'Going dark': competing considerations make the decision to exit the SEC reporting system a difficult one for the board.

• Author: Raymond, Doug
• Position: Securities and Exchange Commission

TODAY, approximately 9,000 companies file quarterly and annual reports with the SEC. Roughly 40% of these companies report annual revenues of less than $50 million. Dramatically increased compliance responsibilities, a more active enforcement agenda at the SEC and other government agencies, risks of stockholder litigation, and increased risks of personal liability complicate directors' already complex duties. In addition, the costs of being a public company, which already are significant, are continuing to grow, especially for smaller companies.

The burden of these costs may force them to cut back on areas--such as research and development, expansion, and even dividends--that produce direct benefits to their stockholders. Factor in the time and effort that managers must devote to meeting stockholders' short-term expectations, and it is not surprising that many companies are looking for exits from the regulatory burdens imposed by the SEC and the SROs (NYSE, Nasdaq, and now Archipelago).

One exit that many companies are seriously considering is "going dark." A company goes dark by filing a simple form with the SEC. Once a company goes dark, it does not have to file proxy statements or quarterly, annual, or other reports with the SEC. It also does not need to comply with Sarbanes-Oxley and is no longer subject to the rules and regulations of the stock exchange on which its shares formerly were listed. Going dark does not change the identity or number of stockholders, and the company's shares can still be publicly traded on the National Quotation Bureau's "pink sheets." Many companies that have gone dark continue to comply, on a voluntary basis, with many of the rules applicable to public companies.

The process of going dark is not the same as a going-private transaction, which is a much more complex process in which the company first changes the number of its stockholders through a sale, reverse stock split, tender offer, or similar transaction, and then subsequently delists.

A company may go dark only if it has either: (1) fewer than 300 record stockholders, or (2) fewer than 500 record stockholders and less than $10 million in assets at the end of its last three fiscal years. This count excludes beneficial owners of shares held in street name.

Even though the decision to go dark may save the company a considerable amount of time, money, and management distraction, it can be unpopular with investors. First, investors may believe that the...