From: Dan Schum
Sent: June 1, 2016
Subject: File Number S7-06-16


I would like to comment on Item 201(b) listed on page 173 of the Business and Financial Disclosure Required by Regulation S-K concept.  

I am a private investor focused mainly on the microcap sector.  Large companies are followed by many high profile institutional investors and therefore competition is high for their securities.  There is little room to form an edge as an individual when thousands of others are all competing in the same space.  It is for this reason I, and many other individual investors, look at microcaps.  A tiny company is just too small to invite the large, well funded, and highly trained institutional investors of Wall Street.  The SEC must protect investors such as myself just as much as the large institutional investors.  

As it stands now the SEC is working with tiny companies to punish investors.  Let me say that again, the SEC is actively colluding with corrupt management to rip off shareholders.  It's time to stop.  The issue doesn't get air time because the companies in question are small so it's the individual investor such as myself who stands to lose.  Item 201(b) and Exchange Act Rule 12(g) do not require companies to recognize all shareholders.  Item 201(b) and 12(g) do not count shares held in street name as real owners of stock.  Rule 12g allows companies to deregister if they have less than 300 "shareholders" without so much as a vote and the SEC allows companies to conveniently forget about all shareholders held in street name.  What this means is there could be 10,000 people holding stock through one broker and the SEC would only consider this to be 1 shareholder.  When the Commission first adopted Rule 12g5-1 in 1965, approximately 23.7% of securities were held in nominee or street name.  In late 2002, it was estimated that over 84% of securities were held in nominee or street name. (credit to the SEC Advisory Committee on Smaller Public Companies).  The means right now most shares are held in street name yet the SEC does not recognize them; put another way the SEC is only protecting 16% of shareholders.  Think about that for a minute while considering why the SEC was formed in the first place. 

So let's say a tiny company wants to stop filing reports.  Management may have a number of reasons for doing this.  Some reasons are valid and noble such as wanting to save money.  Other reasons may be less so such as wanting to manipulate price to buy stock at depressed levels.  If the company is very small then chances are they have less than 300 shareholders "of record" as defined by Item 201b and Rule 12g.  All the company has to do is file a couple of forms and they can disappear forever with no thought given to the thousands of real shareholders holding shares in street name. 

Do you know what happens to the stock price of a company that deregisters from the SEC?  It drops to the floor.  Shareholders are left behind as the company discloses nothing.  No one knows revenue, earnings, or book value.  The only think people know is management doesn't care for shareholders so they sell and pretty soon the stock has lost most of its value.  

When a company goes public they sell shares to raise money with all buyers becoming shareholders.  The company owes it to these new shareholders to release information and the SEC owes it to the public to protect these new shareholders.  The new shareholders have helped out the company and the company must repay the favor by giving information, at a minimum.  But Item 201b and rule 12g allow companies to shirk this responsibility.  Imagine you buy stock in a small company.  You are excited about the opportunity this new company has to make it big.  Then the company abruptly stops filing any sort of report.  You ask the company for information only to be told they are not required to divulge anything because they have filed a form 12.  They don't answer the phone or respond to your emails.  The stock price tanks as shareholders are left in the dark.  Your retirement is a mess.  The company's management is now free to buy shares for pennies on the dollar as they are the only ones with any idea what is going on.  You have no one to turn to.  The government agency supposedly there to help, the SEC, does not recognize you as a shareholder so you are out of luck.  Eventually you have to sell at a huge loss.

Item 201(b) and rule 12(g) should be modified to require companies to recognize all beneficial shareholders, including those who whole share in street name.  This was surely the intent when rule 12g was adopted 50 years ago.  This is important for common stock shareholders of all companies.  This is mostly important for common stock shareholders of very small companies who have near 300 shareholders "of record".  

There is a long list of people who agree with my position.  The SEC Advisory Committee on Smaller Public companies recommended the SEC modify it's definition of shareholders "of record" to include those shares held in street name in 2006 (see Recommendation IV.S.1 here  Stephen J. Nelson, on behalf of eight institutional investors, authored a petition dated July 3, 2003 to amend Rule 12g5-1 in a manner similar to that which the Committee has proposed.  The NY State Bar also expressed general support for a reconsideration of the “held of record” definition.  Attorneys, who represent smaller public companies and are active members of the Committee on Federal Regulation of Securities and the Small Business Committee of the American Bar Association’s Section of Business Law have sent in a comment to File No. 265-23 in support of this position (see  

Yet the SEC has not acted.  It is time for the SEC to stand up for the little guy.  Stand up for the individual investor searching the microcap space.  Stand up for the couple managing their 401k as retirement quickly approaches.  I urge you to modify Item 201b and Rule 12g to redefine shareholders of record to include all those shares held in street name.  

I look forward to your response.  
Thank you for your time,

Dan Schum