Against the backdrop of pending legislation that would raise the 500-shareholder threshold for public reporting, the SEC is conductng a review of the 500-sharegholder regulations under Section 12(g) of the Exchange Act that is at least as robust as the 1963 special study of the securities markets that generated the enactment of Section 12(g). This is the message SEC Director of Corporation Finance Meredith Cross will deliver to House Capital Markets subcommitee hearings on capital formation and job creation. The special study included a survey of over 2,000 issuers that sought data from these issuers on, among other things, asset levels, their securities offerings, shares outstanding, stockholders of record, and the number of shares held by large shareholders. The data derived from the study was critical in developing the most appropriate metrics upon which to base the triggers for public reporting given the nature of the companies and the shareholders that would be impacted.
Section 12(g) requires a company to register its securities with the Commission, within 120 days after the last day of its fiscal year, if, at the end of the fiscal year, the securities are “held of record” by 500 or more persons and the company has “total assets” exceeding $10 million. Shortly after Congress adopted 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, or on its behalf, in accordance with accepted practice.
Securities markets have changed significantly since the enactment of Section 12(g) and the Commission’s adoption of the definition of “held of record.” Today, the vast majority of securities of publicly-traded companies are held in nominee or “street name” rather than directly by the owner. This means that the brokers that purchase securities on behalf of investors typically are listed as the holders of record.
Director Cross will tell Congress that the SEC staff is conducting a robust study seeking to determine whether the current thresholds and standards effectively implement the Exchange Act registration and reporting requirements and what it means to be a public company such that an issuer should be required to register its securities and file with the Commission. The staff has begun a detailed analysis of public company information, including numbers of record and beneficial owners, total assets, and public float, to assess the characteristics of public companies.
The study also will seek to obtain and consider private company information to assess current reporting thresholds. To the extent that the staff develops recommendations or proposals regarding changes to the reporting thresholds for the Commission’s consideration, the consequences of any such proposed change will be subject to careful assessment as to the impact on investor protection and capital formation and the other costs and benefits of any proposed change.