By Marco Materazzi
This Client Update is the third part of a three-part series on the new Jumpstart Our Business Startups Act of 2012. This update summarizes the amended thresholds for registration under the Securities Exchange Act of 1934 and related changes under the JOBS Act. Part I, available here, described the JOBS Act "crowdfunding" exemption, a new registration exemption for the offer or sale of securities by an issuer where the amount sold does not exceed $1 million in a 12-month period. Part II, available here, described the streamlined initial public offering and reporting requirements for "emerging growth companies," as well as the increase in the permitted size of Regulation A offerings from $5 million to $50 million.
What Are the Increased Registration Thresholds?
The JOBS Act raises the number of shareholders of a class of equity securities that triggers the requirement for a company to register that class of securities under the Exchange Act. This amended registration threshold is effective immediately. Once registered, all Exchange Act reporting requirements apply to the registered company, including the requirements to file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and proxy statements, as well as the requirements for certain persons to report transactions on Forms 3, 4, and 5 and Schedules 13D and 13G.
Previously, a company with total assets exceeding $10,000,000 and a class of equity securities "held of record" by 500 or more holders was required to register under the Exchange Act, even if the company had never previously sold securities publicly. While maintaining the asset threshold, the JOBS Act raises the registration threshold to (a) 2,000 holders or (b) to 500 holders who are not accredited investors. As a result, a company may have 1,500 holders who are accredited investors and 499 holders who are not accredited investors and not be required to register under the Securities Exchange Act. For banks and bank-holding companies, the threshold is simply 2,000 holders, without a lower alternative limitation for holders who are not accredited investors. The new thresholds allow companies to maintain a larger shareholder base without the risk of becoming subject to the disclosure and filing burdens under the Exchange Act.
Did the JOBS Act Change the Meaning of "Held of Record"?
The term "held of record" continues to disregard beneficial holders who hold securities through nominees, such as brokerage firms and banks. As a result, companies need not "look through" brokers and other record holders to the ultimate beneficial owners of shares for purposes of determining whether the registration threshold is reached.
The JOBS Act did, however, amend the definition of "held of record" to exclude equity securities held by persons who received the securities pursuant to employee compensation plans in transactions exempt from registration under the Securities Act of 1933. The JOBS Act directs the SEC to adopt regulations implementing this change and to adopt regulations that exclude securities issued pursuant to the newly established "crowdfunding" exemption.
These new provisions provide further opportunities for companies to raise capital through sales of shares and to offer equity incentive compensation without registering under the Exchange Act and becoming subject to the attendant reporting and compliance obligations. The provisions of the securities laws related to the offer and sale of securities of course continue to apply.
As a result of these new provisions, private companies with large numbers of shareholders will likely want to establish procedures to track whether shareholders are accredited or non-accredited, and whether shareholders received shares pursuant to qualified compensation plans or the crowdfunding exemption.
Did the JOBS Act Change the Deregistration Thresholds for Banks and Bank Holding Companies?
The JOBS Act also changes the threshold for Exchange Act deregistration for banks and bank holding companies. Previously, in order to deregister under the Exchange Act, all companies were required to have fewer than 300 shareholders of record in order to be eligible for deregistration. Banks and bank holding companies will now be able to deregister a class of securities from Section 12(g) of the Exchange Act if the number of record holders of that class of security falls below 1,200 persons. For all other companies, the 300-person threshold for deregistration remains in place.
The SEC must issue final rules implementing the amended deregistration threshold within one year of the date of enactment of the JOBS Act. However, FAQs issued by the SEC's Division of Corporation Finance on April 11, 2012 and oral statements made by Division staff suggest that the staff views the reforms as effective immediately, particularly as they affect bank holding companies. This increased floor may provide a reduced regulatory burden for community banks or other small banks with numerous shareholders.