On May 3, 2016, the Securities and Exchange Commission (the “SEC”) approved technical amendments to its rules relating to the thresholds for registration, termination of registration and the suspension of reporting obligations under Section 12(g) of the Securities Exchange Act of 1934 (the “Exchange Act”). These amendments implement certain provisions of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) and the Fixing America’s Surface Transportation Act of 2015 (the “FAST Act”) that provide companies with the opportunity to stay private longer.1

Increased Thresholds for Exchange Act Reporting and Revisions to the Termination and Suspension Requirements

The SEC amended Rules 12g-1 through 12g-4 and 12h-3 under the Exchange Act, which set out the procedures for registration and termination of registration under Section 12(g) of the Exchange Act, and the suspension of reporting under Section 15(d) of the Exchange Act, to reflect new thresholds established by the JOBS Act and the FAST Act.

As a result of the JOBS Act and the FAST Act, an issuer that is not a bank, bank holding company or savings and loan holding company is required to register a class of equity securities under the Exchange Act if, on the last day of its fiscal year, it has more than $10 million of total assets and the securities are “held of record” by either 2,000 persons, or 500 persons who are not accredited investors.2 Further, under this legislation, an issuer that is a bank, bank holding company or savings and loan holding company is required to register a class of equity securities if, on the last day of its fiscal year, it has more than $10 million of total assets and the securities are “held of record” by 2,000 or more persons. The previous threshold for registration for all issuers was 500 holders of record without regard to accredited investor status.

With respect to termination and suspension of reporting requirements, an issuer that is not a bank, bank holding company or savings and loan holding company may still terminate or suspend the registration of a class of securities under the Exchange Act if the securities are “held of record” by fewer than 300 persons. However, a bank, bank holding company or savings and loan holding company may terminate or suspend the registration of a class of securities under the Exchange Act if the securities are “held of record” by fewer than 1,200 persons.

Changes to Held of Record

The SEC also amended the definition of “held of record” in Rule 12g5-1 under the Exchange Act to provide that, when determining whether an issuer is required to register a class of equity securities under Section 12(g)(1) of the Exchange Act, an issuer may exclude:

  • securities held by persons 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 of 1933 (the “Securities Act”); and
  • in certain circumstances involving restructurings, business combinations and similar transactions, securities held by persons who received them in exchange for securities received under an employee compensation plan.

These amendments also establish a non-exclusive safe harbor in Rule 12g5-1 under the Exchange Act that an issuer can rely upon in determining whether securities fit within the “held of record” exclusions described above. The safe harbor provides that:

  • an issuer may deem a person to have received the securities pursuant to an employee compensation plan if such plan and the person who received the securities pursuant to the plan met the plan and participant conditions of Rule 701(c) under the Securities Act; and
  • an issuer may, solely for the purposes of Section 12(g) of the Exchange Act, deem the securities to have been issued in a transaction exempt from, or not subject to, the registration requirements of Section 5 of the Securities Act if the issuer had a reasonable belief at the time of the issuance that the securities were issued in such a transaction.

Foreign private issuers may also rely on the safe harbor when making their determination of the number of U.S. resident holders under Rule 12g3-2(a) of the Exchange Act. Rule 12g3-2(a) of the Exchange Act provides that a foreign private issuer that meets the asset and shareholder thresholds of Section 12(g) of the Exchange Act is exempt from registering a class of equity securities under the Exchange Act if the class of equity securities is held by fewer than 300 holders resident in the United States. The SEC also made clear that securities held by employees must continue to be counted for the purposes of determining the percentage of the issuer’s outstanding securities held by U.S. residents when determining if an issuer qualifies for foreign private issuer status.