Welcome to Luca!globe
SEC ADVISOR Current Issue!    Navigation Tips!
Main Menu
CPA Journal
Professional Libary
Professional Forums
Member Services


By Gary Illiano, CPA,
Grant Thornton LLP

The SEC has issued new 1934 Act reporting requirements for recent sales of equity securities that have not been registered under the 1933 Act. Generally, the required information must be included in periodic filings on Forms 10-Q or 10-K, or if the sales were made pursuant to Regulation S, in a Form 8-K. An amended Item 701 of Regulations S-K and S-B contains the requirements for the content of the required disclosures. The new rules took effect on November 18, 1996.

The new reporting requirements are designed to address the lack of adequate and timely disclosure of unregistered equity offerings. Without such disclosure, the shareholders and the markets may be unaware of the potential dilution and effect on the financial condition of the issuer. The SEC believed the lack of disclosure may have permitted abusive practices, in particular under Regulation S.

Form 8-K has been amended to include a new Item 9, Sales of Equity Securities Pursuant to Regulation S. A Form 8-K filed pursuant to Item 9 must be filed within 15 calendar days after the date of sale.

All sales of equity securities that are not registered under the 1933 Act, other than sales made in reliance on Regulation S, must be reported in the next quarterly filing, either on Form 10-Q (or 10-QSB) or Form 10-K (or 10-KSB). Item 2 of Form 10-Q and Item 5 of Form 10-K have been revised to require the additional information. Once the information has been included in the appropriate 1934 Act report, it need not be repeated in subsequent 1934 Act filings.

The SEC believes that quarterly reporting will be sufficient for most equity sales that are exempt from 1933 Act registration. Typically those securities are subject to resale restrictions. They cannot be freely sold into the public market for a significant period of time (e.g., generally two years under Rule 144) so quarterly reporting should provide sufficient notice to shareholders and the

Equity securities sold pursuant to Regulation S are restricted from resale in the U.S. public markets for only 40 days. If sales were required to be reported quarterly, such securities could be resold in the U.S. market before disclosure of the initial sale was made. As a result, the new rules require Regulation S sales to be reported within 15 days on Form 8-K. The SEC has indicated it is considering revising Regulation S, including lengthening the restricted period. If the restricted period is changed, the SEC will consider revising the new Form 8-K disclosure requirement.

The information requirements for unregistered equity sales are contained in Item 701 of Regulations S-K and S-B. Item 701 has been amended to require additional information in 1934 Act reports when the securities sold are convertible or exchangeable into equity securities, or are warrants or options representing equity securities. Registrants must now disclose the terms of conversion or exercise of the securities. The SEC believes the disclosure of pricing information for the underlying common equity is useful for shareholders and the market because it shows the potential dilutive effects of conversion or exercise. The SEC also considered requiring the disclosure of the names of the persons to whom the securities were sold, but decided instead to allow a description of the person or persons by class, e.g., accredited investor.

The text of the new rules, which may be found in Release No. 34-37801 and International Series No. 1020, are
available in the Federal Register or
on the SEC's home page at http//www.sec.gov. *

Gary Illiano, CPA
Grant Thornton LLP

The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

©2009 The New York State Society of CPAs. Legal Notices

Visit the new cpajournal.com.