DealLawyers.com Blog

Has Sarbanes-Oxley increased your company’s or client’s compliance costs significantly (internal and disclosure controls come to mind)? Is management’s time being diverted from operations to ensure such compliance? As some of you may know, there is a “switch” available for companies meeting certain specific SEC requirements that can, in effect, turn off and effectively eliminate these compliance burdens.

For those of you who have not had a chance to read yesterday’s Wall Street Journal Article on Going Dark, a growing number of smaller companies are flipping the compliance switch off by voluntarily delisting from their exchange or market and deregistering their securities from the reporting requirements of the SEC (even though companies would no longer be required to file quarterly and annual reports, certain companies continue to post such results on their websites). Since the beginning of 2004, companies such as Anacomp, Inc., Coast Dental Services, Inc., Kyzen Corp., Quality Products, Inc. and Sport Supply Group, Inc. (to name just a few) have flipped the switch and gone dark even though they are still publicly held. The benefits of “going dark” are that it does not require shareholder approval and it is a swift, simple and relatively inexpensive alternative to engaging in a going private transaction. In addition, companies that go dark are still eligible to have their securities quoted on the pink sheets. Of course, the process of “going dark” requires satisfaction of certain SEC requirements and is not a “one size fits all” solution. A company’s board of directors will therefore need to weigh the costs and benefits of delisting and deregistering prior to making a decision to go dark.

It should be noted that the going dark process is not without its opponents. For example, the Nelson Law Firm LLC, acting on behalf of certain institutional investors, filed a Petition in 2003 (which is currently pending with the SEC), requesting that the SEC amend Rule 12g5-1 under the Exchange Act to include securities held by a beneficial owner in “street name” as securities “held of record.” This change would, in effect, make it less likely that a company would satisfy the record holder conditions of Rule 12h-3 under the Exchange Act in order to go dark. Thus far, the SEC has not acted on this Petition and the switch to go dark currently remains a viable alternative for some companies who satisfy the criteria. By way of background, Rule 12h-3, upon satisfaction of certain other requirements, permits suspension of the duty to file reports under Section 15(d) of the Exchange Act for a class of securities held of record by (i) less than 300 persons, or (ii) less than 500 persons, where the total assets of the issuer have not exceeded $10,000,000 on the last day of each of the issuer’s three most recent fiscal years.

A big thank you to Arash Mostafavipour for en”light”ening us on this often overlooked alternative to going private.