On December 17, 2014, the Securities and Exchange Commission proposed rules implementing the requirements of Titles V and VI of the Jumpstart Our Business Startups Act (JOBS Act), which revised the thresholds for registration, termination of registration and suspension of reporting under the Securities Exchange Act of 1934. A copy of the SEC’s proposed rules are available here. Comments on the proposed rules should be received by March 2, 2015.

Overview

The proposed rules:

  • amend Exchange Act Rules 12g-1, 12g-2, 12g-3, 12g-4 and 12h-3 to reflect the new, higher thresholds for registration, termination of registration and suspension of reporting under Section 12(g) of the Exchange Act set forth in the JOBS Act;
  • revise existing rules to apply the new thresholds for banks and bank holding companies to savings and loan holding companies; and
  • apply the definition of “accredited investor” in Rule 501(a) under the Securities Act of 1933 to determinations as to which holders of record are accredited investors for purposes of Section 12(g)(1) of the Exchange Act;

The proposal also would amend the definition of “held of record” to provide that an issuer, when determining whether it is required to register a class of equity securities, may exclude certain securities held by persons who received them under an employee compensation plan or in exchange for securities received under an employee compensation plan. The proposal also includes a non-exclusive safe harbor with respect to certain securities received under compensatory benefit plans.

Registration, Termination of Registration and Suspension of Reporting Thresholds

The JOBS Act revised Sections 12(g)(1), 12(g)(4) and 15(d) of the Exchange Act to raise the thresholds at which an issuer is required to register a class of equity securities. Prior to the JOBS Act, a company that had more than US$10 million in total assets as of the end of its fiscal year and a class of equity securities held of record by 500 or more persons at the end of its fiscal year was required to register under the Exchange Act. Under the JOBS Act’s revised threshold and the proposed rules, which amend Exchange Act Rules 12g-1, 12g-2, 12g-3, 12g-4 and 12h-3, an issuer that is not a bank or a bank holding company is required to register a class of equity securities under the Exchange Act if it has more than US$10 million of total assets as of the end of its fiscal year and the securities are held of record by either 2,000 persons or 500 persons who are not accredited investors. An issuer that is a bank or bank holding company is required to register a class of equity securities if it has more than US$10 million of total assets as of the end of its fiscal year and the securities are held of record by 2,000 or more persons.

The JOBS Act also revised the thresholds at which an issuer that is a bank or bank holding company can terminate its registration of a class of securities under Section 12(g) of the Exchange Act or suspend its reporting under Section 15(d)(1) of the Exchange Act from 300 holders of record to 1,200 holders of record. For non-bank or bank holding company issuers, the termination of registration and suspension of reporting thresholds remain at 300 holders of record (or 500 holders of record if the company has total assets of US$10 million or less).

The proposed rules would apply the higher bank and bank holding company thresholds to savings and loan holding companies and update certain procedural accommodations to reflect the revised thresholds.

Accredited Investor Status

The proposed rules would apply the definition of “accredited investor” in Securities Act Rule 501(a) to making determinations as to whether the new threshold for registration for issuers other than banks and bank holding companies under Section 12(g) of the Exchange Act is met. The accredited investor determination would be made as of the last day of the fiscal year, rather than at the time of sale of the securities. The release notes that this timing may create difficulties for an issuer because it “will need to determine, based on facts and circumstances, whether it can rely upon prior information to form a reasonable basis for believing that the security holder continues to be an accredited investor as of the last day of the fiscal year.” In light of this potential difficulty, the SEC is considering whether to take a different approach for determining accredited investor status under Section 12(g), and the release solicits comment on alternative approaches.

Employee Compensation Plans

The JOBS Act revised Section 12(g)(5) of the Exchange Act to provide that the definition of “held of record” should not include securities held by persons who received them pursuant to an employee compensation plan in transactions exempted from the registration requirements of Section 5 of the Securities Act solely for purposes of determining whether the registration thresholds (and not the termination of registration or suspension of reporting thresholds) described above have been met. The JOBS Act instructed the SEC to amend the definition of “held of record” to implement the amendment regarding the exclusion of employee compensation plans and to adopt a safe harbor for issuers to determine whether holders of their securities received them pursuant to an employee compensation plan in an exempt transaction. The proposed rules amend Exchange Act Rule 12g5-1 to implement this mandate.

The amendment to the definition of “held of record” provides that, when determining whether an issuer is required to register a class of equity securities under Section 12(g)(1) of the Exchange Act, the issuer can exclude securities that are either:

  • held by persons who received the securities pursuant to an employee compensation plan in transactions exempt from the registration requirements of Section 5 of the Securities Act or that did not involve a sale within the meaning of Section 2(a)(3) of the Securities Act (i.e., under the “no-sale” theory relating to the issuance of compensatory grants to employees pursuant to broad-based stock bonus plans); or
  • held by persons eligible to receive securities from the issuer pursuant to Securities Act Rule 701(c) who received the securities in a transaction exempt from the registration requirements of Section 5 of the Securities Act in exchange for securities that can be excluded under the proposed Exchange Act Rule 12g5-1(a)(7) safe harbor (discussed below).

The proposed rules also include a non-exclusive safe harbor (proposed Rule 12g5-1(a)(7)) under which a person will be deemed to have received securities pursuant to an employee compensation plan if the person received them under a compensatory benefit plan in transactions that met the requirements of Securities Act Rule 701(c). The safe harbor would be available if the securities were issued under Rule 701(c) or in transactions otherwise exempted from, or not subject to, the Securities Act registration requirements that satisfy the conditions of Rule 701(c) (even if the other conditions of Rule 701 are not satisfied). This would allow the safe harbor to be available for holders of securities received in other employee compensation plan transactions exempted from, or not subject to, Securities Act registration requirements, such as securities issued without registration under Section 4(a)(2), Regulation D or Regulation S. The safe harbor would be limited to the categories of holders specified in Rule 701(c) (e.g., employees, directors, general partners, trustees, officers and certain consultants and advisors). Once such holders transfer the securities, the securities would need to be counted as held of record for purposes of determining whether the registration thresholds discussed above have been met.

In addition, under the proposed rules, foreign private issuers would be able to rely on the new safe harbor when determining the number of US resident holders for purposes of the exemption from registration under Section 12(g) pursuant to Exchange Act Rule 12g3-2(a).