SEC to Relax Registration Requirements


An initial public offering (IPO) isn’t the only way a private company would have to start filing certain documents with the SEC. Companies are required to register with the SEC in accordance with the Securities Exchange Act of 1934 after they reach a certain number of shareholders and a certain level of assets.

To enable private companies to stay private longer (and conduct an IPO when they’re ready), the Jumpstart Our Business Startups (JOBS) Act of 2012 relaxed the registration requirements. And the SEC is preparing to finalize proposed regulations implementing the new requirements.

Higher Reporting Thresholds

Under current rules, a company generally must register a class of equity securities within 120 days after the end of its fiscal year if, on the last day of that year, its total assets exceed $1 million and the class of equity securities is “held of record” by 500 or more persons. The JOBS Act increases the asset threshold to $10 million and increases the 500-person threshold to either 2,000 persons or 500 persons who aren’t “accredited investors” as defined by the SEC. For banks, bank holding companies, and savings and loan holding companies, the threshold is 2,000 persons, regardless of accredited status.

The SEC’s proposal would adopt the definition of accredited investor used in Regulation D, which allows companies to raise capital in unregistered offerings that meet certain requirements. Accredited investors include certain entities, as well as individuals with either net worth of at least $1 million (excluding their primary residence) or income of at least $200,000 ($300,000 for a married couple) in each of the preceding two years. The proposal differs from Regulation D in one significant aspect: The determination of whether an investor is accredited is made as of the last day of the company’s fiscal year, rather than the date the securities were sold.

The proposal would also allow banks, bank holding companies, and savings and loan holding companies to terminate their registrations and suspend SEC reporting when their registered securities, on a class-by-class basis, are held of record by fewer than 1,200 persons. For other companies, this threshold remains at its current level of 300.

Treatment of Equity Compensation

The JOBS Act gives private companies greater flexibility to use equity-based compensation without triggering public reporting requirements. It exempts securities from the definition of “held of record” if they’re received by a person according to an employee compensation plan in a transaction that’s exempt from registration under the Securities Act of 1933.

The SEC’s proposal doesn’t define “employee compensation plan,” but it would create a nonexclusive safe harbor for certain securities issued in accordance with a compensatory benefit plan — such as an option, bonus, profit-sharing, pension or deferred compensation plan — that meets the conditions of SEC Rule 701(c). Rule 701(c) exempts equity compensation grants to certain plan participants as well as to their family members who receive securities by gift or in accordance with a domestic relations order. When plan participants or family members sell or transfer their shares, however, the buyer or transferee would be counted toward the held-of-record threshold.

The SEC’s proposal also contains a provision designed to facilitate restructurings, business combinations and similar exempt transactions without increasing the number of shares held of record. Companies would be allowed to ignore holders who are eligible to receive securities in accordance with Rule 701(c) and who acquire securities in exchange for securities excludable from the definition of “held of record.”

Stay Tuned

Private companies approaching the held-of-record and asset thresholds should review the regulations after they’re finalized and evaluate the impact of the increased thresholds on their ability to remain private or to go public on their own terms. Talk to your advisor about how Rule 701(c) might affect your company.


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