SEC Proposes Exchange Act Registration Thresholds

On December 18, 2014, the SEC issued proposals required by the JOBS Act intended to permit non-reporting issuers to delay or avoid becoming SEC reporting companies.  To accomplish this, the Securities Exchange Act of 1934, as amended (the “Exchange Act”) was amended to increase the threshold number of record holders that triggering an issuer’s obligation to file a registration statement covering a class of equity securities under Section 12 of the Exchange Act, and to exclude certain records holders entirely from the calculation. Form 10 and Form 8-A are Exchange Act registration statements.

The SEC’s new JOBS Act proposals would:

• Amend the JOBS Act’s record holder thresholds for Exchange Act registration, termination of registration and suspension of reporting.
• Apply the same threshold to savings and loan holding companies that applies to banks and bank holding companies under the Exchange Act as amended by the JOBS Act.
• Define when issuers are required to apply the amended Exchange Act registration threshold that is triggered by an issuer having more than 500 unaccredited record holders.
• Modify the SEC’s rules to allow issuers to exclude certain shares issued pursuant to employee compensation plans to be excluded from the record holder count, and adopt a related safe harbor.

Definition of Record Holder

The proposals amend Rule 12g5-1 under the Exchange Act to provide that when determining whether it is required to register a class of equity securities under Section 12(g), an issuer may exclude securities held by persons who received them under an employee compensation plan in transactions that either:

• Were exempt from Securities Act registration (for example, under Section 4(a)(2) of, or Regulations D or S under, the Securities Act).
• Did not involve a sale within the meaning if Section 2(a)(3) of the Securities Act. This provision is intended to accommodate issuers that make compensatory grants to broad groups of employees pursuant to broad-based stock bonus plans under the theory that the awards are not an offer or sale of securities.

In addition, issuers may exclude securities held by persons eligible to receive the securities from the issuer under Securities Act Rule 701(c) who received them in transactions exempt from Securities Act registration in exchange for securities that are excluded under proposed Rule 12g5-1(a)(7). This provision is intended to accommodate issuers that conduct restructurings, business combinations and similar transactions exempt from Securities Act registration in which securities that would have been excluded under proposed Rule 12g5-1(a)(7) are surrendered for other securities serving the same compensatory purpose as the surrendered securities.

Notably, this exclusion would not “follow the securities.” In other words, once a security was transferred by the recipient under the compensation plan (or certain permitted transferees, like family members receiving securities pursuant to a domestic relations order) the securities would need to be counted as held of record by the transferee.

JOBS Act Amendments – Higher Record Holder Thresholds

Sections 501 and 601 of the JOBS Act amend Section 12(g) of the Exchange Act to increase the thresholds at which an issuer is required to register a class of securities under the Exchange Act. The SEC’s rule proposal would amend SEC rules consistent with the JOBS Act statutory amendments and enable S&L holding companies to rely on the JOBS Act’s higher thresholds for bank holding companies.

Threshold for Issuers Generally

Section 501 of the JOBS Act amends Section 12(g)(1) of the Exchange Act to require an issuer must register a class of equity securities under the Exchange Act within 120 days after its fiscal year end if on the last day of that fiscal year:

• Its total assets exceed $10 million.
• The class of securities is held of record by either:
  • 2,000 persons; or
  • 500 persons who are not Accredited Investors.

The SEC’s proposal would amend Rule 12g-1 through 12g-3 and Rule 12h-3 and make the rules in line with the amended statutory language and correct other obsolete references in the rules.

Threshold for Bank Holding Companies and Savings and Loan Holding Companies

Section 601 of the JOBS Act amends Section 12(g)(1) of the Exchange Act and adds subsection (B). Under Section 12(g)(1)(B), a bank holding company is required to register a class of equity securities under the Exchange Act within 120 days after its first fiscal year end after April 5, 2012 if, on the last day of that fiscal year:

• Its total assets exceed $10 million.
• The class of securities is held of record by 2,000 persons.

Additionally, Section 601 amended Section 12(g) of the Exchange Act to allow a bank holding company to deregister a class of securities under Section 12(g) and suspend its Section 15(d) obligations relating to that class of securities if the number of record holders of the class of security falls below 1,200 persons. To make rules consistent with the Record Holder thresholds, the SEC is proposing amendments to its rules to reflect the new bank holding company registration and deregistration thresholds.

Applying the Threshold for Accredited Investors

Under amended Section 12(g), the obligation of an issuer other than a bank holding company to register a class of its securities is not triggered until the class is held of record by 2,000 persons or 500 persons who are not Accredited Investors. To shed some light on the application of the new standard, the SEC’s proposal would:

• Adopt for purposes of the threshold the definition of AI contained in Rule 501(a) of the Securities Act. The Rule 501(a) Accredited Investor definition includes persons in eight enumerated categories, and persons that an issuer reasonably believes falls into one or more of these categories.
• Require issuers applying the standard to determine whether a record holder is an Accredited Investor as of the last day of each fiscal year.

The release requests comments on whether the final rules should create a safe harbor or provide guidance on methods an issuer may use to form a reasonable believe about its holders’ Accredited Investor status and the burdens and costs issuers may face in making the foregoing determination.

Employee Compensatory Shares – Record Holder Count

Section 502 of the JOBS Act amended Section 12(g)(5) of the Exchange Act to provide when determining whether it must register a class of equity securities under Section 12(g), an issuer may exclude from the definition of record holder shares held by a person who received both:

• Under an “employee compensation plan.”
• In transactions exempt from registration under the Securities Act.

Impact on Foreign Private Issuers

There are a number of rules under the federal securities laws applicable to foreign issuers that require them to determine the number of US holders of their securities. The proposal addresses how the safe harbor in proposed Rule 12g5-1(a)(7) would interact with these rules. Under the proposal, Foreign Private Issuers would be permitted to rely on the safe harbor when determining if they have met the 300 US resident holder standard under Exchange Act Rule 12g3-2(a).

For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute legal advice on any specific matter, nor does this message create an attorney-client relationship.  Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates 
Brenda Hamilton, Going Public Lawyer
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Boca Raton, Florida 33432
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