The Sarbanes-Oxley Act, the declining U.S. economy and increasing legal, auditing and other compliance costs reduced the number of issuers electing to become Securities & Exchange Commission (“SEC”) reporting issuers, particularly in the microcap markets. With new Rule 506(c) pusuant ot the JOBS Act allowing general solicitation and advertising in private placements, many issuers are evaluating whether any benefits of public company status remain. In some instances, issuers are seeking to voluntarily deregister with the SEC – commonly referred to as “going dark”.
The once perceived benefits of being an SEC reporting publicly traded company are dwindling as many microcap issuers are able to use general solicitation and advertising for their private placements. The less money the issuer has, the more difficult it becomes to maintain an SEC reporting company status since the issuer spends more of its financial, personnel, and outside resources to maintain its SEC reporting status; resources of which may have served (or will be served) better to improve and expand the issuer’s business.
Issuers who go private become non-reporting issuers and their securities are no longer publicly traded; however, “going dark” is distinct because the issuer’s securities continue to be publicly traded on the OTC Markets Pink Sheets.
Unless an issuer’s certificate of incorporation or bylaws provide otherwise, a going dark transaction does not require approval by the issuer’s shareholders. In most instances, a proxy or information statement is not required.
Benefits of Deregistration
Some of the benefits of deregistration include:
♦ Significantly lower accounting, legal and compliance costs;
♦ Increased management attention to the issuer’s business and operations instead of SEC compliance and reporting;
♦ Flexibility to undertake reorganizations and other possible extraordinary corporate transactions;
♦ More simplified and reduced disclosure requirements;
♦ Personal liability of officers and directors, particularly those certifying SEC filings, is reduced and the costs associated with officer and director insurance will also be reduced; and
♦ The issuer’s securities can continue to actively trade on the OTC Markets Pink Sheets.
How to Deregister
Issuers become subject to SEC reporting obligations in three ways.
♦ under Section 12(b) of the Securities Exchange Act of 1934, (the “Exchange Act”) if it has shares listed on a national securities exchange;
♦ under Section 12(g) of the Exchange Act if it has 500 shareholders of record of a class of securities and total assets exceeding $10 million; and
♦ under Section 15(d) by having a registration statement declared effective under the Securities Act of 1933, as amended (the “Securities Act”).
Public companies can deregister if they have fewer than 300 shareholders of record, or fewer than 500 holders of record and less than $10 million of assets in each of the prior three years. Many issuers with thousands of shareholders qualify for deregistration because each brokerage firm holding shares in street name counts as only one holder of record according to the current interpretation of Rule 12g5-1.
Listed issuers can delist their securities voluntarily and deregister them under Section 12(b) of the Exchange Act by filing a Form 25 with the SEC. The issuer must give 10 days notice of its plans to delist by issuing a press release ten days prior to filing the Form 25. The delisting becomes effective ten days after filing the Form 25. Most of the SEC reporting obligations are suspended ten days after the issuers files a Form 25. The actual termination of registration under Section 12(b) does not occur until 90 days after the effectiveness of the delisting.
Once delisted, an issuer can still be required to file reports pursuant to Section 12(g) of the Exchange Act if it has more than 500 holders of record and total assets exceeding $10 million, or pursuant to Section 15(d) of the Exchange Act if it at any time the issuer had an effective Registration Statement under the Securities Act. To avoid this result, the issuer may deregister under Section 12(g) and suspend its reporting obligations under Section 15(d) if it has less than 300 shareholders of record. Section 15(d) reporting obligations may be suspended if the issuer had less than 300 shareholders of record on the first day of its fiscal year. Under either scenario, the issuer must file a Form 15 certifying that the class registered has less than 300 shareholders of record and, if applicable, the issuer must also suspend its reporting obligations under Section 15(d).
Note that Section 15(d) reporting obligations can never be terminated; they can only be suspended. An issuer’s reporting obligations can be reinstated if the issuer exceeds the limit on the number of record holders on the first day of any fiscal year after it files a Form 15.
Note that under Rule 12h-3(c), a company may not suspend its Section 15(d) reporting obligations in any fiscal year where it has a registration statement declared effective under the Securities Act or “that is required to be updated” pursuant to Section 10(a)(3) of the Securities Act.
Effectiveness of Deregistration
An issuer’s periodic reporting obligations under the Exchange Act will be suspended immediately upon its filing of a certification on Form 15 stating that it has less than 300 holders of record. Deregistration under Section 12(g) will become effective 90 days after filing the Form 15. After deregistration, the issuer’s securities will trade on the Pink Sheets.
Filing a Form 15 will immediately suspend an issuer’s reporting obligations under Section 13(a) of the Exchange Act and thus, the issuer is no longer required to file Forms 10-K, 10‑Q or 8‑K. In the case of a foreign private issuer, it is no longer required to file Forms 20-F or 6‑K. Certain reporting obligations continue for 90 days after the filing of the Form 15 including under the proxy and tender offer rules.
Some of the disadvantages of Going Dark include:
♦ The issuer could unintentionally become reporting again after going dark if it ever has over 300 shareholders;
♦ The issuer’s shareholders may believe that it became non-reporting because the issuer has a hidden and illegal agenda and/or has failed to disclose material information;
♦ The issuer’s shareholders may bring civil actions against management for going dark alleging breach of fiduciary duty and other causes of action;
♦ Lessened public exposure of the issuer may negatively impact the issuer’s business and/or the public’s perception of the issuer;
♦ The issuer’s securities will be less useful as a form of currency for acquisitions and be less attractive to employees for equity based compensation;
♦ While the issuer’s securities can trade on the Pink Sheets, its stock price will likely be significantly lower and its trading volume will decrease after going dark; and
♦ Reduced corporate governance and oversight may increase the risk of self dealing, undisclosed conflicts of interests, breaches of fiduciary duty and the duty of loyalty.