SEC Proposes Amendments To Beneficial Ownership Reporting Rules

On February 10, 2022, the SEC announced proposed rule amendments governing beneficial ownership reporting under Exchange Act Sections 13(d) and 13(g).  The proposed amendments would accelerate the filing deadlines for Schedules 13D beneficial ownership reports from 10 days to 5 calendar days and require that amendments be filed within one business day; generally accelerate the filing deadlines for Schedule 13G beneficial ownership reports (which differ based on the type of filer); extend the filing deadline to 10:00 p.m. EST; expand the application of Regulation 13D-G to certain derivative securities; clarify the circumstances under which two or more persons have formed a “group” that would be subject to beneficial ownership reporting obligations; provide new exemptions to permit certain persons to communicate and consult with one another, jointly engage issuers, and execute certain transactions without being subject to regulation as a “group;” and require that Schedules 13D and 13G be filed using XBRL.

Final rules have yet to be published, but the proposed rules were listed in the final rule stage on the SEC’s most recent Regulatory Agenda and are expected to be completed by October (see HERE).  A chart has been included at the end of this blog summarizing the proposed amendments.

Filing Deadlines

Currently, Section 13(d)(1) of the Exchange Act requires a disclosure statement to be filed “within ten days after [an] acquisition [of more than 5% of a covered class] or within such shorter time as the Commission may establish by rule.”  Rule 13d-1(a), in turn, requires the filing within 10 days and has so required since its enactment more than 50 years ago.  The proposed rule change would shorten the filing deadline to within 5 days of acquiring beneficial ownership of more than 5% of a covered class of securities.  Similarly, when a Schedule 13G filer loses 13G eligibility (for example, due to a plan to change or influence control over the company or ownership increasing to 20% or more), the filing deadline would also be reduced from 10 to 5 days.

A Schedule 13D is not available to a passive investor and accordingly, any investor filing the Schedule is either an affiliate/insider, or a shareholder attempting to make changes to management or the company.  Accordingly, the shortened window will require further upfront planning by filers.

Currently, an amendment to Schedule 13D must be filed “promptly” upon a triggering event.  The proposed new rules would require all amendments to Schedule 13D be filed within one business day after the material change that triggers the amendment obligation.

A Schedule 13G is an abbreviated form that can be used by certain exempt filers or exempt acquisitions.  Currently, a Qualified Institutional Investor (“QII”) need only file a Schedule 13G if it owns in excess of 5% as of the end of the calendar year.  If a filing is required, it must be completed within 45 days of the end of the calendar year.  If the QII surpasses 10% ownership as of the last day of a calendar month, a Schedule 13G must be filed within 10 days of the end of the month in which the ownership that amount.

Under the current rules, an Exempt Investor (definition below) must file a Schedule 13G within 45 days of the end of the calendar year and a Passive Investor (definition below) must file within 10 days after acquiring beneficial ownership of more than 5% of a covered class.

The Schedule 13G filing deadlines are proposed to be shortened to 5 business days after the last day of the month in which beneficial ownership first exceeds 5% for QIIs and Exempt Investors and to within 5 days after acquiring beneficial ownership of more than 5% for Passive Investors.  Amendments to Schedule 13G would be due within 5 business days after the end of the month in which a reportable change occurs or within 5 calendar days where a person’s ownership increases to over 10% and thereafter when there is any change of more than 5%.   Amendments resulting from a change of facts would only be required if material as opposed to the prescriptive amendment requirement currently in the rules.

“Exempt Investor” refers to persons holding beneficial ownership of more than 5% of a covered class at the end of the calendar year, but who have not made an acquisition of beneficial ownership subject to Section 13(d). For example, persons who acquire all their securities prior to the issuer registering the subject securities under the Exchange Act are not subject to Section 13(d) and persons who acquire not more than two percent of a covered class within a 12-month period are exempted from Section 13(d), but in both cases are subject to Section 13(g).  Section 13(d) also exempts acquisitions of subject securities acquired in a stock-for-stock exchange that is registered under the Securities Act, such as in an S-4 registration statement.

A “Passive Investor” is a person that owns more than 5% but less than 20% of a covered class whose shares were not acquired or held for the purpose or effect of changing or influencing the control of the company or acquired in connection with or as a participant in any transaction having such purpose or effect (such as not acquired in a reverse merger).

Under the proposed rules, the cut-off time for making a filing (initial or amendment) would be extended from 5:30 p.m. EST to 10:00 p.m. EST.

Derivative Securities

Currently, under Rule 13d-3 a person is “deemed” a beneficial owner of a covered class if that person holds a right to acquire the covered class, for example, through the exercise of an option or warrant or conversion of a security, that is exercisable or convertible within 60 days.  In addition, if a right has been acquired for the purpose or with the effect of changing or influencing control of the issuer of securities, that person is treated as a beneficial owner of the underlying class of equity securities regardless of when that right may be exercisable, exchangeable or convertible.

Generally, holders of derivative securities settled exclusively in cash do not have enforceable rights or any other entitlements with respect to the reference security under the terms of the agreement governing the derivative and as such were not historically included in beneficial ownership calculations.  However, the SEC believes these holders may have both the incentive and ability to influence control over the company, including through contracts with counterparties, and accordingly should be included in ownership calculations.

The SEC is proposing to amend Rule 13d-3 to deem holders of certain cash-settled derivative securities as beneficial owners of the reference covered class.  Specifically, a person would be deemed the beneficial owner of equity securities if such person holds the derivative security with the purpose or effect of changing or influencing the control of the issuer of such class of equity securities, or in connection with or as a participant in any transaction having such purpose or effect.  The proposed rule would exclude securities-based swaps.

The proposed rules also include provisions for how to calculate the number of reference securities that will be deemed beneficially owned.  That is, the number of securities that the holder is deemed to own will be the larger of two calculations: (i) the product of (x) the number of securities by reference to which the amount payable under the derivative security is determined multiplied by (y) the delta of the derivative security; or (ii) dividing the notional amount of the derivative security by the most recent closing market price of the reference equity security, and then (y) multiplying such quotient by the delta of the derivative security.  In each case, the “delta” is the ratio that that is obtained by comparing (x) the change in the value of the derivative security to (y) the change in the value of the reference equity security.

This proposed rule change would likewise impact Section 16 filings which refer to Section 13 for the definition of beneficial ownership.

Composition of a “Group”

The proposed amendments make several changes to Rule 13d-5 in reference to when two or more persons are acting as a “group.”  First, the title of the rule is proposed to be changed from “Acquisition of securities” to “Acquisition of beneficial ownership” to more accurately reflect the intended meaning of the statute.

The proposed rule change would amend the definition of a “group” to remove any implication that an express or implied agreement among group members is a necessary precondition to the formation of a group.

In addition, the proposed rules would add a new provision whereby if a person discloses to any other person that such filing will be made and such other person acquires securities in the covered class for which the Schedule 13D will be filed, then those persons are deemed to have formed a group within the meaning of Section 13(d)(3).  Also, a group will be deemed to acquire any additional equity securities acquired by a member of the group after the date of the group’s formation.

On the other hand, the new rules would add additional exemptions to circumstances in which individuals will be deemed to act as a group.  The amended rules would add circumstances under which two or more people may communicate and consult with one another and engage with a company without concern that they will be subject to regulation as a group.

Likewise, the proposed rules would set forth the circumstances under which two or more persons may enter into an agreement governing a derivative security in the ordinary course of business without concern that they will become subject to regulation as a group with respect to the derivative’s reference equity securities.

Chart of Proposed Amendments

⁹ See Rule 13(a)(2) of Regulation S-T. We also are proposing to amend Rule 201(a) of Regulation S-T to make the temporary hardship exemption set forth in that rule—which applies to unanticipated technical difficulties preventing the timely preparation and submission of an electronic filing—unavailable to Schedules 13D and 13G, including any amendments thereto.

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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