KMK Law Corporate & Securities Blog

As mandated by 2012’s Jumpstart Our Business Startups Act (“JOBS Act”), the Securities and Exchange Commission has proposed amendments to the thresholds at which a company will be required to register its equity securities under Section 12(g) of the Securities Exchange Act of 1934 (the “Exchange Act”) and thus be subject to the Exchange Act’s periodic reporting obligations. Exchange Act registration would now be required only when a company has more than $10 million in assets and a class of equity securities “held of record” by either: (a) 2,000 persons (up from 500 persons), or (b) 500 persons or more who are not “accredited investors” under SEC rules (with the determination being made as of the last day of the fiscal year). The proposal would also amend the threshold requirements for banks or bank holding companies to terminate or suspend the registration of a class of securities under the Exchange Act from 300 to 1,200 persons.

Under the proposed rule, “accredited investor” is defined by reference to the familiar definition used for Regulation D offerings under the Securities Act of 1933 (the “Securities Act”). However, the SEC is considering whether a different approach than that used under the Securities Act would be appropriate for determining Exchange Act registration obligations.

A holder of record generally is the person or entity identified in the records maintained by a company or its transfer agent as the registered holder of securities. In many instances, a broker will be a registered holder of securities on behalf of many clients, with those clients being considered the “beneficial owners” of the securities.

In addition to increasing the holder of record thresholds, the proposed amendments would exempt certain securities from the holders of record calculation.  Specifically, securities held by employees who received them pursuant to certain employee compensation plans in transactions exempt from the registration requirements of Section 5 of the Securities Act or that did not involve a sale within the meaning of Section 2(a)(3) of the Securities Act will not be counted as shares held of record. In addition, securities held by employees who received them in exchange for securities received under an employee compensation plan would not be counted as shares held of record under certain circumstances.

The SEC will seek public comment on the proposed rule amendments for 60 days following their publication in the Federal Register.

While the new thresholds should provide privately-held companies wishing to raise capital by admitting new investors or issuing equity under compensation arrangements with more flexibility to do so, such companies should still continue to monitor their outstanding holdings in order to avoid inadvertently triggering the Section 12(g) registration requirements.