Happy Public Float Day!

If you are a year-end company, today is the end of your second fiscal quarter, which means that it's just about time to calculate your public float to see if your reporting status has changed. Here are a few things to remember.

Calculating Your Public Float

Your public float is the aggregate number of your company’s outstanding shares available for trading by public investors, multiplied by the current sale price of the shares. It does not include:

•  Shares held by executive officers, directors and other stockholders who are deemed affiliates of the company (including all restricted stock and performance shares issued under equity compensation plans)
• Treasury Shares
• Derivative Securities (e.g., options, warrants and restricted stock units)

Public Float = sale price of common stock on the applicable date (e.g., last business day of the issuer’s second fiscal quarter (June 30^th)) X the number of aggregate worldwide outstanding shares held by non-affiliates of the issuer on that date.

What Are Non-Affiliate Shares?

SEC rules indicate that an affiliate of an issuer is a person that “controls, or is controlled by, or is under common control with, such issuer.” The SEC then goes on to define “control” as “the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise” (emphasis added).

It is important to note that determining affiliate status is a “facts and circumstances” or “case-by-case” determination, and the SEC has indicated many times that it won’t provide guidance on affiliate status. Most issuers have no trouble deeming their executive officers and directors to be affiliates due to their ability to influence the policies and operations of a company. However, whether stockholders that do not otherwise have board representation are affiliates or not can be a troublesome analysis. While a beneficial owner of 10% or more of the voting securities of an issuer is presumed to be a control person/affiliate and most 5% stockholders are required to disclose in a Schedule 13D or 13G filed with the SEC whether their shares are held for the purposes of influencing or changing control, companies should still review their known beneficial owners and consider all factors relating to affiliate status, including but not limited to:

•  Distribution of voting shares among all stockholders. Consider whether a stockholder has a large percentage of an issuer’s voting stock as compared to all other stockholders of the company. If a company has one 4% stockholder and no other stockholder owns at least 1% of a company’s outstanding shares then that stockholder may be considered an affiliate depending upon other factors present. Conversely, if a company has four institutional stockholders that each own more than 5% of the company’s stock and those stockholders are not affiliated with each other, it is likely that none of those stockholders will be considered affiliates. Companies should also look to see whether more than one stockholder is deemed under the SEC’s beneficial ownership rules to own the same securities as another stockholder as this too may impact the analysis.
•  Impact of possible resale. Under certain circumstances, a communication to an issuer’s management by a “significant” stockholder that such stockholder plans to resell his or her shares into the market – with the implicit message that such resales will likely cause a drop in the market price of the issuer’s shares – may provide that stockholder with the power to influence the direction and policies of that issuer.
•  Relationship between the stockholder and management. A stockholder might be viewed as a controlling person because of the stockholder’s close personal or business relationship with the management of the issuer. Thus, an inquiry into this type of relationship becomes important in attempting to determine whether the stockholder should be deemed an affiliate.
• Influence as stockholder. A stockholder might have influence over the outcome of a stockholder vote. For example, a person might be considered an affiliate because, in part, he or she might have the ability by virtue of the influence he or she has over other stockholders, whether implicit or explicit, to (a) prevent the formation of a quorum for a shareholders meeting or (b) block the taking of an action by the issuer.
•  Voting agreements. It is important to know whether any person, directly or indirectly, possesses the right to vote shares by means of a trust, proxy, power of attorney, pooling agreement or any other contract or arrangement. If such an arrangement exists it is important to determine the extent of that power in terms of percentage of voting rights and duration.

Public Float Affects Your Filing Status and Compliance Requirements

The dollar value of your public float determines your filer status which establishes the deadline by which your company must file its annual and quarterly reports with the SEC. Your public float can also impact your eligibility to register shares on a short-form registration statement.

Exchange Act reporting companies fall into one of three filer status categories: (1) large accelerated filers, (2) accelerated filers and (3) all other filers, including non-accelerated filers and smaller reporting companies.

Although a company’s status does not change until the end of the fiscal year, the Form 10-K for the current fiscal year, because it is filed in the next year, will be the first filing impacted by the change in status. Therefore in order to prepare for the coming year it is best to make the calculation soon after the second quarter deadline. In addition, if you plan to register shares, your public float could have immediate consequences. For example, if it has decreased below $75 million, you may be limited in the amount of equity that you can sell in a primary offering on Form S-3. General Instruction I.B.6 to Form S-3 provides that a registrant with a public float of less than $75 million may only sell under a Form S-3, during any 12-month period, securities having an aggregate market value of not more than one-third of the public float of such registrant.

What Happens When Your Filer Status Changes?

In addition to the change in timing of the due dates of SEC reports, rules related to disclosure also change, and the timing of such changes does not neatly tie into the above rule.

For more information on how a change in filer status will impact you, please register for Mintz's upcoming Webinar, Navigating SEC Filer Status Changes for Emerging Growth & Smaller Reporting Companies, presented by Pamela Greene and Linda Rockett. [Update: This webinar has been postponed to a later date, to be determined. Please visit our website for updates.]

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