On May 3, 2016, the Securities and Exchange Commission (SEC) approved rule amendments to implement changes liberalizing certain rules related to registration thresholds, termination of registration, and suspension of periodic reporting obligations under Section 12(g) and Section 15(d) of the Securities Exchange Act of 1934 (Exchange Act), as mandated by the Jumpstart Our Business Startup Act (JOBS Act) and the Fixing America’s Surface Transportation Act (FAST Act). The following highlights the three major revisions implemented by the amendments.

Amendments to the Exchange Act Registration and Reporting Thresholds

The SEC adopted conforming amendments to Rules 12g-1 through 12g-4 and 12h-3 of the Exchange Act, which govern procedures relating to registration, termination of registration and suspension of reporting obligations under Sections 12(g) and 15(d), to increase the initial registration thresholds for all issuers, with certain additional relief provided to issuers that are banks, bank holding companies or savings and loan holding companies (“bank issuers”). Following these amendments, Rule 12g-1 will require non-bank issuers to register their securities within 120 days following their fiscal year end if, on the last day of the issuer’s fiscal year: (1) the issuer has over $10 million in total assets and (2) the issuer has more than 2,000 holders of record, or 500 holders of record who are not accredited investors. Bank issuers will be required to register their securities in a similar timeframe if the issuer has: (1) over $10 million in total assets and (2) over 2,000 holders of record as of their fiscal year end.

The amendments also raised the threshold at which Section 12(g) carry-over registration (for securities that cease to be registered under Section 12(b) because they are delisted from a national securities exchange) or successor registration (for securities issued in a merger, consolidation or exchange transaction) would apply to bank issuers under Rules 12g-2 and 12g-3, to 1,200 holders of record—an increase from the previous threshold of 300 record holders that continues to apply to other issuers. Parallel amendments to Rule 12g-4 and 12h-3 also will allow bank issuers to terminate or suspend the registration of a class of securities, or to suspend a duty under section 15(d) to file reports required by section 13(a) of the Exchange Act, if their securities are held by fewer than 1,200 record holders—an increase from the threshold of 300 record holders that continues to apply to other issuers. (All issuers continue to be able to take such actions if they have fewer than 500 holders of record and total assets not exceeding $10 million on the last day of each of their three most recent fiscal years.)

Application of the term “Accredited Investor”

The amendments also provided that the definition of “accredited investor” as set forth in Rule 501(a) of Regulation D under the Securities Act of 1933 (Securities Act) will apply to determinations of whether holders of record are “accredited investors” for purposes of Rule 12g-1, based on the issuer’s good faith determination of such holders’ “accredited investor” status as of its fiscal year end rather than at the time the security is issued.

Exclusion of Certain Employee Equity Awards in Determining “Holders of Record”

The amendments also added a new paragraph (a)(8) to Rule 12g5-1 designed to lessen the impact of employee equity awards on determining when a pre-public company crosses the Exchange Act’s mandatory registration threshold. For purposes of determining whether an issuer has exceeded the number of “holders of record” that would trigger registration under Rule 12g-1. issuers will no longer be required to count securities held by persons who either:

  1. received them through employee compensation plans exempt from, or not subject to, registration under Section 5 of the Securities Act or
  2. received such securities in substitution or exchange for securities described in clause (A) from the issuer (or a predecessor of the issuer or an acquired company), provided the substitute securities were issued in a similarly exempt transaction and the recipient would have been eligible to receive securities under Securities Act Rule 701(c) at the time of their initial issuance.

The SEC also established a non-exclusive safe harbor allowing issuers to exclude any securities held by persons who acquired the securities pursuant to an employee compensation plan, provided that:

  • both the plan and the participant met the conditions of Securities Act Rule 701(c), and
  • the issuer reasonably believed the securities were issued in a transaction exempt from, or not subject to, the registration requirements of Section 5 of the Securities Act.

While these changes provide relief that may make it easier for pre-public companies to compensate their employees through equity awards, it is important to note these exemptions only apply to the holder who received the security under the employee benefit plan. Once the security is transferred, the transferee must be counted as a “holder of record” in determining whether the issuer has crossed over the threshold for registration purposes. As a result, issuers may need to implement transfer restrictions or enhanced record-keeping systems to monitor when such securities are transferred.

As intended by the legislative mandates included in the JOBS Act and FAST Act, these amendments may provide pre-public companies with greater flexibility in structuring their capital raising transactions and incentive compensation plans by allowing them to remain private – and avoid the considerable expenses of public reporting under the Exchange Act – for longer than has been the case under the prior rules.