SEC Proposes Rule Amendments to Implement JOBS Act Provisions That Increased Thresholds for Registration and Reporting Obligations

SUMMARY

On December 18, 2014, the SEC issued a release proposing amendments to various Exchange Act rules to reflect the new, higher thresholds for Exchange Act registration by all issuers, and for termination of registration and suspension of reporting by banks and bank holding companies, that were set forth in the JOBS Act.1 The proposed amendments would extend the higher termination and suspension threshold for banks and bank holding companies to savings and loan holding companies. The proposals would also revise the definition of “held of record” under Exchange Act Rule 12g5-1 to implement the JOBS Act provision excluding from these computations certain securities held by persons who received those securities pursuant to employee compensation plans.

Comments on the proposed rules will be due 60 days after publication in the Federal Register. Sullivan & Cromwell LLP is planning to submit a comment letter.

DISCUSSION

PROPOSED AMENDMENTS TO REGISTRATION AND REPORTING THRESHOLDS

The JOBS Act amended Sections 12(g) and 15(d) of the Exchange Act to increase certain threshold triggers for registration, termination of registration and suspension of reporting by a company under the Exchange Act. In particular, the threshold for registration under Section 12(g)(1) was increased to include any issuer having total assets of more than $10 million and a class of equity securities held of record by at least (i) 2,000 persons or (ii) 500 persons who are not accredited investors. There is a separate threshold for banks and bank holding companies, under which the issuer must have total assets of more  than $10 million and a class of equity securities held of record by at least 2,000 persons (without regard to accredited investor status). The JOBS Act also amended Sections 12(g)(4) and 15(d)(1) of the Exchange Act to enable issuers that are banks or bank holding companies to terminate the registration of a class of securities under Section 12(g) or suspend reporting if the number of holders falls to less than 1,200 persons. For other issuers, the threshold for termination and suspension remains at 300 persons, or 500 persons if the issuer has had less than $10 million in assets over the last three fiscal years.

To implement these JOBS Act provisions, the SEC has proposed:

  • an amendment to Rule 12g-1 to increase the holder of record thresholds for registration purposes; and
  • amendments to Rules 12g-2, 12g-3, 12g-4 and 12h-3 to allow a bank or bank holding company to suspend reporting immediately, to avoid being deemed registered as a successor issuer or upon the termination of certain exemptions, and to terminate registration, once the bank or bank holding company has less than 1,200 holders of record.

The proposed amendments applicable to banks and bank holding companies would extend as well to savings and loan holding companies.

The JOBS Act provisions addressing the thresholds for issuers other than bank or bank holding companies do not define “accredited investor” for this purpose. The proposed rules would apply the definition of “accredited investor” in Rule 501(a) of Securities Act Regulation D to determinations under Exchange Act Section 12(g)(1). However, under Section 12(g)(1), the accredited investor status determination would need to be made as of the last day of the issuer’s fiscal year. This is in contrast to the usual situation in a Regulation D offering, where the determination of accredited investor status is made at the time of a sale of securities. The proposing release notes that after an issuer completes its offering and has sold securities to purchasers who have been determined to be accredited investors, it is not required to periodically assess an investor’s accredited investor status. The proposed rules do not address how an issuer should make this determination in the Section 12(g) context, but the proposing release solicits comment as to whether the SEC should include a safe harbor or other guidance to provide issuers with certainty as to how to establish a reasonable belief that a security holder is an accredited investor.

PROPOSED AMENDMENTS RELATING TO EMPLOYEE COMPENSATION PLANS

The JOBS Act amended Section 12(g)(5) of the Exchange Act to provide that the definition of “held of record,” used in the registration threshold provisions, shall not include securities held by a person who received them pursuant to an “employee compensation plan” in transactions exempted from registration under Section 5 of the Securities Act. The term “employee compensation plan” is not defined in the JOBS Act, but the SEC was specifically directed to amend the definition of “held of record” to implement these provisions and to adopt a safe harbor for securities received by persons pursuant to an employee compensation plan in exempt transactions.

The proposed rules do not provide a definition for the term “employee compensation plan,” but instead (i) revise the definition of “held of record” and (ii) establish a non-exclusive safe harbor that relies on the definition of “compensatory benefit plan” in Rule 701 of the Securities Act and the conditions in Rule 701(c). Rule 701(c)(2) defines a “compensatory benefit plan” as “any purchase, savings, option, bonus, stock appreciation, profit sharing, thrift, incentive, deferred compensation, pension or similar plan.”

Under the SEC’s proposed safe harbor, a person will be deemed to have received securities pursuant to an employee compensation plan if the person receives them pursuant to a transaction that is exempted from the registration requirements of Section 5 (or did not involve a sale within the meaning of Section 2(a)(3)) and that meets the conditions of Rule 701(c). So long as those conditions are met, the safe harbor could apply to securities issued in reliance on Section 4(a)(2), Regulation D or Regulation S of the Securities Act, without regard to the other requirements of Rule 701, including the issuer eligibility restrictions of Rule 701(b)(1), the volume limitations of Rule 701(d) or the disclosure delivery provisions of Rule 701(e).

The Rule 701(c) conditions include that such an employee compensation plan is established by the issuer, its parents, its majority-owned subsidiaries or majority-owned subsidiaries of the issuer’s parents, for the participation of their employees, directors, general partners, trustees, officers, consultants and advisors.2 Consistent with Form S-8, the proposed safe harbor will also cover securities transferred to family members by gift or domestic relations order or acquired in connection with options transferred to family members by the plan participant by gift or domestic relations order. However, once an employee or family member subsequently transfers those securities, they would be counted as held of record by the transferee for the purposes of Section 12(g)(1).

Foreign private issuers would also be allowed to rely on the safe harbor for registration purposes to determine if the number of U.S. resident holders under Exchange Act Rule 12g3-2(a) is fewer than 300.3