A Small Entity Compliance Guide*

May 24, 2016

Introduction

Section 12(g) of the Securities Exchange Act of 1934 (the “Exchange Act”) establishes the thresholds at which an issuer is required to register a class of securities with the Securities and Exchange Commission (the “SEC”).  On May 3, 2016, the SEC approved amendments to implement Title V and Title VI of the Jumpstart Our Business Startups Act (the (“JOBS Act”) and Title LXXXV of the Fixing America’s Surface Transportation Act (the “FAST Act”).

The rule amendments implement the JOBS Act and the FAST Act provisions by:

• Amending Exchange Act Rules 12g-1 through 12g-4 and 12h-3, which govern the procedures relating to registration and termination of registration under Section 12(g), and suspension of reporting obligations under Section 15(d), to reflect the new thresholds established by the JOBS Act and the FAST Act;
• Amending the definition of “held of record” to exclude certain employee compensation plan securities from the determination of whether an issuer is required to register a class of equity securities with the Commission under Exchange Act Section 12(g)(1).

Increased Statutory Thresholds for Registration and Termination of Registration

The JOBS Act and the FAST Act raised the thresholds for registration and termination of registration for a class of equity securities under Exchange Act Section 12(g).  As a result of the statutory changes, an issuer that is not a bank, bank holding company or savings and loan holding company is required to register a class of equity securities under the Exchange Act if:

• it has more than $10 million of total assets; and
• the securities are “held of record” by either 2,000 persons, or 500 persons who are not accredited investors.

An issuer that is a bank, bank holding company or savings and loan holding company is required to register a class of equity securities if:

• it has more than $10 million of total assets; and
• the securities are “held of record” by 2,000 or more persons.

In addition, a bank, bank holding company or savings and loan holding company may terminate or suspend the registration of a class of equity securities under the Exchange Act if the securities are held of record by fewer than 1,200 persons. 

The JOBS Act also directed the Commission to revise the definition of “held of record” to exclude securities held by persons who received the securities under an “employee compensation plan” in transactions exempted from the registration requirements of Section 5 of the Securities Act of 1933 and to create a safe harbor that issuers can follow when making that determination.

Rules Related to Registration and Termination of Registration Under Section 12(g), and suspension of Reporting Obligations Under Section 15(d)

The Commission adopted amendments to Exchange Act Rules 12g-1, 12g-2, 12g-3, 12g-4 and 12h-3 to reflect the statutory changes made by the JOBS Act and the FAST Act. 

Rule 12g-1 was amended to provide that an issuer is not required to register a class of equity securities pursuant to Section 12(g)(1) if on the last day of its most recent fiscal year:

• the issuer had total assets not exceeding $10 million; or
• the class of equity securities was held of record by fewer than 2,000 persons or 500 persons who are not accredited investors (as such term is defined in Securities Act Rule 501(a)), determined as of such day rather than at the time of the sale of the securities; or
• in the case of a bank; a savings and loan holding company; or a bank holding company, the class of equity securities was held of record by fewer than 2,000 persons.

Rule 12g-2, Rule 12g-3, Rule 12g-4(a) and Rule 12h-3 were each amended to provide a 1,200 holder of record threshold in the case of a bank, a savings and loan holding company, or bank holding company: 

• Rule 12g-2 addresses securities deemed to be registered pursuant to Section 12(g)(1) upon termination of the exemption pursuant to Section 12(g)(2)(A) or (B);[1]
• Rule 12g-3 addresses the registration of securities of successor issuers under Section 12(b) or Section 12(g);
• Rule 12g-4(a) addresses the termination of registration under Section 12(g) after the issuer certifies its eligibility to do so on Form 15; and
• Rule 12h-3 addresses the suspension of the duty to file current and periodic reports pursuant to Section 15(d) after the issuer certifies its eligibility to do so on Form 15.

As a result of these changes, banks, savings and loan holding companies and bank holding companies will be able to rely on the SEC’s rules when making these determinations regarding whether they are able to terminate registration of a class of securities and suspend their duty to file current and periodic reports.

Amendments to Rule 12g5-1 Definition of “Held of Record” to Exclude Certain Employee Compensation Plan Securities

The Commission adopted amendments to Exchange Act Rule 12g5-1 to implement the changes from Section 502 of the JOBS Act excluding certain employee compensation plan securities from the definition of “held of record.”

The definition of “held of record” in Rule 12g5-1 was amended to provide that, when determining whether an issuer is required to register a class of equity securities with the Commission pursuant to Exchange Act Section 12(g)(1), an issuer may exclude securities that are:

• held by persons who received them under an employee compensation plan in transactions exempt from, or not subject to, the registration requirements of Section 5 of the Securities Act and in certain circumstances, held by persons who received them in exchange for securities received under an employee compensation plan.

Additionally, the amendments to Rule 12g5-1 added a non-exclusive safe harbor for determining the holders of record.  The safe harbor provides that:

• An issuer may deem a person to have received the securities under an employee compensation plan if the plan and the person who received the securities under the plan met conditions of Securities Act Rule 701(c); and

• An issuer may, solely for the purposes of Section 12(g), deem the securities to have been issued in a transaction exempt from, or not subject to, the registration requirements of Section 5 of the Securities Act if the issuer had a reasonable belief at the time of the issuance that the securities were issued in such a transaction.

Other Resources

The adopting release for the amendments to Rules 12g-1, 12g-2, 12g-3, 12g-4, 12h-3 and Rule 12g5-1 can be found on the SEC’s website at http://www.sec.gov/rules/final/2016/33-10075.pdf. 

The Exchange Act rules relating to registration, termination of registration and the definition of “held of record” can be accessed through the “Corporation Finance” section of the SEC’s website at http://www.sec.gov/divisions/corpfin/ecfrlinks.shtml.

Additional materials regarding the application of the Exchange Act rules are available at http://www.sec.gov/divisions/corpfin/cfguidance.shtml.

You can also submit complaints or tips about possible securities laws violations on the SEC’s questions and complaints page at http://www.sec.gov/complaint.shtml.

Contacting the SEC

The SEC’s Division of Corporation Finance is happy to assist small companies with questions regarding registration, and termination of registration.  You may contact the Division’s Office of Small Business Policy online or by telephone at (202) 551-3460.