JOBS ACT TITLE V: RAISING THRESHOLD FOR
REGISTRATION
SUSAN BEBLAVI
I. INTRODUCTION
Congress adopted the Jumpstart Our Business Startups Act (the
“JOBS Act”) on April 5, 2012.1 According to the preamble, the JOBS
Act will “increase American job creation and economic growth by
improving access to the public capital markets for emerging growth
companies.”2 The Act sought to accomplish this goal by alleviating the
regulatory burdens surrounding capital raising.
Title V of the JOBS Act amends Section 12(g) of the Securities
Exchange Act of 1934 Act (the “Exchange Act”).3 The amendments raise
the threshold number of shareholders required to trigger securities
registration requirements with the Securities and Exchange Commission
(“SEC”).4 Registration has significant consequences. Registered
companies must file periodic reports, adhere to the proxy rules, prohibit
short swing profits, and comply with other requirements of the federal
securities laws.5 These provisions protect investors but also add
significant cost to a company’s operations.
Title V changed the requirements for registration but in a
complicated fashion. The amendment increased the threshold for
registration from 500 holders of record to 2,000. The provision, however,
provided that companies with 500 unaccredited investors must register.6
The Jobs Act also excluded from the total those employees who acquired
shares through certain compensation plans.
. J.D. Candidate 2013, University of Denver Sturm College of Law.
1. Jumpstart Our Business Startups Act Frequently Asked Questions, U.S. SEC. & EXCH.
COMM’N, http://www.sec.gov/divisions/corpfin/guidance/cfjjobsactfaq-12g.htm (Apr. 11, 2012).
2. Jumpstart Our Business Startups Act, H.R. 3606, 112th Cong., 2d. Sess. (2012), available
at http://www.gpo.gov/fdsys/pkg/BILLS-112hr3606enr/pdf/BILLS-112hr3606enr.pdf.
3. U.S. SEC. & EXCH. COMM’N, supra note 1.
4. Testimony Concerning the “JOBS Act in Action Part II: Overseeing Effective
Implementation of the JOBS Act at the SEC”, U.S. SEC. & EXCH. COMM’N (June 28, 2012),
http://www.sec.gov/news/testimony/2012/ts062812mls.htm.
5. See Securities Exchange Act of 1934 § 13(a), 15 U.S.C § 78m(a) (requiring the filing of
periodic and annual reports with the SEC); Securities Exchange Act of 1934 § 14(a), 15 U.S.C. §
78n(a)(1) (mandating certain disclosures when soliciting proxies); Securities Exchange Act of 1934
§ 16(a), 15 U.S.C. § 78p(a) (prohibiting short-swing profits by directors, officers, and principal
stockholders); Williams Act § 14(d), 15 U.S.C. §78n(d) (prohibiting tender offers of registered
securities).
6. Title V made permanent the asset test adopted by the SEC. Section 12(g) originally set the
threshold at $1 million. Relief from Reporting by Small Issuers, Exchange Act Release No. 37,157,
61 FR 21354 (May 1, 1996), available at http://sec.gov/rules/final/34-37157.txt. Through
rulemaking, the SEC gradually raised this threshold to $10 million. See infra note 30. The JOBS Act
made the $10 million threshold permanent.
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This paper will explore the amendments to Section 12(g). Part II
addresses the state of the law prior to the adoption of the JOBS Act. Part
III discusses how Congress determined the new threshold for
registration. Part IV considers the likely consequences of Title V.
II. THE LAW PRIOR TO THE ADOPTION OF THE JOBS ACT
As originally enacted, the Exchange Act did not obligate companies
in the over-the-counter market to register. Only issuers listed on a
national securities exchange were subject to the requirements of the
Exchange Act.7 The disparity in treatment resulted in proposals for
reform throughout the 1940s and 1950s.8 Only in 1964 did Congress
finally extend the registration requirements to non-exchange traded
companies with the adoption of Section 12(g) of the Exchange Act.9
Under the provision, issuers were required to register with the SEC
if they had “total assets exceeding $1 million” and a class of securities
“held of record by 500 persons or more.”10 The asset test ensured that the
issuers could afford the requirements that came with registration.11 The
minimum number of shareholders ensured that there would be sufficient
trading activity to justify the imposition of the reporting requirements.12
The amendments extended the registration requirements to an “estimated
3,500 issuers of over-the-counter securities.”13
The SEC gradually raised the asset threshold for registration. Rule
amendments in 1982 increased the amount to $3 million.14 The threshold
7. The Act applied to certain over-the-counter issuers only in very limited circumstances,
such as required compliance with certain reporting requirements if an issuer filed a registration
statement. Richard M. Phillips & Morgan Shipman, An Analysis of the Securities Acts Amendments
of 1964, 1964 Duke L.J. 706, 712–13 (1964).
8. Phillips & Shipman, supra note 7, at 714.
9. Pub. L. No. 467, 88th Cong., 2d Sess. (Aug. 20, 1964). In 1963, the SEC issued a report
acting as the catalyst for reform, and the SEC subsequently worked with industry groups to provide
legislative proposals. Phillips, supra Note 7, at 707, 713; see Report of Special Study of Securities
Market, U.S. SEC. & EXCH. COMM’N, H.R. Doc. No. 95, 88th Cong., 1st Sess. (1963).
10. Report on Authority to Enforce Exchange Act Rule 12g5-1 and Subsection (b)(3), U.S.
SEC.
&
EXCH.
COMM’N,
6
(Oct.
15,
2012),
available
at
http://www.sec.gov/news/studies/2012/authority-to-enforce-rule-12g5-1.pdf.
11. The SEC defined “total assets” as “the total assets as shown on the issuer's balance sheet
or the balance sheet of the issuer and its subsidiaries consolidated, whichever is larger.” SEC
General Rules and Regulations, Securities Exchange Act of 1934, 17 C.F.R. § 240.12g5-2 (1965).
The assets test was designed to ensure that companies were big enough to afford to file periodic
reports. Order Granting an Application of BF Enterprises, Inc. under Section 12(h) of the Securities
Exchange Act of 1934, Exchange Act Release No. 66541, 77 Fed. Reg. 15148 (Mar. 8, 2012),
available at http://www.sec.gov/rules/other/2012/34-66541.pdf.
12. U.S. SEC. & EXCH. COMM’N, supra note 10, at 5–6. “Held of record” meant those
investors “identified as the owner of such securities on records of security holders maintained by or
on behalf of the issuer.” 17 C.F.R. §240.12g5-1. The definition also included participants in
depositories. See U.S. SEC. & EXCH. COMM’N, supra note 11, at 9.
13. This expansion of regulation “serve[d] another high important function; by subjecting
corporate management to the glare of publicity, [it] provide[d] significant controls over, and
inevitably reduce[d], conflicts of interest and undesirable management practices.” Phillips &
Shipman, supra note 7, at 712.
14. The Commission viewed the change as an adjustment designed to account for inflation.
The Commission also reasoned that the 500-shareholder limit “criterion is an appropriate indicator
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JOBS ACT TITLE V
65
was again raised to $5 million in 1986 and $10 million in 1996.15
Although the number of shareholders of record never changed, 16 the
SEC did clarify that the requirement applied to participants in
depositories17 and to foreign shareholders.18
With experience, the shareholder threshold raised concerns.
Companies could inadvertently trigger registration by accidentally
amassing more than 500 shareholders of record.19 This risk increased
with the growth in the use of stock as compensation for employees.20
The low threshold, therefore, acted as a disincentive to use equity as a
form of worker compensation.21
In addition, the market shifted from an emphasis on “holders of
record” to beneficial or street name owners.22 Record ownership ceased
to have any relationship to actual number of shareholders.23 At the same
time, however, companies could not always control the number of shares
held in record name. The arbitrary or random decision by some investors
to rely on record ownership could trigger registration requirements.24
of investor interest, one which balances the concerns of cost of compliance with adequate investor
protection.” U.S. SEC. & EXCH. COMM’N, supra note 17 at 17047–48.
15. U.S. SEC. & EXCH. COMM’N, supra note 6.
16. System of Classification for Purposes of Exempting Smaller Issuers From Certain
Reporting and Other Requirements, Exchange Act Release No. 18647, 47 Fed. Reg. 17046 (Apr. 13,
1982). The Commission brought a number of cases designed to enforce or clarify the threshold.
17. See U.S. SEC. & EXCH. COMM’N, supra note 11 at 9.
18. In In the Matter of The National Dollar Stores, Ltd., the issuer applied for an exemption
from registration under §12(g) because it had only 456 shareholders living in the United States, in
addition to 143 shareholders living abroad, and there was “a very nominal amount of trading interest
in the stock.” 1968 SEC LEXIS 2728, *8 (U.S. Sec. & Exch. Comm’n Feb. 1, 1968). The SEC held
that the fact some shareholders lived abroad was irrelevant and “entirely unconvincing,” accordingly
the issuer was required to register. Id. at *12.
19. More recently, there was speculation that Section 12(g) “forced” Google and Facebook to
go public because they acquired more than 500 shareholders in 2003 and 2011, respectively. William
K. Sjostrom Jr., Questioning The 500 Equity Holders Trigger, 1 HARV. BUS. L. REV. ONLINE 43,
(2011), available at http://www.hblr.org/2011/03/questioning-the-500-equity-holders-trigger/.
20. In 2010, it was estimated that “nine million employees held stock options, plus probably
several hundred thousand employees who have other forms of individual equity. That is down from
its peak in 2001, however, when the number was about 30% higher.” Employee Stock Options Fact
Sheet, THE NAT’L CTR. FOR EMP. OWNERSHIP, available at http://www.nceo.org/articles/employeestock-options-factsheet (last visited Jan. 2, 2013).
21. Tyler Adam, The JOBS Act: Unintended Consequences of the “Facebook Bill,” 9
HASTINGS BUS. L.J. 99, 113 (2012) (“to stay within the 500 record holder threshold, companies are
faced with the choice of limiting the number of employees they hire, the number of new investors
they take on, or their ability to acquire other businesses for stock”).
22. Beneficial shares are held through an intermediary and securities in certificate form are
deposited, or “immobilize[d],” with a registered clearing agency acting as a securities depository,
with securities transactions reflected as changes in beneficial interest in the immobilized securities
rather than changes in record ownership. J. Robert Brown, The Shareholder Communication Rules
and the Securities and Exchange Commission: An Exercise in Regulatory Utility or Futility?, 13 J.
CORP. L. 683, 715 (1988).
23. Id. at 683.
24. In one case, the SEC took note of this possibility and exempted a company from
registration under Section 12(g). BF Enterprises had 85 shareholders. One of them created 500
identical trusts in an effort to force the company to register. U.S. SEC. & EXCH. COMM’N, supra note
12. In exempting the company from registration, the Commission reasoned that this increase in the
number of owners appearing on the company's books does not reflect a growth in public holders that
requires the protections of Exchange Act reporting; nor is this increase “sufficiently significant from
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The “held of record” standard also to some degree applied the
reporting requirements in an arbitrary fashion.25 In In the Matter of
Bacardi Corporation, Bacardi sought to deregister by undertaking a
reverse stock split that would decrease the number of shareholders of
record to less than 300.26 In counting the number of shareholders of
record, Bacardi did not take into account count 238 revocable trusts, each
with one share. Bacardi argued that these trusts had been created only
for the “express purpose of attempting to prevent . . . deregistration” and
constituted a “circumvention” of §12(g). The Commission held that this
section is “directed at issuers who seek to evade registration . . . not a
tool to help issuers deregister.”27 Accordingly, the trusts were to be
counted as holders of record.
III. LEGISLATIVE HISTORY AND IMPETUS BEHIND TITLE V
Representative David Schweikert introduced what would later
become Title V of the JOBS Act on June 14, 201128 as part of the
“Private Company Flexibility and Growth Act.”29
The original
legislation sought to raise the shareholder threshold in Section 12(g)
from 500 shareholders of record to 1000.30 The original bill also
excluded from the definition of “held of record” accredited investors or
employees who obtained their shares through certain types of
compensation plans.31
The exclusion of employees was intended to encourage the use of
equity as compensation, allowing companies to pay lower salaries and
the point of view of the public interest to warrant the regulatory burden to be assumed by the
Government and the compliance burden to be imposed on the [issuer] involved.” Id. at 15150.
25. See Stephen J. Nelson, Petition for Commission Action to Require Exchange Act
Registration of Over-the-Counter Equity Securities (July 3, 2003), available at
http://www.sec.gov/rules/petitions/petn4-483.htm#P58_10328 (discussing twenty-four issuers
allegedly using the definition of “held of record” to circumvent the reporting requirements and
petitioning the SEC to define “held of record” in terms of beneficial ownership).
26. In the Matter of Bacardi Corporation, Admin. Proc. File No. 3-7019, 5 (Feb. 15, 1990),
available at http://www.sec.gov/litigation/aljdec/1990/id19900215mor.pdf; see Securities Exchange
Act of 1934 § 12(g)(4), 15 USC § 78l(g)(4) (permitting deregistration when company had less than
300 shareholders of record).
27. Id.
28. Bill Summary & Status, H.R. 2167, 112th Cong., 1st Sess. (2011), available at
http://thomas.loc.gov/cgi-bin/bdquery/z?d112:h.r.2167: (last visited Jan. 9, 2013).
29. H.R. REP. NO. 112-327 (2011), available at http://www.gpo.gov/fdsys/pkg/BILLS112hr2167rh/pdf/BILLS-112hr2167rh.pdf.
30. The proposal also raised the asset threshold to $10 million, the same amount imposed by
the SEC in Rule 12g-1.
H.R. 2167, 112th Cong., 1st Sess. (2011), available at
http://financialservices.house.gov/uploadedfiles/hr2167ai.pdf.
31. Id. The SEC adopted Rule 12h-1(f) in 2007, allowing privates companies to furnish
employees with compensatory stock options without registering such options. Legislative Proposals
to Facilitate Small Business Capital Formation and Job Creation: Hearing before the Subcommittee
on Capital Markets and Government Sponsored Enterprises of the Committee on Financial Services,
112th Cong. 77 (2011) [hereinafter Hearings] (statement of Meredith B. Cross, SEC Director
Division of Corporation Finance), available at http://financialservices.house.gov/uploadedfiles/11263.pdf.
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save cash for operations.32 The change in the number of shareholders of
record was viewed as necessary because the existing threshold had
“become an impediment to capital formation for small startup companies
that are innovative and create jobs.”33 By avoiding registration and the
accompanying expenses associated with public status, companies could
use the saved funds to create jobs.34 The requirement also facilitated
capital raising. Companies no longer had to stop selling shares once they
approached the 500 threshold.35 Finally, the change took into account the
fact that the “ability [of investors] to gain information [today is]
dramatically different than even a decade ago.”36
In debating the legislation, members of the House Committee on
Financial Services generally agreed that a threshold of 500 shareholders
of record was too low 37 but did not entirely agree on the “right”
threshold for triggering registration.38 Some wanted to raise the threshold
to 2,000, bringing it in conformity with other proposals applicable to
banks and bank holding companies.39 The Committee also considered but
rejected an amendment to look to beneficial rather than record owners.40
The Committee ultimately agreed on an “appropriate compromise”
and increased the threshold to 2,000 shareholders of record.41 The
change, however, was accompanied by a separate threshold for
32. Hearings, supra note 31, at 128 (statement by Barry Silbert) (“[T]he 500 Shareholder
Rule has created a disincentive for private companies to hire new employees, or acquire other
business for stock, as these private companies are fearful of taking on too many shareholders.
Application of the rule also discourages companies from providing equity-based compensation to
employees, removing one of the great economic incentives attracting the country’s best and brightest
employees to startups.”). See also id. at 137 (statement by William Waddill) (“[B]iotechnology
companies are particularly affected by this 500 shareholder rule due to our industry’s growth cycle
trends and compensation practices . . . Exempting employees from any shareholder limit is a
minimum necessary measure to ensure growing biotech companies are able to hire the best available
employees and compensation them with equity interests, allowing them to realize the financial
upside of a company’s success.”).
33. H.R. REP. NO. 112-327, at 2.
34. 112 CONG. REC. H1240 (daily ed. Mar. 7, 2012).
35. Id. at H1244 (statement of Rep. David Schweikert).
36. 112th Cong., supra note 32. Representative Schweikert stated that this increase was,
therefore, the “reality” of living in the modern world. Id. Additionally, one witness testifying before
the House subcommittee stated, “[w]hen Section 12(g) was established in 1964, the Commission
could not have anticipated the technological changes that have transpired since that time. These
advances not only allow small companies to grow rapidly, but also bring more transparency and
confidence to the financial markets.” Hearings, supra note 31, at 111.
37. See 112 CONG. REC. H1279 (Mar. 8, 2012).
38. Hearings, supra note 31.
39. Id. Representative Schweikert further stated that he wanted to raise the threshold to 2,000
persons to make it in conformity with the proposed legislation sponsored by Representative Jim
Himes. Id. Not everyone agreed with this approach. Id. (statement by Rep. Barney Frank).
40. Amendment to H.R. 2167, 112th Cong., 1st Sess. (2011) (offered by Mr. Capuano)
available at http://financialservices.house.gov/uploadedfiles/102611hr2167capuano.pdf. According
to some, the “held of record” standard provided a loophole whereby companies could have an
unlimited number of investors without filing any disclosures. 112th Congress, supra note 32
(statement of Representative Capuano).
41. Hearings, supra note 31. Representative Capuano stated, “We don’t know really whether
it should be 500, 1,000, 2,000, 5,000, or some number, but there is no debate yet that I’ve heard that
there should be no cap.” Id.
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unaccredited investors. Recognizing that these investors had a greater
need for the protections of the securities laws, particularly the periodic
reporting requirements,42 the provision required registration whenever a
company had more than 500 unaccredited shareholders of record.43
The legislation, therefore, essentially exempted companies that
were, for the most part, owned by accredited investors. At the same time,
companies could have a modest number of unaccredited shareholders. As
Congressman Schweikert noted, “we’ve made the decision that this
somewhat more sophisticated population gets to participate but they have
to opt in. And yet, we still do not lock out those who are, shall we say,
working their way to becoming that next sophisticated population.”44 The
final provision also retained the exclusion for employees who owned
shares as a result of certain compensation plans.
In the Senate, concerns were raised by the continued reliance on
record ownership.45 Senator Dick Durbin introduced into the record a
statement by SEC Commissioner Luis A. Aguilar addressing the
subject.46 The letter cautioned that, under the standard, the actual
number of owners would not be counted because most shares were
owned beneficially through “street name” accounts.47 Commissioner
Aguilar also argued that the definition of “accredited investor” was
potentially insufficient to protect those investors who need it most.48 An
amendment in the Senate to change the standard from record to
beneficial ownership failed.49
42. “[G]overnment should not go to great lengths to protect people who really can fend for
themselves, who are more sophisticated, and who really knowingly decide that they do not want
protections.”112 CONG. REC. H1279 (Mar. 8, 2012) (statement of Rep. Brad Miller).
43. Id. (statement of Rep. David Schweikert) ( “[W]e’ve made the decision that this
somewhat more sophisticated population gets to participate, but they have to opt in. And yet, we still
do not lock out those who are, shall we say, working their way to becoming the next sophisticated
population.”).
44. Discussing general solicitations, Representative Waters stated, “accredited investors are
individuals, companies, or organizations that generally have the sophistication needed to make
complex financial decisions. These folks are thought to need less protection than average retail
investors.” 112 CONG. REC. H7290 (Nov. 3, 2011).
45. 112 CONG. REC. S1966-68 (Mar. 22, 2012) (statement of Sen. Jack Reed).
46. 112 CONG. REC. S1970 (Mar. 22, 2012) (statement of Sen. Dick Durbin).
47. Commissioner Aguilar wrote that “a company could have a virtually unlimited number of
record stockholders, without being subject to the disclosure rules applicable to public companies.”
112 CONG. REC. S1970 (Mar. 22, 2012).
48. Id. Commissioner Aguilar used the example of a person worth $1 million and approaching
retirement; this person is relying on this money to support them, so this person could not afford to
lose large sums of money, unlike the accredited investor foreseen by the current definition. Id.
49. 112 CONG. REC. S1977 (Mar. 22, 2012). The amendment was introduced by Senator
Reed. As he explained:
But by counting shareholders of record instead of the beneficial shareholders—there is a
legal owner on the books of the company, but that legal owner may represent thousands
of actual owners . . . if we preserve this loophole going forward, this could potentially
create a situation where an unlimited number of investors could be involved in a
company and that company would still be able to remain private and not have to provide
periodic reports under the Exchange Act . . . Our bill eliminates this loophole by
clarifying that recordholders must be beneficial owners, while at the same time raising
the shareholder cap from 500 to 750, to make it more contemporaneous. But we exempt
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IV. IMPLEMENTATION
50
Section 501 of the JOBS Act increased the threshold for
registration in Section 12(g) to 2,000 persons of record or 500 persons
“who are not accredited investors.”51 In addition, the provision excluded
from the definition of “holder of record” those persons who received
securities through employee compensation plans.52 The legislation
instructed the SEC to adopt a safe harbor implementing the provision and
to examine whether it needed additional enforcement authority to prevent
evasion of the requirement.53
The provision was intended to reduce regulatory costs by decreasing
the number of companies required to register under Section 12(g). The
provision, however, may not accomplish this goal. First, the provision
did not provide any immediate benefit. The amendment left the number
of shareholders needed to deregister at 300. Thus, the sizable number of
registered companies with fewer than 2,000 shareholders of record was
unable to deregister. 54
Second, although raising the threshold, many public companies will
still confront the risk of registration once they have 500 shareholders of
record. Most privately held companies raise capital through private
placements.55 In general, sales pursuant to Rule 506 are sold only to
accredited investors.56 As a result, companies selling to fewer than 2,000
accredited investors will initially avoid any requirement to register.
employees from this recordholder trigger for public registration, and that will allow
private companies that want to remain private, but want to reward their employees with
shares to stock, the ability to do so without triggering the public reporting requirements.
112 CONG. REC. S1823 (Mar. 20, 2012) (statement of Sen. Jack Reed).
50. Title V addresses only those issuers who are not banks and bank holding companies; these
types of issuers are addressed in Title VI.
51. Jumpstart Our Business Startups Act § 501.
52. Section 502 of the JOBS Act states in part, “the definition of ‘held of record’ shall not
include securities held by persons who received the securities pursuant to an employee compensation
plan in transactions exempted from the registration requirements of section 5 of the Securities Act of
1933.” Id. § 502. In an unrelated provision of the JOBS Act, shares issued through the crowdfunding
exemption were also excluded from the threshold. Id. § 303. Additionally, one Senator advised that
“the definition of an ‘employee compensation plan’ should be interpreted broadly,” suggesting that
current and former employees should be included within this definition as well as those who inherit
securities from an employee. 112 CONG. REC. S22301 (Mar. 29, 2012) (statement of Sen. Pat
Toomey).
53. “SEC, we believe you already have this authority. Please, for the first 120 days look into
this, see if it causes any harm.” 112 Cong. Rec. H1279 (Mar. 8, 2012) (statement of Rep. David
Schweikert).
54. Based on 2011figures, the SEC estimated that, out of 2,524 reporting companies, only 318
had at least 2,000 shareholders of record. U.S. SEC. & EXCH. COMM’N, supra note 11, at 26.
55. Rule 506 of Regulation D permits companies to raise “an unlimited amount of money”
and fall within a safe harbor if certain conditions are met. See Rule 506 of Regulation D, U.S. SEC. &
EXCH. COMM’N (Dec. 3, 2009) http://www.sec.gov/answers/rule506.htm (last visited Feb. 8, 2013).
Rule 506 is the most common exemption. A Brief Rundown on Common Securities Exemptions, THE
CALIFORNIA
SECURITIES
ATTORNEYS
(last
visited
Jan.
14,
2013),
http://thecaliforniasecuritiesattorneys.com/a-brief-rundown-on-common-securities-exemptions/.
56. U.S. SEC & EXCH. COMM’N, supra note 55. Rule 506 allows up to 35 unaccredited
investors. Id. (stating most offerings do not sell to unaccredited investors).
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That status, however, will change. Even if accredited at the time of
the purchase, an investor’s status may not remain static. 57 A
shareholder’s income or net worth could fall as a result of the loss of a
job or other financial reversal.58 Thus, over time, shareholders may shift
from accredited to unaccredited. Companies will, therefore, need to
monitor accredited investor status.59
More importantly, accredited investors can, after a brief holding
period, sell the shares to unaccredited investors. Rule 144 provides an
exemption for the resale of securities purchased in a private placement.60
The Rule provides that shares can be sold by non-affiliates after a one
year holding period. Moreover, the shares are unrestricted and can
therefore be sold to anyone, including unaccredited investors.
Once sales begin to take place, therefore, companies will not know
if shareholders are accredited or unaccredited. Companies could attempt
to monitor the accredited status of subsequent purchasers.61
Continuously inquiring into the investor’s status would, however,
increase costs.62 Issuers could try to control the number of unaccredited
investors through contractual limitations. Doing so, however, would
impose significant restrictions on transferability, interfere with secondary
trading, and presumably reduce the value of the shares.
Often, the company will not know a subsequent shareholder’s
status. Where this is the case, the company presumably will need to
assume that they are unaccredited. Accordingly, a company will have to
register once it has more than 500 shareholders of unknown status.
57. A safe harbor provision will likely be contemplated under Section 503 regarding the time
at which an issuer determines accredited investor status (i.e. at the time of initial issuance or at some
other date) and shares purchased through crowdfunding. When discussing a potential safe harbor
provision, Senator Toomey stated, “absent actual knowledge of information to the contrary, to rely
on information it has about a person at the time the securities are issued.”112 CONG. REC. S22301
(Mar. 29, 2012).
59
..
This concern may be addressed through rulemaking, with companies required to
determine accredited status at the time the shareholder is most recently issued shares, or at the end of
each fiscal year. See Letter from Steven R. Barth, Esq., Foley and Lardner LLP, to Elizabeth M.
Murphy, Secretary of the Securities and Exchange Commission (May 24, 2012), available at
http://www.sec.gov/comments/jobs-title-v/jobstitlev-5.pdf ; see also Letter from Keith Paul Bishop,
Former California Commissioner of Corporation (June 13, 2012), available at
http://www.sec.gov/comments/jobs-title-v/jobstitlev-7.pdf.
60. Rule 144 specifies certain conditions, including a holding period, adequate current
information, and compliance with a trading volume formula, that must be met in order to sell
restricted and control securities. Rule 144: Selling Restricted and Control Securities, U.S. SEC. &
EXCH. COMM’N (Aug. 6, 2008), http://www.sec.gov/investor/pubs/rule144.htm.
61. The SEC stated, “[i]t remains an open question as to how market participants will develop
systems to address this issue and lower the possibility of error in their calculations of the number of
holders or investor status.” U.S. SEC. & EXCH. COMM’N, supra note 11, at 25.
62. Steven R. Barth, Esq., supra note 59. (May 24, 2012); Letter from Robert E. Buckholz,
Chair, Committee on Securities Regulation, New York City Bar, to Elizabeth M. Murphy, Secretary
of the Securities and Exchange Commission (June 6, 2012), available at
http://www.sec.gov/comments/jobs-title-v/jobstitlev-6.pdf.
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Third, the changes implemented under Title V also make more
complicated the determination of the number of record owners.63 The
number of record owners excludes employees but only if their shares
were acquired from certain compensation plans. Thus, the exemption
does not apply to employees who obtain shares in other ways. Moreover,
once the employee sells the shares, the new owner is not exempt. 64
Crowdfunding offerings can also complicate the determination of
the number of record owners. The JOBS Act contemplates an exemption
from Section 12(g) for shares issued in this type of offering. 65
Companies, therefore, will need to maintain records indicating the source
of the shares. To the extent investors hold shares issued in a
crowdfunding offering, therefore, they may not be counted in
determining the number of shareholders of record.
Finally, the provision makes the decision to register voluntarily
under Section 12(g) more complicated. Companies trading in the OTC
Bulletin Board must register.66 For companies close to 500 shareholders
of record, early registration merely advanced the date when they would
become subject to the periodic reporting requirements and provided an
immediate benefit of a liquid trading market. With the threshold
increased to 2,000, companies not confronting the risk of mandatory
registration may decide not to voluntarily subject themselves to the
periodic reporting requirements. As a result, investors will be denied
access to the OTC Bulletin Board.
V. CONCLUSION
Title V increased the threshold for registration from 500 holders of
record to 2,000; however, it also provided that companies with 500
unaccredited investors must register. Additionally, the provision
excluded from the total those employees who acquired shares through
certain compensation plans and those who received shares through
crowdfunding. Although these changes were proposed to reduce
63. U.S. SEC. & EXCH. COMM’N, supra note 11, at 25. “Crowdfunding” alludes to the concept
of companies raising certain amounts of money from a large number of investors. Id. at 24. The
JOBS Act “exempt[s] offers and sales from the requirements of Section 5 of the Securities Act when
the amount of securities offered is $1 million or less, provided that individual investments do not
exceed certain thresholds and the issuer satisfies other conditions in the JOBS Act.” Id.
64. In contrast, the crowdfunding exemption looks to the shares sold in the offering, not the
identity of the holder. See Jumpstart Our Business Startups Act § 303.
65. The SEC must create the exemption through rulemaking. Section 303 of the JOBS Act
states:
(a)EXEMPTION.—Section 12(g) of the Securities Exchange Act of 1934 (15 U.S.C. 78l(g)) is
amended by adding at the end the following: ‘‘(6) EXCLUSION FOR PERSONS HOLDING
CERTAIN SECURITIES.—The Commission shall, by rule, exempt, conditionally or
unconditionally, securities acquired pursuant to an offering made under section 4(6) of the Securities
Act of 1933 from the provisions of this subsection.’’ (b) RULEMAKING.—The Commission shall
issue a rule to carry out section 12(g)(6) of the Securities Exchange Act of 1934 (15 U.S.C. 78c), as
added by this section, not later than 270 days after the date of enactment of this Act.
Id.
66. U.S. SEC. & EXCH. COMM’N, supra note 11, at 5.
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regulatory costs, they may well generate expensive record-keeping
responsibilities. Accordingly, Title V may not exempt many additional
companies from registration but could impose additional costs through
the need for complex record-keeping systems.