Going Dark: Deregistration in the COVID-19 Era

For purposes of this alert, “public companies” are those subject to SEC reporting obligations under the Securities Exchange Act of 1934 (the Exchange Act), including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. The process for deregistering depends on the Exchange Act section under which the registrant’s reporting obligations arise. Such reporting obligations typically arise under one or more of the following categories:

• Exchange Listing (Section 12(b)): Registration under Section 12(b) of the Exchange Act is required of issuers with a class of securities (debt or equity) listed on a national securities exchange, such as the Nasdaq Stock Market or the New York Stock Exchange. Registration under this section triggers the periodic and current reporting requirements of Section 13(a).
• Size Thresholds (Section 12(g)): Registration under Section 12(g) of the Exchange Act is required of issuers (1) with a class of equity securities held of record by 2,000 or more persons, or 500 or more persons who are not accredited investors, and (2) whose total assets exceed $10 million at the end of the fiscal year (with some variations for special types of issuers, such as banks). Registration under this section also triggers the periodic and current reporting requirements of Section 13(a).
• Public Offering without an Exchange Listing (Section 15(d)): Any issuers that have filed a registration statement under the Securities Act of 1933 but have not listed the securities on any exchange are nevertheless subject to the reporting requirements of Section 15(d), as though they had registered under Section 12.

Public companies, particularly smaller firms with low trading volumes and those hard-hit by the economic effects of the COVID-19 pandemic, may look into exiting the disclosure regime in light of the potential cost savings of deregistration. But companies should note that going dark is distinct from “going private”: the latter is generally understood to involve a complex restructuring resulting in concentrated ownership, often driven by a controlling stockholder or a leveraged management buy-out, and eventually deregistration. While both options ultimately reduce the overall regulatory burden, going dark without also executing a going-private transaction is only available if the company and its securities are already eligible to terminate their Exchange Act registration.

Assuming the company is eligible to terminate its Exchange Act registration, the deregistration procedure for each respective reporting trigger is outlined below:

Section 12(b). Rule 12d2-2 sets forth the requirements for terminating registration under Section 12(b). Under this rule, either the national securities exchange or the issuer must file an application with the SEC to strike a class of securities from listing using Form 25. National securities exchanges are required to file a Form 25 if an event enumerated in Rule 12d2-2(a), such as redemption or maturity of the entire class, occurs. However, national securities exchanges also have latitude under Rule 12d2-2(b) to file a Form 25 to delist an issuer’s class of securities if the issuer violates the national securities exchange’s rules. Finally, under subsection (c) of the rule, the issuer may file Form 25 directly with the SEC to notify the SEC of its intention to delist the securities and withdraw from registration under Section 12(b).

The delisting of a class of securities on a national securities exchange becomes automatically effective 10 calendar days after the Form 25 is filed with the SEC. The deregistration typically does not take effect until 90 days after filing, but the securities are considered delisted upon the effective date of delisting for purposes of Section 12, even if the withdrawal of registration is not effective until a later time. Issuers should keep these time periods in mind because the reporting requirements of Section 13(a) continue to apply until the effective date of the delisting. As such, issuers should be prepared to file any periodic or current report that is due within the 10-calendar-day period after the Form 25 has been filed.

Section 12(g). Any class of securities listed and registered on a national securities exchange (and thus registered under Section 12(b)) is not subject to registration under Section 12(g). However, once an issuer deregisters the class of securities under Section 12(b), the registration and reporting obligations of Section 12(g) automatically kick in as a backstop. Thus, even if Form 25 has been filed and the class of securities has been successfully delisted and deregistered under Section 12(b), the issuer must deregister under Section 12(g) as well.

Domestic public companies can terminate their registration under Section 12(g) by using Form 15. In filing Form 15, the issuer certifies to the Commission that the class of securities is held of record by either (i) less than 300 persons; (ii) less than 500 persons, if the total assets do not exceed $10 million and the issuer’s assets have been no more than $10

million at the end of each of its last three fiscal years; or (iii) in the case of a bank or bank holding company, the number of record holders falls below 1,200. Unlike with Form 25, an issuer’s obligation to file periodic and current reports is suspended immediately upon filing Form 15 (even though deregistration is not effective until 90 days after filing). However, issuers should keep in mind that until deregistration is final, certain filings and restrictions under the Exchange Act still apply. These include beneficial ownership filings (Section 16(a) and 13(d)), short-swing profit restrictions (Section 16(b)), and proxy-related obligations (Section 14(a)).

Issuers should note that for a class of securities being delisted from a national securities exchange, Form 15 may not be filed prior to the effective date of the Form 25. The SEC takes this view under the reasoning that Sections 12(g) and 15(d) are suspended while Section 12(b) applies, and do not kick in until Form 25 becomes effective.

Section 15(d). Much like the dormant Section 12(g) obligations, Section 15(d) revives upon successful deregistration from both sub-parts of Section 12, assuming the issuer has an effective Securities Act registration statement. Most registrants will rely on Rule 12h-3 to circumvent this final layer of reporting obligations. Rule 12h-3 allows issuers to file Form 15 (the same form that is used for deregistration under Section 12(g)) to suspend reporting obligations under Section 15(d). Issuers make the same certifications detailed above for Section 12(g) deregistration. Registrants must take care to abide by Rule 12h-3 and the guidance provided in Staff Legal Bulletin No. 18 (March 15, 2010), which precludes the use of this safe harbor in certain circumstances, including, for example, if the relevant registration statement became effective in that fiscal year through an update to a Form S-3 or Form S-8 during the fiscal year. These and similar fact patterns may call for no-action requests or other creative approaches to going dark.

Although, as noted above, Section 15(d) technically does not apply until deregistration under Section 12, companies will often file one Form 15 to deregister under both Section 12(g) and Section 15(d). As is the case for Section 12(g) deregistration, reporting obligations under Section 15(d) are also immediately suspended upon filing Form 15. Unlike Section 12, however, Section 15(d) obligations can only be suspended, not terminated. The registration and reporting obligations Section 15(d) revive if at any point in the future the issuer does not meet the criteria for suspension. For example, if an issuer finds itself with more than $10 million in assets and 300 shareholders of record on the first day of its fiscal year, the issuer’s obligation to file periodic and current reports under Section 15(d) would be revived and the issuer would be required to file a Form 10-K for the prior fiscal year.

Public companies facing financial difficulties and deteriorating growth opportunities in today’s economic environment could find significant benefits to exiting the disclosure regime of the SEC. Going dark is only one of many options on the table for distressed public companies, but for some it may be a viable strategy for reducing cost and streamlining operations. Registrants considering this option should consult with legal counsel to navigate the complex regulatory landscape of going dark.

For more information, please reach out to your regular Pillsbury contact or the authors of this client alert.

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