Unlike a Securities Act of 1933 (“Securities Act”) registration statement, a Securities Exchange Act of 1934 (“Exchange Act”) Section 12(g) registration statement does not register securities for sale or result in any particular securities becoming freely tradeable. Rather, an Exchange Act registration has the general effect of making a company subject to the Exchange Act reporting requirements under Section 13 of that Act. Registration also subjects the company to the tender offer and proxy rules under Section 14 of the Act, its officers, directors and 10%-or-greater shareholders to the reporting requirements and short-term profit prohibitions under Section 16 of the Act and its 5%-or-greater shareholders to the reporting requirements under Sections 13(d) and 13(g) of the Act.
A company may voluntarily register under Section 12(g) at any time and, under certain circumstances, may also terminate such registration (see HERE).
In addition, unless an exemption is otherwise available, a company must register under Section 12(g), if as of the last day of its fiscal year: (i) it has $10 million USD in assets or more as shown on the company’s balance sheet; and (ii) the number of its record security holders is either 2,000 or greater worldwide, or 500 persons who are not accredited investors or greater worldwide. Such registration statement must be filed within 120 days of the last day of its fiscal year.
A company that is registering on a national securities exchange accomplishes its registration under Section 12(b) of the Exchange Act. Other than the referenced section, the process and registration statements used are the same as for a Section 12(g) registration.
Benefits of Registration
There are numerous business and legal benefits to registration under Section 12(g). Below are a few of the most compelling benefits.
Rule 144
Rule 144 is the most often used exemption to remove the restrictive legend and sell unregistered securities into the public marketplace. For more on Rule 144, see HERE and HERE. In order to utilize Rule 144, the security holder must satisfy certain requirements including a holding period. The holding period varies based on whether the company is subject to the SEC reporting requirements or not.
The holding period for a company subject to the SEC reporting requirements is six months whereas it is one year for a company that is not. An Exchange Act registration statement under Section 12(g) results in the company becoming subject to the SEC reporting requirements. Although a Securities Act registration statement, such as on Form S-1, will also make a company subject to the Exchange Act reporting requirements, that requirement may only be temporary. That is, a company only reporting as a result of a Securities Act registration statement may slip into voluntary reporting status whose security holders would be subject to the longer one-year Rule 144 holding period. For more on voluntary reporting status, see HERE.
Furthermore, w is not available for a company that is or was ever a shell company unless the company: (i) is no longer a shell company; (ii) is subject to the Exchange Act reporting requirements (such as through the filing of a 12(g) registration statement); (iii) has filed all reports under the Exchange Act during the preceding 12 months; (iv) has filed current Form 10 information with the SEC reflecting its status as no longer a shell company; and (v) one year has elapsed since the filing of the Form 10 information.
Regulation S
Similarly, registration under the Exchange Act has implications on the applicable distribution compliance period in a Regulation S offering. For more on Regulation S, see HERE. A distribution compliance period is defined in Rule 903 of Regulation S and provides for a holding period in which securities issued in a Regulation S transaction cannot be re-sold to a U.S. person or for the account or benefit of a U.S. person. There are three categories of distribution compliance periods. Rule 903 imposes duties on a company, a distributor and any affiliates of the company or a distributor to ensure that the distribution compliance periods are abided by to prevent the sale of securities to a U.S. person during the distribution compliance period.
Category 1 can only be relied on by a Foreign Private Issuer (“FPI”) with no substantial U.S. market interest and where the offering is directed into a single country other than the U.S. Category 1 does not impose any additional time restrictions on re-sales. Category 2 applies to equity securities of an Exchange Act reporting FPI and can be relied upon even if there is a substantial U.S. market interest in the securities. The category 2 distribution compliance period is 40 days. Category 3 applies to domestic reporting and non-reporting companies and non-reporting FPI’s where there is a substantial U.S. market interest in the securities. The distribution compliance period for category 3 companies tracks Rule 144 and, as such, is one year for non-reporting U.S. and FPI’s and six months for reporting U.S. companies. Accordingly, both U.S. companies and FPI’s may benefit from becoming subject to the SEC reporting requirements through the filing of an Exchange Act registration statement.
S-3 Eligibility
A basic requirement for any company to be able to use an S-3 registration statement is that it have a class of securities registered under Section 12(g) (or 12(b)) and has otherwise be required to file SEC reports for a period of 12 months. For more on S-3 eligibility, see HERE.
Exemptions; Section 12g3-2
A company that would otherwise be required to register under Section 12(g) may instead register under Section 12(b) by registering with and listing on a national securities exchange. Other than the referenced statutory section, the process and registration statements used are the same as for a Section 12(g) registration.
An FPI has two exemptions from the Section 12(g) registration requirement. First, Exchange Act Rule 12g3-2(a) exempts FPI’s who have fewer than 300 U.S. record holders from the registration requirement. In determining record holders for purposes of this exemption, the calculation is the same as described below except that where the record holder is a broker, dealer, bank or other nominee, the company must look through and count each of the accounts of customers held by such broker, dealer, bank or nominee.
Second, Exchange Act Rule 12g3-2(b) provides an automatic exemption from registration for an FPI if the following three conditions are met: (i) the FPI is not required to file reports under Exchange Act Sections 13(a) or 15(d) (such obligations arising generally as a result of a public offering of securities, a listing on a national securities exchange, or voluntary registration under the Exchange Act); (ii) the FPI maintains a listing of the subject class of securities on one or two exchanges in a non-U.S. jurisdiction(s) that comprise more than 55% of its worldwide trading volume (its “Primary Trading Market”) as of its most recently completed fiscal year; and (iii) the FPI publishes in English on its website or through another electronic delivery platform generally available to the public in its primary trading market certain material items of information.
Calculation of Holders of Record
As mentioned, a company is required to register under Section 12(g) if as of the last day of its fiscal year the number of its record security holders is either 2,000 or greater worldwide, or 500 persons who are not accredited investors or greater worldwide. The determination of record holders and the determination of accredited status are both made as of the last day of the fiscal year.
Accredited investor is defined in Securities Act Rule 501(a) (see HERE) and specifically provides that an accredited investor can be one that the company “reasonably believes” comes within the specific enumerated accreditation categories. In making the determination as to whether a company has over 500 non-accredited investors as of the last day of its fiscal year-end, a company must consider all facts and circumstances, including whether prior information obtained at the time of a sale of securities can reasonably be relied upon to still be correct.
It is important that all private companies with more than 500 shareholders consider the accredited status of its shareholders as of the last day of each fiscal year to be sure it is not inadvertently violating the federal securities laws requiring registration. During times of financial uncertainty and the dramatic impact upon some people’s net worth that has followed the Covid crisis, it is even more important to keep an eye on this ball. All such, companies should consult with competent securities counsel.
At the time of adopting the last amendment to Section 12(g) in 2016, the SEC was asked by many commenters to provide guidance or establish safe harbors related to the requirement to determine shareholder accreditation as of the last day of each fiscal year-end. At that time, the SEC declined to do so and as of today has still not done so, even using C&DI.
The calculation of held of record starts with the actual record holders on the company’s shareholder list, assuming that list has been properly maintained. If it was not properly maintained, any corrections should be made to get to a starting point. Securities held in similar names with the same address can be counted as one holder.
Securities held in the name of a corporation or other entity are counted as a single holder, regardless of the number of beneficial holders of that entity. This is one of the reasons that special purpose acquisition vehicles or SPV’s are very popular for use in investing in private placements.
Securities jointly owned, such as by a husband and wife, are counted as one record holder. Although bearer certificates (i.e., certificates that are owned by the person who is the physical bearer of such document) are rare in today’s world, where such certificates exist, each one is deemed to be held by a separate owner unless there is direct evidence otherwise.
Securities held by a trustee, executor, guardian or other fiduciary are deemed held by one record holder. Securities held of record by a broker, dealer, bank or nominee may be counted as a single shareholder. However, institutional custodians, such as Cede & Co. and other commercial depositories, are not single holders of record for purposes of the Exchange Act’s registration and periodic reporting provisions. Instead, each of the depository’s accounts for which the securities are held is a single record holder.
In addition, persons that received the securities under an employee compensation plan that was exempt from U.S. registration may be excluded (generally shares issued under Rule 701 – see HERE). Securities issued in a Regulation CF offering or a Regulation A, Tier 2 offering may also be excluded.
In order to exclude shares issued in a Regulation CF offering, the company must: (i) be current in its Regulation CF annual reporting (see HERE); (ii) have total assets of less than $25 million as of the end of its most recently completed fiscal year; and (iii) have engaged an SEC registered transfer agent. Moreover, if a company would be required to register solely because it exceeds the asset limit, it can avail itself of a two-year transition period as long as it continues to file its Regulation CF annual reports.
In order to exclude shares issued in a Regulation A, Tier 2 offering, the company must: (i) be required to file SEC reports under Regulation A; (ii) be current in its annual, semi-annual and other Regulation A reports; (iii) have engaged an SEC registered transfer agent; and (iv) have a non-affiliate public float of less than $75 million as of the last day of the second quarter of its most recently completed fiscal year or if no public float, have annual revenues of less than $50 million as of its most recently completed fiscal year. If a company would be required to register solely because it exceeds the market value or revenue limit, it can avail itself of a two-year transition period as long as it continues to file its Regulation A SEC reports.
A few other securities are exempt from the 12(g) calculation, including (i) a security issued under an employee stock option or similar plan which is not transferable except upon death or incapacity; (ii) subject to certain regulations, any interest or participation in a common trust fund by a bank exclusively for collective investment; (iii) any class of equity security which will not be outstanding 60 days after a registration statement would be required to be filed with respect thereto; (iv) standardized options issued by a clearing agency and traded on a national exchange; (v) securities futures traded on a national exchange; and (vi) certain compensatory stock options.
Form of Registration Statement and Time for Effectiveness
Eligibility to use a particular form of registration is determined by a review of the instructions for such form at the time of use. A Form 10 is the general form of registration statement for a U.S. domestic company; however, the short Form 8-A may be used by a company that is already required to filed reports under the Exchange Act, usually as a result of having filed a registration statement under the Securities Act, or that is concurrently qualifying a Tier 2 offering statement relating to that class of securities using the Form S-1 or Form S-11 format.
A Form 20-F is the common basic registration statement for an FPI and a Form 40-F is favored for Canadian companies that qualify for its use. An FPI may voluntarily file a registration statement using a U.S. domestic form, but must meet FPI status within 30 days of filing its first registration statement in order to rely on an “F” form.
Generally, an Exchange Act registration statement automatically goes effective on the 60th day following filing; however, a company may request accelerated effectiveness from the SEC. A Form 8-A goes effective either upon filing, or if a Securities Act registration statement is concurrently being filed, upon effectiveness of that Securities Act registration statement.
The Author
Laura Anthony, Esq.
Founding Partner
Anthony L.G., PLLC
A Corporate Law Firm
LAnthony@AnthonyPLLC.com
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including siting on the board of directors of the American Red Cross for Palm Beach and Martin Counties, and providing financial support to the Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others. She is also a financial and hands-on supporter of Palm Beach Day Academy, one of Palm Beach’s oldest and most respected educational institutions. She currently resides in Palm Beach with her husband and daughter.
Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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