5 Ways to Help Maintain ’34 Act Reporting Compliance

by Craig Butler on June 23, 2009

In tough economic times there are things smaller public companies can do to help ensure they maintain their ’34 Act reporting compliance

Although the economy appears to be starting a slight recovery, times remain tough for many companies.  Public and private companies once thought beyond reproach have failed or are failing.  When the stalwarts of the American economy are struggling how are smaller reporting companies expected to survive and maintain their public company status?  While there is no magical elixir, there are several things management of smaller reporting companies can do to improve their chances of remaining publicly-traded companies.  Some of these suggestions are cost cutting measures and some are strategic alternatives.  By following some or all of the suggestions in this guide we believe smaller reporting companies can drastically improve their chances of remaining listed on their current stock exchange.

1)         Cut Legal Fees.  This may seem like an odd suggestion coming from a law firm, but in our experience many smaller reporting companies are overpaying for their legal expenses related to their public filings – as much as $100,000 per year – and sometimes more.  For most smaller reporting companies, total legal fees for a company’s annual report (10-K), quarterly reports (10-Qs), as well as an average number of current reports (Form 8-Ks) should not exceed $35,000 in total.  Under The Lebrecht Group’s ’34 Act Maintenance Plan, a smaller reporting company’s total annual legal fees for its 10-K, 10-Qs, up to six 8-Ks, as well as some 144 legal opinions and Section 16 filings (Forms 3 and 4) and some other small filings, is under $30,000, payable monthly over the course of the year. Another area where a company may wish to review its legal fees relates to its registration statements (primarily S-1s).  While legal fees for many registration statements are based on the dollar amount of the shares being registered, the legal fees for all but the largest registration statements should not exceed $50,000 to $60,000.  However, at times, legal fees being charged for these registration statements are approaching, or are even over, $200,000.  Therefore, searching out additional qualified lawyers to draft and file the company’s registration statement may provide a company with as much as $100,000 to $150,000  in savings.

2)         Cut Auditor Fees.  Similar to legal fees above, many smaller reporting companies are paying excessive auditor fees.  Based on the auditors our firm works with on a regular basis, for the average smaller reporting company, the auditor fees for the annual audit and the review of the three quarterly periods should be anywhere from $50,000 to $100,000.  Many smaller reporting companies are paying large accounting firms two to three times this amount for their annual audit and three quarterly reviews.  If your company needs a referral to experienced auditing firm with fees in the $50,000 to $100,000 range please feel free to contact an attorney in our office.

3)         Seek Money From Investors to Cover Fees Associated with ’34 Act Filings.   Obviously raising money for any purpose is a good way to save cash flow from operations.  However, for smaller reporting companies that may have difficulty raising money to expand operations, financing may be available to fund reporting obligations, due to the fact that the funding necessary to do this is relatively small (in the range of $150,000 to $200,000 annually if suggestions #1 and #2 above are followed).  Therefore, if a current ’34 Act reporting company has an adequate stock price and volume it may be able to raise $500,000 to $1 million to pay for its reporting obligations for 2-3 years, which would obviously accomplish two goals – keep the company current in its reporting obligations, a huge benefit to both the company and its shareholders, and preserve cash flow for operations.  If this is an opportunity your company would like to pursue, please contact an attorney in our office, as we have several funding sources looking to invest money in smaller reporting companies for this purpose.

             4)         Stock Option Plan/S-8.  It may seem counterintuitive to suggest that a company spend money on a stock option plan and an S-8 registration statement as a way to save money, however, this suggestion can be very productive in the long run.  For smaller reporting companies that stay current in their reporting obligations, a stock option plan registered on an S-8 registration statement will allow the company to issue registered shares and/or options to qualified employees, consultants and service providers (such as the company’s legal counsel) for a portion of their fees thereby freeing up cash flow for operations and other service providers that cannot accept stock, such as the company’s auditor.  Obviously, this suggestion must be handled appropriately in order to ensure the company maintains its stock price and there is not major dilution to existing stockholders.  However, when properly planned and executed a registered stock option plan can cut the cash expenses of a company’s ’34 Act filing obligations as well as free up cash for operations.

5)         E-Proxy Rules.  Historically, the proxy materials that were sent to a company’s shareholders to inform them of an annual or special meeting of shareholders included a paper copy of a 14-A or a 14-C and a copy of the company’s last annual report.  The cost for mailing hundreds of pages of documents to all the company’s shareholders was over $3.00 per shareholder, and thus many times easily exceeded $5,000 when all was said and done, including copy, stuffing and postage charges (and many times much higher).  Under the SEC’s new e-proxy rules, a company is permitted to post its 14-A or 14-C and its annual report, and any other proxy materials, to a website (many times a designated page on the company’s website) and then mail only a one page notification letter to the shareholders informing them where the company’s 14-A or 14-C and annual report can be viewed on the Internet.  The company does, however, still have to mail a paper copy of the proxy materials to any shareholder that makes a request for a paper copy.  Additionally, the timelines in terms of when the one page notification must be sent differs from the mailing date for when the proxy materials had to be mailed to shareholders previously so this concept needs to be discussed with the company’s legal counsel before undertaking this procedure.  However, if done properly and in compliance with the new e-proxy rules, this procedure can save a company thousands of dollars over the traditional mail method each time the company holds an annual or special meeting of shareholders.

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           The Lebrecht Group, APLC provides comprehensive advice on a variety of corporate and securities law matters.  Please contact us if you have any questions.

To view other articles written by Mr. Butler, please follow this link or cut and paste it in your Internet browser: http://www.thelebrechtgroup.com/index.php/publications/tlg-publications.

Craig V. Butler, Esq. is an attorney with The Lebrecht Group, APLC, located in Irvine, California and Salt Lake City, Utah.  He can be reached at (949) 635-1240 or via e-mail at cbutler@thelebrechtgroup.com with questions or comments.  Please visit our website at www.thelebrechtgroup.com for future updates and other information.

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