Will The Pilot Know When A Corporation Has "Crost the Bar"?

Section 12(g)(1) of the Securities Exchange Act previously required issuers with total assets of $10 million and a class of equity securities held of record by 500 or more persons to register the security with the Securities and Exchange Commission.  Registration was required within 120 days after the last day of the issuer's first fiscal year ended on which it met both tests.  Registration isn't so bad, it's the consequences of registration that is so very expensive and distracting for corporations.

Section 501 of the JOBS Act, Congress increased the shareholder of record trigger for issuers (other than banks or bank holding companies) to either (i) 2,000 persons; or (ii) 500 persons who are not accredited investors (as defined by the SEC).  While it is tempting to think that the test is now 2,000 record holders, a more realistic assessment would be to consider the test unchanged unless the issuer is able to keep track of the accredited investor status of its shareholders.  This could be a real problem because the status of investors may change or the securities may be transferred to different investors.  There are several possible solutions.  One would be to allow issuers to rely on the determination of accredited investor status at the time the securities are offered and sold.  Another approach would be to require issuers to seek to update the information but to allow issuers to rely on the information previously provided if the investors fail to provide updated information.

In Section 502, Congress excepted  from the definition of "held of record" securities held by persons who received the securities pursuant to an employee compensation plan in transactions exempted from registration under Section 5 of the Securities Act of 1933.  Congress also ordered the SEC to adopt a safe-harbor rule for issuers who wish to rely on this exception.  Although issuers don't need to wait for the rule (see Question #5), the exception does generate a lot of questions that I hope the SEC will answer in its rule.

Here are the preliminary comments that I recently submitted to the SEC on the new '34 Act triggers.