Change to Help Smaller Companies Raise Funds
Federal regulators are about to
ease rules that have made it difficult for small and
medium-size publicly traded companies to raise money. The
changes, experts say, are well timed, given the tightening of
the credit markets.
The revisions in the Securities
and Exchange Commission’s Rule 144, which governs the sale
of so-called restricted securities, affect companies with
annual revenues of less than $700 million. The rules take
effect on Feb. 15.
Restricted securities are
shares or bonds sold in private placements, usually at a
discount around 10 percent from the market price; the
securities cannot be registered immediately with the S.E.C.
Under current rules, investors must wait one year before
selling them, and then usually only in stages of a specified
number per quarter for the year after that.
Under the changes approved by
the commission on Nov. 15, and retroactive to past
transactions, the investors must wait only six months to sell
the securities, and can part with them all at once.
“The changes will likely make
private placements by smaller publicly traded companies much
more attractive to investors,” said David Danovitch, a
partner at the Manhattan law firm of Gersten Savage who
specializes in securities laws. “When the credit markets
tighten, people run to the equity markets, and now it should
be easier for companies that are starved for cash to tap into
Two years ago, Mr. Danovitch
said, the S.E.C. relaxed the rules governing registration
statements filed by publicly traded companies with a market
capitalization of $700 million or more to give them better
access to the capital markets. Now, he said, it is extending
the benefits to smaller companies.
Investors will also gain a
greater degree of liquidity and thus a better chance of making
a good profit.
“Smaller businesses are a
critical part of our nation’s economy,” the chairman of
the S.E.C., Christopher
Cox, said in November in announcing the unanimous vote to
make the amendments. He added that the new rules would “make
it more efficient for companies of all sizes to access the
One entrepreneur who is
delighted with the changes is David Warwick, chief executive
of the Aftersoft Group, a $28 million maker of software for
car repair shops, car parts distributors, tire makers and
other car-related businesses.
Aftersoft originated in Britain
but entered the American market in the early 1990s and is now
seeking to expand. It is No. 1 in Britain, with 68 percent of
the automotive software aftermarket, as it is called, and is
hoping to achieve the same status in the United States within
two years. It now holds a 12 percent share.
Mr. Warwick said his
company’s software could be used in other industries as
well. “We could expand to the lumber industry, the plumbing
industry — the possibilities are endless,” he said. “We
have a very aggressive growth plan.”
To achieve his ambitions,
though, Mr. Warwick, 48, needs to raise money.
“We spent the better part of
last year raising funds,” he said. “It would have been a
much quicker and more efficient process if the new rules had
been in effect.”
He said he expected to go back
into the market late next year. Before doing a private
placement, he says, he wants to get Aftersoft’s stock price
up from about 30 cents a share today to $2. If he succeeds in
increasing the stock price, he will seek to raise equity to do
a spate of acquisitions, perhaps shooting for as much as $100
million if he decides to make a takeover bid for his major
competitor, a company called Activant Solutions Inc.
The global effect of the looser
S.E.C. standards is anybody’s guess at this early stage.
Brian Overstreet, president of Sagient Research Systems in San
Diego, said its PlacementTracker service found that the number
of deals involving private investment in public equity
stabilized last year at 1,378, compared with 1,343 in 2006.
The funds raised, however, surged to $81.5 billion from $28.3
billion. He attributed about $40 billion of the increase to a
frenzy of transactions by big investment banks in the last
four months of 2007, aimed at resolving their subprime woes.
Even taking that factor out the equation, though, he said, an
increase to $41 billion from $28 billion was significant.
He cautioned, however, that
most of those deals were made under different and more
investor-friendly terms than those of Rule 144, and thus were
not a barometer of future 144 activity. Still, he said, the
changes approved by the S.E.C. were bound to prompt more small
companies to turn to the rule.
People are just starting to
price deals under the new regulations, according to Mr.
Danovitch of Gersten Savage. And while the change will make it
easier for small-capitalization companies to gain access to
the capital markets, and do so on more favorable terms, it is
not clear yet how much more money will flow to them.
“I’d say the companies that
will benefit the most from the changes are those with a market
cap of less than $100 million,” Mr. Danovitch said.