[Federal Register: July 19, 2007 (Volume 72, Number 138)]
[Proposed Rules]
[Page 39669-39715]
[DOCID:fr19jy07-21]

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Part II

Securities and Exchange Commission

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17 CFR Parts 210, 228, 229 et al.

Smaller Reporting Company Regulatory Relief and Simplification;
Proposed Rule

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SECURITIES AND EXCHANGE COMMISSION

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

[Release Nos. 33-8819; 34-56013; 39-2447; File No. S7-15-07]
RIN 3235-AJ86

Smaller Reporting Company Regulatory Relief and Simplification

AGENCY: Securities and Exchange Commission.

ACTION: Proposed amendments.

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SUMMARY: The Securities and Exchange Commission is proposing rule
amendments relating to our disclosure and reporting requirements for
smaller companies under the Securities Act of 1933 and the Securities
Exchange Act of 1934. We propose to extend the benefits of our current
optional disclosure and reporting requirements for smaller companies to
a much larger group of companies. The proposals would allow companies
with a public float of less than $75 million to qualify for the smaller
company requirements, up from $25 million for most companies today. The
proposals also would combine for most purposes the ``small business
issuer'' and ``non-accelerated filer'' categories of smaller companies
into a single category of ``smaller reporting companies.'' In addition,
the proposals would maintain the current disclosure requirements for
smaller companies contained in Regulation S-B, but integrate them into
Regulation S-K. We also are soliciting suggestions for additional ways
in which we could better scale our disclosure and reporting
requirements to the needs of smaller reporting companies and their
investors.

DATES: Comments should be received on or before September 17, 2007.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml.
);     Send an e-mail to<EMAIL_ADDRESS>Please include

File Number S7-15-07 on the subject line; or
     Use the Federal Rulemaking Portal (http://www.regulations.gov
). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number S7-15-07. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments

are also available for public inspection and copying in the
Commission's Public Reference Room, 100 F Street, NE., Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. All comments received will be posted without change; we do not
edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Gerald J. Laporte, Chief, 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: We propose 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 propose to amend Items 10, 101, 201, 301, 302, 303,
305, 401, 402, 404, 407, 503, 504, 512, 601, 701, and 1118.\5\ We
propose to add a new Item 310 to Regulation S-K. We propose to amend
Securities Act Rules 110, 138, 139, 158, 175, 405, 415, 428, 430B,
430C, 455, and 502.\6\ Further, we propose to repeal Regulation S-B \7\
and eliminate the forms associated with it, which include Forms SB-1,
SB-2, 10-SB, 10-QSB, and 10-KSB.\8\ We propose to amend Securities Act
Forms 0-1, S-1, S-3, S-4, S-8, S-11, 1-A, and F-X.\9\ We also propose
to amend 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 also propose to amend Schedules 14A and 14C.\12\ Under
Regulation S-X,\13\ we propose to amend Rules 210.3-01, 210.3-10,
210.3-12, 210.3-14, 210.4-01, and 210.10-01.\14\ Finally, we propose to
amend Trust Indenture Act Rules 0-11, 4d-9, 10a-5,\15\ and Sec.  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, 229.201, 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, 210.3-10, 210.3-12, 210.3-14, 210.4-01,
and 210.10-01.
    \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
II. Explanation of Proposals
    A. Expanding Eligibility for Smaller Company Scaled Regulation
    1. Quantitative Standards in the Proposed Definition of
``Smaller Reporting Company''
    a. Proposed Standard
    b. Comparison of the Proposed Standard to the Advisory
Committee's Recommendation
    2. Exclusions From the Definition of ``Smaller Reporting
Company''
    B. Integrating Requirements of Current Regulation S-B Into
Regulation S-K
    1. Policy Objectives of Proposal
    2. Specific Integration Proposals
    a. Financial Statements
    b. Proposed Changes to Other Regulation S-K Disclosure Items
    c. A La Carte Approach
    d. Eliminating ``SB'' Forms
    e. Transition to and From Smaller Reporting Company Status
    f. Eliminating Transitional Small Business Issuer Format
    g. Other Proposals
III. General Request for Comments
IV. Paperwork Reduction Act
V. Cost-Benefit Analysis
VI. Consideration of Impact on the Economy, Burden on Competition
and Promotion of Efficiency, Competition and Capital Formation
VII. Initial Regulatory Flexibility Act Analysis
VIII. Small Business Regulatory Enforcement Fairness Act
IX. Statutory Basis and Text of Proposal

I. Background

    Since the federal securities laws were first enacted, the
Commission has made special efforts not to subject smaller companies
and their investors to unduly burdensome federal securities
regulation.\17\ This special concern for small business in part
reflects recognition of the special role that small business
historically has played as a driver of economic activity, innovation,
and job creation in the United States. In March 2005, we chartered the
Advisory Committee on Smaller Public Companies and asked that panel to
assess the current regulatory system for smaller companies under the
federal securities laws and to recommend changes to that system.\18\
The major proposals we are making in this release stem from the
Advisory Committee's recommendations.
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    \17\ See SEC Advisory Committee on Smaller Public Companies,
Final Report 20-21 (2006) (``Advisory Committee Final Report''),
available at http://www.sec.gov/info/smallbus/acspc.shtml.

    \18\ See Advisory Committee Final Report 1, App. B (Advisory
Committee Charter).
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    Our rules currently include two major categories of smaller
companies--``small business issuers'' and ``non-accelerated filers''--
for purposes of scaling our disclosure and reporting requirements to
the needs of smaller companies and their investors. These two
categories of smaller companies are defined as follows:
     ``Small business issuers'' essentially are companies with
both a public float and revenues of less than $25 million. Of the
11,898 companies that filed annual reports under the Exchange Act in
2006, 3,749 had a public float of less than $25 million.\19\
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    \19\ Of these 11,898 filers, 3,395 filed a Form 10-KSB, the
annual report filed by small business issuers. We determined that
there were an additional 354 filers with a public float of less than
$25 million that did not file a Form 10-KSB because they opted to
use Form 10-K, the form prescribed for most larger companies,
instead. We have not attempted to provide information on companies
with revenues of less than $25 million because, as discussed below,
we propose to eliminate the revenue test for purposes of the primary
determination of whether smaller companies qualify for scaled
regulation under our disclosure requirements.
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     ``Non-accelerated filers'' are companies that do not
qualify as ``large accelerated filers'' or ``accelerated filers'' under
our rules.\20\ Non-accelerated filers essentially are companies with a
public float of less than $75 million. Of the 11,898 companies that
filed annual reports under the Exchange Act in 2006, 4,976 had a public
float of less than $75 million.\21\
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    \20\ The terms ``large accelerated filer'' and ``accelerated
filer'' are defined in Exchange Act Rule 12b-2 (17 CFR 240.12b-2).
    \21\ Statistics are based on 2006 data from the Commission's
computerized filing system and Thomson Financial (Datastream).
Datastream data includes all 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
depository receipts, and direct foreign listings.
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    The scaled disclosure and reporting requirements available to these
smaller companies apply to companies filing registration statements
covering offerings of securities under the Securities Act and companies
required to file annual and other reports under Exchange Act Sections
13 and 15(d).\22\
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    \22\ 15 U.S.C. 78m and 15 U.S.C. 78o(d).
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    ``Small business issuers'' are eligible to make required
disclosures based on the requirements in Regulation S-B,\23\ which sets
forth disclosure standards for small business issuers that must file
documents with the Commission under the Securities Act, Exchange Act,
or Trust Indenture Act. In most cases, small business issuers may make
disclosures based on Regulation S-B only if they use one of the forms
we have designated with the letters ``SB''--Form 10-SB, Form 10-QSB,
Form 10-KSB, Form SB-1, and Form SB-2. One of the most important
provisions of Regulation S-B is Item 310, which governs the form,
content, and preparation of financial statements for companies that
provide disclosure pursuant to Regulation S-B. The requirements in Item
310 of Regulation S-B are less detailed than the requirements in
Regulation S-X, the regulation that governs the financial statements of
most companies that do not rely on Regulation S-B. Regulation S-B also
contains a number of disclosure requirements that are scaled to the
characteristics of smaller companies, including requirements on
executive compensation, related person transactions, and management's
discussion and analysis of financial condition and results or plan of
operation.\24\
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    \23\ The term ``small business issuer'' is defined in Item
10(a)(1) of Regulation S-B (17 CFR 228.10(a)(1)), among other
places. The Commission adopted Regulation S-B in 1992. See Release
No. 33-6949 (July 30, 1992) [57 FR 36442].
    \24\ For a more complete survey of the disclosure requirements
for small business issuers in Regulation S-B, see Section II.B.2
below.
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    Smaller companies qualifying as ``non-accelerated filers'' may file
their annual reports no later than 90 days after fiscal year end and
their quarterly reports no later than 45 days after the end of each
fiscal quarter.\25\ This contrasts with the 60-day and 75-day deadlines
for the annual reports of large accelerated filers and accelerated
filers, respectively, and the 40-day deadline for quarterly reports of
those larger companies. Non-accelerated filers also are treated
differently with regard to the compliance dates applicable to the
internal control over financial reporting provisions in Section 404 of
the Sarbanes-Oxley Act of 2002.\26\
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    \25\ See Release No. 33-8644 (Dec. 21, 2005) [70 FR 76626].
    \26\ Pub. L. No. 107-204, 116 Stat. 745 (July 30, 2002); see
also Release No. 33-8760 (Dec. 15, 2006) [71 FR 76580].
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    Our proposals have three primary objectives, each of which is
consistent with investor protection:
     Expanding eligibility for our scaled disclosure and
reporting requirements for smaller companies by making those
requirements available to most companies with a public float of less
than $75 million;
     Simplifying our rules for smaller companies by combining
the two categories of small business issuers and non-accelerated filers
into one category called ``smaller reporting companies;'' and
     Simplifying and improving our disclosure and reporting
rules for smaller companies by maintaining the Regulation S-B
disclosure requirements for smaller companies but integrating them into
the disclosure requirements in Regulation S-K.
    The Advisory Committee on Smaller Public Companies addressed these
objectives in the following recommendations:
     Recommendation II.P.1: Establish a new system of scaled or
proportional securities regulation for smaller public companies using
the following six determinants to define a ``smaller public company'':
     The total market capitalization of the company;
     A measurement metric that facilitates scaling of
regulation;
     A measurement metric that is self-calibrating;
     A standardized measurement and methodology for computing
market capitalization;
     A date for determining total market capitalization; and
     Clear and firm transition rules, i.e., small to large and
large to small.
    Develop specific scaled or proportional regulation for companies
under the system if they qualify as ``microcap companies'' because
their equity market capitalization places them in the lowest 1% of
total U.S. equity market capitalization or as ``smallcap companies''
because their equity market capitalization places them in the next

lowest 1% to 5% of total U.S. equity market capitalization, with the
result that all companies comprising the lowest 6% would be considered
for scaled or proportional regulation; \27\
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    \27\ See Advisory Committee Final Report 14-22.
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     Recommendation IV.P.1: Incorporate the scaled disclosure
accommodations currently available to small business issuers under
Regulation S-B into Regulation S-K, make them available to all microcap
companies, and cease prescribing separate specialized disclosure forms
for smaller companies; \28\ and
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    \28\ See Advisory Committee Final Report 60-64.
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     Recommendation IV.P.2: Incorporate the primary scaled
financial statement accommodations currently available to small
business issuers under Regulation S-B into Regulation S-K or Regulation
S-X and make them available to all microcap and smallcap companies.\29\
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    \29\ See Advisory Committee Final Report 65-68.
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    It has been maintained that regulation and disclosure standards are
proportional when compliance requirements are flexible enough to be
modified and scaled according to the size, resources, operations, and
financial complexities of the reporting company without sacrificing
investor protection.\30\ We believe that our proposals meet this
standard. We also believe these proposals maintain investor protection
while providing greater capital formation opportunities for smaller
reporting companies and encouraging more robust smaller company
participation in the United States capital markets.
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    \30\ See generally C. Steven Bradford, Does Size Matter? An
Economic Analysis of Small Business Exemptions from Regulation, 8 J.
Small & Emerging Bus. L. 1, 2 (1999) (providing an economic analysis
of costs and benefits associated with small business exemptions).
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II. Explanation of Proposals

    The proposals that we publish for comment today would simplify, and
increase significantly the number of companies eligible for our scaled
disclosure and reporting rules for smaller reporting companies,
consistent with investor protection. Our proposals largely would
implement several of the recommendations of our Advisory Committee on
Smaller Public Companies in these areas.

A. Expanding Eligibility for Smaller Company Scaled Regulation

    The proposals would expand the availability of our disclosure and
reporting requirements for smaller companies to most companies with a
public float of less than $75 million.\31\ We are proposing a new
term--``smaller reporting company''--to replace the term ``small
business issuer'' and proposing to make available to these ``smaller
reporting companies'' \32\ the disclosure and reporting standards that
we make available to small business issuers and most non-accelerated
filers.\33\ Our proposals would provide further regulatory
simplification and relief for smaller reporting companies by
integrating into Regulation S-K the salient ``small business issuer''
disclosure requirements currently found in Regulation S-B. Finally, our
proposals would eliminate all ``SB'' forms associated with Regulation
S-B.
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    \31\ See proposed Item 10(f)(1) of Regulation S-K. We propose to
continue to exclude investment companies and asset-backed issuers
from eligibility for scaled reporting and disclosure regulation.
    \32\ The definition would replace the almost identical
definitions of the term ``small business issuer'' in Securities Act
Rule 405 and Exchange Act Rule 12b-2. We also would insert the new
definition as a new paragraph in Item 10(f) of Regulation S-K.
    \33\ Under our proposals, we would continue to use the term
``non-accelerated filer'' to refer to companies that are not subject
to our accelerated filing requirements for their annual and
quarterly reports under the Exchange Act and are currently eligible
to use different compliance dates applicable to internal control
over financial reporting and different periodic report deadlines.
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1. Quantitative Standards in the Proposed Definition of ``Smaller
Reporting Company''
a. Proposed Standard
    The smaller reporting company definition would include a public
float eligibility ceiling of $75 million for most companies. Other
companies, for example, companies that do not have a public float as
defined or are unable to calculate it, would be eligible for scaled
treatment if their revenues are below $50 million annually.\34\ At
present, 3,395 reporting companies use our current scaled disclosure
and reporting requirements for smaller companies.\35\ If the proposals
are adopted, a total of 4,976 companies would be eligible to use the
scaled disclosure item requirements. The 4,976 eligible companies
represent 42% of the 11,898 companies that filed annual reports under
the Exchange Act in 2006.\36\
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    \34\ See proposed Item 10(f)(1) of Regulation S-K.
    \35\ See footnote 19 above.
    \36\ See footnote 21 above.
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    The term ``smaller reporting company'' would replace the term
``small business issuer,'' which defines the companies eligible
currently to use the Regulation S-B disclosure requirements.\37\ The
proposed definition of smaller reporting company also would include
most non-accelerated filers, which generally are those filers with a
public float of less than $75 million.\38\ Non-accelerated filers are
the companies currently eligible to use different compliance dates
applicable to internal control over financial reporting and different
periodic report deadlines. By using the same term to refer to both
current groups of companies, we would effectively combine the two
groups of scaled requirements into a single group--companies with a
public float of less than $75 million, or revenues below $50 million if
their public float cannot be calculated. As proposed, the $75 million
and $50 million ceilings would be adjusted for inflation on September
1, 2012, and every fifth year thereafter, to reflect any changes in the
value of the Personal Consumption Expenditures Chain-Type Price Index
(PCECTP Index) (or any successor index thereto), as published by the
Department of Commerce, from December 31, 2006.\39\
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    \37\ See Item 10(a)(1) of Regulation S-B, Securities Act Rule
405, and Exchange Act Rule 12b-2.
    \38\ Although the term ``non-accelerated filer'' is not defined
in our rules, we allude to it in Exchange Act Rule 12b-2 and have
used it throughout several releases to refer to an Exchange Act
reporting company that does not meet the Exchange Act Rule 12b-2
definitions of either an ``accelerated filer'' or a ``large
accelerated filer.'' See Release No. 33-8760 n.15 (Dec. 15, 2006)
[71 FR 76580].
    \39\ Each adjustment would be rounded to the nearest multiple of
$5,000,000. We propose to use the PCECTP Index because it is a
widely used and broad indicator of inflation in the U.S. economy.
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    We propose to set the initial ceiling for smaller reporting
companies at $75 million in public float because we now have several
rules using the $75 million public float metric to distinguish smaller
companies. In addition to the use of this public float metric in the
definition of accelerated filer, the $75 million public float
requirement is used to determine expanded eligibility in Form S-3 and
Form F-3.\40\ Further, issuers are required to provide their public
float on the cover page of their Exchange Act annual reports.
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    \40\ 17 CFR 239.33 and 239.13.
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    Our proposed definition of ``smaller reporting company'' does not
include a revenue test for most companies. While our current definition
of ``small business issuer'' includes a revenue standard, the
classification of an issuer as a large accelerated filer, an
accelerated filer, or (by default) a non-accelerated filer does not
involve a revenue standard. We chose not to propose a revenue standard
to qualify for ``smaller reporting company'' status for most companies
to provide greater simplicity, consistency, and certainty.
    While our proposed definition of ``smaller reporting company'' does
not generally apply a revenue standard,

where an issuer has no common equity public float or market price, we
propose a revenue test.\41\ If an issuer has no common equity public
float or market price and it has reported annual revenues of less than
$50 million in the most recently completed fiscal year for which
audited financial statements are available, then it would qualify
initially for scaled regulation as a smaller reporting company for the
fiscal year in which it files a registration statement under the
Securities Act or Exchange Act with the Commission as a smaller
reporting company.\42\
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    \41\ An issuer may have no public float or market price because
it has no significant public equity outstanding or no public market
for its equity. For example, a company with only debt publicly
outstanding would use the revenue test.
    \42\ The issuer would refer to its most recently audited
financial statements available at the time it files with the
Commission as a smaller reporting company.
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    As proposed, the determination date for calculating a company's
public float to establish eligibility for smaller reporting company
status would be the same date used to determine accelerated filer
status today--the last business day of a company's second fiscal
quarter.\43\ The public float of a reporting company would 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.\44\
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    \43\ See proposed Item 10(f)(1)(i) of Regulation S-K.
    \44\ Id.
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    With regard to a Securities Act registration statement for an
initial public offering of common equity securities, however, a company
would calculate its public float as of a date within 30 days of the
date it files the initial registration statement. These companies would
compute public float by multiplying the aggregate worldwide number of
such shares held by non-affiliates before the offering plus the number
of such shares included in the registration statement by the estimated
public offering price of the shares.\45\ The proposed method of
calculating public float with regard to a Securities Act registration
statement for an initial public offering would operate consistently
with the following example:
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    \45\ See proposed Item 10(f)(1)(ii) of Regulation S-K.
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     Company X has 50,000,000 shares of common stock
outstanding;
     Company X has 25,000,000 shares of common stock
outstanding that are held by non-affiliates;
     Company X files a Securities Act registration statement
for its initial public offering--in that registration statement,
Company X registers 7,000,000 shares of common stock to be sold at an
estimated offering price of $10 per share; and
     For purposes of the smaller reporting company definition,
Company X's ``public float'' would be $320,000,000 ((25,000,000 shares
+ 7,000,000 shares) x $10 per share).
    Currently, Regulation S-B requires a company preparing an initial
public offering of securities to calculate its public float for
purposes of determining small business issuer status on the basis of
the total number of equity shares outstanding before the offering and
the estimated public offering price of the securities. Our proposed
change to this rule is intended to more accurately reflect the
company's public float by requiring companies to include the number of
shares registered to be offered to the public in calculating the public
float.
    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 and
reporting would be based on its revenue.
b. Comparison of the Proposed Standard to the Advisory Committee's
Recommendation
    The proposal to broaden the number of smaller companies eligible
for our scaled disclosure and reporting requirements is consistent
with, but not identical to, the Advisory Committee recommendation. The
Advisory Committee recommended that we make the majority of our smaller
company requirements available to companies whose equity market
capitalization places them in the lowest 1% of total U.S. market
capitalization, which it called ``microcap companies.'' The Advisory
Committee indicated that, based on the information it relied upon, the
ceiling for that category was $128 million in market
capitalization.\46\ We have chosen to propose using public float rather
than market capitalization to set the ceiling for several reasons:
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    \46\ The Advisory Committee relied on data derived from Center
for Research in Security Prices (CRSP) for 9,428 New York and
American Stock Exchange companies as of March 31, 2005 and from
Nasdaq for NASDAQ Stock Market and Over-the-Counter Bulletin Board
firms as of June 10, 2005. See Advisory Committee Final Report, at
15 n.36.
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     The Commission has consistently used public float in this
context,\47\ rather than market capitalization;
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    \47\ In our adopting release for public securities offering
reform, we provided the historical background for the use of public
float as a measure for determining Form S-3 or F-3 eligibility. See
Release No. 33-8591, at 26 n.50 (July 19, 2005) [70 FR 148].
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     Each reporting company already is required to disclose its
public float on the cover page of its annual report on Form 10-K or
Form 10-KSB;
     The use of market capitalization would require us to
establish new standards for reporting companies to calculate that
information and a new obligation for those companies to disclose that
information; and
     The overlap between reporting companies with $128 million
in market capitalization and reporting companies with $75 million in
public float is approximately 98%.\48\
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    \48\ This estimate was calculated from data obtained from
Thomson Financial (Datastream).
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    We have not proposed a standard based on a company's ranking within
a specified percentage of total U.S. market capitalization because we
believe that such a standard may make the smaller reporting company
system unduly complicated and create confusion among both smaller
companies and their investors. Our proposal to adjust the $75 million
public float and $50 million in revenue ceilings every five years to
account for inflation, however, responds to the Advisory Committee's
concern that our regulatory metrics should be adjusted in a timely
manner to reflect changes in our economy.
    The Advisory Committee received numerous comments to the effect
that the $25 million public float and revenue standards in Regulation
S-B are too low and should be increased to permit a broader range of
smaller companies to be eligible for its benefits, particularly in
light of the increased costs associated with Exchange Act reporting
obligations.\49\ A group responding to the Advisory Committee's request
for comments on its proposed agenda noted that the $25 million
standards resulted in Regulation S-B being available only

to the very smallest public companies.\50\ This group also expressed
the view to the Advisory Committee that, for Regulation S-B to have any
meaningful benefit to new and smaller public companies, the threshold
needed to be raised to $100 million in both revenue and market
capitalization. Another commentator has argued that the standard should
be less concerned with market capitalization and more concerned with
revenue, which in part indicates the ability of small companies to
shoulder the burdens of regulation.\51\ The Advisory Committee rejected
a revenue-based metric in determining general eligibility for scaling,
however, stating that market capitalization should be the primary
metric for determining eligibility for scaling regulations and that
including revenues would introduce unnecessary additional
complexity.\52\
---------------------------------------------------------------------------

    \49\ See Advisory Committee Final Report 64 n.132.
    \50\ See Letter from Subcommittee on Smaller Public Companies,
Securities Law Committee, Society of Corporate Secretaries &
Governance Professionals (June 7, 2005) (on file in Commission
Rulemaking File No. 256-23), available at http://www.sec.gov/info/smallbus/acspc.shtml
.

    \51\ Paul Rose, Balancing Public Market Benefits and Burdens for
Smaller Companies Post Sarbanes-Oxley, 41 Willamette L. Rev. 707,
740 (2005).
    \52\ The Advisory Committee did recommend that we adopt a
revenue ceiling for companies to be eligible for certain scaled
regulations under Section 404 of the Sarbanes-Oxley Act. See
Advisory Committee Final Report 43.
---------------------------------------------------------------------------

    The Advisory Committee recommended that we extend eligibility for
scaled disclosure to two tiers of companies--what the Advisory
Committee called ``microcap companies'' and ``smallcap companies.''
More specifically, the Committee recommended that we develop scaled or
proportional regulation for companies that qualify as ``microcap
companies'' because their equity market capitalization places them in
the lowest 1% of total U.S. market capitalization and ``smallcap
companies'' because their equity market capitalization places them in
the next lowest 1% to 5% of total U.S. equity market capitalization,
with the result being that all companies comprising the lowest 6% would
be eligible for scaled or proportional regulation.\53\ Based on the
statistics relied upon by the Advisory Committee, companies with less
than $787 million in market capitalization would have been included in
the lowest 6% of market capitalization as of March 31, 2005.\54\ Our
proposals do not extend the scaled disclosure regime or develop another
scaled disclosure regime for companies between $75 million and $787
million in market capitalization at this time. We solicit comment below
on the appropriateness of scaled disclosure requirements for companies
with a public float greater than $75 million.
---------------------------------------------------------------------------

    \53\ See Advisory Committee Final Report 14-19.
    \54\ Id.
---------------------------------------------------------------------------

2. Exclusions From the Definition of ``Smaller Reporting Company''
    The current definition of ``small business issuer'' excludes
companies that are not organized in the United States or Canada,
investment companies, and asset-backed issuers.\55\ Under the proposed
amendments, all foreign companies that meet the criteria would be able
to qualify as smaller reporting companies. Foreign companies could,
therefore, take advantage of the scaled standards available to domestic
smaller reporting companies if they otherwise qualify for that status
and file a form that permits disclosure based on the standards for
smaller reporting companies, such as Forms S-1, S-3, S-4, and Forms 10-
Q and 10-K. In this regard, the forms available only to ``foreign
private issuers,'' such as Form F-1,\56\ Form F-3,\57\ Form F-4,\58\
and Form 20-F,\59\ would not permit disclosure based on the standards
for smaller reporting companies.\60\ Foreign private issuers who
qualify for smaller reporting company status could choose whether to
use the domestic forms and be able to provide disclosure based on these
standards or to use the ``F'' forms and comply with the disclosure
requirements of those forms.
---------------------------------------------------------------------------

    \55\ See Item 10(a)(1)(ii) through (iii) of Regulation S-B.
    \56\ 17 CFR 239.31.
    \57\ 17 CFR 239.33.
    \58\ 17 CFR 239.34.
    \59\ 17 CFR 249.220f.
    \60\ The term ``foreign private issuer'' is defined in
Securities Act Rule 405 and Exchange Act Rule 12b-2.
---------------------------------------------------------------------------

    We propose to continue to exclude investment companies and asset-
backed issuers from eligibility for scaled reporting and disclosure
regulation. Investment companies are subject to separate disclosure and
reporting requirements.\61\ Asset-backed issuers have a separate
disclosure system that applies to them and do not use Regulation S-K
for their disclosure requirements.\62\
---------------------------------------------------------------------------

    \61\ See, e.g., Form N-1A (17 CFR 239.15A; 274.11A), N-2 (17 CFR
239.14; 274.11a-1), and N-3 (17 CFR 239.17a; 274.11b), the
registration forms used by management investment companies to
register under the Investment Company Act of 1940 (15 U.S.C. 80a-1
et seq.), and to register their securities under the Securities Act.
Business development companies, which are a category of investment
companies that are not required to register under the Investment
Company Act, register their securities under the Securities Act on
Form N-2.
    \62\ See Regulation AB (17 CFR 229.1100 through 229.1123).
---------------------------------------------------------------------------

Request for Comments
     Should the definition of smaller reporting company include
tests based on both public float and revenue? Should the definition
contain only a revenue test, rather than the proposed public float
test? If the definition contained a revenue test, should the standard
be $50 million, $75 million, $100 million, or some other amount? Please
explain in detail and provide a reasoned basis for your views.
     Is a public float of less than $75 million the appropriate
standard for defining a ``smaller reporting company?'' Should the
public float standard be $50 million, $150 million, or some other
amount? Please explain in detail and provide a reasoned basis for your
views.
     Is it appropriate to compute public float for an initial
public offering by a smaller reporting company by multiplying the
aggregate worldwide number of such shares held by non-affiliates before
the offering plus the number of shares included in the registration
statement by the estimated public offering price of the shares? Is it
appropriate to permit the calculation of public float on any date
within 30 days of a filing?
     Is it appropriate to require companies to estimate the
public offering price of the securities before filing an initial
registration statement that would qualify them for smaller reporting
company status, as has been required in the past under Regulation S-B
and as we propose to continue to require? For purposes of calculating
the estimated public offering price per share, should we require
issuers to rely on the high, low, or mid-point of the price range for
the securities?
     Is there an alternative standard that would more
accurately calculate a company's public float before it files its
initial Securities Act registration statement with the Commission to
determine smaller reporting company eligibility? Please provide details
and reasoned support for your position.
     Should the definition of smaller reporting company be
based on market capitalization, as suggested by the Advisory Committee,
rather than public float? If so, should the market capitalization
standard be $150 million, $125 million, $100 million, or some other
level? Please discuss the benefits and burdens of your suggested
standard and provide reasoned support for your position.
     Should a system of scaled or proportional regulation be
made available to companies in the lowest 1% of total U.S. market
capitalization (less

than $128 million as of March 31, 2005) or the lowest 6% of total U.S.
market capitalization ($787 million as of March 31, 2005), as suggested
by the Advisory Committee? Please provide reasoned support for your
position.
     Is the $50 million revenue threshold an appropriate level
for companies without a public float or market price, or should the
test be $75 million or $25 million in revenue or some other standard?
     Should any public float and/or revenue ceilings be indexed
to adjust for inflation? Should any ceilings be indexed using a
different index than the PCECTP Index, the one we propose to use?
Please provide details and reasoned support for your position.
     Should the Commission allow asset-backed issuers and
investment companies, including business development companies, or
business development companies only, to qualify as smaller reporting
companies?
     Is it appropriate to permit all non-U.S. companies to
qualify for smaller reporting company status?
     Are there companies reporting as small business issuers
that have only public debt outstanding and have little or no publicly-
held common equity? Are there companies with one or more classes of
public debt outstanding but no significant amount of outstanding common
equity held by non-affiliates that should qualify as smaller reporting
companies? If so, should we permit such companies to qualify as smaller
reporting companies on the basis of a revenue test? Does the proposed
revenue test meet the needs of smaller companies?
     What benefits would flow to investors if the Commission
adopted these proposals? For example, would the possible cost savings
for the company provide a net benefit to shareholders? Please provide
details and reasoned support for your position.
     If adopted, would these proposals have any negative effect
on investors? For example, would investors in companies that have a
public float of between $25 million and $75 million be harmed if a
company chose to provide the disclosure required of a smaller reporting
company rather than the disclosure currently required under Regulation
S-K? If so, please describe the negative effect in detail, providing
data and support where possible.

B. Integrating Requirements of Current Regulation S-B Into Regulation
S-K

1. Policy Objectives of Proposal
    We have maintained a separate registration, reporting, and
qualification system for small business issuers under the Securities
Act, Exchange Act, and Trust Indenture Act since 1992.\63\ The
centerpiece of this system, Regulation S-B, followed the model of
Regulation S-K. When adopting Regulation S-B, we incorporated some
concepts from Form S-18, which was a simplified registration form for
smaller companies under the Securities Act that we replaced with Forms
SB-1 and SB-2.\64\
---------------------------------------------------------------------------

    \63\ See Release No. 33-6949 (Jul. 30, 1992) [57 FR 36442].
    \64\ See Release No. 33-6949 (Jul. 30, 1992) [57 FR 36442] and
Release No. 33-6924 (Mar. 20, 1992) [57 FR 9768].
---------------------------------------------------------------------------

    Regulation S-B was designed to provide small business issuers with
a single source for their SEC disclosure requirements. Our objectives
in adopting a disclosure system for smaller companies were to reduce
compliance costs while maintaining adequate investor protection, to
improve the ability of start-ups and other small businesses to obtain
financing through the public capital markets, and to encourage those
companies to provide their investors with the benefits of trading in
those markets.\65\
---------------------------------------------------------------------------

    \65\ See Release No. 33-6924.
---------------------------------------------------------------------------

    We propose to integrate the substantive provisions of Regulation S-
B into Regulation S-K for a number of reasons. We believe integration
will simplify regulation for small business and lower costs. The
current dual system scheme is complex, and we believe this complexity
may deter smaller companies from taking advantage of scaled regulation.
We also are aware of anecdotal reports that securities lawyers
recommend against using the Regulation S-B system because it results in
increased legal costs. The Advisory Committee, in recommending that we
integrate the scaled disclosure requirements available to small
business issuers into Regulation S-K and make them available to
microcap companies, heard testimony that Regulation S-B was not used
for two principal reasons. The first reason is that lawyers assert that
they cannot use prior examples of filings involving companies that are
not relying on Regulation S-B. The second reason is that the lawyers
must maintain expertise in two different disclosure systems.\66\
Maintaining two separate but largely similar systems also results in
increased burdens on the Commission staff.
---------------------------------------------------------------------------

    \66\ See Advisory Committee Final Report 64.
---------------------------------------------------------------------------

Request for Comments
     Assuming we should revise Regulation S-B, should we do so
in some way other than integrating its substantive provisions into
Regulation S-K? Please be as specific as possible with your comments.
     Might integrating our two disclosure systems make it more
difficult to maintain scaled securities regulation for smaller
companies? How should we maintain scaled regulation over time? Please
provide opposing or supporting views and clearly explain the bases for
your views.
     Will this proposal simplify the disclosure obligations of
smaller companies? Please provide details to support your view.
     If these proposals are adopted, would smaller companies
experience lower costs for legal assistance and other services?
     If adopted, would these proposals have any effect on
investors, either positive or negative? Please provide a detailed
explanation of your views, with supporting data if possible.
2. Specific Integration Proposals
a. Financial Statements
    We propose to add a new Item 310 (Financial Statements of Smaller
Reporting Companies) to Regulation S-K to set forth the alternative
requirements on form and content of financial statements for smaller
companies that now appear in Item 310 of Regulation S-B. Item 310 of
Regulation S-B constitutes perhaps the most significant example of
scaling for smaller companies in all of Regulation S-B, as it bases the
requirements on form, content, and preparation of financial statements
for smaller companies solely on generally accepted accounting
principles (``GAAP''). It does not require smaller companies to conform
their financial statements to the Commission's Regulation S-X.\67\ Item
310 of Regulation S-B allows smaller companies to provide an audited
balance sheet for the latest fiscal year only and audited statements of
income, cash flows, and changes in stockholders' equity for each of the
latest two fiscal years only, rather than an audited balance sheet for
the latest two fiscal years and audited statements of income, cash
flows, and changes in stockholders' equity for each of the latest three
fiscal years, as required in Regulation S-X. Item 310 of Regulation S-B
also differs from Regulation S-X in its requirements for historical and
pro forma financial statements for significant acquired businesses, the
maximum age of

financial statements, and limited partnerships.\68\
---------------------------------------------------------------------------

    \67\ See Rule 1.01 of Regulation S-X (17 CFR 210.1-01).
    \68\ The requirements of Item 310 of Regulation S-B were
consistent with the requirements of Form S-18, which governed the
form and content of financial statements of smaller companies
choosing to use that form before Regulation S-B was adopted in 1992.
See Release No. 33-6949 (Jul. 30, 1992) [57 FR 36442].
---------------------------------------------------------------------------

    We propose one substantive change in Item 310 that would
differentiate it from the current Item 310 in Regulation S-B.
Currently, in Note 2 preceding the Item, foreign private issuers are
permitted to prepare and present financial statements in accordance
with Item 17 of Form 20-F. Item 17 of Form 20-F allows an issuer to
provide alternative financial statements prepared according to a
comprehensive body of accounting principles other than those generally
accepted in the United States if certain conditions are met. Regulation
S-B currently is available only to U.S. and Canadian issuers, so
permitting non-U.S. GAAP for Canadian foreign private issuers was a
modest adjustment in terms of the number of companies eligible to use
this adjustment. Because we propose to expand the definition of smaller
reporting company to include all foreign companies, we do not feel that
non-U.S. GAAP financial statements would be appropriate for a larger
number of issuers. Therefore, we propose that foreign issuers who elect
to use Item 310 disclosure for smaller reporting companies be required
to present financial statements pursuant to U.S. GAAP. Currently, all
financial statements in registration statements that may be used by
domestic issuers, other than Canadian small business issuers using
Forms SB-1 and SB-2, are required to conform to U.S. GAAP.\69\
---------------------------------------------------------------------------

    \69\ As noted previously, foreign private issuers may use the
forms and disclosure standards available only for such issuers.
---------------------------------------------------------------------------

Request for Comments
     Should the Commission incorporate the requirements on form
and content of financial statements of smaller companies now in Item
310 of Regulation S-B into Regulation S-X, as proposed? Should the
Commission modify proposed Item 310 in any way?
     Is it appropriate to require U.S. GAAP for foreign private
issuers and other foreign issuers who take advantage of the smaller
reporting company requirements? Or is the option of filing a
registration statement on Form 20-F an acceptable alternative? What
effect, if any, will this have on foreign private issuers?
     The Advisory Committee believed that a second year of
audited balance sheet data would provide investors with a basis for
comparison with the current period, without substantially increasing
audit costs.\70\ Should we consider following the Advisory Committee
recommendation to require smaller reporting companies to provide two
years of audited balance sheet data in annual reports and registration
statements?
---------------------------------------------------------------------------

    \70\ See Advisory Committee Final Report 65-66.
---------------------------------------------------------------------------

b. Proposed Changes to Other Regulation S-K Disclosure Items
    As a general rule, we propose to integrate the individual
Regulation S-B disclosure items (other than Item 310 as discussed
immediately above) into Regulation S-K. To do this, we propose to add a
new paragraph to each item of Regulation S-K that will contain separate
disclosure standards for smaller reporting companies, to the extent
that a particular item permits such disclosure.\71\ To ease navigation,
each new paragraph would have a heading reading ``Smaller reporting
companies,'' so readers can easily find the requirements tailored for
smaller reporting companies. At this time, we do not propose any major
substantive changes to the items that we are moving from Regulation S-B
into Regulation S-K. Where the disclosure standards of identically
numbered items in Regulation S-B and Regulation S-K are substantially
the same for smaller reporting companies and larger companies, we
propose no change to the existing Regulation S-K disclosure items.\72\
We discuss our proposed treatment of specific Regulation S-K disclosure
items below.
---------------------------------------------------------------------------

    \71\ We propose to add the new paragraphs at the end of items in
Regulation S-K as they exist today. If we add additional paragraphs
to items of Regulation S-K in the future, we may or may not move the
smaller reporting company paragraph to the end of the item at that
time.
    \72\ We propose no changes to the following items of Regulation
S-K because the disclosure standards are currently substantially the
same: Item 102 (Description of Property), Item 103 (Legal
Proceedings), Item 202 (Description of Registrant's Securities),
Item 304 (Changes In and Disagreements with Accountant on Accounting
and Financial Disclosure), Item 307 (Disclosure Controls and
Procedures), Item 308 (Internal Control Over Financial Reporting),
Item 308T (Internal Control Over Financial Reporting), Item 401
(Directors, Executive Officers, Promoters and Control Persons), Item
403 (Security Ownership of Certain Beneficial Owners and
Management), Item 405 (Compliance with Section 16(a) of the Exchange
Act), Item 406 (Code of Ethics), Item 501( Forepart of Registration
Statement and Outside From Cover Page of Prospectus), Item 502
(Inside Front and Outside Back Cover Pages of Prospectus), Item 505
(Determination of Offering Price), Item 506 (Dilution), Item 507 (
Selling Security Holders), Item 508 (Plan of Distribution), Item 509
(Interest of Named Experts and Counsel), Item 510 (Disclosure of
Commission Position on Indemnification for Securities Act
Liabilities), Item 511 (Other Expenses of Issuance and
Distribution), Item 701 (Recent Sales of Unregistered Securities;
Use of Proceeds from Registered Securities), Item 702
(Indemnification of Directors and Officers), and Item 703 (Purchases
of Equity Securities by the Issuer and Affiliated Purchasers).
---------------------------------------------------------------------------

    Item 101 (Description of Business). We propose to add a new
paragraph (h) to Item 101 of Regulation S-K to set forth the
alternative disclosure standards for smaller companies that appear now
in Item 101 of Regulation S-B. Under Item 101 of Regulation S-B,
smaller companies are required to provide a description of their
business that is less detailed than the description that larger
companies provide and to 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.
    Item 201 (Market Price of and Dividends on Registrant's Common
Equity and Related Stockholder Matters). We propose only a minor change
in wording to this item because Instruction 6 to paragraph (e) of Item
201 of Regulation S-K currently contains a provision permitting smaller
companies to use the alternative disclosure standards of Regulation S-B
when preparing documents under Regulation S-K. Therefore, no
substantive change is necessary. We propose to replace the reference to
a ``small business issuer'' with a reference to a ``smaller reporting
company'' and add a heading to Instruction 6.
    Items 301 (Selected Financial Data) and 302 (Supplementary
Financial Information). Regulation S-B currently does not require
smaller companies to disclose Item 301 (Selected Financial Data) or
Item 302 (Supplementary Financial Information) data. We therefore
propose to add a new paragraph (c) to Items 301 and 302 in Regulation
S-K, providing that smaller reporting companies are not required to
present the information required by these items.
    Item 303 (Management's Discussion and Analysis of Financial
Condition and Results of Operations). We propose to add a new paragraph
(d) to Item 303 of Regulation S-K to reflect the alternative disclosure
standards for smaller companies now in Item 303 of Regulation S-B.
Regulation S-B provides more streamlined disclosure requirements for a
smaller company's management to present its discussion and analysis of
the company's financial condition and results of operations. It
requires 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 as required in Regulation S-

X. Further, Regulation S-B does not require smaller companies to
provide tabular disclosure of contractual obligations, as required for
companies reporting under Item 303(a)(5) of Regulation S-K.\73\
---------------------------------------------------------------------------

    \73\ 17 CFR 229.303(a)(5).
---------------------------------------------------------------------------

    Item 305 (Quantitative and Qualitative Disclosures about Market
Risk). Regulation S-B currently does not require smaller companies to
disclose Item 305 (Quantitative and Qualitative Disclosures about
Market Risk) information. We therefore propose to add a new paragraph
(e) to Item 305 of Regulation S-K providing that smaller reporting
companies are not required to respond to this item.
    Item 402 (Executive Compensation). We propose to add a new
paragraph (l) to Item 402 of Regulation S-K to add the alternative
standards for smaller reporting companies for disclosure of
compensation of executives and directors now in Item 402 of Regulation
S-B. Under Item 402 of Regulation S-B, a smaller company is allowed to
provide executive compensation disclosure for only three officers,
rather than the five required under Item 402 of Regulation S-K, and
Summary Compensation Table disclosure for only two years, rather than
the three years required under Regulation S-K. A smaller company does
not need to provide a Compensation Discussion and Analysis, is required
to provide only three of the seven tables prescribed by Item 402 of
Regulation S-K, and is required to provide alternative narrative
disclosures. In the Director Compensation Table, a smaller company need
not include footnote disclosure of the grant date fair value of equity
awards, given that no corresponding Grants of Plan-Based Award Table
disclosure for named executive officers of smaller companies is
required.\74\
---------------------------------------------------------------------------

    \74\ See Release No. 8732A (Aug. 8, 2006) [71 FR 53158] and
Release No. 33-8765 (Dec. 22, 2006) [71 FR 78338].
---------------------------------------------------------------------------

    Item 404 (Transactions with Related Persons, Promoters and Certain
Control Persons). We propose to add a new paragraph (d) to Item 404 of
Regulation S-K to add the alternative standards for disclosure of
related person transactions now available to smaller companies in Item
404 of Regulation S-B. A smaller reporting company would not be
required to disclose policies and procedures for approving related
person transactions, which is required of other companies under
paragraph (b). Item 404 of Regulation S-B requires disclosure regarding
transactions where the amount exceeds the lesser of 1% of a smaller
company's total assets or $120,000. Companies using Regulation S-K are
required to disclose information only about transactions above $120,000
in amount. As such, for smaller companies with an asset level such that
1% of its assets would equal a dollar amount lower than $120,000,
related person disclosure under Item 404 is more rigorous than for
larger companies. Further, smaller companies are required to disclose
additional specific information about underwriting discounts and
commissions and corporate parents. We propose, however, to change the
calculation of total assets for smaller reporting companies from 1%
percent 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. This standard is more consistent with the two
years of financial statements required of smaller reporting companies
in the filings containing these disclosures.
    Item 407 (Corporate Governance). We propose to add a new paragraph
(g) to Item 407 of Regulation S-K to add the corporate governance
disclosure standards now available to smaller companies in Item 407 of
Regulation S-B. Smaller reporting companies would not be required to
provide Compensation Committee Interlock and Insider Participation
disclosure or a Compensation Committee Report. In addition, smaller
reporting companies would not be required to provide an Audit Committee
Report until the first annual report after their initial registration
statement is filed with the Commission.
    Item 503 (Prospectus Summary, Risk Factors, and Ratio of Earnings
to Fixed Charges). We propose to add a new paragraph (e) to Item 503 of
Regulation S-K to add the alternative standards for disclosure now
available to smaller companies in Item 503 of Regulation S-B. Item 503
of Regulation S-B does not require smaller companies to 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.
    Item 504 (Use of Proceeds). We propose no change to the primary
text of Item 504 of Regulation S-K because the disclosure standards of
Regulation S-K and Regulation S-B currently are substantially the same.
We propose a minor change to the instructions to the item, however, to
clarify that new Item 310 of Regulation S-K, rather than Regulation S-
X, will govern whether financial statements of businesses proposed to
be acquired are to be included in the filings of smaller reporting
companies relying on Item 310 of Regulation S-K rather than Regulation
S-X. We recognize that the instructions to Item 504 in Regulation S-K
are more specific than and more than twice as long as those in Item 504
of Regulation S-B. We do not propose to substitute the shorter
instructions of Regulation S-B for smaller reporting companies
complying with Item 504, because we do not regard the longer
instructions as necessarily more burdensome or not scaled to the needs
of smaller companies.
    Item 512 (Undertakings). We propose to add a new paragraph (m) to
Item 512 of Regulation S-K to add the alternative standards for
disclosure now available to smaller companies in Item 512 of Regulation
S-B. Item 512 of Regulation S-B does not require smaller companies to
provide the information about asset-backed securities, foreign private
issuers, and trust indenture offerings now required by Regulation S-K.
    Item 601 (Exhibits). We propose to add a new paragraph (c) to Item
601 of Regulation S-K to incorporate the standards currently in Item
601 of Regulation S-B. The paragraph would clarify that a smaller
reporting company is not required to provide Exhibit 12 (Statements re
Computation of Ratios) unless it discloses one of the ratios discussed
in the requirement upon the registration of debt or preference equity
securities. The paragraph also would clarify that, for purposes of
Exhibit 7 (Correspondence from an Independent Accountant Regarding Non-
Reliance on a Previously Issued Audit Report or Completed Interim
Review), new Item 310 of Regulation S-K, rather than Regulation S-X,
may govern the form, content, and preparation of financial statements
provided by a smaller reporting company. Our proposal also would revise
Item 601 of Regulation S-K to delete references to several ``SB'' forms
and to Regulation S-B, all of which would be deleted from our rules and
regulations.
Request for Comments
     Would a different format in the proposed integrated
Regulation S-K more clearly identify the provisions that are different
for smaller reporting companies?
     Is the proposed Item 101 (Description of Business)
requirement adequate for most smaller reporting companies? Please be as
specific as possible and provide details to support your position.
     Should the Commission consider requiring smaller reporting
companies

to provide tabular disclosure of contractual obligations required in
paragraph (5) of Regulation S-K Item 303? Would this disclosure provide
meaningful information for investors or would it be overly burdensome
for smaller reporting companies?
     Should smaller reporting companies be required to fully
comply with any other items of Regulation S-K to which we do not
propose to subject them?
     Are there any other provisions in current Regulation S-B
that should be carried over for smaller reporting companies into
Regulation S-K that we have not proposed to be carried over?
     Conversely, are any of the current Regulation S-B items
that we propose to carry over inappropriate for the larger group of
companies we propose to define as smaller reporting companies?
c. A La Carte Approach
    We propose to allow a company that qualifies as a smaller reporting
company to choose, on an item-by-item or ``a la carte'' basis, to
comply with either the scaled disclosure requirements made available in
Regulation S-K for smaller reporting companies or the disclosure
requirements for other companies in Regulation S-K, when the
requirements for other companies are more rigorous.\75\ 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 items, at its election, in any one filing, in such cases. We would
require, however, that a smaller reporting company provide its
financial statements on the basis of either 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. If this approach is adopted, we would expect that
our staff, in reviewing filings of smaller reporting companies, would
be instructed to evaluate item-by-item compliance only with the
Regulation S-K requirements applicable to smaller reporting companies,
and not with the requirements applicable to larger companies, even if
the company whose filing is being reviewed chooses to comply with the
larger company requirements.\76\ The staff also would continue to seek
clarity in disclosure provided by smaller reporting companies.
---------------------------------------------------------------------------

    \75\ As proposed, Item 404 would be the only disclosure
requirement in Regulation S-K that would be more rigorous for
smaller reporting companies than for other companies.
    \76\ These proposals would have no effect on the legal
requirements and liabilities that would continue to apply to all
disclosures made by issuers.
---------------------------------------------------------------------------

    Our objective in proposing the ``a la carte'' approach is to
provide maximum flexibility for smaller reporting companies without
disadvantaging investors. While establishing a baseline of required
disclosure, we want to encourage smaller reporting companies to
determine for themselves the proper balance and mix of disclosure for
their investors within the boundaries of the law, given the costs of
compliance and the market demand for information.
    We propose to add a check box to the cover page of all filings in
which smaller reporting companies may take advantage of the alternative
disclosure requirements. The check box would require smaller reporting
companies to indicate that they are eligible for ``Smaller Reporting
Company'' status. Investors and others reviewing the filing would be
able to tell from the check box that the disclosing company is eligible
to comply with the scaled disclosure available to smaller reporting
companies.
    In proposing to require smaller reporting to companies to check a
box identifying themselves as such on the cover page of their filings,
we are attempting to strike the appropriate balance among investor
protection, transparency, and the legitimate needs of smaller
companies. We are aware that, as discussed by the Advisory Committee, a
major reason our current Regulation S-B system has not worked as well
as intended is that it requires filing on ``SB'' forms that may not
have achieved an optimal level of market acceptance.\77\ By requiring a
company to check a box on the front of its filings, we are trying to
address the legitimate needs of investors who may want to know if a
company is eligible to comply with standards scaled for smaller
companies. We are attempting, however, to avoid unduly stigmatizing
smaller companies. We believe that, if we have scaled our disclosure
and reporting requirements to properly reflect the characteristics of
smaller companies, investors will be adequately protected by our rules
and should not be unduly concerned that a company may be providing
information under a different, scaled standard.
---------------------------------------------------------------------------

    \77\ See Advisory Committee Final Report 63-64.
---------------------------------------------------------------------------

Request for Comments
     Should the Commission adopt the a la carte approach,
allowing smaller reporting companies to take advantage of the adjusted
disclosure requirements available to them on an item-by-item basis?
     Have smaller companies filing on ``SB'' forms not achieved
greater market acceptance because investors believe that the disclosure
required by Regulation S-K is valuable? Please provide a detailed
explanation and a reasoned basis for your view.
     Does the proposal to scale disclosure for smaller
reporting companies strike the proper balance between imposing
proportional costs and burdens on smaller reporting companies while
adequately protecting investors?
     Should the Commission adopt an approach requiring smaller
reporting companies to comply with all disclosure requirements for
larger companies if they elect to comply with any of those
requirements? Should we require smaller reporting companies that choose
to no longer follow the disclosure requirements for larger companies to
separately disclose that change?
     Is the Commission creating a situation in which newly
eligible companies could selectively choose not to disclose information
that may be beneficial to investors?
     Does requiring smaller reporting companies to check a box
indicating their ``Smaller Reporting Company'' status on the cover page
of filings unduly penalize or stigmatize smaller reporting companies?
Is a check box necessary for investor protection? Is another
alternative preferable to a check box?
     Should the proposal require a smaller reporting company to
check the box only if it is choosing to comply with at least one item
in Regulation S-K scaled for smaller reporting companies, rather than
requiring all eligible companies to check the box even if they choose
not to comply with any scaled items?
     What should be the impact on a smaller reporting company
that attempts to satisfy the disclosure requirements of larger
companies but fails to satisfy those requirements? Please provide
details to support your views.
     Instead of a check box indicating the size of the company,
would it be preferable to have check boxes or some other form of
identification indicating what smaller reporting company items the
company has relied upon in preparing its filing?
     How would the a la carte approach affect the ability of
investors to compare disclosures of smaller reporting companies?
d. Eliminating ``SB'' Forms
    We anticipate that the elimination of forms associated with
Regulation S-B (Forms 10-SB, 10-QSB, 10-KSB, SB-1,

and SB-2) will result in regulatory simplification by mainstreaming
smaller reporting company filers into the Regulation S-K framework. We
anticipate that legal practitioners, accountants, and other individuals
preparing disclosure forms will appreciate the convenience of referring
to only one set of disclosure requirements.
    The Advisory Committee noted that elimination of the ``SB'' forms
would reduce the complexity of federal securities regulations. The
Advisory Committee recognized that the drawbacks associated with
Regulation S-B included a lack of acceptance of ``SB'' filers in the
marketplace.\78\ Also, North American Securities Administrators
Association officials representing state securities regulators have
commented that small businesses issuing securities were especially
vulnerable to loss of investor confidence if some issuers ``poisoned
the well'' with material misstatements.\79\
---------------------------------------------------------------------------

    \78\ Id.
    \79\ U.S. General Accounting Office, Small Business: Efforts to
Facilitate Equity Capital Formation 190 (2000).
---------------------------------------------------------------------------

    The elimination of the forms associated with Regulation S-B would
result in most smaller reporting companies using Securities Act Form S-
1 to offer securities to the public. Since 2005, an issuer using Form
S-1 that is subject to the requirement to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act may be permitted to
incorporate by reference its previously filed Exchange Act reports if
it has filed an annual report for its most recently completed fiscal
year, has filed all reports and other materials required to be filed by
Sections 13(a), 14, or 15(d) of the Exchange Act during the preceding
12 months (or for such shorter period that the registrant was required
to file such reports), and makes available all incorporated materials
on its Web site.\80\ We believe that this ability to incorporate
previously filed reports by reference would result in some cost savings
and efficiencies in preparing registration statements for smaller
reporting companies.
---------------------------------------------------------------------------

    \80\ See Release No. 33-8591 (Jul. 19, 2005) [70 FR 44722].
---------------------------------------------------------------------------

    It is our intention that the integration of the disclosure
standards of Regulation S-B into Regulation S-K will mitigate the
reported lack of market acceptance associated with smaller filers. As
one commentator has explained, it is not enough to establish that small
business should at times be treated separately from larger business;
the manner in which the distinction is made is equally important, ``for
a misguided partition may be worse than no partition at all.'' \81\ We
expect that adoption of our proposal to eliminate the forms associated
with Regulation S-B will further our goals of eliminating unwarranted
negative perceptions of the smaller reporting company disclosure
regime.
---------------------------------------------------------------------------

    \81\ See Larry T. Garvin, Small Business and the False
Dichotomies of Contract Law, 40 Wake Forest L. Rev. 295, 373 (2005).
---------------------------------------------------------------------------

Request for Comments
     Is it appropriate to eliminate all ``SB'' forms associated
with Regulation S-B?
     Should we maintain some or all of the ``SB'' forms, even
if we integrate the provisions of Regulation S-B into Regulation S-K?
     If adopted, would elimination of the ``SB'' forms provide
significant benefits to legal practitioners, accountants, and other
individuals preparing disclosure for smaller companies? Would there be
any impact on investors? Please provide details to support your views.
e. Transition To and From Smaller Reporting Company Status
    As discussed above, we propose to significantly expand eligibility
for smaller company-scaled regulation by combining our two current
smaller company regulatory categories, ``small business issuer'' and
``non-accelerated filer,'' into a new category called ``smaller
reporting company.'' These companies would have their own eligibility
standards and rules for transitioning up to a category of larger
companies once a company exceeds the limitations for the smaller
reporting company designation. In addition, each category of larger
companies has rules for transitioning down to a smaller company
category. This ordinarily would occur if the company drops below the
ceiling marking the boundary between the smaller and larger company
categories.
    Currently, a small business issuer that exceeds the $25 million
revenue and $25 million public float standards for that status at the
end of two consecutive fiscal years must transition out of small
business issuer status, effective immediately for filings covering
events and completed fiscal periods in the next fiscal year. A non-
accelerated filer ceases to qualify for that status and must transition
to accelerated filer status in the next fiscal year after its public
float first rises above $75 million as of the last business day of its
most recently completed second fiscal quarter.\82\ For smaller
reporting companies, we propose to follow the transition model
currently used to determine ``accelerated filer'' status. Under our
proposal, smaller reporting companies would lose eligibility to claim
that status in the first fiscal year following a fiscal year in which
the smaller reporting company's public float rises above $75 million as
of the last business day of the second fiscal quarter.\83\
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    \82\ Exchange Act Rule 12b-2 (paragraph (3)(i) of the definition
of ``accelerated filer'') provides:
    The determination at the end of the issuer's fiscal year for
whether a non-accelerated filer becomes an accelerated filer, or
whether a non-accelerated filer or accelerated filer becomes a large
accelerated filer, governs the deadlines for the annual report to be
filed for that fiscal year, the quarterly and annual reports to be
filed for the subsequent fiscal year and all annual and quarterly
reports to be filed thereafter while the issuer remains an
accelerated filer or large accelerated filer.
    \83\ See proposed Item 10(f) of Regulation S-K.
---------------------------------------------------------------------------

    We also propose to follow the accelerated filer model in
establishing rules for companies to transition to smaller reporting
company status. Under our current rules, a reporting company may
transition to small business issuer status in the next fiscal year if
its public float and revenue fall below $25 million at the end of two
consecutive fiscal years.\84\ An accelerated filer may transition to
non-accelerated filer status in the next fiscal year if its public
float falls below $50 million as of the last business day of the
company's second fiscal quarter. We propose that a reporting company
that does not file reports claiming smaller reporting company status be
required to transition to that status in the next fiscal year if its
public float falls below $50 million as of the last business day of the
company's second fiscal quarter.\85\
---------------------------------------------------------------------------

    \84\ See Item 10 of Regulation S-B.
    \85\ See proposed Item 10(f) of Regulation S-K.
---------------------------------------------------------------------------

    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, we propose to allow it to use the scaled disclosure
item requirements until it exceeds $50 million in annual revenue. Once
an issuer fails to qualify for smaller reporting status under the
revenue test, it would remain unqualified unless its annual revenues
fall below $40 million during the previous fiscal year.
    The determination as to whether a company qualifies for smaller
reporting company treatment would be made at the beginning of a fiscal
year on the basis of the information in a quarterly report on Form 10-Q
or an initial registration statement under the Securities Act or
Exchange Act, whichever is the first to be filed during that year. If
an issuer that qualified on the basis of revenue develops a public

float or its public float increases during the year, the issuer would
remain a smaller reporting company for the entire fiscal year.
    Our purpose in proposing these transition rules is to provide both
predictability and flexibility to smaller companies, while at the same
time assuring that investors have access to the appropriate level of
disclosure. We do not wish to have the rules under which a smaller
company is reporting change too frequently. It also is our intention to
provide smaller reporting companies with the ability to take advantage
of scaled regulation in the appropriate circumstances.
Request for Comments
     Should the transition rules to and from smaller reporting
company status be more similar to the current transition rules for
small business issuer status?
     Should we provide a two-year test period, rather than a
single determination date, for transitioning from smaller reporting
company status, as is the case for transitioning from small business
issuer status today?
     Should the Commission consider a threshold other than $50
million in public float to transition into smaller reporting company
status? Should we set the public float level for transitioning into
smaller reporting company status at $40 million, $60 million, $75
million, or some other level?
     Is there a better way for smaller reporting companies to
transition to or from that status? Please be as specific as possible
and provide details with your comments.
f. Eliminating Transitional Small Business Issuer Format
    As part of the adoption of Regulation S-B, and later additional
small business initiatives, the Commission developed a transitional
registration statement, Form SB-1, and annual report, Form 10-KSB,
allowing disclosure based on Model A or B found in Regulation A.\86\
The Commission allowed the question-and-answer format for small
business issuers to make an easy transition from a non-reporting
company to a reporting company under the Securities Act or Exchange
Act. A small business issuer may use this transitional disclosure
format until it:
---------------------------------------------------------------------------

    \86\ The transitional registration statement and annual report
on Form 10-KSB allow some small business issuers to provide
alternative disclosure. The Commission also allowed some small
business issuers to provide Regulation A model disclosure on Form
SB-1 to raise up to $10 million of securities in a continuous 12-
month period. See Release No. 33-6949; see also Release No. 33-6996
(Apr. 28, 1993) [58 FR 26509].
---------------------------------------------------------------------------

     Registers more than $10 million under the Securities Act
in any continuous 12-month period, other than on a Form S-8;
     Elects to graduate to a non-transitional disclosure
system; or
     Is no longer a small business issuer.
    The number of companies that registered on Form SB-1 and followed
the transitional disclosure format within Form 10-KSB has declined over
time. During the past five years, the Commission has received only 56
Form SB-1 registration statements.\87\ The number of companies that
file their Form 10-KSB using the transitional disclosure format is also
small. For the calendar years 2000 to 2005, two small business issuers
out of 56 filed a Form 10-KSB using the transitional disclosure format.
---------------------------------------------------------------------------

    \87\ We calculated the number of Forms SB-1 filed by adding
those received from 2002 through 2006.
---------------------------------------------------------------------------

    Because the transitional disclosure format is not commonly
understood and infrequently used, we propose to eliminate this
disclosure option. Accordingly, smaller reporting companies no longer
would have the option to use Form SB-1 and the transitional format
version of Form 10-KSB. Instead, they would use Form S-1 and 10-K. Our
proposal would remove all references to transitional filer status,
including removing paragraph 4 of General Instruction D in Form S-4,
the Note to Small Business Issuers in Rules 14a-3 and 14c-3, and
General Instructions G in Schedule 14A. We are not proposing to alter
the disclosure format permitted in Regulation A offerings on Form 1-A.
Request for Comments
     Should the Commission maintain the transitional disclosure
format option? If so, please indicate the reasons why the option should
be maintained.
g. Other Proposals
    We also are soliciting suggestions for additional ways in which we
could better scale our disclosure and reporting requirements to the
needs of smaller companies and their investors. All suggestions that
ease the burdens of smaller companies without compromising investor
protection are welcome.
    We also propose several minor and technical amendments to our rules
and forms to conform them to the regulatory changes we propose today.
Most of these amendments are deletions of references to Regulation S-B
or a small business issuer rule and substitutions of references to
Regulation S-K. In a few instances, we propose to amend rules to
reflect the Commission's current address of 100 F Street, NE.,
Washington, DC 20549.
Request for Comments
     Are there additional ways in which we could better scale
our disclosure and reporting requirements to the needs of smaller
reporting companies and their investors, while continuing to take
investor protection into account? Please be as specific as possible and
provide detailed support for your suggestions.

III. General Request for Comments

    We request and encourage any interested person to submit comments
on any aspect of our proposals and any of the matters that might have
an impact on the proposed amendments. We request comment from investors
and companies that may be affected by the proposals. We also request
comment from service professionals, such as law and accounting firms,
and facilitators of capital formation, such as underwriters and
placement agents, and other regulatory bodies, such as state securities
regulators. We are especially interested in comments from service
professionals that regularly work with smaller reporting companies.
With respect to any comments, we note that they are of greatest
assistance to our rulemaking initiatives if accompanied by supporting
data and analysis of the issues addressed and by alternatives to our
proposals where appropriate.

IV. Paperwork Reduction Act

A. Background

    The proposed amendments contain ``collection of information''
requirements within the meaning of the Paperwork Reduction Act of
1995.\88\ We are submitting a request for approval of the proposed
amendments to the Office of Management and Budget for review in
accordance with the Paperwork Reduction Act and its implementing
regulations.\89\ The titles of the collections of information are: \90\
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    \88\ 44 U.S.C. 3501 et seq.
    \89\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
    \90\ 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).
    We adopted all of the existing regulations and forms pursuant to
the Securities Act, the Exchange Act, and the Trust Indenture Act.
These regulations and forms set forth the disclosure requirements for
annual, periodic, and current reports and registration statements that
are prepared by issuers to provide investors information to make
informed investment decisions in registered offerings of securities and
in secondary market transactions.
    Our proposed amendments to existing forms and regulations and the
proposed elimination of Regulation S-B, Form SB-1, Form SB-2, Form 10-
SB, Form 10-KSB, and Form 10-QSB are intended to:
     Make proportional and scaled disclosure options available
to a larger number of smaller companies;
     Promote regulatory simplification; and
     Integrate current Regulation S-B disclosure requirements
for smaller companies into disclosure requirements of Regulation S-K.
    These proposed amendments are intended to result in regulatory
simplification for a greater number of entities that would be eligible
for scaled disclosure item requirements. These proposals should not
increase the disclosure requirements for any registrant, but will
require some registrants to file different forms than they currently
use. These proposals do not affect any disclosure requirements for any
company with a public float over $75 million.
    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. An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information requirement unless
it displays a currently valid control number.
    The information collections related to annual, periodic, and
current reports and registration statements would be mandatory for
larger reporting companies; some of the requirements, however, would be
voluntary for smaller reporting companies.

B. Summary of Information Collections

    Our proposals would amend the forms listed above as collections of
information but focus primarily on the forms discussed below.
    The proposals would increase existing collection of information
total burden estimates for reports on Form 10-K and Form 10-Q as well
as registration statements on Form 10, Form S-1, and Form S-11 for the
following reasons:
     The elimination of Form 10-KSB would cause an increase in
the number of companies that are required to file an annual report on
Form 10-K; \91\
     The elimination of Form 10-QSB would cause an increase in
the number of companies that are required to file quarterly reports on
Form 10-Q; \92\
     The elimination of Form SB-1 would cause an increase in
the number of registration statements filed on Form S-1; \93\
     The elimination of Form SB-2 would cause an increase in
the number of registration statements filed on Form S-1; \94\ and
     The elimination of Form SB-2 would cause real estate
companies that had previously used that form to use Form S-11 instead,
thereby increasing the number of registration statements filed on Form
S-11.\95\
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    \91\ We estimate that approximately 3,504 small business issuers
would file their annual reports on Form 10-K, rather than Form 10-
KSB.
    \92\ We estimate that approximately 11,299 reports on Form 10-
QSB that were filed in the last fiscal year would be filed on Form
10-Q.
    \93\ We estimate that approximately 24 registration statements
in the last fiscal year were filed on Form SB-1 and would be
required to be filed on Form S-1.
    \94\ We estimate that approximately 1,028 registration
statements were filed on Form SB-2 in the last fiscal year and that
the number of Form S-1 registration statements would increase by the
same number.
    \95\ We estimate that approximately 15 registration statements
were filed on Form SB-2 in the last fiscal year covering real estate
transactions that would be required to be registered on Form S-11 if
these proposals were adopted.
---------------------------------------------------------------------------

    At the same time, the proposals would decrease existing collection
of information total burden estimates for annual reports on Form 10-
KSB, quarterly reports on Form 10-QSB, and registration statements on
Form 10-SB, Form SB-1, and Form SB-2 by:
     Eliminating Form SB-1, Form SB-2, Form 10-SB, Form 10-KSB,
and Form 10-QSB and integrating the disclosure requirements of
Regulation S-B into Regulation S-K, thereby simplifying the disclosure
requirements by combining them into one regulation.
    In addition, the proposals may decrease existing collection of
information total burden estimates, or not affect them at all, for some
reports filed on Form 10-K and Form 10-Q and some registration
statements on Form 10, Form S-1, and Form S-11, depending on the
company's particular circumstances, by:
     Replacing the definition of small business issuer with a
broader category of smaller reporting companies comprised of most non-
accelerated filers with a public float between $25 million and $75
million, and providing these smaller reporting companies with the
option of scaled disclosure;
     Allowing smaller reporting companies to provide a three-
year discussion of their business development (Item 101), rather than
five years as required of larger companies;
     Allowing smaller reporting companies to provide more
streamlined disclosure for management's discussion and analysis of
financial condition and results of operations (Item 303) by requiring
two years of analysis if the company is presenting only two years of
financial statements rather than three years as required of larger
companies. Further, smaller reporting companies would not have to
provide tabular disclosure of contractual obligations as required for
larger companies under Item 303(a)(5);
     Allowing smaller reporting companies to provide an audited
balance sheet for the most recent fiscal year and audited statements of
income, cash flows, and changes in stockholders' equity for each of the
latest two fiscal years rather than an audited balance sheet for the
latest two fiscal years and

audited statements of income, cash flows and changes in stockholders'
equity for each of the latest three fiscal years as required by
Regulation S-X for larger companies;
     Allowing smaller reporting companies to provide
information about the chief executive officer and two other highly
compensated executive officers (Item 402), rather than information
about the chief executive officer, chief financial officer, and three
other highly compensated executive officers as required for larger
companies and to provide only a summary compensation table, an
outstanding equity awards table, and a director compensation table,
rather than the seven tables required for larger companies.
Furthermore, a smaller reporting company would not be required to
provide a Compensation Discussion and Analysis, as required of larger
companies; and
     Allowing smaller reporting companies to disclose related
person transactions that exceed the lower of 1% of their total assets
or $120,000 in amount. In this instance, a smaller reporting company
for which 1% of its assets is less than $120,000 may have a more
rigorous disclosure burden than a larger registrant if it chose to
provide the scaled disclosure available to smaller reporting companies.
Smaller reporting companies also would provide the related person
disclosure for two years rather than the three years required for
larger companies. A smaller reporting company would not be required to
disclose its policies and procedures for approving related person
transactions.

C. Paperwork Reduction Act Burden Estimates

    For purposes of the Paperwork Reduction Act, we believe that if
these proposals were adopted, the burden changes would be insignificant
for companies that currently meet the small business issuer definition.
    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 would be 6,151,112 and that
the total increase in cost would be $933,954,800. 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 6,149,012 burden hours and
a total decrease in cost of $927,927,800. The net difference between
the increase and decrease is an increase of 2,100 burden hours and a
cost of $6,027,000. The reason for the net difference is that small
real estate companies, which are currently eligible to use Form SB-2,
would be required to use Form S-11 if these proposals are adopted. Form
S-11 is a form tailored to the real estate industry that requires more
internal burden hours and increased professional costs. The net
increase of 2,100 burden hours and costs of $6,027,000 is outweighed by
the possible decrease of 356,390 burden hours and costs of $47,479,000,
as discussed in detail below.
    Our methodologies for deriving the burden hour and cost estimates
presented below represent the average burdens for all issuers, both
large and small. For Exchange Act annual reports and quarterly reports
on Form 10-K and 10-Q, we estimate that 75% of the burden of
preparation is carried by the company internally and that 25% of the
burden is carried by outside professionals retained by the issuer at an
average cost of $400 per hour.\96\
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    \96\ In connection with other recent rulemakings, we have had
discussions with several private law firms to estimate an hourly
rate of $400 as the average cost of outside professionals that
assist issuers in preparing disclosure and conducting registered
offerings.
---------------------------------------------------------------------------

    For purposes of the Paperwork Reduction Act, we estimate that over
a three-year period \97\ the annual increased incremental disclosure
burden imposed by the proposed revisions would average 4,457,088 hours
per Form 10-K, 7,387 hours per Form 10, 1,155,209 hours per Form 10-Q,
138,765 hours per Form S-1, and 7,413.75 hours per Form S-11. The plain
English requirements would apply to these disclosure statements and is
factored into the incremental burden of preparing these forms.
---------------------------------------------------------------------------

    \97\ We calculated an annual average over a three-year period
because OMB approval of Paperwork Reduction Act submissions cover a
three year period.
---------------------------------------------------------------------------

    These estimates were based on the following assumptions:
Form 10-K
     The elimination of Form 10-KSB would cause the number of
Form 10-Ks filed to increase. We estimate there were approximately
3,504 Form 10-KSBs filed in the last fiscal year so there would be a
corresponding increase of 3,504 Form 10-Ks filed.
     We estimate that an increase of 3,504 Form 10-Ks filed
would result in an increase in the compliance burden by an estimated
4,457,088 hours (3,504 companies x 1,272 internal hours per company)
and an annual cost increase of $594,278,400 ($169,600 cost per response
x 3,504 annual responses) with respect to the current Form 10-K.\98\
---------------------------------------------------------------------------

    \98\ Our current PRA inventory for completing a Form 10-KSB is
1,272 burden hours and a cost of $169,600 (424 professional hours x
$400/hour) per report.
---------------------------------------------------------------------------

Form 10-Q
     The elimination of Form 10-QSB would cause the number of
Form 10-Qs to increase. We estimate that there were approximately
11,299 Form 10-QSBs filed last fiscal year so there would be a
corresponding increase of 11,299 more Form 10-Qs filed.
     We estimate that an increase of 11,299 to the number of
Form 10-Qs filed would result in an increase in the compliance burden
by 1,155,209 hours (11,299 responses by companies x 102.24 internal
hours per response) and an annual cost increase of $154,027,968 (34.08
professional hours x $400 per hour = $13,632 cost per response x 11,299
responses annually) with respect to the current Form 10-Q.
Form 10
     The elimination of Form 10-SB would cause the number of
Form 10s to increase. We estimate that approximately 166 Form 10-SBs
were filed in the last fiscal year so there would be a corresponding
increase of 166 Form 10s.
     We estimate that an increase of 166 to the number of Form
10s filed would result in an increase in the compliance burden by 7,387
hours (166 responses by companies x 44.5 internal hours per response)
and an annual cost increase of $8,864,000 (133.5 professional hours x
$400 per hour = $53,400 cost per response x 166 responses annually)
with respect to the current Form 10.
Form S-1
     The elimination of Form SB-1 would cause the number of
Form S-1s to increase. We estimate there were approximately 17 Form SB-
1s filed in the last fiscal year so there would be a corresponding
increase of 17 Form S-1s filed.
     We estimate that 17 more Form S-1s would increase the
compliance burden by 3,009 hours (17 company responses x 177 internal
hours per response) and increase the annual cost by $3,610,800 (531
professional hours x $400 per hour = $212,400 cost per response x 17
responses annually).
     The elimination of Form SB-2 would cause the number of
Form S-1s to increase. We estimate that there were approximately 870
Form SB-2s filed in the last fiscal year so there would be a
corresponding increase of 870 more Form S-1s filed.
     We estimate that 870 more Form S-1s would result in an
increase in the compliance burden by 138,765 hours (870 company
responses x 159.5 internal hours per response) and an annual cost of
$166,518,000 (478.5

professional hours x $400 per hour = $191,400 cost per response x 870
responses annually) increase to the current Form S-1.
Form S-11
     The elimination of Form SB-2 would also cause the number
of Form S-11s to increase. We estimate there were approximately 15 Form
SB-2s filed by real estate companies in the last fiscal year so that
there would be a corresponding increase of 15 Form S-11s filed.
     We estimate that 15 more Form S-11s would result in an
increase in the compliance burden by 7,414 hours (15 company responses
x 494.25 internal hours per response) and an annual cost of $8,898,000
(1,483 professional hours x $400 per hour = $593,200 cost per response
x 15 responses annually) increase in the current Form S-11.
    The annual decrease in incremental disclosure burden resulting from
the proposed revisions would average 4,457,000 hours per Form 10-KSB,
7,387 hours per Form 10-SB, 1,540,458 hours per Form 10-QSB, 3,009
hours per Form SB-1, and 141,158 hours per Form SB-2. The annual
decrease in incremental cost burden resulting from the proposed
revisions would average $594,278,000 per Form 10-KSB, $8,864,000 per
Form 10-SB, $151,786,000 per Form 10-QSB, $3,610,800 per Form SB-1, and
$169,389,000 per Form SB-2. The plain English requirements would apply
to these disclosure statements and is factored into the incremental
burden of preparing these forms.
    These estimates were based on the following assumptions:
Form 10-KSB
     We estimate that the elimination of 3,504 Form 10-KSBs
filed would result in a decrease in the compliance burden by 4,457,088
hours (3,504 responses by companies x 1,272 internal hours per
response) and an annual cost decrease of $594,278,400 (424 professional
hours x $400 per hour = $169,600 cost per response x 3,504 responses
annually).
Form 10-QSB
     We estimate that the elimination of 11,299 Form 10-QSBs
filed would result in a decrease in the compliance burden by 1,155,209
hours (11,299 responses by companies x 102.24 internal hours per
response) and an annual cost decrease of $154,027,968 (34.08
professional hours x $400 per hour = $13,632 cost per response x 11,299
filings annually).
Form 10-SB
     We estimate that the elimination of 166 Form 10-SBs filed
would result in a decrease in the compliance burden by 7,387 hours (166
responses by companies x 44.5 internal hours per response) and an
annual cost decrease of $8,864,000 (133.5 professional hours x $400 per
hour = $53,400 cost per response x 166 responses annually).
Form SB-1
     We estimate that the elimination of 17 Form SB-1s would
result in a decrease in the compliance burden by 3,009 hours (17
company responses x 177 internal hours per response) and an annual cost
decrease of $3,610,800 (531 professional hours x $400 per hour =
$212,400 cost per response x 17 responses annually).
Form SB-2
     We estimate the elimination of 885 Form SB-2s would result
in a decrease in the compliance burden by 141,157.5 hours (885 company
responses x 159.5 internal hours) and an annual cost decrease of
$169,389,000 (478.5 professional hours x $400 per hour = $191,400 cost
per response x 885 responses annually).
    Additionally, we estimate that approximately 1,581 companies would
become newly eligible to use scaled disclosure for smaller reporting
companies or have a new opportunity to assess whether they should avail
themselves of scaled regulation under the restructured regime and could
experience significant burden and cost savings if these proposals are
adopted.\99\ We estimate that if these smaller reporting companies use
all of the scaled smaller reporting company requirements, they would
save 713,031 burden hours and an aggregate cost of $95,018,100.\100\ We
do not expect all of the 1,581 companies, however, to use all of the
scaled disclosure available to smaller reporting companies.
---------------------------------------------------------------------------

    \99\ 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.
    \100\ A smaller reporting company generally may choose to comply
with one, some, all, or none of the scaled disclosure requirements
available for smaller reporting companies under our proposals. If a
smaller reporting company used all scaled disclosure available, it
would decrease the compliance burden by up to 713,031 hours (1,581
responses by companies using regular Regulation S-K disclosure x
1,723 internal hours per company = 2,724,063 hours minus 1,581
responses by companies using scaled disclosure x 1,272 internal
hours per company = 2,011,032 hours for smaller reporting companies)
and decrease the annual cost by up to $95,018,100 (574.25
professional hours x $400 per hour = $229,700 cost per response
using the regular Regulation S-K disclosure x 1,581 annual responses
minus 424 professional hours x $400 per hour = $169,600 cost per
response x 1,581 annual responses).
---------------------------------------------------------------------------

    While we are unsure how many of the 1,581 smaller reporting
companies would use the scaled disclosure requirements, for purposes of
this analysis, we estimate that approximately 50% of these companies
would use the proposed scaled disclosure available to smaller reporting
companies. As a result, we estimate that these 790 smaller reporting
companies could save 356,390 internal burden hours and costs of
$47,479,000 as indicated in the table below showing our estimates if
50% of the companies used the scaled disclosure in preparing their Form
10-K.\101\
---------------------------------------------------------------------------

    \101\ 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).
---------------------------------------------------------------------------

Totals
    The tables below illustrate the incremental annual compliance
burden in the collection of information in hours and cost for Exchange
Act periodic reports, Exchange Act registration statements, and
Securities Act registration statements.

Calculation of Paperwork Reduction Act Burden Estimates for Exchange
Act Reports, Exchange Act Registration Statements, and Securities Act
Registration Statements

                                               Table 1.--Decreases
----------------------------------------------------------------------------------------------------------------
                                                                      Annual
                              Form                                   responses     Burden hours    Annual costs
----------------------------------------------------------------------------------------------------------------
10-KSB..........................................................           3,504       4,457,000    $594,278,000
10-QSB..........................................................          11,299       1,540,458     151,786,000
10-SB...........................................................             166           7,387       8,864,000
SB-1............................................................              17           3,009       3,610,800
SB-2............................................................             885         141,158     169,389,000
                                                                 -----------------------------------------------
    Total.......................................................  ..............       6,149,012     927,927,800
----------------------------------------------------------------------------------------------------------------

                                                                                Table 2.--Increases
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Increased   Proposed     Current    Increase    Proposed       Current        Increase in        Proposed
                              Form                                 Current annual    annual      annual      burden     in burden    burden      professional     professional     professional
                                                                     responses      responses   responses     Hours       hours       hours         costs            costs            costs
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
10-K............................................................            8,602       3,504      12,106  14,819,096   4,457,088  19,276,184   $1,975,879,000     $594,278,000   $2,570,157,000
10-Q............................................................           20,264      11,299      31,563   2,918,263   1,540,458   4,458,721      291,826,000      151,786,000      443,612,000
1Q..............................................................               72         166         238       4,338       7,387      11,725        5,206,000        8,864,000       14,070,000
S-1.............................................................              528         887       1,415     155,232     138,765     293,997      186,278,000      170,128,800      356,406,800
S-11............................................................               60          15          75      29,655       7,414      37,069       35,586,000        8,898,000       44,484,000
                                                                 -------------------------------------------------------------------------------------------------------------------------------
    Total.......................................................  ...............  ..........  ..........  ..........   6,151,112  ..........  ...............      933,954,800  ...............
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

                                                    Table 3.--Decreases for Newly Eligible Companies
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Current          Proposed       Decrease in
                                                     Current burden      Proposed       Decrease in      professional     professional     professional
   Companies between $25 million and $75 million      hours under      burden hours     burden hours     costs under      costs using      costs using
                                                        standard       using scaled     using scaled       standard          scaled           scaled
                                                     regulation S-K     disclosure       disclosure     regulation S-K     disclosure       disclosure
--------------------------------------------------------------------------------------------------------------------------------------------------------
790...............................................       1,361,170        1,004,880          356,290     $181,463,000     $133,984,000      $47,479,000
--------------------------------------------------------------------------------------------------------------------------------------------------------

D. Request for Comment

    We request comment in order to (a) evaluate whether the collections
of information are necessary for the proper performance of our
functions, including whether the information will have practical
utility; (b) evaluate the accuracy of our estimate of the burden of
collections of information; (c) determine whether there are ways to
enhance the quality, utility, and clarity of the information to be
collected; and (d) evaluate whether there are ways to minimize the
burden of the collections of information on those who respond,
including through the use of automated collection techniques or other
forms of information technology.\102\
---------------------------------------------------------------------------

    \102\ Comments are requested pursuant to 44 U.S.C.
3506(c)(2)(B).
---------------------------------------------------------------------------

    Any member of the public may direct to us any comments concerning
the accuracy of these burden estimates and any suggestions for reducing
these burdens. Persons submitting comments on the collection of
information requirements should direct the comments to the Office of
Management and Budget, Attention: Desk Officer for the Securities and
Exchange Commission, Office of Information and Regulatory Affairs,
Washington, DC 20503, and should send a copy to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090, with reference to File No. S7-15-07.
Requests for materials submitted to OMB by the Commission with regard
to these collections of information should be in writing, refer to File
No. S7-15-07, and be submitted to the Securities and Exchange
Commission, Records Management, 6432 General Green Way, Alexandria, VA
22312. Because OMB is required to make a decision concerning the
collection of information requirements between 30 and 60 days after
publication of this release, your comments are best assured of having
their full effect if OMB receives them within 30 days of publication.

V. Cost-Benefit Analysis

A. Background

    We are proposing to eliminate our ``SB'' forms and integrate
Regulation S-B item requirements into amended Regulation S-K. We
propose to amend all relevant rules and forms under the Securities Act,
the Exchange Act, and the Trust Indenture Act to replace the existing
definition of ``small business issuer'' with the new definition of a
``smaller reporting company.'' The ``smaller reporting company'' would
replace the current ``small business issuer'' eligibility standards to
allow a broader range of public companies to provide disclosure based
on the scaled disclosure requirements. The proposed new definition for
smaller reporting company would include companies with a public float
of less than $75 million and would therefore provide a significant
increase from the $25 million levels for public float and revenue under
the current ``small business issuer'' definition.

B. Summary of Proposals

    As noted above, our proposals would eliminate the separate
disclosure framework of Regulation S-B by integrating those
requirements into Regulation S-K. The proposed new definition for
``smaller reporting company'' would expand the number of filers that
would qualify to provide disclosure under the more scaled item
requirements of the current Regulation S-B framework. As proposed,
smaller reporting companies and non-accelerated filers would both be
subject to Regulation S-K, but smaller reporting companies would have
the option to provide disclosure on an item-by-item basis according to
the scaled item requirements of amended Regulation S-K.

New Definition of Smaller Reporting Company in Regulation S-K
    Under the proposals, the newly defined term ``smaller reporting
company'' would include previously excluded companies with public float
levels of between $25 and $75 million. Additionally, companies that do
not have a public float as defined, or are unable to calculate it,
would be eligible for scaled disclosure if their revenues are below $50
million annually. A smaller reporting company would have the option to
prepare disclosure based on the scaled disclosure item requirements of
amended Regulation S-K. The proposed amendments to Regulation S-K would
foster regulatory flexibility because eligible filers would be able to
choose the level of disclosure to provide on an item-by-item basis. We
believe providing disclosure choice is consistent with a principles-
based approach, which encourages filers to provide more meaningful and
relevant disclosure that is specific to the needs of the company and
its investors.
Description of Business
    Under the proposal, companies with public float levels of less than
$75 million would be able to elect to provide disclosure regarding the
development of their business for three years rather than the current
requirement applicable to companies between $25 million and $75 million
in public float to disclose the general development of the business for
the past five years.
Financial Information
    As part of our proposals to reduce costs associated with regulatory
compliance, we are proposing to simplify financial statement disclosure
requirements for smaller reporting companies.
    As proposed, the current financial statement requirements in Item
310 of Regulation S-B would be available to smaller reporting
companies. As proposed, Item 310 of Regulation S-K would permit smaller
reporting companies to provide an audited balance sheet for the last
fiscal year and audited statements of income, cash flows, and changes
in stockholders' equity for each of the latest two fiscal years. In
addition, the expanded category of smaller reporting companies
(companies with public float levels between $25 and $75 million) would
no longer be required to provide an audited balance sheet for the
latest two fiscal years and audited statements of income, cash flows,
and changes in stockholders' equity for each of the latest three fiscal
years as required by Regulation S-X. Other simplified aspects under
proposed Item 310 of Regulation S-K would include:
     The historical and pro forma financial statements for
significant acquired businesses;
     The maximum age of financial statements; and
     Limited partnerships financial statement disclosure of
general partners.
Executive Compensation
    As proposed to be amended, Item 402 of Regulation S-K would require
smaller reporting companies to 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; and
     Only three of the seven tables (Summary Compensation,
Outstanding Equity Awards, and Director Compensation) required of
larger reporting companies.
Transactions With Related Persons, Promoters, and Certain Control
Persons
    Under the proposals, smaller reporting companies would be able to
use the scaled disclosure requirements for transactions with related
persons currently in Item 404 of Regulation S-B. Unlike Item 404 of
Regulation S-K, Item 404 of Regulation S-B does not require disclosure
regarding the company's policies and procedures for approving related
person transactions. Smaller reporting companies would be required,
however, to report transactions occurring within the last two years,
whereas Item 404 of Regulation S-K requires disclosure for the last
fiscal year, unless the information is included in a Securities Act or
Exchange Act registration statement, where information as to the last
three fiscal years is required.

C. Benefits

    As discussed above, our proposals would 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 would enable a larger category of
public companies to have more flexibility in tailoring disclosure
standards to fit the realities of their company. The proposed increased
public float standards in the definition of smaller reporting company
would provide more companies the flexibility to choose between scaled
item requirements such as financial statement information and executive
compensation disclosure.
    Eliminating the ``SB'' forms would mitigate the perceived notion
that smaller companies are currently reporting under a completely
different disclosure framework. Integrating smaller reporting companies