On October 15, 2012, the SEC staff issued a report required by Section 504 of the JOBS Act. Section 504 required the SEC to examine its authority to enforce Rule 12g5-1 to determine if it needs any new tools to enforce Rule 12g5-1(b)(3). Rule 12g5-1 defines "held of record" for purposes of determining whether a company has reached the threshold number of shareholders requiring it to register under Section 12(g) of the Exchange Act. Rule 12g5-1(b)(3) requires beneficial holders to be counted as record holders if the issuer knows or has reason to know that a form of ownership of securities is being used to circumvent the record holder calculation.

The report concludes that the current tools available to the SEC to enforce Rule 12g5-1(b)(3), including voluntary requests for documents, interviews, subpoenas and cease-and-desist proceedings, are adequate. It notes that, because the JOBS Act reforms were just recently enacted, time will need to pass before their impact on circumvention efforts can be assessed. As a result, the report does not suggest any particular legislative action.

The report, which is part of broader JOBS Act reforms to Exchange Act registration thresholds, was motivated by concerns raised by the recent establishment of special purpose vehicles that pool investor funds and purchase shares of private companies. Treating these vehicles as a single investor for purposes of the Section 12(g) threshold could allow a company to delay or avoid becoming a public company.

For more on these reforms, see Practice Note, JOBS Act: Exchange Act Registration Thresholds Summary. For more on Exchange Act registration generally, see Practice Note, Exchange Act Registration: Overview.