Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

The SEC has approved the NYSE proposal to exempt early stage companies from having to obtain shareholder approval before issuing shares for cash to related parties. Under the revised rules, Sections 312.03(b) and 312.04 of the Listed Company Manual are amended to provide an exemption to an “early stage company” listed on the NYSE from having to obtain shareholder approval, under certain circumstances, before issuing shares of common stock, or securities convertible into or exercisable for common stock, to the following “exempted parties”:

  • director, officer or substantial security holder of the company, referred to as related parties,
  • subsidiary, affiliate or closely-related person of a related party, or
  • a company or entity in which a related party has a substantial direct or indirect interest.

In particular, shareholder approval will no longer be required under Section 312.03(b) for an “early stage company,” before the issuance of shares for cash to an exempted party, provided that the company’s audit committee or a comparable committee comprised solely of independent directors reviews and approves of all such transactions prior to their completion.

An early stage company is defined as a company that has not reported revenues greater than $20 million in any two consecutive fiscal years since its incorporation.

In its first formal recommendation to the Commission, the SEC Office of the Investor Advocate recommended that the Commission not approve the proposed rule change. Nonetheless, the Commission approved the rule change noting that that the proposal was consistent with the Exchange Act.

The Commission acknowledged however “the important contributions that are being made by its Investor Advocate on a range of important policy matters, including those raised by individual proposed rule changes filed by the exchanges, such as the proposal that is the subject of this Order. While the Commission today determined that the NYSE’s proposed rule change is consistent with the Act, the Commission encourages the Investor Advocate to continue bringing important matters to our attention, including identifying circumstances where incremental changes, while consistent with the Act, may be contributing to cumulative impacts that harm investors or impede fair and orderly markets. In this instance, the comments of the Investor Advocate prompted the Exchange to bolster the justification for its proposal, including through the provision of additional data, and to clarify its limited scope. As a result, the extent and quality of information available to the Commission in considering the proposed rule change was substantially enhanced, to the benefit of investors and all market participants.”


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