SEC Adopts Final Exchange Act Registration Thresholds Rules to Implement JOBS Act and FAST Act | Practical Law

SEC Adopts Final Exchange Act Registration Thresholds Rules to Implement JOBS Act and FAST Act | Practical Law

The SEC has adopted amendments to its rules related to the thresholds for registration, termination of registration, and suspension of reporting under Section 12(g) of the Exchange Act.

SEC Adopts Final Exchange Act Registration Thresholds Rules to Implement JOBS Act and FAST Act

by Practical Law Corporate & Securities
Published on 05 May 2016 • USA (National/Federal)
The SEC has adopted amendments to its rules related to the thresholds for registration, termination of registration, and suspension of reporting under Section 12(g) of the Exchange Act.
On May 3, 2016, the SEC issued final rules required by Titles V and VI of the JOBS Act and Title LXXXV of the Fixing America's Surface Transportation Act (FAST Act), which are statutory reforms intended to permit non-reporting companies to delay or avoid becoming reporting companies. To accomplish this, Titles V and VI of the JOBS Act amended the Exchange Act to increase the number of record holders of a company's equity securities that triggers the obligation for that company to register the class of equity securities under Section 12 of the Exchange Act, and to exclude certain holders entirely from the record holder count. Title LXXXV of the FAST Act later adjusted the Exchange Act thresholds for registration, termination of registration, and suspension of reporting for savings and loan (S&L) holding companies to make them the same as the thresholds for banks and bank holding companies.
The final rules:
  • Amend the SEC's rules consistent with the JOBS Act's and FAST Act's record holder thresholds for Exchange Act registration, termination of registration, and suspension of reporting.
  • Clarify how issuers must apply the amended Exchange Act registration threshold, which is triggered by an issuer having more than 500 record holders who are not accredited investors (AIs).
  • Modify the SEC's rules to reflect that issuers may exclude certain employee compensatory shares from the record holder count, and adopt a related safe harbor.
The final rules take effect on June 9, 2016.

Amendments Reflecting the Higher Record Holder Thresholds

Sections 501 and 601 of the JOBS Act amended Section 12(g) of the Exchange Act to increase the thresholds at which issuers must register a class of securities under the Exchange Act. Section 85001 of the FAST Act further amended these provisions to apply the new statutory thresholds for banks and bank holding companies to S&L holding companies. The final rules amend SEC rules consistent with the JOBS Act and FAST Act statutory amendments.

Threshold for Issuers Generally

Section 501 of the JOBS Act amended Section 12(g)(1) of the Exchange Act to provide that an issuer must register a class of equity securities under the Exchange Act within 120 days after its fiscal year end if on the last day of that fiscal year:
  • Its total assets exceed $10 million.
  • The class of securities is held of record by either:
    • 2,000 persons; or
    • 500 persons who are not AIs.
These statutory amendments were effective immediately on the JOBS Act's enactment. However, they did not amend the SEC's related rules dealing with the mechanics of registration, termination of registration, and the suspension of reporting. The final rules now amend Rule 12g-1 through 12g-4 and Rule 12h-3 to make them consistent with the amended statutory language and to correct other outdated references in the rules.

Threshold for Bank Holding Companies and S&L Holding Companies

Section 601 of the JOBS Act amended Section 12(g)(1) of the Exchange Act to add a new subsection (B), which requires a bank holding company to register a class of equity securities under the Exchange Act within 120 days after its first fiscal year end if, on the last day of that fiscal year:
  • Its total assets exceed $10 million.
  • The class of securities is held of record by 2,000 persons.
In addition, Section 601 amended Section 12(g) to provide that a bank holding company may deregister a class of securities under Section 12(g) and suspend its Section 15(d) obligations relating to that class of securities if the number of record holders of the class of security falls below 1,200 persons (as opposed to the 300 person deregistration standard that previously applied to all issuers, and continues to apply to most issuers).
Despite the fact that Section 602 of the JOBS Act required the SEC to issue final rules implementing these statutory amendments, the SEC staff took the position that the reforms were generally immediately effective on the JOBS Act's enactment, and issued guidance to this effect (see Practice Note, JOBS Act: Exchange Act Registration Thresholds Summary: Deregistration Threshold). The final rules now bring the SEC's rules in line with the new thresholds.
Further, Section 85001 of the FAST Act extended the reforms applicable to bank holding companies to S&L holding companies. The final rules reflect this provision and adjust the Exchange Act thresholds for registration, termination of registration, and suspension of reporting for S&L holding companies to make them the same as the thresholds for banks and bank holding companies.

Applying the Numerical Threshold for AIs

As discussed, under amended Section 12(g), the obligation of an issuer (other than a bank holding company) to register a class of equity securities is not triggered until that class is held of record by 2,000 persons or 500 persons who are not AIs. To clarify how this new standard must be applied, the final rules:
  • Adopt the definition of AI contained in Rule 501(a) of the Securities Act for purposes of the threshold (this is the definition that applies in Regulation D offerings). Notably, the Rule 501(a) AI definition includes persons that fall within eight enumerated categories, as well as persons that an issuer reasonably believes fall into one or more of these categories.
  • Require issuers applying the standard to determine whether a record holder is an AI as of the last day of each fiscal year. In other words, an issuer cannot rely indefinitely on its determination that a record holder is an AI made at the time the record holder purchases its securities. Instead, an issuer must determine, based on the facts and circumstances, whether it can rely on earlier information to form a reasonable belief that the record holder is an AI as of the last day of the relevant fiscal year.

Exclusion of Employee Compensatory Shares from Record Holder Count

Section 502 of the JOBS Act amended Section 12(g)(5) of the Exchange Act to provide that, for purposes of determining whether it must register a class of equity securities under Section 12(g), an issuer may exclude from the definition of "held of record" securities held by persons who received them both:
  • Under an "employee compensation plan."
  • In transactions exempt from Securities Act registration.
Section 503 of the JOBS Act directed the SEC to revise its rules to exclude these parties from the definition of record holder, and to adopt safe harbor provisions that issuers may follow when determining when the exclusion applies. The final rules answer these two mandates, and also highlight related considerations for foreign private issuers (FPIs) (see Impact on FPIs).

Definition of Record Holder

The final rules adopt Rule 12g5-1(a)(8)(i) under the Exchange Act to provide that when determining whether it is required to register a class of equity securities under Section 12(g), an issuer may exclude securities that are either:
  • Held by persons who received them under an employee compensation plan in transactions exempt from, or not subject to, Securities Act registration (for example, under Section 4(a)(2) of, or Regulations D or S under, the Securities Act).
  • Held by persons who received them in a transaction exempt from, or not subject to, Securities Act registration from the issuer, a predecessor of the issuer, or an acquired company in substitution or exchange for excludable securities under the above bullet, as long as the persons were eligible to receive securities under Securities Act Rule 701(c) at the time the excludable securities were originally issued to them. This provision is intended to accommodate issuers that conduct restructurings, business combinations, and similar transactions exempt from Securities Act registration in which securities that would have been excludable under the new rule are surrendered for other securities serving the same compensatory purpose as the surrendered securities.
Notably, this exclusion does not "follow the securities." In other words, once a security is transferred by the recipient under the compensation plan (or certain permitted transferees, like family members receiving securities pursuant to a domestic relations order), the securities will need to be counted as held of record by the transferee.
In addition, the exclusion does not apply for purposes of determining whether an issuer may deregister a class of equity securities.

Non-Exclusive Safe Harbor

The final rules set out a non-exclusive safe harbor under Rule 12g5-1(a)(8)(ii) under which a person will be considered to have received securities under an employee compensation plan if the plan and the person who received securities under the plan met the plan and participant conditions of Rule 701(c) under the Securities Act. By referring to Rule 701(c), the safe harbor effectively incorporates the definition of "compensatory benefit plan" under Rule 701(c)(2), which includes "any purchase, savings, option, bonus, stock appreciation, profit sharing, thrift, incentive, deferred compensation, pension or similar plan."
Generally, Rule 701(c) exempts offers and sales of securities under a written compensatory benefit plan (or written compensation contract) established by the issuer or certain affiliates for the participation of employees, directors, general partners, trustees (where the issuer is a business trust), officers, or consultants and advisors, and their family members who acquire such securities from such persons through gifts or domestic relations orders. For more information on Rule 701, see Practice Note, Employee Incentive Compensation and the Role of Rule 701.
The new safe harbor also provides that an issuer may, solely for 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.

Impact on FPIs

There are a number of rules under the federal securities laws applicable to foreign issuers that require them to determine the number of US holders of their securities. The final rules address how the new exclusion in Rule 12g5-1(a)(8) interacts with these rules.
Under the final rules, FPIs are permitted to exclude the securities listed in 12g5-1(a)(8) when determining if they have met the 300 US resident holder standard under Exchange Act Rule 12g3-2(a). For more information on Rule 12g3-2(a), see Practice Note, Rule 12g3-2(b) Filing Exemption: Why and How to Qualify. However, an FPI is not permitted to exclude securities held by employees in determining the percentage of the issuer's outstanding securities held by US residents for purposes of determining the issuer's FPI status under Rule 405 under the Securities Act and Rule 3b-4 under the Exchange Act. For more information on foreign private issuer status, see Which Non-US Companies Qualify as Foreign Private Issuers?.
Update: On May 24, 2016, the SEC issued a small entity compliance guide that summarizes and explains the changes to the Exchange Act registration requirements.
For more information on Titles V and VI of the JOBS Act, see Practice Note, JOBS Act: Exchange Act Registration Thresholds Summary. This resource is currently being updated to reflect the issuance of the final rules.