On June 25, 2014, the Securities and Exchange Commission (the “SEC”) announced that it had ordered the national securities exchanges and the Financial Industry Regulatory Authority, Inc. (“FINRA”) to act jointly to develop and file with the SEC a national market system plan to implement a targeted 12 month pilot program that will widen minimum quoting and trading increments (“tick sizes”) for certain smaller capitalization stocks. The SEC indicated that it plans to use the pilot program to assess whether these tick size changes would enhance market quality to the benefit of U.S. investors, issuers and other market participants. More specifically, the pilot program should facilitate studies of the effect of tick size on liquidity, execution quality for investors, volatility, market maker profitability, competition, transparency and institutional ownership. The SEC order requires the national securities exchanges and FINRA to submit a national market system plan detailing the pilot program by August 25, 2014.

The pilot program, which will be designed so as to not cause excessive disruption to the market and to limit increases in transaction costs, will last for one year and include stocks with: (1) a market capitalization of $5 billion or less; (2) an average daily trading volume of one million shares or less; and (3) a share price of $2 per share or more. The pilot program will consist of one control group and three test groups with 300 securities in each test group selected by stratified sampling. Pilot securities in the control group will be quoted at the current tick size increment of $0.01 per share, and trade at the increments currently permitted. Pilot securities in the first test group will be quoted in $0.05 minimum increments. Pilot securities in the second test group will be quoted in $0.05 minimum increments, and traded in $0.05 minimum increments subject to certain exceptions. Pilot securities in the third test group will be subject to the same minimum quoting and trading increments (and the same exceptions) as the second test group, but would also be subject to a “trade-at” requirement.

For more information, see Press Release, “SEC Announces Order for Tick Size Pilot Plan – Pilot to Assess Impact of Tick Size on Market Quality for Small Cap Companies” (June 25, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542172819#.U62K7ovD-9I, and SEC Release No. 34-72460 (June 24, 2014), available at http://www.sec.gov/rules/other/2014/34-72460.pdf

The Small Cap Liquidity Reform Act (H.R. 3448) is scheduled for a vote on February 11th.  The bill (which was approved by the House Financial Services Committee in 2013) would implement a pilot program during which EGCs would be permitted to choose their tick size for prices greater than $1.00.  This comes after the Investor Advisory Committee recommended no changes to tick sizes because a majority of that committee believed that there was insufficient evidence to demonstrate the benefits of a pilot program.  Instead, the committee recommended that regulators consider other options to improve liquidity for smaller cap companies.   Liquidity for smaller cap companies will remain a subject of continued discussion as commenters respond to the Commission’s proposed Regulation A+ rules.

Congressman Garrett recently renewed discussions regarding additional individual legislative initiatives or other proposals relating to promoting capital formation that might well be grouped together into a single “JOBS Act 2.0” measure.  These matters had been scheduled (prior to the shutdown) to be considered at a hearing on October 9, 2013.

Commentators have noted that the IPO on-ramp alone cannot be expected to revitalize the U.S. IPO market, especially the market for offerings by smaller companies.  Various measures have been suggested, including addressing tick sizes, reviewing disclosure requirements for registration statements, leveling further the information playing field as between retail and institutional investors, and taking additional steps to encourage additional research coverage.

For smaller public companies that completed their IPOs prior to the JOBS Act enactment, additional disclosure and corporate governance accommodations may be appropriate.  Various groups also have urged the Securities & Exchange Commission to review the thresholds for the designation of entities as smaller reporting companies and accelerated filers.  Before the JOBS Act, the Commission had committed to reviewing existing communications safe harbors.  Given technological advancements, IPO communications restrictions (such as the quiet period), and offering related communications may benefit from revamping.  The 2005 Securities Offering Reform changes were principally focused on the largest, most sophisticated issuers, but many of those measures could be applied to a broader group of companies.  In addition, modernizing the regulations applicable to business development companies, along the lines contemplated by legislation already introduced in Congress, would facilitate capital formation for BDCs.

Yesterday, June 12, 2013, the House Subcommittee on Capital Markets and GSEs held a hearing on “Reducing Barriers to Capital Formation.”  The prepared testimony for the hearing is available at: http://financialservices.house.gov/calendar/eventsingle.aspx?EventID=336906.  The Subcommittee noted that there are a number of regulatory obstacles to capital formation that continue to burden smaller companies, and focused on proposals that might facilitate capital formation by smaller companies.  In addition to various calls for the SEC to complete its JOBS Act-related rulemaking, there were a number of issues that were suggested for consideration, including changing the minimum trading increment or “tick size” for smaller companies; authorizing the creation of new equity markets to register with the SEC and then list and trade the securities of smaller companies; modernizing the regulatory structure of business development companies; improving capital formation for privately held small businesses and publicly traded companies with less than $250 million in public market capitalization.

A bill was introduced today in the House of Representatives (HR 1952) by Rep. Schweikert that  proposes to amend the Securities Exchange Act of 1934 to require the Securities and Exchange Commission to allow publicly traded companies with a certain sized public float to change their stocks’ tick sizes to increase liquidity by incentivizing capital commitment, research coverage, and brokerage support, thereby increasing the stocks’ liquidity and investor interest, and for other purposes.  The bill was referred to the Committee on Financial Services.

The SEC has made available the archived version of the webcast from the most recent meeting, held on May 1, 2013.  The meeting included presentations from Duncan Niederauer, Chief Executive Officer of NYSE Euronext, and William Hambrecht, CEO of WR Hambrecht + Co., as well as discussions with several Commissioners.  The webcast is accessible from here:  http://www.sec.gov/news/otherwebcasts/2013/acsec050113.shtml.

Niederauer discussed the decline in small company IPOs, as well as the IPO market generally, and the need for tick size changes.  Hambrecht reviewed with the Committee his views regarding the potential utility of the Section 3(b)(2) exemption (or Reg A+) for smaller companies, and how Reg A+ offerings might well serve to revive the IPO market for smaller companies that undertake a Reg A+ offering with a contemporaneous exchange listing.  Hambrecht urged the Committee to recommend that the Staff of the SEC move forward with rulemaking to implement the exemption and take into account in their rulemaking addressing the obstacles that render current Regulation A of limited use compared to Rule 506 under Regulation D.  Hambrecht also discussed his recommendations for additional reforms to the IPO process generally.  Bob Greifeld, CEO of NASDAQ, also supported changes to tick sizes, as well as the creation of a separate market for the securities of small companies.

On April 11, 2013, Lona Nallengara, Acting Director of the SEC’s Division of Corporation Finance, and John Ramsay, Acting Director of the Division of Trading & Markets offered testimony before the House Subcommittee on Investigations, Oversight and Regulations of the Committee on Small Business.  Their testimony, which provides an overview of the Act and the implementation efforts to date is available here:  http://www.sec.gov/news/testimony/2013/ts041113lnjr.htm.

Commenting on Title I, Nallengara and Ramsay noted that SEC staff is consulting with the exchanges on the structure of a pilot program on modified tick sizes.  They also noted that the Staff is preparing its recommendations in connection with the mandated review of the disclosure requirements in Regulation S-K, and expects to complete the review in “the near future.”  On Title II (the Rule 506 rulemaking), they noted that the Staff is developing recommendations for the Commission’s consideration.  There was no sense given regarding the timing of proposals relating to Title III (crowdfunding) or Title IV (Regulation A+).

The SEC has made available links to the webcasts from Friday’s meeting of the Advisory Committee on Smaller and Emerging Companies.  You may access the morning session at http://www.sec.gov/news/otherwebcasts/2013/acsec020113.asx and the afternoon session at http://www.sec.gov/news/otherwebcasts/2013/acsec020113-2.asx.  Chairman Walter began the meeting with a few opening remarks, which may be accessed here:

http://www.sec.gov/news/speech/2013/spch020113ebw.htm.  Chairman Walter invited the public to provide comments on the issues raised by the Advisory Committee, and, especially welcomed empirical studies and similar information on the matters being considered by the Committee.  Lona Nallengara briefly discussed the status of the rulemaking related to the JOBS Act.  Mr. Nallengara noted that the Staff is putting together recommendations relating to the Rule 506 rulemaking for consideration by the Commissioners.  Mr. Nallengara noted the Committee had recommended that SEC resources not be directed to the Reg A+ rulemaking initiative, which is interesting given that the standalone legislation related to amending existing Regulation A, which preceded the JOBS Act received overwhelming bipartisan support.  A participant asked that Mr. Nallengara comment on the drafting error in the JOBS Act that omitted mention of savings and loans and thrifts from the holder-of-record threshold.  Mr. Nallengara noted that the SEC Staff is considering whether savings and loans and thrifts should be included in the relief on the holder-of-record threshold and this is being considered as part of the SEC’s rulemaking.

The Committee then proceeded to discuss its recommendations.

Tick Sizes:  The Committee first considered its recommendation related to tick sizes.  The Committee noted that a consensus has formed that incentives should be provided to market participants in order to encourage them to make active markets in the securities of smaller and mid-sized companies is important.  The Committee suggests that the SEC adopt rules that implement a pilot study or pilot period (of sufficient duration) that will permit the adoption of increased tick sizes.  This should be formulated such that companies will be permitted to choose their own tick sizes within specified ranges approved by the SEC.  The SEC and others will then be able to assess the impact of increased tick sizes on liquidity in the securities of smaller and mid-cap companies.  The recommendation was adopted.

New Securities Exchange:  The Committee considered a recommendation that would encourage the establishment of a separate securities exchange that would be designed specifically for small and emerging companies that are newly public.  A listing on the exchange would be seen as a transitional step for the listed companies, which might then move on to another exchange.  The SEC should facilitate and encourage the creation of this market where investor participation would be limited to investors that are sophisticated or accredited and the exchange should have regulations designed to protect investors, but that would be flexible enough to encourage smaller and emerging companies to pursue public offerings.  SEC representatives noted that there are no regulatory impediments that would prevent an exchange to propose a market for smaller and emerging companies, and that there may be business reasons that would limit the development of such a market.  Disclosure requirements for these companies would be scaled, with accommodations made in light of the fact that the only investors that will have an opportunity to trade in these securities are sophisticated or accredited investors.  There was significant discussion regarding this recommendation, with some commenters suggesting that the exchange be established for companies that are still private or non-SEC reporting companies (similar to the function served by SecondMarket) and other commentators suggesting that the exchange be established for newly public smaller companies that are subject to scaled disclosure requirements.

Disclosures for Smaller Companies:  The Committee considered a recommendation that the definition of “smaller reporting company” be modified and the threshold raised from $75 million in public float to $250 million in public float, and that certain disclosure and governance requirements be modified or scaled for smaller reporting companies.

Today the Securities & Exchange Commission announced the agenda for the February 1st meeting of the Advisory Committee (see:  http://www.sec.gov/news/press/2013/2013-11.htm), which is open to the public, and also available afterward for webcast viewing.  The group will discuss tick sizes, the creation of a sophisticated-investor only exchange for emerging companies, and scaled disclosures.