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From Securities Regulation Daily, February 11, 2014

House passes bipartisan bill providing SEC pilot program on tick sizes for emerging growth companies

By Jim Hamilton, J.D., LL.M.

The House passed with an overwhelming bipartisan majority the Small Cap Liquidity Reform Act, H.R. 3448, which would provide  emerging growth companies with a five-year, optional pilot program that would give them the ability to quote and trade stocks in 5- and 10-cent increments instead of just pennies. The vote to pass was 412 to 4. The increased tick size is designed to maximize companies’ liquidity, thereby giving them access to capital that the penny tick size does not. By providing flexibility in tick size for smaller issuers, the bill aims to improve market quality and increase liquidity in companies’ shares, thereby promoting capital formation. The measure was reported out of the House Financial Services Committee by a strong bipartisan 57 to 0 vote.

Introduced by Rep. Sean P. Duffy (R-Wis.), and co-sponsored by Rep. John Carney (D-Del.), H.R. 3448 would provide for an optional SEC-administered pilot program allowing certain JOBS Act emerging growth companies with a stock price above $1.00 to increase the tick size at which their stocks are quoted and traded. The tick size would increase from $0.01 to $0.05 or, if the company’s board of directors so elects, $0.10. The bill allows covered emerging growth companies to change the tick size of their stock from $0.05 to $0.10 or from $0.10 to $0.05 once during the pilot program. It also allows companies to opt out of the program.

Tick size pilot program. On the House floor, Rep. Scott Garrett (R-N.J.), chair of the House Capital Markets Subcommittee, said that the legislation is a bipartisan effort to support small business formation by enhancing liquidity for the stock of small issuers. The pilot program is a test that would increase minimum trading requirements to incentivize market makers to concentrate their trading interest between two price points, among other things. The chair said that the broad goal of the legislation is to help small companies obtain capital.

The SEC will design and maintain the pilot program, noted Rep. Garrett, and the Commission will have discretion to generate deep and useful data on tick sizes. The bill would also ensure that any permanent changes to tick sizes would be done in a thoughtful and data-driven manner. Make no mistake, said the chair, the legislation is focused on small business capital formation. It is not a substitute for a detailed and holistic SEC reform of how financial markets work.

Representative Carney noted that the legislation is designed to help companies grow after their IPO, and thereby builds on the JOBS Act on-ramp for emerging growth companies. Representative Duffy noted that the emerging growth companies created by the JOBS Act have found that they are not easily accessing capital. He also noted the five-year pilot program would end if it does not go as expected. If it does go as expected, he added, it could become permanent. Representative Duffy said that the bill would give the SEC the ability set up different baskets and segments to get good quality data.

An amendment offered by Rep. Duffy, and approved during the mark-up of the bill in the Financial Services Committee, provides that if an emerging growth company opts out of the program, the SEC must notify all venues on which the company is traded. Another Duffy Amendment approved in the mark-up would give the SEC discretion to determine where in the 5- and 10-cent increments the stock may be traded. An amendment offered by Rep. Carney would clarify that the intent is to apply the safe harbor provision in the bill solely to the decision to expand the tick size for the company. The intent is to ensure that the safe harbor is not too broad, while at the same time sufficient to protect the company from shareholder suits.

MainStory: TopStory ExchangesMarketRegulation DistrictofColumbiaNews SECNewsSpeeches JOBSAct

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