Understanding the regulations surrounding public offerings is crucial for both companies and investors. In this article written by Patrick Costello, from Bevilacqua PLLC, we’ll delve into Section 12(g) of the Securities Exchange Act. You’ll find insights on outlining the requirements for companies to register securities with the SEC. Also, Patrick sheds light on the factors triggering registration, including asset value and investor thresholds.
Keep reading and learn more about this important matter in the financial market.
Section 12(g) of the Securities Exchange Act of 1934 (the “Exchange Act”) (15 U.S.C § 78l(g)) mandates that a company register with the Securities and Exchange Commission (the “SEC”) a class of securities if:
- the company has gross assets of more than $10 million; and
- the securities of such class are held of record by more than (a) 2,000 persons or (b) 500 non-accredited investors (as defined under Securities Act Rule 501(a) (17 C.F.R. § 230.501(a))
These are referred to individually as the “Gross Assets Threshold” and the “Held of Record Threshold,” and, together, the “Thresholds.”
Issuers who cross the Thresholds must register the relevant class of securities with the SEC by filing a form 10-12G registration statement within 120 days of the last day of the fiscal year in which the issuer exceeds the Thresholds. After filing its 10-12(G) registration statement, an issuer will need to comply with the continuous reporting obligations under Exchange Act Section 13 as it relates to annual, quarterly, and periodic reports, and beneficial ownership reporting, Section 14 as it relates to proxy rules and Section 16 as it relates to insider transactions in a public company’s securities.
Absent future clarification from the SEC, Section 12(g)’s registration requirements are unavoidable once an issuer crosses the Thresholds under any circumstances. Registration under Section 12(g) is required even if an issuer crosses the Thresholds and subsequently complies with Section 12(g)’s requirements to terminate a registration statement under Section 12(g) (less than 300 holders of record) before the 120-day registration deadline. Further, an issuer who crosses the Thresholds inadvertently and then purposefully seeks to terminate their registration requirements under Section 12(g)(4) may be deemed to be engaging in a scheme to avoid the application of the federal securities laws, likely considered a violation of the anti-fraud rules.
Considering the consequences and difficulties associated with the above aspects of Section 12(g), issuers must engage in proper business planning to avoid an accidental crossing of the Thresholds. Thankfully, there are certain exemptions and definitional exclusions from Section 12(g) that can help issuers avoid crossing Section 12(g)’s Thresholds.
Calculating the Holders of Record
To determine the number of holders of record, an issuer should count (i) each person who is identified as the owner of the record at the company’s registrar for the class of securities and (ii) if the shareholders list was improperly maintained, each person who would have been a record holder had it been properly maintained (17 C.F.R. § 240.12g5-1). As stated above, there are a few exclusions and special rules that apply when calculating the Thresholds. For example, Exchange Act Rule 12g5-1 contains the following special rules:
| Corporate Personhood. | Securities owned by a corporation, partnership, or trust, or other organization are treated as held by one person (17 C.F.R. § 240.12g5-1(a)(2));
Securities owned by one or more persons as trustees, executors, guardians, custodians or in other fiduciary capacities with respect to a single trust, estate or account shall be treated as held of record by one person (17 C.F.R. § 240.12g5-1(a)(3));
|
| Co-owned Securities | Co-owners of a security will be counted as one person (17 C.F.R. § 240.12g5-1(a)(4)); |
| Similarly Named Holders | Securities registered in substantially similar names where the issuer has reason to believe that such names represent the same person, may be treated as held by one person (17 C.F.R. § 240.12g5-1(6)). |
| Crowdfunding Securities; Co-Issuer offerings | An issuer that no longer qualifies for Exchange Act Rule 12g-6’s exemption (discussed below) from Section 12(g) for securities issued in a Crowdfunding Offering must count all holders of the same class of securities issued under Regulation Crowdfunding regardless of whether the holders thereof obtained those securities via a Crowdfunding Offering (Regulation Crowdfunding Compliance & Disclosure Interpretations, Questions 202.01 and 03).
Crowdfunding issuers and Crowdfunding Vehicles, referred to as Co-Issuers, who perform a Co-Issuer Crowdfunding Offering according to Rule 201 (17 C.F.R. § 227.201) and Rule 3a-9 of the Investment Company Act of 1940 (17 C.F.R. § 270.3a-9) can exclude securities issued by the Crowdfunding Vehicle to the extent that natural persons hold such securities. Securities held by non-natural persons are not excludable and must be included in the calculation of the holders of record for both Co-Issuers (17 C.F.R. § 240.12g5-1(9)).
|
| Equity Incentive Plan Securities | Securities held by individuals who received them through an employee compensation plan exempt from the Securities Act’s registration requirements are excluded from the Held of Record calculation (17 C.F.R. § 240.12g5-1(8)(A)).
Additionally, securities acquired in exempt securities offerings, issued by the issuer, its predecessor, or an acquired company in exchange for securities that are already excludable are excluded from the Held of Record calculation.
This exclusion applies if the recipients were eligible under Securities Act Rule 701(c) (17 C.F.R. § 230.701), a registration exemption for offers and sales of securities pursuant to certain compensatory benefit plans and contracts relating to compensation when the original securities were issued (17 C.F.R. § 240.12g5-1(8)(i)(B)).
Non-Exclusive Safe Harbor:
|
In addition to the above rules for calculating the Held of Record Threshold, two very important exemptions increase or alter the Thresholds for securities issued under Regulation Crowdfunding and Tier 2 of Regulation A. For Regulation Crowdfunding, Exchange Act Rule 12g-6 (17 C.F.R. § 240.12g-6) states that securities issued in a Regulation Crowdfunding offering will not be counted towards the Held of Record Threshold if:
- the issuer is current in its ongoing annual reports;
- has gross assets of $25 million or less as of the end of the most recently completed fiscal year; and
- has engaged a transfer agent to serve as the transfer agent for the securities in question.
Additionally, there is a transition period for issuers who exceed $25 million in gross assets according to (b) above. Specifically, Rule 12g-6 states that a crowdfunding issuer can continue to exclude their securities from the holder of record calculation for a period ending on the day before the last day of their fiscal year, which is two years after the issuer’s total assets rose above $25 million; provided, however, that such issuer continues to comply with its ongoing reporting requirements during those two years. An issuer that does not comply with their ongoing reporting obligations must register the relevant class of securities under Section 12(g) within 120 days.
Likewise, for Regulation A, Exchange Act Rule 12g5-1(a)(7) (17 C.F.R. § 240.12g5-1(a)(7)) states that companies may exclude securities issued in Tier 2 offerings from the Held of Record calculation if they:
- are current in their annual, semiannual, and special financial reports as of the most recently completed fiscal year;
- has engaged a transfer agent with respect to the class of securities at issue; and
- Had (1) a public float of less than $75 million as of the last business day of its most recently completed semiannual period; or (2) if the public float is zero, then less than $50 million as of the most recently completed fiscal year.
As with Rule 12g-6 above, an issuer can continue to exclude such securities from the Held of Record Threshold for a period ending on the day before the last day of their fiscal year two years after they became ineligible for the Rule 12g5-1(a)(7) exemption. An issuer that does not comply with their ongoing reporting obligations must register the relevant class of securities under Section 12(g) within 120 days.
Conclusion
Section 12(g) represents a critical component of the U.S. securities regulatory framework, balancing investor protection with the practical needs of growing businesses. The evolution of its thresholds and conditions reflects a dynamic response to the changing economic landscape, particularly for startups and small businesses, and especially at a time when exempt capital financing is as accessible as it is today. Understanding these regulations is essential for companies seeking to comply with federal securities laws while capitalizing on opportunities for growth and investment. To do so, it is essential that these issuers engage with qualified securities attorneys who can assist them with compliance and navigation of the federal securities laws.
Stay tuned to our blog! We’re always bringing fresh content to keep you always updated.