574.25
professional hours x $400 per hour = $229,700 cost per response
using regular Regulation S-K disclosure x 790 responses minus 424
professional hours x $400 per hour = $169,600 cost per response
using the scaled disclosure x 790 annual responses).
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    Finally, another benefit to smaller reporting companies is that by
using Registration Statement Form S-1, a company may be permitted to
incorporate by reference its previously filed periodic reports. We
believe that this will result in some cost savings and efficiencies in
preparing registration statements for smaller reporting companies.

D. Costs

    In our view, the elimination of the ``SB'' forms and moving the
Regulation S-B disclosure standards into Regulation S-K and financial
disclosure into Regulation S-X will not significantly increase the
costs of complying with the Commission's rules.
    The disclosure requirements will not change except in minor ways
for current small business issuers that previously

filed under Regulation S-B, so we do not anticipate any increase in
costs due to the change in disclosure requirements.\117\
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    \117\ For current ``SB'' filers, we estimate the net difference
of reporting under Regulation S-K will be an increase of 4,405.5
burden hours and a cost of $5,257,200 for purposes of the Paperwork
Reduction Act.
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    Four commenters \118\ stated that these proposals may have
unintended consequences, such as extra legal and accounting costs. One
of these commenters \119\ expressed concern that moving the disclosure
requirements of Regulation S-B into Regulation S-K would only benefit
small issuers if the legal and accounting costs do not increase. The
commenter did not provide any data or information to support its
position that costs could increase. The amount of disclosure a former
small business issuer will provide on the ``SK'' forms should not
increase unless the issuer chooses to provide additional disclosure
above the required disclosure. We have added a heading entitled
``Smaller Reporting Companies'' to Items where scaled disclosure is
available for smaller reporting companies. This will alleviate the
concern that small issuers need guidance in determining what disclosure
requirements apply to them.\120\ Thus, we do not believe that there
should be any significant additional out-of-pocket costs associated
with compliance.
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