SEC Amends Rules Related to Thresholds for Securities Exchange Act Registration and Termination of R
May 26, 2016
On May 3, 2016, the Securities and Exchange Commission’s (“SEC”) adopted amendments to certain rules under the Securities Exchange Act of 1934, as amended (“Exchange Act”), to reflect the new, higher, thresholds for registration, termination of registration, and suspension of reporting under the Exchange Act, including with regard to banks, bank holding companies, and savings and loan holding companies.
The amendments also revise the definition of “held of record” for purposes of registration under the Exchange Act to exclude securities held by persons who received them pursuant to employee compensation plans.
The amended rules implement provisions of the Jumpstart Our Business Startups Act (“JOBS Act”) and the Fixing America’s Surface Transportation Act (“FAST Act”) that had previously amended provisions of the Exchange Act.
Exchange Act Reporting and Termination Thresholds
The JOBS Act and FAST Act revised the thresholds for registration and termination of registration under Section 12(g)(1) of the Exchange Act, including for issuers that are banks, bank holding companies and savings and loan holding companies (“SLHCs”).
As discussed below, the amendments conform existing rules to the new thresholds for registration and termination of registration under the
Exchange Act for issuers arising from the recent statutory amendments and amend Rules 12g-1 through 12g-4 and 12h-3.
Under amended Rule 12g-1, an issuer is not required to register a class of equity securities under Section 12(g)(1) if, on the last day of its most recent fiscal year:
the issuer had total assets not exceeding $10 million, and
the class of equity securities was held of record by fewer than: 2,000 persons (accredited or non-accredited) or 500 persons who were not accredited investors, or in the case of a bank, bank holding company or SLHC the class of equity securities was held of record by fewer than 2,000 person
Amended Rule 12g-4(a) provides that termination of registration under Section 12(g) will take effect 90 days (or such shorter period as the SEC determines) after the company files a Form 15 certifying that the class of its securities is:
held of record by fewer than 300 persons (or 1,200 in the case of a bank, bank holding company, or SLHC), or
held of record by fewer than 500 persons where the total assets of the issuer have not exceeded $10 million on the last day of each of the preceding three years
Amended Rule 12h-3 provides that the duty to file reports under Section 15(d) for the class of securities is suspended immediately upon the filing of a certification on Form 15 provided that:
the issuer has fewer than:
300 holders of record, or
500 holders of record where the issuer’s total assets have not exceeded $10 million on the last day of each of the preceding three years, or
in the case of a bank, bank holding company or SLHC, fewer than 1,200 holders of record
the issuer has filed all periodic reports for the most recent three completed fiscal years and for the period prior to the filing of the Form 15, and
a registration statement has not become effective or been required to be updated under Securities Act Section 10(a)(3) during the fiscal year
“Accredited Investor” Determination"
Under the new increased registration thresholds under the Exchange Act, discussed above, an issuer will need to determine which record holders are “accredited investors” as of the “last day of the issuer’s most recent fiscal year end.”
The rule amendments apply the term “accredited investor” in Rule 501(a) of Regulation D. Under Rule 501(a), an accredited investor is any person who comes within one or more categories of investors specified in the rule, or whom the issuer “reasonably believes” comes within any such category.
An issuer will need to determine, based on facts and circumstances, whether prior information regarding such accredited investor status (e.g., information obtained at the time of sale) provides a basis for a reasonable belief that the security holder continues to be accredited. The SEC declined to provide further guidance on making the accredited investor determination and stated that requiring the issuer to consider its particular facts and circumstances provides appropriate flexibility for making the determination.
Also, determination of accredited investor status must be made as of the last day of the issuer’s fiscal year and not the original time of sale of the securities.
Securities “Held of Record”
The JOBS Act amendments to Section 12(g)(5) of the Exchange Act provide that, for purposes of registration under the Exchange Act, securities “held of record” do not include securities held by persons who received them pursuant to an “employee compensation plan” in transactions exempt from the Securities Act Section 5 registration requirements.
The rule amendments revise the definition of “held of record” in Rule 12g5-1 and establish a new non-exclusive safe harbor.
The amendments to the definition of “held of record” provide that, when determining whether an issuer is required to register a class of equity securities with the SEC under Section 12(g)(1), an issuer may exclude securities that are:
held by a person who received the securities pursuant to an employee compensation plan in transactions exempt from, or not subject to, the registration requirements of Section 5 of the Securities Act, or
held by a person who received the securities in a transaction exempt from, or not subject to, the registration requirements of Section 5 of the Securities Act, from the issuer, a predecessor issuer or acquired company in substitution for excludable securities, provided the person was eligible to receive securities pursuant to Rule 701(c) at the time of original issuance
The securities will include securities received in a transaction that did not involve a sale of securities within the meaning of Section 2(a)(3) of the Securities Act (based on the “no sale” theory) as well as in exempt transactions, including Section 3.
The rule amendments provide a non-exclusive safe harbor under which a person will be deemed to have received securities pursuant to an employee compensation plan if the person received them pursuant to a compensatory benefit plan in a transaction that met the plan and participant conditions of Rule 701(c) under the Securities Act.
Also, the rule includes a safe harbor solely for purpose of Section 12(g) under which an issuer may deem securities to have been exempt from, or not subject to, registration the requirements of Section 5 of the Securities Act if the issuer had a reasonable beliefat the time of issuance that the securities were issued in an exempt transaction or not “subject to” such registration requirements.
The statutory and rule amendments will have the effect of allowing a private company to raise more capital in private transactions and issue equity compensation to employees until either the new, higher, registration thresholds under the Exchange Act are met or it conducts an initial public offering thereby enabling a company to defer the burdens and costs of Exchange Act registration and compliance.
For more information, please contact:
Neil R.E. Carr Direct Dial: +1 202 587 2983 firstname.lastname@example.org
Kathleen L. Cerveny
Direct Dial: +1 202 779 9507
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