SEC Approves NYSE Proposal to Exempt Early Stage Companies from Shareholder Approval Requirement for Issuances to Related Parties | Practical Law

SEC Approves NYSE Proposal to Exempt Early Stage Companies from Shareholder Approval Requirement for Issuances to Related Parties | Practical Law

The SEC approved an NYSE proposal to exempt early stage companies from the requirements of Section 312.03(b) of the NYSE's Listed Company Manual.

SEC Approves NYSE Proposal to Exempt Early Stage Companies from Shareholder Approval Requirement for Issuances to Related Parties

by Practical Law Corporate & Securities
Published on 05 Jan 2016 • USA (National/Federal)
The SEC approved an NYSE proposal to exempt early stage companies from the requirements of Section 312.03(b) of the NYSE's Listed Company Manual.
On December 31, 2015, the SEC approved a proposed rule change by the NYSE that exempts any listed company that has not reported revenues greater than $20 million in any two consecutive fiscal years since its incorporation (Early Stage Company) from the requirements of Section 312.03(b) of the NYSE's Listed Company Manual. The proposal took immediate effect following the SEC's approval.
Section 312.03(b) had required a company to obtain shareholder approval, with certain exceptions, before it issued shares exceeding either one percent of the number of shares of common stock or one percent of the voting power outstanding before the issuance to:
  • Directors, officers or holders of 5% or more of the company's common stock (Related Parties).
  • Affiliates of Related Parties.
  • Entities in which a Related Party has a substantial interest.
Section 312.03(b) has now been amended to exempt from shareholder approval transactions involving the sale of stock for cash by an Early Stage Company to:
  • A Related Party.
  • A subsidiary, affiliate or other closely-related person of a Related Party.
  • Any company or entity in which a Related Party has a substantial direct or indirect interest.
To qualify for the exemption, the Early Stage Company's audit committee, or a comparable committee comprised solely of independent directors, must review and approve all transactions before their completion.
Once a company reports revenues greater than $20 million in each of two consecutive fiscal years, it will lose its designation as an Early Stage Company and become subject to all shareholder approval requirements of Section 312.03(b). A company's annual financial statements before listing will be considered when determining if the company should lose its Early Stage Company designation. For example, if a company files an annual report with the SEC one year after listing on the NYSE and the annual report shows that the company has had revenues greater than $20 million in each of two consecutive fiscal years (even if one of those years was before listing on the NYSE), the company will lose its Early Stage Company designation at that time.
Amended Section 312.03(b) also clarifies that:
  • The exemption does not apply where the proceeds will be used to fund an acquisition of stock or assets of another company where the Related Party has a direct or indirect interest in the company or assets to be acquired or in the consideration to be paid for the acquisition.
  • Any sale of a listed company's securities to a director, employee, or other service provider at a below-market price constitutes equity compensation under Section 303A.08 and continues to be subject to the shareholder approval requirements under that rule.
  • An exemption from one provision of Section 312.03 is not a general exemption from all of Section 312.03. Therefore, even if a transaction by an Early Stage Company is exempt under Section 312.03(b), the shareholder approval requirements of Sections 312.03(c) (requiring shareholder approval of issuances relating to 20% or more of the company's stock) and 312.03(d) (requiring shareholder approval of any issuance giving rise to a change of control) continue to apply.
The rule change notes that many Early Stage Companies do not yet generate significant revenue from operations and may need to raise capital quickly in order to fund their ongoing operations, usually through private placement share issuances. Obtaining shareholder approval is expensive and can take several months of advance preparation, which is burdensome for Early Stage Companies that need capital quickly.
Among the NYSE's reasons for the rule change was that it will enable the NYSE to compete with NASDAQ and NYSE MKT for the listing of Early Stage Companies. Neither NASDAQ nor NYSE MKT has a rule comparable to Section 312.03(b).
To learn more about the NYSE's continued listing requirements, see Qualitative Listing Requirements Chart: New York Stock Exchange.