Sections 13 and 16 of the Securities Exchange Act of 1934, as amended (the Exchange Act), require certain holders of public company securities to file reports with the Securities and Exchange Commission (SEC). These reports range from simple forms that require merely the disclosure of the holder’s identity and details around such person’s holdings to more complex forms that require, among other things, the source and amount of funds used in purchasing the securities and descriptions of any contracts regarding any securities of the issuer. The deadlines for these forms are often tight, so it is important to understand which forms you may be required to file in order to prepare the form by the deadline.
This article lists each type of security holder that may be required to file a report based on ownership of a public issuer’s securities pursuant to Sections 13 and 16 of the Exchange Act and details the deadlines for these forms. The rules pertaining to each report are complex, and this article is only meant to provide a summary of those reports that may be applicable to you. If you believe that you may be obligated to file a report summarized in this article, please contact your lawyer for further information.
Significant Beneficial Owners
A Note Regarding Beneficial Ownership
As discussed in more detail below, significant beneficial owners must make filings under Sections 13 and 16 of the Exchange Act. For Section 13 purposes (and for the determination of a 10 percent holder under Section 16), “Beneficial Ownership” has two components: voting power and investment power. Voting power includes the power to vote, or to direct the voting of, the security. Investment power includes the power to dispose of, or to direct the disposition of, the security. Beneficial ownership can be shared by security holders (including through any contracts or arrangements) and can arise directly or indirectly. In addition, when calculating the number of securities beneficially owned, a person must include that person’s right to acquire beneficial ownership of that class of securities within 60 days (through, for example, the exercise of an option or a warrant).
The determination of “beneficial ownership” is sometimes a complex determination, subject to specific provisions and interpretations under Rule 13(d)-3. In order to determine whether a security acquisition will trigger one of the detailed filings below, an analysis of what constitutes holder’s beneficial ownership must be analyzed in advance of the security acquisition (if possible) or immediately thereafter.
Beneficial Owners of More Than 5 Percent of an Issuer’s Securities
A beneficial owner of more than 5 percent of an outstanding class of equity securities of an issuer is required, pursuant to Section 13(d) of the Exchange Act, to file either a Schedule 13D or 13G with the SEC. The Schedule 13G is a short-form statement that certain investors are permitted to use. The Schedule 13D contains significantly more information than the Schedule 13G. Both forms are time-consuming forms to complete, particularly if the reported beneficial ownership chain is complex. If you anticipate that a transaction will result in ownership of more than 5 percent of an outstanding class of equity securities of an issuer, it is best practice to start preparing the form before the transaction occurs to have ample time to complete the form.
Determining Schedule 13G Eligibility
In order to qualify to use the Schedule 13G, a holder must fit into an exemption contained in either Rule 13d-1(b), (c) or (d).
Rule 13d-1(b) is the “Institutional Investor” exemption and provides that certain Institutional Investors (defined below) that acquire securities in the ordinary course of its business and not with the purpose nor with the effect of changing or influencing the control of the issuer (nor in connection with or as a participant in any transaction having such purpose or effect) may file a Schedule 13G in lieu of a Schedule 13D; provided that such person promptly notifies any other person on whose behalf it holds, on a discretionary basis, securities exceeding 5 percent of the class, of any acquisition or transaction on behalf of such other person that might be reportable by that person under Section 13(d) of the Exchange Act. “Institutional Investors” include certain (1) broker dealers; (2) banks; (3) insurance companies; (4) registered investment companies; (5) registered investment advisers; (6) ERISA plans; (7) parent holding companies or control persons, provided the aggregate amount held directly by the parents or control persons, and directly and indirectly by their subsidiaries or affiliates that are not persons specified in this list of individuals, does not exceed 1 percent of the securities of the subject class; (8) savings associations; (9) church plans excluded from the definition of investment company; (10) a non-US institution that is the functional equivalent of any of the institutions listed above that is subject to a regulatory scheme that is substantially comparable to the regulatory scheme applicable to an equivalent US institution; and (11) any group whose members are all persons enumerated in this list.
Rule 13d-1(c) is the “Passive Investor” exemption and provides that holders who (1) have not acquired the securities with any purpose, or with the effect, of changing or influencing the control of the issuer (or in connection with or as a participant in any transaction having that purpose or effect), (2) are not an “Institutional Investor” defined in the “Institutional Investor” exemption and (3) are not directly or indirectly the beneficial owner of 20 percent or more of the class may file a Schedule 13G in lieu of a Schedule 13D. The determination of whether an investor is a “passive investor” is based on the specific facts and circumstances of the investment.
Rule 13d-1(d) is the “Exempt Investor” exemption and provides that a person who otherwise was exempt from filing a Schedule 13D, (1) because of an exemption provided by Section 13(d)(6)(A) or (B) of the Exchange Act, (2) because the beneficial ownership was acquired prior to December 22, 1970 or (3) because the person otherwise is not required to file a statement, must file a Schedule 13G with the SEC within 45 days after the end of the calendar year in which the person became obligated to report under this rule. The Section 13(d)(6)(A) or (B) exemptions from beneficial ownership reporting are available for acquisitions of securities that either (1) are made by means of a registration statement under the Securities Act of 1933, as amended or (2) together with all other acquisitions by the same person of securities of the same class during the preceding twelve months, do not exceed 2 percent of that class. This exemption applies to so-called “founders” who hold their securities prior to the company’s initial public offering, subject to its conditions.
Schedule 13D Filing Deadlines
The initial Schedule 13D is due within 10 calendar days of becoming a 5 percent or more beneficial holder.
Amendments to Schedule 13Ds must be filed “promptly” after a material change occurs to the facts submitted in the previously filed schedule. While the determination of what constitutes a “material” change is based on the facts and circumstances of the transaction, the SEC deems acquisitions or dispositions of beneficial ownership equal to 1 percent or more of the class of securities as “material.” In addition, while “promptly” has not been defined by the SEC and depends upon the facts and circumstances of the acquisition or disposition, in the case of a change of beneficial ownership equal to 1 percent or more of the class of securities the SEC has taken the position that “promptly” means “within 1 business day.” For all other instances, “promptly” is generally interpreted by practitioners as “within 10 days.” As with the original Schedule 13D filing, it is best practice to start preparing the amendment before the material change occurs to have ample time to complete the form.
Schedule 13G Filing Deadlines
The deadlines for the initial Schedule 13G filing is based on which exemption the holder claimed in order to be able to file a Schedule 13G.
- For holders relying on the Institutional Investor exemption or the Exempt Investor exemption, the initial Schedule 13G is due within 45 days after the end of the calendar year that the holder first became obligated to make a filing; however, if the beneficial ownership of a holder relying on the Institutional Investor exemption exceeds 10 percent of the class of securities during that triggering calendar year before the initial Schedule 13G is filed, it must file a Schedule 13G within 10 days after the end of the first month in which its interest exceeded 10 percent.
- For holders relying on the “Passive Investor” exemption, the initial Schedule 13G must be filed within 10 days after the acquisition of more than 5 percent of a class of securities.
Amendments to Schedule 13Gs to report any changes to information reported in a prior schedule must be filed within 45 days after the end of the calendar year. In addition to this annual amendment, (1) for filers relying on the “Institutional Investor” exemption, amendments must be filed within 10 days after the end of the month that their aggregate beneficial ownership exceeded 10 percent of the class of securities as computed on the last day of that month; and (2) for filers relying on the “Passive Investor” exemption, amendments must promptly be filed when their aggregate beneficial ownership exceeds 10 percent of a class of equity securities, without regard to the end of the calendar month. As with the Schedule 13D, while “promptly” has not been defined by the SEC and depends upon the facts and circumstances of the acquisition or disposition, in the case of a change of beneficial ownership equal to 1 percent or more of the class of securities the SEC has taken the position that “promptly” means “within 1 business day.” For all other instances, “promptly” is generally interpreted by practitioners as “within 10 days. For these “Institutional Investors” and “Passive Investors,” once their ownership exceeds 10 percent and triggers this amendment they must continue to make amended filings (with the same deadlines described in the preceding sentence) any time their beneficial ownership increases or decreases by 5 percent.
Beneficial Owners of More Than 10 Percent of an Issuer’s Securities
As discussed above, a beneficial owner of more than 5 percent of an outstanding class of equity securities of an issuer is required, pursuant to Section 13(d) of the Exchange Act, to file either a Schedule 13D or 13G with the SEC; however, a beneficial owner of more than 10 percent of an issuer’s securities is also required, pursuant to Section 16 of the Exchange Act to file Forms 3, 4 and/or 5 with the SEC.1
Upon acquiring Section 13 “Beneficial Ownership” (as discussed above) of more than 10 percent of an issuer’s securities, the holder has 10 calendar days to file a Form 3 with the SEC. However, a 10 percent or more beneficial owner of an issuer that is registering securities for the first time under Section 12 of the Exchange Act must file the Form 3 no later than the effective date of the registration statement.
Whenever such holder has a change in beneficial ownership (for example, the holder sells securities of the registrant or exercises a derivative security), the holder will be required to file a Form 4 with the SEC by the second business day following the day on which a transaction resulting in a change in beneficial ownership has been executed.
The holder will also be required to file a Form 5 annually with the SEC by the 45th day after the end of the issuer’s fiscal year if there was a change in the holder’s beneficial ownership during the course of the fiscal year that was not reported on a Form 4 (either because it was incorrectly omitted or because it was not required to be reported on a Form 4). For example, purchases of company equity securities in one or more transactions in a total amount that is less than $10,000 do not need to be reported on a Form 4. Instead, the holder can wait until the end of the year to report those transactions on a Form 5 (note, however, that a Form 5 will not be required if all transactions otherwise required to be reported therein have already been reported).
While Section 13 “Beneficial Ownership” of more than 10 percent of an issuer’s securities triggers these Section 16 filings, note that a beneficial owner does not report its Section 13 “Beneficial Ownership” in these filings under Section 16! Instead, pursuant to Rule 16a-1(a)(2), in Section 16 filings the beneficial owner reports its pecuniary interest (or economic interest) in the issuer’s securities or, put another way, such owner’s right to receive or share in, directly or indirectly, profits from a transaction in the securities.
For example, a person’s interest in securities held by a trust and a general partner’s proportionate interest in the portfolio securities held by a general or limited partnership are considered indirect pecuniary interests in the underlying securities and must be reported on Forms 3, 4 and 5.
If a person has beneficial ownership in securities, but not a pecuniary interest, those securities would be included in the determination of the person’s Section 13 “Beneficial Ownership” and would be reported on a Schedule 13D or 13G, but would not be reported on Forms 3, 4 and 5. For example, if Person A is party to a voting agreement with Person B, Person A may be deemed a beneficial holder of the securities held by Person B because Person A has voting control over those securities; however, since Person A has no pecuniary interest in those securities, those securities would not be included in Person A’s Forms 3, 4 and 5 filings.
Although Forms 3, 4 and 5 are short forms, because of the very short deadline for Form 4 (two business days), it is important that the holder is aware of its reporting obligation before or at the time of the triggering event so that it has ample time to prepare and file the form.
Institutional Investment Managers Exercising Discretion More Than $100 Million of Securities
An institutional investment manager that exercises investment discretion over $100 million or more in Section 13(f) securities (explained below) must, pursuant to Section 13(f) of the Exchange Act, file a Form 13F with the SEC within 45 days of the end of a calendar quarter.
The SEC deems the following persons “institutional investment managers”: (1) an entity that invests in, or buys and sells, securities for its own account; or (2) a natural person or an entity that exercises investment discretion over the account of any other natural person or entity. Institutional investment managers can include investment advisers, banks, insurance companies, broker-dealers, pension funds and corporations.
Section 13F securities generally include equity securities that trade on an exchange (including the Nasdaq National Market System), certain equity options and warrants, shares of closed-end investment companies and certain convertible debt securities. Shares of open-ended investment companies (mutual funds) are not Section 13F securities. The SEC publishes a list of Section 13F Securities quarterly on its website at www.sec.gov/divisions/investment/13flists.htm.
An individual or entity who, directly or indirectly, exercises investment discretion over one or more accounts and effects transactions for the purchase or sale of specified exchange-listed securities, by or through one or more registered broker-dealers, in an aggregate amount equal to or greater than (1) two million shares or $20 million during any calendar day or (2) 20 million shares or $200 million during any calendar month, must, pursuant to Section 13(h) of the Exchange Act, file a Form 13H with the SEC “promptly” after the “Large Trader” effects aggregate transactions at or above these trigger levels. “Promptly” has not been defined by the SEC, but is generally interpreted as “within 10 days.” If you anticipate that a transaction will result in you being classified as a Large Trader, it is best practice to start preparing the form before the transaction occurs to have ample time to complete the form.
The SEC will assign to each Large Trader a unique identification number, which Large Traders must provide to their broker-dealers who will be required to maintain transaction records and report such information to the SEC upon request.
Once a person files a Form 13H as a Large Trader, it will be required to file an Annual Filing on Form 13H within 45 days after the end of each full calendar year. If any of the information contained in a Form 13H filing becomes inaccurate, a Large Trader must file an amended filing no later than promptly following the end of the calendar quarter in which the information became stale. If, during a full calendar year, a Large Trader has not effected aggregate transactions in an amount equal to, or greater than, the threshold identifying the activity level, the Large Trader can file for “Inactive Status” through a Form 13H submission. A person on Inactive Status who effects aggregate transactions that are equal to or greater than the identifying activity threshold must file a “Reactivated Status” Form 13H promptly after effecting such transactions. In certain circumstances, a person may also file a “Termination Filing” if such person has terminated its operations and has no chance of re-qualifying for large trader status.
A Note Regarding Edgar Filing Codes
The reports discussed in this article generally must be filed on the SEC Edgar system. In order to file a report on Edgar, the filer must have Edgar codes. To obtain Edgar codes, the filer must file a Form ID with the SEC. Once the form is completed and signed, it is submitted to the SEC. The SEC can take as little as 24 hours to provide a code after a Form ID application is properly submitted. But, if there are issues with the application, this process can take longer. Not having an Edgar code will not extend the deadlines for a report. Therefore, it is important that Edgar codes are applied for as soon as you become aware that a report may be due with the SEC. If you already have Edgar codes because you previously filed a beneficial ownership report with the SEC and you lose them, you cannot apply for new codes. There is a separate process to obtain lost codes (which will also take time). Please note, the password used with a filer’s Edgar codes will need to be changed annually.
The reporting process for holders of public company securities is not necessarily a hard or difficult process if a holder is aware of what reports it has to file and the time in which the forms are due. Problems arise when a holder is unaware of its reporting requirements until after the reporting trigger occurs, resulting in the holder having to scramble to meet the reporting deadline. If you own, or anticipate that you will own as a result of a transaction, a significant number of public company shares, and think you may have reporting obligations as discussed in this article, we would be happy to discuss with you the reports and to plan for these filings so they are made as efficiently as possible.