House bi-partisan legislation (H.R. 1965) would raise the current 500-shareholder threshold for SEC reporting to 2,000, and also raise the deregistration threshold from 300 to 1,200 shareholders. The legislation was introduced by Rep. Jim Himes (D-CT) and Paul Womack (R-AK). Senate companion bi-partisan legislation was introduced earlier by Senator Kay Bailey Hutchison (R-TX) to raise the 500-shareholder threshold for SEC reporting from the current 500 holders to 2000. The bill, S 556, is co-sponsored by Senator Mark Pryor (D-AK). The legislation would also raise the SEC decertification of registration threshold from 300 shareholders to 1200.
The 500-shareholder threshold has not been updated since 1964 despite the fact of changed financial markets and a dramatic expansion in the number of investors. Enacted in 1964, Section 12(g) of the Exchange Act requires companies with more than $10 million in assets whose securities are held by more than 500 owners to file annual and other periodic reports with the SEC, which reports are then available to the public through the SEC's EDGAR database. While the $10 million threshold has been incrementally increased over the years from the $1 million level initially set in 1964, the 500 shareholder of record requirement has never been updated. While the shareholder threshold of 500 at one time may have been an accurate reflection of a public market, commenters, including the American Bankers Association, believe that it no longer is such a reflection given the vast expansion of the number of investors.
The legislative effort to raise the threshold comes against the backdrop of an impending SEC review of the 500-shareholder trigger as part of a larger review of capital formation regulations. In recent testimony before the House Oversight and Government Reform Committee, SEC Chair Mary Schapiro said that both the question of how holders are counted and how many holders should trigger registration need to be examined.
Chairman Schapiro noted that, shortly after the enactment of Section 12(g), the Commission adopted rules defining the terms held of record and total assets. The definition of “held of record” counts as holders of record only persons identified as owners on records of security holders maintained by the company in accordance with accepted practice. The Chair explained that the Commission used this definition to simplify the process of determining the applicability of Section 12(g) by allowing a company to look to the holders of its securities as shown on records maintained by it or on its behalf, such as records maintained by the company’s transfer agent.
But Chairman Schapiro observed that the securities markets have changed significantly since the enactment of Section 12(g). Also, since the definition of “held of record” was put into place, a fundamental shift has occurred in how securities are held in the United States. Today, the vast majority of securities of public companies are held in nominee or street name. This means that the brokers that purchase securities on behalf of investors typically are listed as the holders of record. One broker may own a large position in a company on behalf of thousands of beneficial owners, she noted, but since the shares are all held in street name they are counted as being owned by one holder of record.
According to Chairman Schapiro, for most public companies this shift means that much of their individual shareholder base is not counted under the current definition of held of record. Conversely, the shareholders of most private companies, who generally hold their shares directly, are counted as holders of record under the definition. This has required private companies with more than $10 million in total assets and that cross the 500 record holder threshold, where the number of record holders is actually representative of the number of shareholders, to register and commence reporting. At the same time, it has allowed a number of public companies, many of whom likely have substantially more than 500 shareholders, to stop reporting, or “go dark, because there are fewer than 500 holders of record due to the fact that the public companies’ shares are held in street name.
A company can “go dark,” or terminate the registration of a class of securities under Section 12(g), by certifying to the Commission either that the class of securities is (1) held of record by less than 300 persons or (2) held of record by less than 500 persons where the total assets of the company have not exceeded $10 million on the last day of each of the company’s most recent three fiscal years.