Section 13 – Beneficial Shareholder Reporting Requirements – Part 1

Barely two weeks after the SEC charged six officers, directors and five percent (5%) or greater shareholders with failing to timely file reports, the SEC adopted final amendments to Sections 13(d) and 13(g) of the Securities Exchange Act of 1934 (“Exchange Act”).  The amendments were first proposed in February, 2022 – see HERE.

The amendments update Sections 13(d), 13(g) and Regulation 13D-G to accelerate filing deadlines for both initial and amended reports; expand the timeframe within a business day in which filings may be timely made; clarify the Schedule 13D disclosure requirements with respect to derivative securities; and require that Schedule 13D and 13G filings be filed using XBRL.  I’ve included a chart of the amendments to Schedules 13D and 13G at the end of this blog.

The final rules do not adopt changes that had been proposed to clarify the circumstances under which two or more persons have formed a “group” that would be subject to beneficial ownership reporting obligations; or to 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.”  However, the SEC did issue guidance intended to provide clarity on the circumstances in which a person may be deemed to have formed a group with another person or persons within the meaning of sections 13(d)(3) and 13(g)(3).

Compliance with the revised Schedule 13G filing deadlines will be required beginning on Sept. 30, 2024. Compliance with the XBRL requirements for Schedules 13D and 13G will be required on Dec. 18, 2024. Compliance with the other rule amendments will be required upon the new rules’ effectiveness which is February 5, 2024.

Its been many years since I delved in the intricacies of Section 13 (see HERE), so here we go.  In this first blog in the series I cover the filing deadline amendments for Schedules 13D and 13G and in Part II I will cover derivative securities and the new SEC guidance on “groups.”

Filing Deadlines

                Schedule 13D

Prior to the amendments, Section 13(d)(1) of the Exchange Act required 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, sets forth the 10-day filing deadline and has so required since its enactment more than 50 years ago.

The SEC has amended Rules 13d-1(a), (e), (f) and (g) to shorten the filing deadline to 5 business days after acquiring beneficial ownership of more than 5% of a covered class of securities.  This is a change of the proposed rule which would have shortened the deadline to within 5 calendar days.  Similarly, when a Schedule 13G filer loses 13G eligibility (for example, due to a plan to change or influence control over the company, ownership increasing to 20% or more, or losing a QII exemption eligibility), the filing deadline is also reduced from 10 calendar days to 5 business days.

The date that a person acquires in excess of 5% beneficial ownership or loses Schedule 13G eligibility is not included in the calculation.  Moreover, a filing made by 10:00 p.m. EST will be considered timely, increased from the prior 5:30 deadline.

The SEC asserts many reasons in support of the shortened filing schedule including advances in technology and market movements; assuring timely dissemination of material information; and preventing a disparity in information that can cause transactions to be made based on mispriced securities.

Prior to the rule changes, an amendment to Schedule 13D was required to be filed “promptly” upon a material change in the facts set forth in the filed Schedule 13D or last amendment thereto.  The obligation to file an amendment is not limited to acquisitions, but also includes changes in the disclosure narrative that are material; and material changes in the level of beneficial ownership caused by an involuntary change in circumstances, such as an increase in the number of shares outstanding.  The new rules require all amendments to Schedule 13D be filed within two business days after the material change that triggers the amendment obligation.

Schedule 13G

A Schedule 13G is an abbreviated form that can be used by certain exempt filers or security ownership resulting from certain exempt acquisitions.  In particular, exempt filers include:

• Qualified Institutional Investor (“QII”) – The institutional investors qualified to report on Schedule 13G, in lieu of Schedule 13D and in reliance upon Rule 13d-1(b), include a broker or dealer registered under section 15 of the Exchange Act, a bank as defined in section 3(a)(6) of the Exchange Act, an insurance company as defined in section 3(a)(19) of the Exchange Act, an investment company registered under section 8 of the Investment Company Act of 1940, a person registered as an investment adviser under section 203 of the Investment Advisers Act of 1940, a parent holding company or control person (if certain conditions are met), an employee benefit plan or pension fund that is subject to the provisions of the Employee Retirement Income Security Act of 1974, a savings association as defined in section 3(b) of the Federal Deposit Insurance Act, a church plan that is excluded from the definition of an investment company under section 3(c)(14) of the Investment Company Act of 1940, non-U.S. institutions that are the functional equivalent of any of the institutions listed in Rule 13d-1(b)(1)(ii)(A) through (I), so long as the non-U.S. institution is subject to a regulatory scheme that is substantially comparable to the regulatory scheme applicable to the equivalent U.S. institution, and related holding companies and groups (collectively, “Qualified Institutional Investors” or “QIIs”). In addition, under Rule 13d-1(b), in order to qualify to report on Schedule 13G in lieu of Schedule 13D, a QII must have acquired securities in the covered class in the ordinary course of business and not with the purpose nor with the effect of changing or influencing the control of the issuer, nor in connection with or as a participant in any transaction having such purpose or effect.
• Exempt Investors – persons holding beneficial ownership of more than 5% of a covered class, but who have not made an acquisition of beneficial ownership subject to section 13(d). For example, persons who acquire all of their securities prior to the issuer registering the subject securities under the Exchange Act are not subject to section 13(d). In addition, persons who acquire no more than 2% of a covered class within a 12-month period are exempted from section 13(d) by section 13(d)(6)(B). In both cases, however, those persons are subject to section 13(g).
• Passive Investors – beneficial owners of more than 5% but less than 20% of a covered class who can certify under Item 10 of Schedule 13G that the subject securities were not acquired and are not held for the purpose or effect of changing or influencing the control of the issuer of such securities and were not acquired in connection with or as a participant in any transaction having such purpose or effect. These investors are ineligible to report beneficial ownership pursuant to Rule 13d-1(b) or (d) but are eligible to report beneficial ownership on Schedule 13G in reliance upon Rule 13d-1(c).

A QII is generally exempt from filing a Schedule 13D, and rather than monitoring 5% ownership thresholds throughout the year, need only file a Schedule 13G if it owns in excess of 5% as of the end of the calendar year.  Under the old rule, if a filing was required, it must be completed within 45 days of the end of the calendar year.  Prior to the amendments, if the QII surpassed 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.

The rule amendments require a QII to report in excess of 5% ownership within 45 days of the end of any quarter (as opposed to year-end) and shortened the time frame in which to file a Schedule 13G upon surpassing 10% ownership as of month end, to 5 business days.

Exempt Investors have not had a requirement to determine month-end ownership.  Rather an Exempt Investor has only had to file a Schedule 13G if it beneficially owns in excess of 5% as of calendar year end.  Under the new rules, Exempt Investors are treated the same as a QII and must file a Schedule 31G within 45 days of quarter end in which their beneficial ownership exceeds 5%.

Passive Investors on the other hand have had to file a Schedule 13G within 10 days of obtaining in excess of 5% ownership, without regard to month or year-end calculations.  The rule amendments shorten this time period to 5 days consistent with all filers.

Section 13(g)(2) requires an amendment to be filed to a Schedule 13G if any change occurs in the facts set forth in the filed Schedule 13G or last amendment thereto but currently does not set forth a deadline for such filing, other than requiring amendments to be filed within 45 days of the end of each calendar year.  Under the new rules an amended Schedule 13G must be filed within 45 days after calendar quarter-end.

The SEC has also added a materiality qualifier to changes that trigger an amendment requirement.  Although not exclusive, the rule notes that any material increase or decrease in the percentage of the class beneficially owned and “[a]n acquisition or disposition of beneficial ownership of securities in an amount equal to one percent or more of the class of securities shall be deemed ‘material’ for purposes of this section.”

In addition to the general amendment obligations discussed above, the current rules also require QIIs and Passive Investors (but not Exempt Investors) to file an amended Schedule 13G upon exceeding 10% beneficial ownership or a 5% increase or decrease in beneficial ownership.  In particular, QIIs are required to file an amended Schedule 13G within 10 days after the end of the first month in which their beneficial ownership exceeds 10% of a covered class, calculated as of the last day of the month.  Thereafter, amendments are required within 10 days after the end of the first month in which their beneficial ownership increases or decreases by more than 5% of the covered class, calculated as of the last day of the month.

Under the new rules, the filing deadlines have been decreased for QIIs to within 5 business days after the end of the first month in which their beneficial ownership exceeds 10% of a covered class, calculated as of the last day of the month.  Thereafter, amendments are will now be required within 5 business days after the end of the first month in which their beneficial ownership increases or decreases by more than 5% of the covered class, calculated as of the last day of the month.

Currently Passive Investors must file an amended Schedule 13G promptly after exceeding 10% beneficial ownership or a 5% increase or decrease in beneficial ownership.  Under the new rules, the “promptly” filing deadline has been updated to 2 business days after exceeding 10% beneficial ownership or a 5% increase or decrease in beneficial ownership.

Extension of Time to Timely File

The SEC has extended the filing deadline to complete a timely filing for all initial or amended filings from 5:30 p.m. EST to 10:00 p.m. EST.

Chart of Adopted Amendments to Schedules 13D and 13G

The Author

Laura Anthony, Esq.

Founding Partner

Anthony, Linder & Cacomanolis, PLLC

A Corporate Law Firm

LAnthony@ALCLAW.com

Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, 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, Linder & Cacomanolis, 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 Anthony, Linder & Cacomanolis 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 the American Red Cross for Palm Beach and Martin Counties, 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.

Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.

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