Regulation S-B Definition
Regulation S-B is a securities law that provides the outline of the disclosure requirements for smaller business issuers prescribed under the Securities Act of 1933 and Securities Exchange Act of 1934.
However, in 2008 the Securities and Exchange Commission discarded Form SB 1 in order to strengthen the investors protections new rules were established.
According to the SEC, a small business issuer is a company with revenues of less than $25,000,000 and whose public float does not exceed $25,000,000. Public float is the cumulative market value of the outstanding voting and non-voting common equity held by non-affiliates. If there is no market for a company’s securities, the book value may substitute the market value.
In the new rule implemented in 2008, SEC established a category of reporting companies that are called “smaller reporting companies”. This new category effectively combines the smaller business issuers and non-accelerated filters. A company is qualified as a smaller reporting company if it has less than $75 million in public equity float. If a company is unable to calculate its public float and its annual revenue is less than $50 million in the last fiscal year, that company is considered a smaller reporting company.
A Little More on What is SEC Form SB-1
The Securities Act of 1933 aims to ensure that investors receive all significant information regarding the publicly offered securities. The regulations under the Securities Act of 1933 and Securities Exchange Act of 1934 require all the companies registered on the SEC to disclose the essential information in the prescribed forms. This helps in combating fraudulent activities in the sale of the offered securities and helps the investors take informed decision.
Before the amendment in the regulation, the smaller business issuers were required to submit Form SB-1 to disclose their information. It was a simplified version requiring less information about the business. In this form, summary data was not required. It also didn’t require full detailed financial information.
This form was designed to make the procedure hassle-free for the small businesses offering securities in public. However, in 2008 the regulatory authority mandated a stricter rule to be imposed on the small businesses. The amendment was made to prevent the rising securities frauds and protect the interest of the investors. This new rule demands more comprehensive information about the issuing company upon its registration of the SEC. According to this rule all the companies that fall in the category of “smaller reporting companies” also need to file Form S-1 for the issuance of securities.
While calculating the revenues for this purpose, the issuing companies needs to include all revenues on a consolidated basis. If this consolidated revenue was less $25 million only then it would qualify as the small business issuer. The investment companies, including business development companies and asset-backed issuers, were however not eligible to be considered as a “small business issuer”. The new rule also continued to exclude these companies from eligibility for scaled treatment.
The S-B regulation did not require the disclosure of the names and addresses of management personnel those are beneficial owners of the company’s securities.
References for Regulation S-B
Academic Research at Regulation S-B
• Gatekeepers and the Internet: rethinking the regulation of small business capital formation, Choi, S. J. (1998). J. Small & Emerging Bus. L., 2, 27. This paper argues implementing mandatory securities regulatory regimes will become more difficult with the reduced communication costs through the internet. Increasing the value of regulatory competition will also become difficult. Both the investors and the issuers will voluntarily follow the regulations that protect them against frauds. The internet will give rise to private sources of investors protection, including third-party certifiers of information. This article argues in the age of the internet, the issuers and the investors will get to choose among public and private sources of protections, and they’ll decide upon the best combination of protections for each security offerings.
• Securities regulation as lobster trap: A credible commitment theory of mandatory disclosure, Rock, E. (2001). Cardozo L. Rev., 23, 675. This article argues the SEC system provides the issuers with a device that allows them to make a credible commitment to high quality and comprehensive disclosure for an indefinite time. The new domestic issuers and foreign issuers make the most out of this mechanism of credible commitment. Entering into the SEC system is much easier than exiting it, this practical and formal asymmetry can be explained by this credible commitment theory. Then it analyzes the implications of this credible commitment theory for the different recommendations on security disclosure in the worldwide capital market. The trade-off between the potential advantages of expanding competition among the suppliers of disclosure regulation and the potential loss of the capacity of any framework to offer credible commitment is also analyzed.
• Sacrificing Functionality for Transparency: The Regulation of Swap Agreements in the Wake of the Financial Crisis, Schuster, R. T. (2012). Syracuse L. Rev., 62, 385. This article discusses how the swap agreements contributed to the financial crisis of 2008. It describes how the U.S. Congress and the Securities and Exchange Commission responded to it by implementing provisions of the Dodd-Frank Act and Regulation SB SEF, respectively. The Regulation SB SEF was implemented to regulate securities-based swap agreements in exchange. This article argues this regulation of the SEC ignores the fundamental difference between securities and swap agreements. The article proposes the adoption of a regulatory approach instead of a market transparency approach while dealing with swap agreements. In this regulatory approach, the counterparties would be required to disclose the details to the SEC but not to the market.
• The quiet period in a noisy world: Rethinking securities regulation and corporate free speech, Heyman, S. B. (2013). Ohio St. LJ, 74, 189. This article criticizes the Security and Exchange Commission’s “Quiet Period Rules” that prohibit the dissemination of both truthful and misleading information which is not covered by the statutory prospectus file with the exchange commission. This article criticizes this rule on two counts. Firstly, it argues, in today’s market scenario with so many media outlets including social media and news media, the dissemination of truthful information would actually have a positive impact on the investors. The knowledge would help smart investors to assimilate that information into the price of the securities quickly. The article further criticizes the Quiet Period Rules from a First Amendment perspective. It argues the Quiet Period Rules goes against the fundamentals of the First Amendment. It says if challenged under the commercial speech doctrine, these rules won’t be able to withstand the First Amendment scrutiny. It also won’t survive the scrutiny of corporate political speech rights articulated in Citizens United v. FEC.
• Securities Regulation, Flint Jr, G. L. (2004). Securities Regulation. SMUL Rev., 57, 1207. This article discusses the Securities Regulations focused on the State law of Texas. It also briefly includes the federal securities laws and Fifth Circuit cases under federal law. It aims is to provide an update regarding the developments in the securities regulation that are helpful to the security practitioners based in Texas.
• Jurisdictional Choice in Securities Regulation, Carney, W. J. (2000). Va. J. Int’l L., 41, 717. This essay analyzes the U.S. approach to the jurisdictional and choice-of-law issues which was raised in international antitrust litigation. It provides a comparative perspective on this issue. Personal jurisdiction over foreign defendants involved in anticompetitive conduct is analyzed and examined in the essay. The intersection between antitrust claims and contract claims is also discussed in the article. It further discusses the special conflict-of-laws issues that arise in the context of class actions.
• Balancing Public Market Benefits and Burdens for Smaller Companies Post Sarbanes-Oxley, Rose, P. (2005). Willamette L. Rev., 41, 707. This paper argues certain contemporary regulations passed by Congress and the SEC including the Sarbanes-Oxley Act have a negative impact on the smaller public companies. As these smaller companies are not being able to survive the burden imposed by such laws, they are forced to exit the public market. This article provides a comprehensive assessment of these regulations and recommends several options that can solve this issue. The simplest method suggested by the paper is offering a waiver or postponing the imposition of certain regulations. Other recommendations include expanding the small business regulatory regime under Regulation S-B and creating a security market for smaller business issuers.
• SOA attestation: what are the initial costs for banks? For banks in the sample, the average increase in audit fees from 2003 to 2004 was 100 percent, Eldridge, S. W., & Kealey, B. T. (2005). Bank Accounting & Finance, 19(1), 3-12. This study uses the data from Fortune 1000 companies to measure the impact of the new internal control audit requirement on the overall audit cost of the company. This new internal control audit is mandated by the Sarbanes-Oxley Act of 2002 (SOX). Primarily due to this new SOX audit, the average audit fee was increased by $2.3 million from 2003 to 2004. The study finds the size of the business, its asset growth and the effectiveness of the internal controls determine the SOX audit cost. The SOX audit cost is directly proportionate to the size of the company and the SOX audit unit cost vary inversely. It also establishes a positive relationship between SOX audit costs and asset growth. It finds the SOX audit rates are significantly low for the service firms and high for the equipment and electronic firms.
• Does size matter-An economic analysis of small business exemptions from regulation, Bradford, C. S. (2004). J. Small & Emerging Bus. L., 8, 1. Many regulations exempt the small businesses and small transactions to provide them some relief. This paper investigates whether this policy of exemption is economically efficient. It develops a mathematical model to estimate how the costs and benefits of regulation vary with the size of the business. It constructs the model with different assumption and concludes that small business exemptions are economically efficient in any circumstances. However, if the transactions costs, the cumulative impact of regulation and other practical issues are taken into account, the issue of small business exemption becomes more ambiguous.
• The SEC’s expanded role in small business capital formation, Iannaconi, T. E. (1993). Journal of Accountancy, 176(2), 47. This paper discusses the role of the US Securities and Exchange Commission in promoting small business’s capital formation. It argues that the rules adopted in July 1992 and April 1993 will provide greater opportunities for small businesses to raise the capital needed for starting and expanding their businesses.