Comment letter to the SEC

Re: (1) File No. S7-15-07; Release Nos. 33-8819; 34-56013; 39-2447 — Smaller Reporting Company Regulatory Relief and Simplification; (2) File No. S-7-10-07; Release No. 33-8812 — Revisions to the Eligibility Requirements for Primary Securities Offerings on Forms S-3 and F-3

September 24, 2007

Securities and Exchange Commission
100 F St., N.E.
Washington, D.C. 20549

Attention: Nancy M. Morris, Secretary

VIA E-MAIL (rule-comments@sec.gov)

Re:

(1) File No. S7-15-07; Release Nos. 33-8819; 34-56013; 39-2447 — Smaller Reporting Company Regulatory Relief and Simplification;

(2) File No. S-7-10-07; Release No. 33-8812 — Revisions to the Eligibility Requirements for Primary Securities Offerings on Forms S-3 and F-3

Ladies and Gentlemen:

The Society of Corporate Secretaries & Governance Professionals is a professional association, founded in 1946, with over 4,000 members who serve approximately 3,000 companies. Responsibilities of our members include supporting the work of corporate boards of directors, their committees and executive management regarding corporate governance and disclosure. Our members assure issuer compliance with the securities laws and regulations, corporate law, stock exchange listing requirements and the accounting rules, and have been on the front-line in implementing the structural changes necessitated by the Sarbanes-Oxley Act of 2002 and the related rules of the Securities and Exchange Commission, the Public Company Accounting Oversight Board and the exchanges. This comment letter is based on the experience of our members who are implementing the securities laws at public companies, small and large, on a daily basis.

We support generally the proposed rule changes contained in the subject Releases but believe they do not go far enough to mitigate the regulatory burden which falls disproportionately on smaller public companies. Our comments fall into two general categories:

• Recommendations to expand the scope of the proposed changes to more fully reflect the recommendations of the Commission's Advisory Committee on Smaller Public Companies.
  
  
• Comments on the specific provisions contained in the Releases.

Expanding the Scope of the Rule Changes as Recommended by the Advisory Committee

The Advisory Committee's Final Report of April 23, 2006 recommended three critical changes to the Commission's rules which are not reflected in these Releases or the parallel releases approved by the Commission at its May 23, 2007 meeting.

1. In Part I of the Report, the Advisory Committee recommended a new methodology for determining which companies should be considered "microcap" and "smallcap" and thus appropriate for scaled regulation by the Commission. This methodology, based on thresholds of 1% and 6% of total market capitalization, offered the opportunity for the Commission to solve a long-standing, persistent problem with its regulatory system—the inability to continuously correct for the impact of inflation and market changes. As anyone who has practiced for any length of time in the securities laws knows, the Commission's rules are replete with set dollar amounts which have become obsolete. "Small companies" become "big companies" even though their underlying fundamentals are unchanged. Release No. 33-8819 attempts to address this phenomenon by including an inflation adjustment formula based on a Department of Commerce index. Whether this index will in fact result in a stable universe of "smaller reporting companies" will only be known when the adjustment date arrives in five years. If the percentage of these companies shifts significantly either way, it strongly suggests that the formula will have failed.
   
   By contrast, Commission adoption of the Advisory Committee's percentage-of-total-market-capitalization standard would establish thresholds which provide assurance that the universe of companies eligible for scaled regulation remains constant over time as a fraction of the total market—an approach which more correctly reflects the view of these companies in the market.
   
   Clearly, adopting the percentage-of-total-market-capitalization system would implicate changes to other areas of the Commission's rules and would require additional rule-making. Release No.33-8819 opts against this system, essentially on the grounds that it would be such a major change that it would be complex to implement. While this might well be a significant project for the Commission's staff, the changes would be largely technical in nature and unlikely to present the Commission with difficult or controversial policy questions. The end product would be an inherently superior regulatory system which would largely end the never-ending debates over set dollar levels which inevitably become obsolete.
   
   
2. Release No.33-8819 also rejects the use of market capitalization as the test of "small" vs. "large" and continues to use public float as the test, relying on (i) the fact that many other commission rules use a public float standard, and (ii) the apparent substantial overlap between companies covered by the $75 million public float test and the 1% of market capitalization "microcap" standard—roughly $128 million—proposed by the Advisory Committee. While the public float test has the appearance of being a more precise measuring stick because it excludes the equity held by affiliates, in fact it is a less reliable comparison point because it assumes that all companies are making equivalent judgments as to who is an affiliate. In fact, there is substantial variation among companies. Thus, market capitalization, a number far less prone to subjective judgmental differences—and more difficult to manipulate by those seeking to avoid the full effect of the securities laws—is a much more reliable standard. Again, adopting this standard is a more difficult task for the Commission's staff, but worth doing over the long run.
   
   Moreover, investors would be better served by the use of market capitalization as the standard for "small" vs. "large." A Company's size, as established by the market, is based on the evaluation of the business, regardless of who owns the shares. By excluding affiliate-held shares, the Commission's rules distort the disclosure standards based on an accident of the moment as to how many shares are still held by, say, venture capitalists and founder-executives. Over time, these shares might be sold into the market and the company would move from "small" to "large" even though the business was unchanged. The level of disclosure companies are obligated to provide and investors are entitled to receive should vary based on the company's size and not on where it is at a point in time in the evolution of its shareholder base.
   
   Correspondingly, use of public float rather than market capitalization produces an anomalous result in the expansion of eligibility for Forms S-3 and F-3. Here also, the amount of disclosure the public receives turns on the quirks of the company's ownership at the time the offering is registered (as well as the company's subjective judgment as to who is an affiliate). We believe the disclosure burden on the company and the level of information provided by the company to potential investors should be based on the company's actual size as measured by market capitalization. Use of public float means that two otherwise identical companies would be providing investors differing disclosure based on who happens to own the shares at the time.
   
   While the Commission believes that there is currently substantial overlap between a $75 million public float test and a $128 million market capitalization test, there can be no assurance that this congruence will remain intact going forward.
   
   
3. Another major recommendation of the Advisory Committee was the division of smaller public companies into two categories: "microcap"—the bottom 1% of total market capitalization—and "smallcap"—those companies in the bracket from 1% to 6% of total market capitalization. Smallcap would include companies with market capitalizations from about $128 million up to about $787 million. This group would be roughly equivalent to the Commission's current category of "accelerated filers" (as opposed to "large accelerated filers") and would, with modest adjustments, exclude the WKSI category of companies. The distinction drawn by the Commission at the roughly $700 million level recognizes that companies at this level are still relatively small and typically lack the internal resources and the market size and visibility to be regulated in the same manner as larger public companies.
   
   The Advisory Committee recognized this situation and made several recommendations for reducing the regulatory burden on these companies, including making the smallcap companies eligible for the reporting requirements contained in Regulation S-B. Expanding the rule proposal in Release No.33-8819 to include these companies is not a "giveaway" that would seriously damage investors in these smaller companies. Investors would still be provided with substantial information about these companies, but permitting smallcap companies to be eligible for the Regulation S-B level of reporting would significantly reduce their costs of compliance. Given the Commission's ala carte approach in Release No.33-8819, which we endorse, it would allow the market to determine the appropriate level of disclosure for these companies. It might well be necessary for some of these companies to upgrade at least portions of their disclosures to achieve market acceptance.
   
   We urge the Commission to seriously consider the Advisory Committee's recommendations to expand the relief provided to these "smallcap" companies.

Specific Provisions of the Releases

1. We support the elimination of the revenue threshold from the definition of "smaller reporting companies." A revenue test will inevitably disadvantage companies which experience wide fluctuations in revenue over different periods. Market capitalization or public float are better tests (assuming that the company can calculate them) because they essentially look beyond these revenue fluctuations to establish a more reliable measure of the actual size of these companies.
   
   
2. If the Commission elects to continue to use a fixed dollar test combined with an inflation adjustment formula for determining which are "smaller reporting companies" rather than adopting the Advisory Committee's self-adjusting system, we believe that five years is too long a period between adjustments. Looking back over recent years makes it clear that five years is a virtual eternity in the dynamic U.S. economy and its securities markets. A three year adjustment would strike a better compromise between the need to avoid uncertainty and frequent shifts in status and the inevitable changes in the economy.
   
   
3. Given the increasing globalization of the markets, the proposal in Release No.33-8819 to expand eligibility to companies organized outside the U.S. and Canada provided they provide the same information as that provided by U.S. and Canadian companies is a prudent and realistic change. It is, however, puzzling, as to why this Release does not address the option for these companies to use IFRS accounting standards to achieve compliance, given the Commissions actions to facilitate the use of that accounting system.

We appreciate this opportunity to share our views with you, and would be happy to provide you with further information to the extent you would find it useful.

Respectfully submitted,

Society of Corporate Secretaries and Governance Professionals
521 Fifth Avenue New York NY 10175
212-681-2000 - Fax 212-681-2005

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