The SEC’s Advisory Committee on Small and Emerging Companies met on February 1, 2012, to consider proposed recommendations to the SEC concerning a relaxation of the registration requirements under the Securities Exchange Act of 1934 (Exchange Act), which would increase the amount of securities that can be sold pursuant to Regulation A and crowd-funding.
Under Section 12(g) of the Exchange Act and relevant SEC rules, a company must register a class of its equity securities and is subject to the reporting obligations under the Exchange Act if, at the end of the company’s fi scal year, the securities are held of record by 500 or more persons and the company has total assets exceeding $10 million. Concerns have been raised that this registration threshold is too low and forces companies to become subject to public-reporting requirements prematurely and that companies are forced to adjust artifi cially their compensation and capital raising activities to avoid hitting the 500 shareholder cap.
The Committee discussed a number of issues, including whether benefi cial owners or shareholders of record should be counted, the particular capital-raising needs of community banks, and whether employee-shareholders should be counted. After much discussion, the Committee determined to recommend to the SEC that (i) record holders, and not benefi cial owners, continue to be counted for purposes of Section 12(g) of the Exchange Act, (ii) the threshold for registration and reporting under the Exchange Act be increased to 2,000 record holders (and to 1,200 to cease reporting under the Exchange Act) for banks and bank holding companies, (iii) the threshold for registration and reporting under the Exchange Act be increased to 1,000 record holders (and to 600 to cease reporting under the Exchange Act) for entities that are not banks or bank holding companies, and (iv) employees who are unable to trade their company securities be excluded from the number of shareholders counted for purposes of Section 12(g).
The Committee also discussed Regulation A, a rarely used provision of the federal securities laws that allows companies to offer and sell up to $10 million of securities without having to complete a “fullblown” S-1 registration statement. Sometimes called “registration lite,” Regulation A is seldom used because the company is required to prepare an extensive offering document which is fi led with and reviewed by the SEC and each state securities commission of the states in which the securities will be sold. The Committee voted to recommend to the SEC that the Regulation A threshold be increased to $50 million but recognized that the process of fi ling with and review by state securities commissions remains a signifi cant barrier to the use of Regulation A. In general, members of the Committee did not expect that increasing the threshold to $50 million would increase the utilization of Regulation A.
Interestingly, the Committee decided to make no recommendation with respect to crowd- funding. Members of the Committee expressed concern that by permitting crowd-funding, early-stage companies would signifi cantly damage their ability to later raise needed funds from angel and institutional investors who, generally, are averse to investing in private companies with large numbers of shareholders. The Committee also expressed concerns about allowing such offerings with little, if any, regulatory oversight.