On December 18, 2014, the Securities and Exchange Commission (SEC) proposed new rules regarding the thresholds for registration, termination of registration and suspension of reporting under Section 12(g) of the Securities Exchange Act of 1934 (the “Exchange Act”)1 , as amended in 2012 by the JOBS Act. The SEC has requested that comments on the proposed rules be received by March 2, 2015.

Registration Requirements

Prior to amendment by the JOBS Act, U.S. issuers were required to register a class of equity securities under the Exchange Act if (i) the securities were “held of record” by 500 or more persons, and (ii) the issuer held more than $10 million of total assets, each measured as of the last day of the issuer’s fiscal year.

In an effort to provide issuers with greater opportunities to raise capital without subjecting them to the reporting requirements of registration under the Exchange Act, the JOBS Act revised Section 12(g) of the Exchange Act to increase the threshold at which an issuer is required to register its equity securities.

As a result of the JOBS Act, an issuer that is not a bank or a bank holding company must register a class of equity securities under the Exchange Act if the issuer has total assets in excess of $10 million and the class of equity securities is “held of record” by either (a) 2,000 persons or (b) 500 persons who are not accredited investors.

The JOBS Act also amended the Exchange Act to require a bank or bank holding company to register its equity securities under the Exchange Act if it has total assets in excess of $10 million and a class of equity securities that is “held of record” by 2,000 or more persons (without regard to whether any of such persons are accredited investors).

Thresholds for Termination of Registration; Banks and Bank Holding Companies

The JOBS Act relaxed the termination and suspension of Exchange Act registration obligations for banks and bank holding companies by permitting a bank or bank holding company to terminate its registration or suspend its reporting obligations if it has fewer than 1,200 record holders, an increase from the former threshold of fewer than 300 record holders. The threshold for other issuers to terminate or suspend their Exchange Act registration or reporting requirements for a class of equity securities remains at fewer than 300 record holders.

The SEC proposes to amend Rules 12(g)(1), 12(g)(2), 12(g)(3), 12(g)(4) and 12(h)(3) so that the provisions governing registration and termination of registration under Section 12(g) of the Exchange Act, and suspension of reporting obligations under Section 15(d) of the Exchange Act, conform to the levels prescribed by the JOBS Act.

If adopted, the proposed amendments to the thresholds for banks and bank holding companies would expand the existing provisions of Rule 12(g)(4) and Rule 12(h)(3) to conform to the termination and suspension thresholds provided for in the JOBS Act. This change would allow banks and bank holding companies to rely on the SEC’s rules to suspend reporting immediately, and to terminate their registration during the fiscal year, at the new, higher 1,200-holder threshold.

In the proposing release, the SEC stated that, because it believes that the regulatory oversight applicable to savings and loan holding companies is substantially similar to the regulatory oversight for bank holding companies, the SEC should treat savings and loan holding companies consistently with other depositary institutions under the SEC rules. Therefore, the SEC has also proposed to amend Rule 12(g)(1) to establish an exemption for savings and loan holding companies from the registration requirement that mirrors the exemption for banks and bank holding companies established by the JOBS Act.

Determination of “Accredited Investor” Status

For an issuer to determine whether it has more than 500 holders who are not “accredited investors,” the proposed rules rely on the definition of “accredited investor” found in Rule 501(a) of Regulation D, under the Securities Act of 1933. The complication is that under Regulation D, an investor’s “accredited” status is determined at the time of a Regulation D offering, whereas, under the proposed rules, accreditation would be determined annually on the last day of the issuer’s fiscal year.

Obviously, the fact that an investor was accredited at the time of an offering does not mean that the investor will be accredited after a year or more. The SEC’s position is that issuers may not necessarily rely on information obtained from an investor upon an initial sale of securities. Under the proposed rules, issuers must decide, “based on facts and circumstances,” whether it would be appropriate to rely upon information obtained previously from a particular investor in forming a “reasonable basis” for believing that a particular investor is accredited as of the last day of the issuer’s fiscal year.

This has particular importance for private issuers whose securities are held by a large number of accredited investors. Unless the SEC issues additional guidance, it will be unclear what will provide a “reasonable basis” for deciding that investors are accredited as of the end of the issuer’s fiscal year. Some issuers may find it necessary to send a questionnaire to shareholders every year to help establish reasonable basis, and may find it difficult to obtain responses from all shareholders without substantial effort.

The SEC is considering what approach would be appropriate for determining accredited investor status under Section 12(g) of the Exchange Act and is specifically soliciting comment on the appropriate structure and criteria for such an approach. However, it is not too early for private companies that have a large number of shareholders to consider charter amendments that would require that shareholders respond to inquiries regarding their accredited investor status, as shareholders that persistently fail to confirm their accreditation must be counted as unaccredited investors.

Download: SEC Proposes New Exchange Act Regulations in Conformity with JOBS Act


  1. Full text of the proposed changes may be found at this link.
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