Co-authored by Adam Remillard, summer law clerk
The JOBS Act has finally been laid to rest, and the much anticipated final rules—by all accounts—delivered. As the dust settles, issuers and investors should make note of three key takeaways:
- Exchange Act reporting thresholds have been relaxed significantly;
- "Accredited Investor" determination has been clarified;
- "Held of Record" definition has been amended to exclude securities received pursuant to an "employee compensation plan."
Here's a review and analysis of the details.
- Exchange Act Registration Thresholds. The SEC
implemented the new registration thresholds by amending Rules 12g-1
through 12g-4 (governing registration and termination thereof under
Section 12(g)), as well as Rule 12h-3 (governing suspension of
reporting requirements under Section 15(d)). The new thresholds
vary among different types of issuers.
All Non-Bank Issuers
Previously, reporting obligations would be triggered under 12(g) if an issuer had net assets in excess of $10M and any class of equity securities was "held of record" by at least 500 persons. The new rules increased the held-of-record threshold from a flat 500 persons to a variable 2,000 persons, or, alternatively, 500 persons who are not "accredited investors." Further, non-bank issuers may terminate or suspend registration of a class of securities if it is held of record by fewer than 300 persons.
Foreign Private Issuers
Beyond the relaxed thresholds applicable to all non-bank issuers, Section 12(g) reporting is not required for foreign private issuers unless at least 300 of the persons by whom the securities are held of record are also residents of the United States.
Banks & Bank Holding Companies
Reporting under Section 12(g) is triggered for banks and certain related entities only if the issuer has net assets in excess of $10M and the class of securities is held of record by in more than 2,000 persons.
The most significant changes for these issuers, however, involve termination and suspension thresholds. The held-of-record threshold below which registration of a class of securities may be terminated or suspended has seen a generous increase from 300 to 1,200; additionally these issuers may now terminate or suspend reporting on the basis of the new threshold during the fiscal year, a highly-flexible rule in stark contrast to the rigid end-of-fiscal-year cutoff point or 90-day waiting period applicable to other issues. - Definitions.
To supplement and bring clarity to the changes described above, the final rules also amended the meanings and applications associated with two critical terms.
"Accredited Investor"
The rules now provide explicitly that, for purposes of determining whether a class of securities is held of record by fewer than 500 persons who are not accredited investors—triggering a duty to report under Section 12(g)(1)—the applicable definition of "accredited investor" is equivalent to that used in Rule 501(a). As provided in Rule 501(a), a person will be deemed accredited even if the person does not in fact fall within one of the several prescribed categories, so long as the issuer "reasonably believes" that such person does fall into at least one such category. By whatever avenue a person is deemed to exhibit accredited status or not, the final rules provide that such determination must be made as of the close of the issuer's most recent fiscal year.
The new rules do not, to the dismay of some commentators, provide anything in the way of a safe harbor on which issuers would be able to rely in making the determination described above. The SEC remarked in its Release that "requiring issuers to consider their particular facts and circumstances in establishing a reasonable basis for their determination" would allow such issuers to exercise "appropriate flexibility."
"Held of Record"
The new rules amended Rule 12g5-1's definition of "held of record" to exclude securities acquired pursuant to an "employee compensation plan" in transactions exempt from, or not subject to, the registration requirements of Section 5. In lieu of explicitly defining the contours of "employee compensation plan," the SEC created a nonexclusive safe harbor for determining whether a class of securities is held of record by persons sufficiently numerous to trigger reporting obligations under Section 12(g). The safe harbor provides that a person will be deemed to have acquired securities pursuant to an "employee compensation plan" if the securities were issued in accordance with Rule 701(c). Additionally, and for purposes of Section 12(g) only, an issuer may safely determine that the securities had been issued in a transaction exempt from, or not subject to, the registration requirements of Section 5, if at the time of such issuance such issuer reasonably believed the transaction was in compliance with the requirements of Rule 701(c).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
