On December 18, 2014, the Securities and Exchange Commission proposed rule amendments that, if adopted, would modify SEC rules governing registration under Section 12(g) of the Securities Exchange Act of 1934 (Exchange Act), termination of registration under Section 12(g) of the Exchange Act and suspension of reporting obligations under Section 15(d) of the Exchange Act to reflect the thresholds enacted by Titles V and VI of the Jumpstart Our Business Startups Act (JOBS Act). Titles V and VI of the JOBS Act, which became effective upon adoption, raised the threshold for registration from 500 holders of record and total assets exceeding $1 million to either 2,000 holders or (except for banks and bank holding companies) 500 holders who are not accredited investors and total assets exceeding $10 million. The JOBS Act also raised the threshold at which a bank or bank holding company (but not other registrants) may terminate or suspend the registration of a class of its securities under the Exchange Act from 300 to 1,200 persons.
The proposal provides that, for purposes of making the determination of whether an issuer is required to register a class of securities, the definition of “accredited investor” contained in Rule 501(a) under the Securities Act of 1933 (Securities Act) would apply, and that the determination of accredited investor status would have to be made as of the last day of the fiscal year (rather than at the time of the sale of the securities). The proposal suggests that the due diligence required to ascertain whether existing holders qualify as accredited investors would be comparable to current requirements applicable to private offerings made in reliance upon Rule 506 under the Securities Act. However, the staff requested comment with respect to whether a different approach for determining accredited investor status would be appropriate for purposes of Exchange Act Section 12(g).
The JOBS Act also amended the definition of the term “held of record” in Exchange Act Section 12(g)(5) to exclude securities that are 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. In order to implement that exclusion, the SEC proposed to amend Exchange Act Rule 12g5-1 such that issuers determining whether a person holds securities of record (for purposes of determining whether an issuer is required to register a class of securities pursuant to Exchange Act Section 12(g)) would be permitted to exclude securities that are held by persons who received them pursuant to an “employee compensation plan” in transactions exempt from Securities
Act registration (e.g., pursuant to Securities Act Rule 701, Regulation D or another available exemption) or that did not involve a “sale” (e.g., as may be the case where there is a broad-based grant of equity awards with no specific consideration paid by the recipients). The exclusion would also apply to securities held by employees, directors, officers, certain advisors and other persons specified in Securities Act Rule 701(c) that were issued in exchange for securities that would otherwise be covered by the exclusion contemplated by the proposed rule (e.g., securities issued in restructurings, business combinations and similar transactions that are exempt from Securities Act registration).
The SEC also proposed a non-exclusive safe harbor under proposed Rule 12g5-1(a)(7) that would provide that a person will be deemed to have received securities pursuant to an “employee compensation plan” (as defined in Securities Act Rule 701) if such person received them pursuant to a “compensatory benefit plan” in transactions that met the conditions of Securities Act Rule 701(c). This would be the case even if the securities were not issued in compliance with all requirements Rule 701, but, if they were not, another exemption would need to apply or there must not have been a “sale” of the securities.
The SEC is seeking public comment on the proposed rules and the comment period ends on March 2, 2015.
Click here to view the complete text of the rule proposal.