[Code of Federal Regulations]
[Title 17, Volume 2]
[Revised as of April 1, 2001]
From the U.S. Government Printing Office via GPO Access
[CITE: 17CFR228.10]

[Page 307-310]
 
              TITLE 17--COMMODITY AND SECURITIES EXCHANGES
 
             CHAPTER II--SECURITIES AND EXCHANGE COMMISSION
 
PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS--Table of Contents
 
                        Subpart A--Regulation S-B
 
Sec. 228.10  (Item 10) General.


    (a) Application of Regulation S-B. Regulation S-B is the source of 
disclosure requirements for ``small business issuer'' filings under the 
Securities Act of 1933 (the ``Securities Act'') and the Securities 
Exchange Act of 1934 (the ``Exchange Act'').
    (1) Definition of small business issuer. A small business issuer is 
defined as a company that meets all of the following criteria:
    (i) has revenues of less than $25,000,000;
    (ii) is a U.S. or Canadian issuer;
    (iii) is not an investment company; and
    (iv) if a majority owned subsidiary, the parent corporation is also 
a small business issuer.
    Provided however, that an entity is not a small business issuer if 
it has a public float (the aggregate market value of the issuer's 
outstanding voting and non-voting common equity held by non-affiliates) 
of $25,000,000 or more.
    Note: The public float of a reporting company shall be computed by 
use of the price at which the stock was last sold, or the average of the 
bid and asked prices of such stock, on a date within 60 days prior to 
the end of its most recent fiscal year. The public float of a company 
filing an initial registration statement under the Exchange Act shall be 
determined as of a date within 60 days of the date the registration 
statement is filed. In the case of an initial public offering of 
securities, public float shall be computed on the basis of the number of 
shares outstanding prior to the offering and the estimated public 
offering price of the securities.

    (2) Entering and Exiting the Small Business Disclosure System. (i) A 
company that meets the definition of small business issuer may use Form 
SB-2 for registration of its securities under the Securities Act; Form 
10-SB for registration of its securities under the Exchange Act; and 
Forms 10-KSB and 10-QSB for its annual and quarterly reports.
    (ii) For a non-reporting company entering the disclosure system for 
the first time either by filing a registration statement under the 
Securities Act on Form SB-2 or a registration statement under the 
Exchange Act on Form 10-SB, the determination as to whether a company is 
a small business issuer is made with reference to its revenues during 
its last fiscal year and public float as of a date within 60 days of the 
date the registration statement is filed. See Note to paragraph (a) of 
this Item.
    (iii) Once a small business issuer becomes a reporting company it 
will remain a small business issuer until it exceeds the revenue limit 
or the public float limit at the end of two consecutive years. For 
example, if a company exceeds the revenue limit for two consecutive 
years, it will no longer be considered a small business. However, if it 
exceeds the revenue limit in one year and the next year exceeds the 
public float limit, but not the revenue limit, it will still be 
considered a small business. See Note to paragraph (a) of this Item.
    (iv) A reporting company that is not a small business company must 
meet the definition of a small business issuer at the end of two 
consecutive fiscal years before it will be considered a small business 
issuer for purposes of using Form SB-2, Form 10-SB, Form 10-KSB and Form 
10-QSB. See Note to paragraph (a) of this Item.
    (v) The determination as to the reporting category (small business 
issuer or other issuer) made for a non-reporting company at the time it 
enters the disclosure system governs all reports

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relating to the remainder of the fiscal year. The determination made for 
a reporting company at the end of its fiscal year governs all reports 
relating to the next fiscal year. An issuer may not change from one 
category to another with respect to its reports under the Exchange Act 
for a single fiscal year. A company may, however, choose not to use a 
Form SB-2 for a registration under the Securities Act.
    (b) Definitions of terms.
    (1) Common Equity--means the small business issuer's common stock. 
If the small business issuer is a limited partnership, the term refers 
to the equity interests in the partnership.
    (2) Public market--no public market shall be deemed to exist unless, 
within the past 60 business days, both bid and asked quotations at fixed 
prices (excluding ``bid wanted'' or ``offer wanted'' quotations) have 
appeared regularly in any established quotation system on at least half 
of such business days. Transactions arranged without the participation 
of a broker or dealer functioning as such are not indicative of a 
``public market.''
    (3) Reporting company--means a company that is obligated to file 
periodic reports with the Securities and Exchange Commission under 
section 15(d) or 13(a) of the Exchange Act.
    (4) Small business issuer--refers to the issuer and all of its 
consolidated subsidiaries.
    (c) Preparing the disclosure document. (1) The purpose of a 
disclosure document is to inform investors. Hence, information should be 
presented in a clear, concise and understandable fashion. Avoid 
unnecessary details, repetition or the use of technical language. The 
responses to the items of this Regulation should be brief and to the 
point.
    (2) Small business issuers should consult the General Rules and 
Regulations under the Securities Act and Exchange Act for requirements 
concerning the preparation and filing of documents. Small business 
issuers should be aware that there are special rules concerning such 
matters as the kind and size of paper that is allowed and how filings 
should be bound. These special rules are located in Regulation C of the 
Securities Act (17 CFR 230.400 et seq.) and in Regulation 12B of the 
Exchange Act (17 CFR 240.12b-1 et seq.).
    (d) Commission policy on projections. The Commission encourages the 
use of management's projections of future economic performance that have 
a reasonable basis and are presented in an appropriate format. The 
guidelines below set forth the Commission's views on important factors 
to be considered in preparing and disclosing such projections. (See also 
17 CFR 230.175 and 240.3b-6).
    (1) Basis for projections. Management has the option to present in 
Commission filings its good faith assessment of a small business 
issuer's future performance. Management, however, must have a reasonable 
basis for such an assessment. An outside review of management's 
projections may furnish additional support in this regard. If management 
decides to include a report of such a review in a Commission filing, it 
should also disclose the qualifications of the reviewer, the extent of 
the review, the relationship between the reviewer and the registrant, 
and other material factors concerning the process by which any outside 
review was sought or obtained. Moreover, in the case of a registration 
statement under the Securities Act, the reviewer would be deemed an 
expert and an appropriate consent must be filed with the registration 
statement.
    (2) Format for projections. Traditionally, projections have been 
given for three financial items generally considered to be of primary 
importance to investors (revenues, net income (loss) and earnings (loss) 
per share), projection information need not necessarily be limited to 
these three items. However, management should take care to assure that 
the choice of items projected is not susceptible to misleading 
inferences through selective projection of only favorable items. It 
generally would be misleading to present sales or revenue projections 
without one of the foregoing measures of income. The period that 
appropriately may be covered by a projection depends to a large extent 
on the particular circumstances of the company involved. For certain 
companies in certain industries, a projection covering a two or three 
year period may be entirely reasonable. Other

[[Page 309]]

companies may not have a reasonable basis for projections beyond the 
current year.
    (3) Investor understanding. Disclosures accompanying the projections 
should facilitate investor understanding of the basis for and 
limitations of projections. The Commission believes that investor 
understanding would be enhanced by disclosure of the assumptions which 
in management's opinion are most significant to the projections or are 
the key factors upon which the financial results of the enterprise 
depend and encourages disclosure of assumptions in a manner that will 
provide a frame-work for analysis of the projection. Management also 
should consider whether disclosure of the accuracy or inaccuracy of 
previous projections would provide investors with important insights 
into the limitations of projections.
    (e) Commission policy on security ratings. In view of the importance 
of security ratings (``ratings'') to investors and the marketplace, the 
Commission permits small business issuers to disclose ratings assigned 
by rating organizations to classes of debt securities, convertible debt 
securities and preferred stock in registration statements and periodic 
reports. In addition, the Commission permits, disclosure of ratings 
assigned by any nationally recognized statistical rating organizations 
(``NRSROs'') in certain communications deemed not to be a prospectus 
(``tombstone advertisements''). Below are the Commission's views on 
important matters to be considered in disclosing security ratings.
    (1)(i) If a small business issuer includes in a filing any rating(s) 
assigned to a class of securities, it should consider including any 
other rating assigned by a different NRSRO that is materially different. 
A statement that a security rating is not a recommendation to buy, sell 
or hold securities and that it may be subject to revision or withdrawal 
at any time by the assigning rating organization should also be 
included.
    (ii)(A) If the rating is included in a filing under the Securities 
Act, the written consent of any rating organization that is not a NRSRO 
whose rating is included should be filed. The consent of any NRSRO is 
not required. (See Rule 436(g) under the Securities Act (Sec. 230.436(g) 
of this chapter.)
    (B) If a change in a rating already included is available before 
effectiveness of the registration statement, the small business issuer 
should consider including such rating change in the prospectus. If the 
rating change is material, consideration should be given to 
recirculating the preliminary prospectus.
    (C) If a materially different additional NRSRO rating or a material 
change in a rating already included becomes available during any period 
in which offers or sales are being made, the small business issuer 
should consider disclosing this information in a sticker to the 
prospectus.
    (iii) If there is a material change in the rating(s) assigned by any 
NRSRO(s) to any outstanding class(es) of securities of a reporting 
company, the registrant should consider filing a report on Form 8-K 
(Sec. 249.308 of this chapter) or other appropriate report under the 
Exchange Act disclosing such rating change.
    (2) [Reserved]
    (f) Incorporation by Reference. Where rules, regulations, or 
instructions to forms of the Commission permit incorporation by 
reference, a document may be so incorporated by reference to the 
specific document and to the prior filing or submission in which such 
document was physically filed or submitted. Except where a registrant or 
issuer is expressly required to incorporate a document or documents by 
reference, reference may not be made to any document which incorporates 
another document by reference if the pertinent portion of the document 
containing the information or financial statements to be incorporated by 
reference includes an incorporation by reference to another document. No 
document on file with the Commission for more than five years may be 
incorporated by reference except:
    (1) Documents contained in registration statements, which may be 
incorporated by reference as long as the registrant has a reporting 
requirement with the Commission; or

[[Page 310]]

    (2) Documents that the registrant specifically identifies by 
physical location by SEC file number reference, provided such materials 
have not been disposed of by the Commission pursuant to its Records 
Control Schedule (17 CFR 200.80f).
    (g) Quantitative and qualitative disclosures about market risk. The 
safe harbor provision included in paragraph (d) of Item 305 of 
Regulation S-K (Sec. 229.305(d) of this chapter) shall apply to 
information required by Item 305 of Regulation S-K (Sec. 229.305 of this 
chapter) that is voluntarily provided by or on behalf of a small 
business issuer as defined in Rule 12b-2 of the Exchange Act.
    Note to paragraph (g): Such small business issuers are not required 
to provide the information required by Item 305 of Regulation S-K.

[57 FR 36449, Aug. 13, 1992, as amended at 60 FR 32824, June 23, 1995; 
62 FR 6064, Feb. 10, 1997; 62 FR 26388, May 14, 1997]