October 22, 2012

JOBS Act Section 504 Report on Authority to Enforce Exchange Act Rule 12g5-1 and Subsection (b)(3)

Holland & Knight Bulletin
Nicole M. Maron

On October 15, 2012, the staff of the SEC released its Report on Authority to Enforce Exchange Act Rule 12g5-1 and Subsection (b)(3), as required by Section 504 of the Jumpstart Our Business Startups Act (the "JOBS Act"). Section 504 of the JOBS Act promulgated that the "[SEC] shall examine its authority to enforce Rule 12g5-1 to determine if new enforcement tools are needed to enforce the anti-evasion provision contained in subsection (b)(3) of the rule."

Section 12(g) of the Exchange Act requires an issuer of a certain size to register under the Exchange Act and file periodic and current reports. The JOBS Act amended Section 12(g) to provide that if a company has less than 2,000 holders of record of its equity securities and less than 500 holders of record who are not accredited investors, the company would not trigger the registration and reporting requirements of Section 12(g).

The concern raised by the amended Section 12(g) is its interaction with special purpose vehicles established to pool investor funds and purchase shares of companies that have not yet undertaken a public offering of their shares. In these situations, if each special purpose vehicle is treated as a single investor for the purposes of Section 12(g), the issuer whose shares were held by such special purpose vehicles could have significantly fewer holders of record than if each individual investor in each special purpose vehicle were counted. The concern is whether the special purpose vehicles facilitate evasion of the registration and reporting requirements of Section 12(g), which could possibly result in investors not having access to appropriate disclosure.

To assess these concerns, the staff of the SEC's Division of Corporation Finance conducted the study in consultation with SEC staff from the Division of Enforcement; the Division of Trading and Markets; the Division of Risk, Strategy and Financial Innovation; the Division of Investment Management; and the Office of the General Counsel. The study examined current Exchange Act Rule 12g5-1(b)(3), its history and origin along with the past record of SEC, staff and court actions relating to the rule. The staff also examined the SEC's ability to enforce Rule 12g5-1(b)(3) as drafted under various fact patterns and the adequacy of current enforcement tools. The staff analyzed whether any new enforcement tools would assist the SEC in enforcing the rule as written.

In its report, the staff of the SEC ultimately concluded that the current enforcement tools available to the SEC are adequate to enforce the anti-evasion provision of Rule 12g5-1. The staff felt that the increase in the Section 12(g) threshold from 500 holders of record to 2,000 included in the JOBS Act may reduce the motivation of issuers to engage in circumvention efforts, although the staff acknowledged the possibility that the requirement to register if the number of non-accredited holders of record exceeds 500 may mitigate that effect. The staff determined that since these changes were just recently enacted, time will need to pass before the impact, including the impact on possible circumvention efforts, can be assessed. As a result, the staff had no particular legislative recommendations regarding enforcement tools relating to Rule12g5-1(b)(3).

The full text of the report may be found here:

Related Insights