Changes to Exchange Act Registration Requirements To Implement Title V and Title VI of the JOBS Act, 28689-28706 [2016-10746]

Download as PDF 28689 Rules and Regulations Federal Register Vol. 81, No. 90 Tuesday, May 10, 2016 This section of the FEDERAL REGISTER contains regulatory documents having general applicability and legal effect, most of which are keyed to and codified in the Code of Federal Regulations, which is published under 50 titles pursuant to 44 U.S.C. 1510. The Code of Federal Regulations is sold by the Superintendent of Documents. Prices of new books are listed in the first FEDERAL REGISTER issue of each week. Table of Contents SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 230 and 240 [Release No. 33–10075; 34–77757; File No. S7–12–14] RIN 3235–AL40 Changes to Exchange Act Registration Requirements To Implement Title V and Title VI of the JOBS Act Securities and Exchange Commission. ACTION: Final rule. AGENCY: We are amending our rules in light of the statutory changes made by Title V and Title VI of the Jumpstart Our Business Startups Act (the ‘‘JOBS Act’’) and Title LXXXV of the Fixing America’s Surface Transportation Act (the ‘‘FAST Act’’). The amendments revise our rules to reflect the new, higher thresholds for registration, termination of registration and suspension of reporting that were set forth in the JOBS Act and the FAST Act. In addition, the amendments revise the definition of ‘‘held of record’’ in Rule 12g5–1 under the Securities Exchange Act of 1934 (the ‘‘Exchange Act’’), in accordance with the JOBS Act, to exclude certain securities held by persons who received them pursuant to employee compensation plans and establish a non-exclusive safe harbor for determining whether securities are ‘‘held of record’’ for purposes of registration under Exchange Act Section 12(g). DATES: Effective June 9, 2016. FOR FURTHER INFORMATION CONTACT: Steven G. Hearne, Senior Special Counsel, at (202) 551–3430, or Anne Krauskopf, Senior Special Counsel, at (202) 551–3500, Division of Corporation Finance, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549. ehiers on DSK5VPTVN1PROD with RULES SUMMARY: VerDate Sep<11>2014 15:17 May 09, 2016 Jkt 238001 We are adopting amendments to Rules 3b–4,1 12g–1,2 12g–2,3 12g–3,4 12g–4,5 12g5– 1,6 and 12h–3 7 under the Exchange Act 8 and amendments to Rule 405 9 under the Securities Act of 1933 (the ‘‘Securities Act’’).10 SUPPLEMENTARY INFORMATION: I. Introduction II. Amendments Relating To Exchange Act Reporting Thresholds A. Application of the Increased Thresholds for Registration and Reporting Obligations B. Application of the Increased Threshold for Accredited Investors III. Amendments to Exchange Act Rule 12g5– 1 A. Statutory Requirement and Definition of ‘‘Employee Compensation Plan’’ B. Definition of ‘‘Held of Record’’ C. Non-exclusive Safe Harbor for Determining Holders of Record D. Foreign Private Issuers IV. Economic Analysis A. Baseline B. Analysis of the Rules V. Paperwork Reduction Act VI. Final Regulatory Flexibility Act Analysis A. Need for, and Objectives of, the Action B. Significant Issues Raised by Public Comment C. Small Entities Subject to the Rule Amendments D. Reporting, Recordkeeping and Other Compliance Requirements E. Agency Action To Minimize Effect on Small Entities VII. Statutory Authority and Text of Rule Amendments I. Introduction On December 17, 2014, we proposed amendments 11 to implement Title V and Title VI of the JOBS Act.12 The JOBS Act amended Sections 12(g) 13 and 15(d) 14 of the Exchange Act to adjust 1 17 CFR 240.3b–4. CFR 240.12g–1. 3 17 CFR 240.12g–2. 4 17 CFR 240.12g–3. 5 17 CFR 240.12g–4. 6 17 CFR 240.12g5–1. 7 17 CFR 240.12h–3. 8 15 U.S.C. 78a et seq. 9 17 CFR 230.405. 10 15 U.S.C. 77a et seq. 11 Changes to Exchange Act Registration Requirements to Implement Title V and Title VI of the JOBS Act, Release No. 33–9693 (Dec. 17, 2014) [79 FR 78343 (Dec. 30, 2014)] (the ‘‘Proposing Release’’). 12 Public Law 112–106, 126 Stat. 306 (Apr. 5, 2012). 13 15 U.S.C. 78l(g). 14 15 U.S.C. 78o(d). 2 17 PO 00000 Frm 00001 Fmt 4700 Sfmt 4700 the thresholds for registration, termination of registration and suspension of reporting.15 Specifically, Section 501 of the JOBS Act 16 amended Section 12(g)(1) of the Exchange Act 17 to require an issuer to register a class of equity securities (other than exempted securities) within 120 days after its fiscal year-end if, on the last day of its fiscal year, the issuer has total assets of more than $10 million and the class of equity securities is ‘‘held of record’’ by either (i) 2,000 persons, or (ii) 500 persons who are not accredited investors. Section 601 of the JOBS Act 18 further amended Exchange Act Section 12(g)(1) to require an issuer that is a bank or a bank holding company, as defined in Section 2 of the Bank Holding Company Act of 1956,19 to register a class of equity securities (other than exempted securities) within 120 days after the last day of its first fiscal year ended after the effective date of the JOBS Act, on which the issuer has total assets of more than $10 million and the class of equity securities is ‘‘held of record’’ by 2,000 or more persons. Section 601 of the JOBS Act also amended Exchange Act Section 12(g)(4) 20 and Exchange Act Section 15(d)(1) 21 to enable an issuer that is a bank or a bank holding company to terminate the registration of a class of securities under Section 12(g) or suspend reporting under Section 15(d)(1) if that class is held of record by less than 1,200 persons.22 For other issuers, the threshold in Section 12(g)(4) for termination of registration and in Section 15(d)(1) for suspension of reporting remained at 300.23 In addition, Section 502 of the JOBS Act 24 amended Exchange Act Section 12(g)(5) 25 to exclude from the definition of ‘‘held of record,’’ for the purposes of determining whether an issuer is required to register a class of equity securities, securities that are held by persons who received 15 The changes to Exchange Act Sections 12(g)(1), 12(g)(4) and 15(d)(1) were effective upon enactment of the JOBS Act and do not require any Commission action. 16 Sec. 501, 126 Stat. at 325. 17 15 U.S.C. 78l(g)(1). 18 Sec. 601, 126 Stat. at 326. 19 12 U.S.C. 1841. 20 15 U.S.C. 78l(g)(4). 21 15 U.S.C. 78o(d)(1). 22 See supra note 18. 23 See 15 U.S.C. 78l(g)(4) and 15 U.S.C. 78o(d)(1). 24 Sec. 502, 126 Stat. at 326. 25 15 U.S.C. 78l(g)(5). E:\FR\FM\10MYR1.SGM 10MYR1 28690 Federal Register / Vol. 81, No. 90 / Tuesday, May 10, 2016 / Rules and Regulations them pursuant to an ‘‘employee compensation plan’’ in transactions exempted from the registration requirements of Section 5 of the Securities Act.26 Section 503 of the JOBS Act 27 directed the Commission to revise the definition of ‘‘held of record’’ pursuant to Exchange Act Section 12(g)(5) to implement the amendment made by Section 502 of the JOBS Act, and to create a safe harbor for issuers when determining whether holders received their securities pursuant to an ‘‘employee compensation plan’’ in a transaction exempted from the registration requirements of Section 5 of the Securities Act. Subsequent to our proposal, Section 85001 of the FAST Act 28 adjusted the Exchange Act thresholds for registration, termination of registration and suspension of reporting for savings and loan holding companies, as defined in Section 10 of the Home Owners’ Loan Act,29 so that they would be the same as the thresholds for banks and bank holding companies. This change also was effective upon enactment. In connection with the amendments made by Title V and Title VI of the JOBS Act and Title LXXXV of the FAST Act, we are amending our rules to reflect the new, higher registration, termination of registration and suspension of reporting thresholds under amended Exchange Act Sections 12(g)(1), 12(g)(4) and 15(d)(1). We are also amending Exchange Act Rule 12g5–1 to reflect the amendment to Exchange Act Section 12(g)(5) and to establish a non-exclusive safe harbor that issuers may follow when determining if securities held by persons who received them pursuant to an employee compensation plan in transactions exempted from the registration requirements of Section 5 of the Securities Act may be excluded when determining whether they are required to register under Exchange Act Section 12(g)(1). The comment period for the proposed amendments closed on March 2, 2015. We received 11 comment letters on the Proposing Release, which generally supported the proposals.30 We have reviewed and considered all of these comments. We are adopting the amendments substantially as proposed, 26 15 U.S.C. 77e. 503, 126 Stat. at 326. 28 Public Law 114–94 (Dec. 4, 2015). 29 12 U.S.C. 1461. 30 We also considered pre-proposal comment letters when formulating the proposed amendments. Pre-proposal comment letters received on Title V of the JOBS Act are available at https://www.sec.gov/comments/jobs-title-v/jobstitle-v.shtml and on Title VI of the JOBS Act at https://www.sec.gov/comments/jobs-title-vi/jobstitle-vi.shtml. ehiers on DSK5VPTVN1PROD with RULES 27 Sec. VerDate Sep<11>2014 15:17 May 09, 2016 Jkt 238001 and discuss these amendments and any modifications or clarifications in detail below. II. Amendments Relating to Exchange Act Reporting Thresholds A. Application of the Increased Thresholds for Registration and Reporting Obligations Sections 501 and 601 of the JOBS Act amended the Exchange Act to raise the total assets and held of record thresholds under which issuers are required to register or permitted to terminate registration or suspend reporting pursuant to Section 12(g) and 15(d) of the Exchange Act. Section 85001 of the FAST Act further amended these provisions to apply the new statutory thresholds for banks and bank holding companies to savings and loan holding companies. 1. Proposed Rule Amendments To harmonize our rules with the statutory changes made to Exchange Act Sections 12(g)(1), 12(g)(4) and 15(d), we proposed amendments to Exchange Act Rules 12g–1, 12g–2, 12g–3, 12g–4 and 12h–3, the rules that govern the mechanics relating to registration, termination of registration under Section 12(g) and suspension of reporting obligations under Section 15(d). These rules generally reflected the holder of record statutory thresholds in Sections 12(g) and 15(d) prior to the enactment of the JOBS Act.31 We proposed to revise Rule 12g–1 to reflect the asset and holder of record thresholds established by Titles V and VI of the JOBS Act relating to the requirement to register a class of equity securities under the Exchange Act.32 Similarly, we proposed to revise Exchange Act Rules 12g–2 33 and 12g– 3 34 to reflect the holders of record thresholds in the Exchange Act, as amended by the JOBS Act, for 31 Prior to adoption of the JOBS Act, the Commission used its general exemptive authority to provide for a $10 million asset threshold by rule. JOBS Act Section 501 amended Exchange Act Section 12(g)(1) to raise the statutory threshold from $1 million to $10 million to match the threshold previously provided in Exchange Act Rule 12g–1. 32 We also proposed to remove the reference to an automated inter-dealer quotation system since the NASDAQ Stock Market is now registered as a securities exchange with the Commission. See In the Matter of the Application of the Nasdaq Stock Market LLC for Registration as a National Securities Exchange; Findings, Opinion and Order of the Commission, Release No. 34–53128 (Jan. 13, 2006) [71 FR 3550 (Jan. 23, 2006)]. 33 Rule 12g–2 addresses securities deemed to be registered pursuant to Section 12(g)(1) upon termination of certain exemptions. 34 Rule 12g–3 addresses the threshold for the registration of securities of successor issuers under Section 12(b) or Section 12(g). PO 00000 Frm 00002 Fmt 4700 Sfmt 4700 terminating registration and suspending reporting for banks and bank holding companies. In addition, we proposed to amend Exchange Act Rules 12g–4 and 12h–3, the rules which permit issuers to immediately suspend their duty to file periodic and current reports, to reflect the new thresholds in Sections 12(g) and 15(d) enacted by the JOBS Act for banks and bank holding companies. In light of the fact that savings and loan holding companies provide similar services to banks and bank holding companies and are generally subject to similar bank regulatory and supervision requirements, we also proposed to use our general exemptive authority to apply the same registration thresholds applicable to banks and bank holding companies to savings and loan holding companies and to revise our rules accordingly. As noted above, subsequent to this proposal, the FAST Act amended the Exchange Act to apply the new statutory thresholds for banks and bank holding companies to savings and loan holding companies.35 Because the new statutory threshold for banks, savings and loan holding companies and bank holding companies is not reflected in our existing rules, such institutions seeking to rely on the new 1,200 holder of record threshold to terminate registration and suspend reporting are not able to rely on the existing procedural accommodations in our rules to do so immediately. Without the proposed amendments, a bank, savings and loan holding company or bank holding company is required to wait 90 days after filing a certification with the Commission that the number of its holders of record is less than 1,200 persons to terminate its Section 12(g) registration and cease filing reports required by Exchange Act Section 13(a),36 rather than being able to suspend its Section 13(a) reporting obligations immediately upon the filing of a Form 15 37 in reliance on the rule. Similarly, without the proposed amendments, banks, savings and loan holding companies or bank holding companies may not rely on Rule 12h– 3 to immediately suspend their Section 15(d) reporting obligations using the new higher statutory threshold during a fiscal year. Rather, Section 15(d)(1) provides for suspending a Section 15(d) obligation only at the beginning of a fiscal year. 35 Because of the FAST Act amendment to the Exchange Act, the Commission no longer needs to adopt changes relating to those thresholds using its general exemptive authority. 36 15 U.S.C. 78m(a). 37 17 CFR 249.323. E:\FR\FM\10MYR1.SGM 10MYR1 Federal Register / Vol. 81, No. 90 / Tuesday, May 10, 2016 / Rules and Regulations 2. Comments on Proposed Rule Amendments We received comments on the proposed amendments from two commenters.38 These commenters supported the amendments as proposed. One commenter further agreed with our determination not to propose amendments to our rules relating to Exchange Act registration that extend substantially beyond the changes contemplated by the JOBS Act.39 Several commenters also expressed support for our proposal to treat savings and loan holding companies similar to banks and bank holding companies for purposes of Exchange Act registration.40 3. Final Rule Amendments ehiers on DSK5VPTVN1PROD with RULES After considering the comments, we are adopting the proposed amendments to Exchange Act Rules 12g–1, 12g–2, 12g–3, 12g–4 and 12h–3 to reflect the statutory changes made by the JOBS Act and the FAST Act. As amended, Rule 12g–1 provides that an issuer is not required to register a class of equity securities pursuant to Section 12(g)(1) if on the last day of its most recent fiscal year: • The issuer had total assets not exceeding $10 million; or • The class of equity securities was held of record by fewer than 2,000 persons or 500 persons who are not accredited investors (as such term is defined in Securities Act Rule 501(a)),41 determined as of such day rather than at the time of the sale of the securities; or • in the case of a bank; a savings and loan holding company, as such term is defined in section 10 of the Home Owners’ Loan Act; or a bank holding company, as such term is defined in Section 2 of the Bank Holding Company Act of 1956, the class of equity securities was held of record by fewer than 2,000 persons.42 38 See letters from American Bankers Association (Feb. 27, 2015) (‘‘American Bankers’’) and American Bar Association (Apr. 10, 2015) (‘‘ABA’’). 39 See letter from ABA. 40 See letters from American Bankers, ABA and Independent Community Bankers Association (Feb. 27, 2015) (‘‘ICBA’’). 41 17 CFR 230.501(a). 42 As observed by one commenter, Section 501 of the JOBS Act amended Section 12(g)(1) of the Exchange Act to require an issuer to register a class of equity securities (other than exempted securities) if, on the last day of its fiscal year, the issuer has total assets of more than $10 million and the class of equity securities is ‘‘held of record by either 2,000 persons, or 500 persons who are not accredited investors.’’ See letter from Keith P. Bishop (Mar. 1, 2016). We read this language to provide that an issuer is not required to register under Section 12(g) if the issuer has fewer than 2,000 persons, or 500 persons who are not accredited investors that hold of record. An issuer VerDate Sep<11>2014 15:17 May 09, 2016 Jkt 238001 As revised, Rule 12g–2, which addresses securities deemed to be registered pursuant to Section 12(g)(1) upon termination of the exemption pursuant to Section 12(g)(2)(A) or (B) 43 and establishes a 300-person threshold for such a class of securities to be registered under Section 12(g), provides a 1,200-person registration threshold for a bank, a savings and loan holding company, as such term is defined in section 10 of the Home Owners’ Loan Act, or bank holding company, as defined in Section 2 of the Bank Holding Company Act of 1956. Revised Rule 12g–3, which addresses the 300-person threshold for the registration of securities of successor issuers under Section 12(b) or Section 12(g), similarly provides a 1,200-person registration threshold for a bank, a savings and loan holding company, as such term is defined in Section 10 of the Home Owners’ Loan Act, or bank holding company, as defined in Section 2 of the Bank Holding Company Act of 1956. Revised Rule 12g–4(a) provides that termination of registration under Section 12(g) shall take effect in 90 days, or such shorter period as the Commission determines, after the issuer certifies on Form 15 that the class of securities is held of record by fewer than 300 persons, 1,200 persons in the case of a bank, a savings and loan holding company, as such term is defined in section 10 of the Home Owners’ Loan Act, or a bank holding company, as defined in Section 2 of the Bank Holding Company Act of 1956, or 500 persons where the total assets of the issuer have not exceeded $10 million on the last day of each of the preceding three years. As a result of the changes to Rule 12g–4(a), banks, savings and loan holding companies and bank holding companies will be able to terminate registration of a class of securities and suspend immediately their duty to file current and periodic reports upon filing a certification on Form 15 at the 1,200 person threshold. Finally, revised Rule 12h–3 provides that the duty to file current and periodic reports under Section 13(a) pursuant to Section 15(d) for that class of securities is suspended immediately upon the with more than 2,000 persons, or 500 persons who are not accredited investors, that hold of record has necessarily met the threshold and would be required to register pursuant to Section 12(g)(1)(A). 43 Section 12(g)(2)(A) [15 U.S.C. 78l(g)(2)(A)] provides an exemption from Section 12(g) registration while the class of securities is listed and registered on a national securities exchange under Exchange Act Section 12(b) [15 U.S.C. 78l(b)]. Section 12(g)(2)(B) [15 U.S.C. 78l(g)(2)(B)] provides an exemption for securities issued by registered investment companies. PO 00000 Frm 00003 Fmt 4700 Sfmt 4700 28691 filing of a certification on Form 15, provided that the issuer has fewer than 300 holders of record, 500 holders of record where the issuer’s total assets have not exceeded $10 million on the last day of each of the preceding three years, or in the case of a bank, a savings and loan holding company, as such term is defined in Section 10 of the Home Owners’ Loan Act, or bank holding company, as defined in Section 2 of the Bank Holding Company Act of 1956, 1,200 holders of record; the issuer has filed its Section 13(a) reports for the most recent three completed fiscal years, and for the portion of the year immediately preceding the date of filing the Form 15 or the period since the issuer became subject to the reporting obligation; and a registration statement has not become effective or was required to be updated pursuant to Exchange Act Section 10(a)(3) 44 during the fiscal year.45 B. Application of the Increased Threshold for Accredited Investors Section 501 of the JOBS Act amended Exchange Act Section 12(g)(1) to increase the threshold that triggers registration by an issuer other than a bank or bank holding company to total assets exceeding $10 million and a class of equity securities (other than an exempted security) held of record by either 2,000 persons or 500 persons who are not accredited investors (as such term is defined by the Commission).46 To rely on the new, higher threshold established by the JOBS Act, an issuer will need to be able to determine which of its record holders are accredited investors. A number of pre-proposal commenters pointed to potential compliance concerns with respect to identifying accredited investors and recommended ways to facilitate issuers’ use of the increased threshold for holders of record that are accredited investors.47 44 15 U.S.C. 78j(a)(3). automatic statutory suspension of an issuer’s Section 15(d) reporting obligation also is not available as to any fiscal year in which the issuer’s Securities Act registration statement becomes effective or is required to be updated pursuant to Section 10(a)(3) of the Securities Act. 46 The statutory amendment was effective upon enactment of the JOBS Act and does not require any Commission action. While this change primarily affects issuers that have never had a reporting obligation under the Exchange Act, issuers that have terminated registration will need to monitor the accredited investor status of their holders of record as of the last day of each fiscal year. 47 See, e.g., letters from New York City Bar Association (June 6, 2012) (‘‘NYCBA’’), the Business Law Section of the American Bar Association (June 26, 2013) (‘‘ABA Pre-Proposal’’) and Foley & Lardner (May 24, 2012) (‘‘Foley’’). 45 The E:\FR\FM\10MYR1.SGM 10MYR1 28692 Federal Register / Vol. 81, No. 90 / Tuesday, May 10, 2016 / Rules and Regulations 1. Proposed Rule Amendment We proposed to amend Rule 12g–1 to make clear that the definition of ‘‘accredited investor’’ in Securities Act Rule 501(a) applies in making determinations under Exchange Act Section 12(g)(1) and that the ‘‘accredited investor’’ determination must be made as of the last day of the fiscal year rather than at the time of the sale of the securities.48 In proposing to use the Rule 501(a) definition, we stated our belief that applying the familiar concepts of the accredited investor definition in Rule 501(a) to the registration threshold in Section 12(g)(1) would facilitate compliance for issuers.49 We also noted our concern that reliance on information previously provided by security holders in connection with the purchase or transfer of securities for an indefinite period into the future could result in the use of outdated information that may no longer be reliable.50 ehiers on DSK5VPTVN1PROD with RULES 2. Comments on Proposed Rule Amendment We received comments on the proposed approach from five commenters.51 Four commenters supported the use of the Securities Act Rule 501(a) definition.52 Two of these commenters requested that the Commission provide guidance on how to establish a reasonable belief of accredited investor status.53 A number of commenters supported establishing a safe harbor for the accredited investor determination that permits an issuer to rely on previously obtained information relating to accredited investor status.54 These commenters recommended various safe harbors that permit issuers 48 Securities Act Rule 501(a) otherwise defines ‘‘accredited investor’’ as being determined at the time of the sale of the securities. 49 See Proposing Release at Section II.C. 50 Id. 51 See letters from ABA, Alternative & Direct Investment Securities Association (Mar. 2, 2015) (‘‘ADISA’’), Investment Program Association (Mar. 2, 2015) (‘‘IPA’’), Securities Arbitration Clinic, Cardozo Law School (Mar. 2, 2015) (‘‘Cardozo’’) and Managed Funds Association (Mar. 2, 2015) (‘‘MFA’’). 52 See letters from ABA, ADISA, Cardozo and MFA. 53 See letters from ABA and ADISA. ABA recommended that the Commission provide guidance by rule or in the text of the release. 54 See letters from ADISA, Milken Institute Center for Financial Markets (Mar. 2, 2015) (‘‘CFM’’), Cleary, Gottlieb, Steen & Hamilton LLP (Feb. 27, 2015) (‘‘Cleary’’) and IPA. CFM suggested that a safe harbor would create certainty and predictability for issuers and investors. IPA recommended a safe harbor as an alternative to determination at time of the last sale and proposed that securities sold prior to the effective date of any rule should not be subject to reaffirmation of accredited investor status. VerDate Sep<11>2014 15:17 May 09, 2016 Jkt 238001 to rely on: information obtained at the time securities were initially or most recently sold to that person; 55 an annual self-certification or affirmation; 56 and determinations made by certain third parties.57 Another commenter provided a more limited recommendation that the Commission permit reliance on accredited investor status determinations made in offerings during the three months prior to fiscal year-end or on self-certification by investors if the offering occurred more than three months but less than twelve months prior to fiscal year-end.58 One commenter opposed a formal safe harbor out of concern it would become a de facto minimum standard and recommended instead that the Commission provide additional guidance.59 Specifically, this commenter recommended that: • an issuer should be able to rely on information previously provided by investors as indicative of their current accredited investor status, when there is a reasonable basis for doing so; • an annual confirmation should only be necessary if there was reason to believe that an investor’s status had changed; • an issuer should be able to rely on certification from certain third parties; and • an issuer should not be subject to enforcement if the basis was reasonable at the time the conclusion was reached.60 One commenter recommended that the Commission issue a separate rule or safe harbor with respect to private investment funds.61 The commenter noted that private investment funds that rely on the exemption in Investment Company Act Section 3(c)(7) 62 (‘‘3(c)(7) 55 See letters from ADISA and CFM. letters from ADISA and IPA. CFM further recommended allowing an issuer to assume that an investor’s status has not changed and to query investors ‘‘as needed’’ via a written communication. 57 See letters from ADISA, Cleary and IPA. These commenters recommended permitting reliance on information from registered broker-dealers, registered investment advisers, licensed attorneys, or certified public accountants. 58 See letter from Cleary. 59 See letter from ABA. 60 See letter from ABA. See also letter from IPA advocating against annual recertification, which noted that any future adjustments to the definition of accredited investor could affect an issuer’s number of accredited investors. This could cause issuers to be required to register despite an issuer’s efforts to sell only to an appropriately limited number of accredited and non-accredited investors at the time of the offer and sale. ABA recommended a presumption that a person continues to be an accredited investor under the revised definition to address concerns relating to future adjustments to the definition of accredited investor. 61 See letter from MFA. 62 15 U.S.C. 80a–3(c)(7). 56 See PO 00000 Frm 00004 Fmt 4700 Sfmt 4700 Funds’’) may have an unlimited number of investors that are ‘‘qualified purchasers,’’ a significantly higher standard than ‘‘accredited investors.’’ The commenter recommended a rule that permits 3(c)(7) Funds to continue to rely on their initial determination of a record holder’s qualified purchaser and accredited investor status on a going forward basis without requiring additional annual diligence. In the alternative, the commenter recommended that the Commission provide a non-exclusive safe harbor that permits 3(c)(7) Funds to send an annual negative consent letter to record holders asking them to inform the issuer if their accredited investor status has changed and permits treatment of a non-response as confirmation of status. Two commenters expressed concern about the timing of the determination and opposed requiring determination as of the last day of the fiscal year.63 One of these commenters claimed that annual reconfirmation will be costly, will provide little investor protection and may cause issuers to sell to fewer investors.64 This commenter recommended only requiring yearly recertification if there is a ready market for the securities and the securities are freely tradable.65 3. Final Rule Amendment After considering the comments, we are adopting an amendment to Rule 12g–1 as proposed, providing that the term ‘‘accredited investor’’ for purposes of Section 12(g)(1) is as defined in Securities Act Rule 501(a).66 Consistent with the proposal, the ‘‘accredited investor’’ determination for these 63 See letters from ADISA and IPA. ADISA recommended permitting issuers to rely on information available at the time they made a judgment, rather than requiring issuers to update information as of the end of the fiscal year. IPA recommended that accredited investor status be determined at the time of last sale, not annually, and expressed concern regarding the administrative and reporting costs of determinations required as of the last day of the fiscal year. 64 See letter from IPA. IPA cited an estimate of ongoing reporting costs under the Exchange Act of $650,000 annually. This commenter additionally noted that becoming an Exchange Act reporting company may be contrary to an issuer’s business plan and against investors’ economic interests. 65 See letter from IPA. IPA suggested that most affected investors will not hold freely tradable securities, muting the benefits of public company reporting for those investors. 66 Consideration of the use of the ‘‘accredited investor’’ definition in this context is distinct from other efforts to consider the definition. In December 2015, the staff issued a report addressing the ‘‘accredited investor’’ definition and providing certain recommendations for our consideration. See Report on the Review of the Definition of Accredited Investor (Dec. 18, 2015), available at https:// www.sec.gov/corpfin/reportspubs/special-studies/ review-definition-of-accredited-investor-12-182015.pdf. E:\FR\FM\10MYR1.SGM 10MYR1 Federal Register / Vol. 81, No. 90 / Tuesday, May 10, 2016 / Rules and Regulations ehiers on DSK5VPTVN1PROD with RULES purposes must be made as of the last day of the issuer’s most recent fiscal year rather than at the time of the sale of the securities. Commenters supported use of the Securities Act Rule 501(a) definition.67 Rule 501(a) provides that an accredited investor is any person who comes within one or more of the categories of investors specified therein, or whom the issuer reasonably believes comes within any such category. Whether the issuer has a reasonable belief depends on the particular facts and circumstances surrounding the determination. Under amended Rule 12g–1, an issuer will need to determine, based on facts and circumstances, whether prior information provides a basis for a reasonable belief that the security holder continues to be an accredited investor as of the last day of the fiscal year.68 Although some commenters requested that the Commission provide guidance on making the accredited investor determination in the Section 12(g) context or establish a safe harbor relating to the determination,69 we have decided against doing so. Our rules do not currently provide a safe harbor for the reasonable belief determination made under Rule 501(a) for exempt offerings and we do not believe that the determinations required for Section 12(g) present a more compelling case for having such a safe harbor. Additionally, as one commenter noted, a safe harbor could become a de facto minimum standard.70 We believe that requiring issuers to consider their particular facts and circumstances in establishing a reasonable basis for their determination provides issuers with appropriate flexibility for making the determination.71 As adopted, the accredited investor determination under Rule 12g–1 must be made as of the last day of the issuer’s most recent fiscal year rather than at the time of the sale of the securities. Several commenters recommended that the Commission adopt rules providing that the determination need not be made at year-end.72 We believe that a fiscal yearend determination date is appropriate because the Section 12(g)(1) requirement to register is triggered if the issuer meets the specified asset and held of record thresholds at the end of its fiscal year. Other commenters recommended permitting an issuer to rely on previously obtained information relating to accredited investor status.73 We continue to be concerned that permitting issuers to rely solely on previously obtained information, which in some cases could be years or decades old, could result in the use of outdated and unreliable information when making the determination. One commenter suggested that we permit issuers to rely on accredited investor determinations made in offerings during the three months prior to fiscal year-end or on self-certification by investors if the offering occurred more than three months but less than twelve months prior to fiscal year-end.74 While such information could provide a reasonable basis for making a determination about accredited investor status as of the end of the fiscal year, for the reasons set forth above, we believe that issuers should consider their particular facts and circumstances before reaching such a conclusion and that the ‘‘reasonable belief’’ standard under Rule 501(a) provides issuers with a familiar context and appropriate flexibility in making such a determination. 67 See letters from ABA, ADISA, Cardozo and MFA. 68 If after the issuer has made its determination as of the end of the fiscal year, it is subsequently determined that an investor did not, in fact, come within one of the accredited investor categories, the issuer may rely on that determination for that fiscal year if it had a reasonable belief at the time the determination was made. 69 See letters from ABA, ADISA, CFM, Cleary and MFA. 70 See letter from ABA. 71 One commenter requested that the Commission establish a separate safe harbor or rule with respect to private investment funds. See letter from MFA. We are declining to provide specific relief to private investment funds for reasons similar to those discussed for issuers generally. We believe that a standard where issuers, including private investment funds, consider their particular facts and circumstances in establishing a reasonable basis for believing that a security holder is an accredited investor is the most appropriate standard to apply at this time. Exchange Act Section 12(g)(5), as amended by Section 502 of the JOBS Act, provides that the definition of ‘‘held of record’’ shall not include securities held by persons who received them pursuant to an ‘‘employee compensation plan’’ in transactions exempted from the registration requirements of Section 5 of the Securities Act. By its express terms, this new statutory exclusion applies solely for purposes of determining whether an issuer is required to register a class of equity securities under the Exchange Act and does not apply to a determination of whether such VerDate Sep<11>2014 15:17 May 09, 2016 Jkt 238001 III. Amendments to Exchange Act Rule 12g5–1 A. Statutory Requirement and Definition of ‘‘Employee Compensation Plan’’ 72 See letters from ADISA and IPA. letters from ABA, CFM, Cleary and MFA. 74 See letter from Cleary. 73 See PO 00000 Frm 00005 Fmt 4700 Sfmt 4700 28693 registration may be terminated or suspended.75 The provision, which is substantially broader than the Commission’s existing rules exempting compensatory employee stock options from Section 12(g) registration,76 does not define the term ‘‘employee compensation plan.’’ Section 503 of the JOBS Act instructs the Commission to amend the definition of ‘‘held of record’’ to implement the amendment in Section 502 and to adopt a safe harbor that issuers can use when determining whether holders of their securities received them pursuant to an employee compensation plan in transactions exempted from the registration requirements of Section 5 of the Securities Act. 1. Proposed Rule Amendment We did not propose to define the term ‘‘employee compensation plan.’’ Instead, we proposed to revise the definition of ‘‘held of record’’ and to additionally establish a non-exclusive safe harbor that relies on the current definition of ‘‘compensatory benefit plan’’ in Rule 701 and the conditions in Rule 701(c). 2. Comments on Proposed Rule Amendment We received comments from two commenters generally supportive of the proposed amendment.77 One of those commenters specifically supported our determination not to create a new definition of the term ‘‘employee compensation plan.’’ 78 This commenter suggested that application in a Section 12(g) context of the familiar concepts applied by an issuer in connection with its exempt issuances of compensatory equity securities under Securities Act Rule 701 would facilitate compliance by streamlining the issuer’s learning curve and simplifying recordkeeping. 75 The statutory exclusion in Section 12(g)(5) specifically refers to Exchange Act Section 12(g)(1), which relates to when an issuer must register its securities with the Commission. 76 Exchange Act Rule 12h–1(f) [17 CFR 240.12h– 1(f)] provides non-reporting issuers with an exemption from Section 12(g) registration for stock options issued under written compensatory stock option plans under certain conditions. Exchange Act Rule 12h–1(g) [17 CFR 240.12h-1(g)] provides reporting issuers a similar exemption for such stock options. The exemptions provide specific eligibility requirements and are limited to options issued pursuant to a written compensatory stock option plan. See Exemption of Compensatory Stock Options from Registration Under Section 12(g) of the Securities Exchange Act of 1934, Release No. 34–56887 (Dec. 3, 2007) [72 FR 69554 (Dec. 7, 2007)]. 77 See letters from ABA and ADISA. 78 See letter from ABA. E:\FR\FM\10MYR1.SGM 10MYR1 28694 Federal Register / Vol. 81, No. 90 / Tuesday, May 10, 2016 / Rules and Regulations 3. Final Rule Amendment After considering the comments, we are adopting an amendment to Rule 12g5–1 to revise the definition of ‘‘held of record,’’ and establish a nonexclusive safe harbor. By not defining the term ‘‘employee compensation plan,’’ and providing for a nonexclusive safe harbor, we believe issuers will have appropriate flexibility to make a principles-based determination about securities received as employee compensation when determining their holders of record under Section 12(g)(5), as well as the added certainty of a safe harbor. We further believe that developing a new definition for ‘‘employee compensation plan’’ could result in needless complexity and create potential conflicts with the current definitions of ‘‘compensatory benefit plan’’ and ‘‘employee benefit plan.’’ 79 Finally, we note that by conditioning the new exclusion from ‘‘held of record’’ upon the securities being received pursuant to an employee compensation plan in transactions exempted from the registration requirements of Section 5 of the Securities Act, Section 502 of the JOBS Act uses Securities Act concepts to identify persons that an issuer may exclude from its determination of the number of holders of record under Section 12(g)(1) of the Exchange Act. Because this provision of the JOBS Act includes concepts from both the Securities Act and Exchange Act,80 we believe that it will facilitate compliance if the terminology used in the new safe harbor in Exchange Act Rule 12g5– 1(a)(8)(ii) is consistent with the terminology used in our Securities Act rules. B. Definition of ‘‘Held of Record’’ Section 503 of the JOBS Act directed the Commission to revise the definition of ‘‘held of record’’ pursuant to Section 12(g)(5) to provide that securities held by persons who received them pursuant to an employee compensation plan in transactions exempted from the registration requirements of Section 5 of the Securities Act may be excluded when calculating the number of holders of record of a class of equity securities for purposes of determining the issuer’s registration obligation under Section 12(g)(1). We received pre-proposal comments addressing issues about the scope of the definition. One commenter recommended that securities issued in a subsequent transaction (including a business combination) that is exempt from, or otherwise is not subject to, the registration requirements of Section 5 to eligible employees, former employees and other covered persons in exchange for securities covered by the Section 12(g)(5) compensatory plan securities carve-out also should be excluded.81 The same commenter further recommended that securities issued in unregistered transactions based on the ‘‘no sale’’ theory 82 should be included within the definition of ‘‘transactions exempt from Section 5.’’ 1. Proposed Rule Amendment We proposed to amend the definition of ‘‘held of record’’ to provide that when determining whether an issuer is required to register a class of equity securities with the Commission pursuant to Exchange Act Section 12(g)(1) an issuer may exclude securities that are either: • held by persons who received the securities pursuant to an employee compensation plan in transactions exempt from the registration requirements of Section 5 of the Securities Act; • held by persons who received the securities pursuant to an employee compensation plan in transactions that did not involve a sale within the meaning of Section 2(a)(3) of the Securities Act; or • held by persons eligible to receive securities from the issuer pursuant to Securities Act Rule 701(c) who received the securities in a transaction exempt from the registration requirements of Section 5 of the Securities Act in exchange for securities excludable under proposed Rule 12g5–1(a)(7). 81 See letter from ABA Pre-Proposal. ‘‘no sale’’ theory relates to the issuance of compensatory grants made by employers to broad groups of employees pursuant to broad-based stock bonus plans without Securities Act registration under the theory that the awards are not an offer or sale of securities under Section 2(a)(3) of the Securities Act [15 U.S.C. 77b(a)(3)]. See Employee Benefit Plans; Interpretations of Statute, Release No. 33–6188 (Feb. 1, 1980) [45 FR 8960 (Feb. 11, 1980)] at Section II.A.5.d; Employee Benefit Plans, Release No. 33–6281 (Jan. 15, 1981) [46 FR 8446 (Jan. 27, 1981)] at Section III. Many issuers rely on the ‘‘no sale’’ theory when making such awards to employees where no consideration—and hence no ‘‘value’’—is received by the issuer in return. The staff has not objected to these issuances in a series of no-action letters. See, e.g., no-action letter to Verint Systems Inc. (May 24, 2007). ehiers on DSK5VPTVN1PROD with RULES 82 The 79 See Rule 701—Exempt Offerings Pursuant to Compensatory Arrangements, Release No. 33–7645 (Feb. 25, 1999) [64 FR 11095 (Mar. 8, 1999)] (the ‘‘1999 Rule 701 Release’’), and Registration of Securities on Form S–8, Release No. 33–7646 (Feb. 25, 1999) [64 FR 11103 (Mar. 8, 1999)] (the ‘‘1999 Form S–8 Release’’). 80 This provision of the JOBS Act relies on concepts from both the Securities Act and the Exchange Act by establishing that certain securities received pursuant to an employee compensation plan in transactions exempted from the registration requirements of Section 5 of the Securities Act may be excluded when determining whether an issuer is required to register under Section 12(g) of the Exchange Act. VerDate Sep<11>2014 15:17 May 09, 2016 Jkt 238001 PO 00000 Frm 00006 Fmt 4700 Sfmt 4700 Section 502 of the JOBS Act refers specifically to ‘‘transactions exempted’’ from the Securities Act Section 5 registration requirements. A number of issuers, however, issue securities to employees without Securities Act registration on the basis that the issuance is not a sale under Section 2(a)(3) of the Securities Act and therefore does not trigger the registration requirement of Securities Act Section 5, which applies only to the offer and sale of securities.83 While securities issued to employees in transactions that do not involve a sale under Section 2(a)(3) are not technically ‘‘transactions exempted from the registration requirements of section 5,’’ they are similar to other compensatory issuances to employees in exempt transactions in that the issuer provides the awards to employees for a compensatory purpose. We therefore proposed to exclude such ‘‘no sale’’ issuances from the definition of ‘‘held of record’’ in Rule 12g5–1 for purposes of determining an issuer’s obligation to register a class of securities under the Exchange Act. Additionally, we proposed to permit an issuer to exclude securities of holders who are persons eligible to receive securities from the issuer pursuant to Rule 701(c) and who acquired the securities in exchange for securities excludable under the proposed definition. The proposed exclusion was intended to facilitate the ability of an issuer to conduct restructurings, business combinations and similar transactions that are exempt from Securities Act registration so that if the securities being surrendered in such a transaction would not have been counted under the proposed definition of ‘‘held of record,’’ the securities issued in the exchange also would not be counted under this definition.84 The securities issued in the exchange would be deemed to have a compensatory purpose because they would replace other securities previously issued pursuant to an employee compensation plan. We believed such an approach would be consistent with the intent of Section 502 of the JOBS Act and would provide issuers with appropriate flexibility to conduct certain business combinations and similar transactions. 83 See id. proposed and consistent with Rule 701(c), securities held of record by former employees would be excluded when determining the securities held of record only if the employees were employed by or providing services to the surviving issuer at the time the exchange securities were offered. 84 As E:\FR\FM\10MYR1.SGM 10MYR1 Federal Register / Vol. 81, No. 90 / Tuesday, May 10, 2016 / Rules and Regulations ehiers on DSK5VPTVN1PROD with RULES 2. Comments on Proposed Rule Amendment We received comments on the proposed amendment from two commenters, both generally supporting the amendment.85 One commenter supported the proposed amendment to the definition of ‘‘held of record’’ to implement JOBS Act Section 503, but recommended that the Commission clarify and extend the scope of the proposed exclusion for securities received in exchange for excludable securities.86 The commenter recommended that the Commission revise the exclusion for employee compensation plan securities acquired through a business combination to encompass securities that are ‘‘exempt from, or not subject to, the registration requirements of Section 5 of the Securities Act.’’ The commenter noted that the proposed language, if construed literally, may not apply to exempt securities under Section 3 of the Securities Act, such as securities issued under Section 3(a)(9) (in connection with exchange offers), Regulation A or Rule 504 or 505 of Regulation D, because those exemptions are securitiesbased rather than transaction-based. Finally, the commenter noted that business combinations do not always involve an exchange and suggested additional clarification that the rule would apply to securities received ‘‘in exchange for, in substitution for or upon conversion or exercise of’’ the original securities. This commenter additionally recommended that the Commission expand the exclusion for securities issued in business combinations and similar transactions that replace securities previously issued pursuant to an employee compensation plan to include former employees, directors, general partners, trustees, officers, or consultants and advisors who were employed by, or providing services to, a predecessor of the issuer or a company acquired in a business combination. The commenter expressed concern that denying the exclusion to former employees could inhibit issuers from entering into business combination transactions. 3. Final Rule Amendment After considering the comments, we are adopting Exchange Act Rule 12g5– 1(a)(8)(i) with the clarifications and changes detailed below.87 We are 85 See letters from ABA and ADISA. letter from ABA. 87 As part of the amendments to Regulation A, we adopted a new Exchange Act Rule 12g5–1(a)(7) providing a conditional exemption to the definition 86 See VerDate Sep<11>2014 15:17 May 09, 2016 Jkt 238001 amending the definition of ‘‘held of record’’ to provide that when determining whether an issuer is required to register a class of equity securities with the Commission pursuant to Exchange Act Section 12(g)(1) an issuer may exclude securities that are: • Held by persons who received the securities pursuant to an employee compensation plan in transactions exempt from, or not subject to, the registration requirements of Section 5 of the Securities Act; or • held by persons who received the securities in a transaction exempt from, or not subject to, the registration requirements of Section 5 of the Securities Act from this issuer, a predecessor of the issuer or an acquired company in substitution or exchange for excludable securities under Exchange Act Rule 12g5–1(a)(8)(i)(A), as long as the persons were eligible to receive securities pursuant to Rule 701(c) at the time the excludable securities were originally issued to them. Consistent with one commenter’s suggestion,88 we are revising the language in new Exchange Act Rule 12g5–1(a)(8)(i)(A) to encompass securities received in transactions exempt from, or not subject to, the registration requirements of Section 5. Such transactions include transactions that did not involve a sale of securities within the meaning of Section 2(a)(3) of the Securities Act, as well as transactions involving exempt securities, such as sales of securities made pursuant to Section 3 of the Securities Act. As we indicated in the Proposing Release, while securities issued to employees in transactions that do not involve a sale under Section 2(a)(3) are not technically ‘‘transactions exempted from the registration requirements of Section 5,’’ they are similar to other compensatory issuances to employees in exempt transactions in that the issuer provides the awards to employees for a compensatory purpose. We believe it is consistent with the statutory relief to also exclude from the definition of ‘‘held of record’’ in Rule 12g5–1 exempt securities issued to employees pursuant to an employee compensation plan. These exempt of ‘‘held of record’’ for securities issued in Tier 2 Regulation A offerings. Amendments to Regulation A, Rel. No. 33–9741 (Mar. 25, 2015) [80 FR 21805 (Apr. 20, 2015)]. We proposed to use Rule 12g5– 1(a)(7) for the exemption and safe harbor under the definition of ‘‘held of record’’ for certain employee compensation plan securities in the Proposing Release. Because Rule 12g5–1(a)(7) has been adopted in relation to Regulation A, we are adopting the proposed exemption and safe harbor as Exchange Act Rule 12g5–1(a)(8). 88 See letter from ABA. PO 00000 Frm 00007 Fmt 4700 Sfmt 4700 28695 securities are similarly issued to employees for compensatory purposes and their issuance does not require registration under the Securities Act. We are adopting new Exchange Act Rule 12g5–1(a)(8)(i)(B) to provide relief in the context of business combinations. We are clarifying and expanding the proposed relief to encompass securities held by former employees of the issuer or its predecessors. In response to a commenter’s concern that the term ‘‘in exchange for’’ is not broad enough to capture all of the ways in which a person may receive new securities in place of existing securities held prior to a business combination, we have revised the language by using the phrase ‘‘in substitution or exchange for’’ to cover various methods of how those securities may be received in place of the existing securities, such as upon conversion or exercise of such securities. In response to a commenter’s concerns,89 we are revising proposed Rule 12g5–1(a)(8)(i)(B) to also permit securities to be excluded if they were received by former employees in an exempt transaction in substitution or exchange for excludable securities, where the former employees were eligible under Rule 701(c) to receive the original securities at the time of issuance. Under the exemption as proposed, securities received in such an exchange by former employees of an issuer and employees of an acquired issuer or the target company in a business combination would not have been excludable. Requiring issuers to count those securities for Exchange Act registration purposes could, as the commenter noted, inhibit issuers from entering into economically beneficial business combinations. Such former employees of the issuer, and employees of a predecessor of the issuer or an acquired company, will have received the original securities pursuant to an employee compensation plan in a transaction exempt from, or not subject to, the registration requirements of Section 5 of the Securities Act. We therefore believe it is appropriate to exclude the securities received by these former employees 90 in such an exchange when determining whether an issuer is required to register under Section 12(g)(1). C. Non-Exclusive Safe Harbor for Determining Holders of Record Section 503 of the JOBS Act directed the Commission to establish a safe 89 Id. 90 Rule 701(c) provides appropriate limitations on who may qualify as an employee, former employee, or permitted family member transferee. See discussion in Section III.C.3.a. E:\FR\FM\10MYR1.SGM 10MYR1 28696 Federal Register / Vol. 81, No. 90 / Tuesday, May 10, 2016 / Rules and Regulations harbor in Rule 12g5–1 that issuers can rely on when determining if securities held by persons who received them pursuant to an employee compensation plan in transactions exempted from the registration requirements of Section 5 of the Securities Act may be excluded when calculating the number of holders of record of a class of equity securities for purposes of determining the issuer’s registration obligation under Section 12(g)(1). One pre-proposal commenter recommended that the Commission expressly provide a non-exclusive safe harbor akin to the Securities Act Rule 506 safe harbor under Securities Act Section 4(a)(2).91 This commenter recommended that the safe harbor provide that an issuer may treat an issuance of securities as exempt from Securities Act registration for purposes of Section 12(g)(5) if that issuer had a reasonable belief that the exemption was available at the time the securities were issued.92 1. Proposed Rule Amendment We proposed a non-exclusive safe harbor that would provide that a person will be deemed to have received the securities pursuant to an employee compensation plan if such person received them pursuant to a compensatory benefit plan in transactions that met the conditions of Securities Act Rule 701(c). ehiers on DSK5VPTVN1PROD with RULES 2. Comments on Proposed Rule Amendment We received comments on the proposed amendment from two commenters, both generally supporting the amendment.93 One commenter, while generally supportive of the rule and safe harbor, expressed concern that an issuer’s ability to rely on the safe harbor was conditioned on the issuer’s ability to demonstrate compliance with all of the express requirements of an exemption, placing undue emphasis on technical aspects of the exemption that should not serve as the basis for determining whether an issuer should be required to register under Section 12(g).94 This commenter suggested that Section 503 of the JOBS Act should be read to mandate that the safe harbor provide certainty with respect to the 91 See letter from ABA Pre-Proposal recommending that the Commission provide ‘‘that the safe harbor(s) is not the exclusive means by which an issuer may comply with the ‘compensatory plan carve-out’ provisions of Section 12(g)(5).’’ This commenter suggested that ‘‘failure to satisfy all conditions to reliance on the safe harbor(s) should not preclude reliance on the statutory carve-out itself.’’ 92 See letter from ABA Pre-Proposal. 93 See letters from ABA and ADISA. 94 See letter from ABA. VerDate Sep<11>2014 15:17 May 09, 2016 Jkt 238001 exempt offering condition of JOBS Act Section 502 and that if the safe harbor requires an issuer to establish annually that each issuance of exempt equity securities satisfied an available Securities Act exemption, then the safe harbor would impose a significant ongoing burden on the issuer. The commenter recommended revising the safe harbor so that, solely for purposes of Exchange Act Section 12(g), the original issuance would be deemed to have satisfied the Securities Act exemption condition if the conditions of Securities Act Rule 701(c) are satisfied at the end of the fiscal year.95 Two commenters made recommendations that the Commission provide more guidance on the application of Securities Act Rule 701(c), or modify the application of Rule 701(c) in the Section 12(g) context.96 One commenter recommended that there be no limit on the categories of persons who may receive securities pursuant to an employee compensation plan for purposes of the safe harbor.97 Another commenter recommended expanding the provisions of Securities Act Rule 701(c) to exempt any consultants and advisors, instead of maintaining the limitation in Rule 701(c) to consultants and advisors who are natural persons.98 This commenter also recommended that the Commission explicitly provide that Rule 701(c) extends to family members who acquire equity securities initially issued pursuant to a compensatory benefit plan from an employee (or former employee) by gift or domestic relations order, or upon an employee’s death or disability, as well as to the executor or guardian of the employee, former employee, or family member who acquires the securities upon such person’s death or disability. 3. Final Rule Amendment and Interpretation After considering the comments, we are adopting the proposed amendment to Exchange Act Rule 12g5–1(a)(8) with the additions and clarifications detailed below. We are adopting a non-exclusive safe harbor.99 The safe harbor provides that: • an issuer may deem a person to have received the securities pursuant to an employee compensation plan if such plan and the person who received the 95 Id. 96 See letters from ABA and ADISA. letter from ADISA. 98 See letter from ABA. 99 Failure to satisfy all of the conditions of the non-exclusive safe harbor would not preclude reliance on Section 12(g)(5) or other provisions of the rule. 97 See PO 00000 Frm 00008 Fmt 4700 Sfmt 4700 securities pursuant to the plan met the plan and participant conditions of Securities Act Rule 701(c); and • an issuer may, solely for the purposes of Section 12(g), deem the securities to have been issued in a transaction exempt from, or not subject to, the registration requirements of Section 5 of the Securities Act if the issuer had a reasonable belief at the time of the issuance that the securities were issued in such a transaction. a. Employee Compensation Plan We believe that using the conditions of Rule 701(c) to structure the employee compensation plan safe harbor for the determination that a person received the securities pursuant to an employee compensation plan allows issuers to apply well understood principles of an existing Securities Act exemption to the new Exchange Act registration determination created by the JOBS Act. We believe application in a Section 12(g) context of the familiar concepts applied in connection with the issuance of compensatory equity securities under Securities Act Rule 701 will facilitate compliance and simplify recordkeeping. Rule 701 exempts from Securities Act registration offers and sales of securities pursuant to certain compensatory benefit plans and contracts relating to compensation. Rule 701(c) limits this exemption to offers and sales of securities under a written compensatory benefit plan established by the issuer, its parents, its majority-owned subsidiaries or majority-owned subsidiaries of the issuer’s parent, for the participation of their employees, directors, general partners, trustees, officers, or consultants and advisors.100 100 Securities Act Rule 701(c) exempts offers and sales of securities (including plan interests and guarantees pursuant to Rule 701(d)(2)(ii)) under a written compensatory benefit plan (or written compensation contract) established by the issuer, its parents, its majority-owned subsidiaries or majority-owned subsidiaries of the issuer’s parent, for the participation of their employees, directors, general partners, trustees (where the issuer is a business trust), officers, or consultants and advisors, and their family members who acquire such securities from such persons through gifts or domestic relations orders. This section exempts offers and sales to former employees, directors, general partners, trustees, officers, consultants and advisors only if such persons were employed by or providing services to the issuer at the time the securities were offered. In addition, the term ‘‘employee’’ includes insurance agents who are exclusive agents of the issuer, its subsidiaries or parents, or who derive more than 50% of their annual income from those entities. As explained in the 1999 Rule 701 Release at Section II.D, Rule 701 is also available to persons with a de facto employment relationship with the issuer. Such a relationship would exist where a person not employed by the issuer provides the issuer services that traditionally are performed by an employee and the compensation paid for those services is the primary source of the person’s earned income. E:\FR\FM\10MYR1.SGM 10MYR1 Federal Register / Vol. 81, No. 90 / Tuesday, May 10, 2016 / Rules and Regulations ehiers on DSK5VPTVN1PROD with RULES Rule 701(c)(1) sets forth special requirements for consultants and advisors 101 and Rule 701(c)(3) defines eligible family members.102 The safe harbor we are adopting today is available for the plan participants enumerated in Rule 701(c), including employees, directors, general partners, trustees, officers and certain consultants and advisors.103 The safe harbor also is available for permitted family member transferees with respect to securities issued pursuant to a plan that are acquired by gift or domestic relations order from plan participants, or such 101 The Commission adopted amendments to Form S–8 and the Rule 405 definition of ‘‘employee benefit plan’’ that made Form S–8 available for the issuance of securities to consultants or advisors only if: They are natural persons; they provide bona fide services to the registrant; and the services are not in connection with the offer or sale of securities in a capital-raising transaction, and do not directly or indirectly promote or maintain a market for the registrant’s securities. See 1999 Form S–8 Release and 1999 Rule 701 Release. Rule 701(c)(1) applies the same limitations regarding consultants and advisors as those provided in Form S–8 and the Rule 405 definition of ‘‘employee benefit plan.’’ 102 Rule 701 is available for the exercise of employee benefit plan options by an employee’s family member who has acquired the options from the employee through a gift or a domestic relations order. As defined in Exchange Act Rule 701(c)(3) [17 CFR 230.701(c)(3)], for this purpose, ‘‘family member’’ includes any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brotherin-law, or sister-in-law, including adoptive relationships, any person sharing the employee’s household (other than a tenant or employee), a trust in which these persons have more than 50% of the beneficial interest, a foundation in which these persons (or the employee) control the management of assets, and any other entity in which these persons (or the employee) own more than 50% of the voting interests. 103 Unlike traditional employees, consultants and advisors typically provide their services to multiple clients rather than to the same issuer on a dedicated basis. This distinction may cause them to be less likely to hold the securities they receive as compensation and more likely to sell them. As a result the Commission limited the consultants and advisors eligible to rely on the exemption. See 1999 Rule 701 Release at Section II.D. We believe that in light of the Rule 701 restrictions applicable to consultants and advisors, the compensatory nature of the transactions justifies treating consultants and advisors who are eligible to receive securities in compensatory transactions that satisfy the conditions of Rule 701(c) as persons who receive securities pursuant to an employee compensation plan for purposes of the Rule 12g5–1 safe harbor. Furthermore, since the securities would no longer be eligible for the exclusion under the safe harbor following their transfer, we believe the potential for abuse would be limited. However, in spite of one commenter’s recommendation (see letter from ABA), we see no reason to expand the scope of eligible consultants and advisors under Section 12(g) or Rule 701, which the Commission narrowed in 1999 in order to address abuses in the use of Form S–8 and Rule 701. See Registration of Securities on Form S–8, Release No. 33–7646 (Feb. 25, 1999) [64 FR 11103 (Mar. 8, 1999)]; Rule 701— Exempt Offerings Pursuant to Compensatory Arrangements, Release No. 33–7645 (Feb 25, 1999) [64 FR 11095 (Mar. 8, 1999)]. VerDate Sep<11>2014 15:17 May 09, 2016 Jkt 238001 securities acquired by permitted family member transferees in connection with options transferred to them by the plan participant through gifts or domestic relations orders.104 Because the safe harbor is limited to holders who are persons specified in Rule 701(c), once these persons subsequently transfer the securities to holders not specified in Rule 701(c), whether or not for value, the securities must be counted as held of record by the transferee for purposes of determining whether the issuer is subject to the registration and reporting requirements of Exchange Act Section 12(g)(1). An issuer may rely on the safe harbor when determining the holders of securities issued in reliance on Securities Act Rule 701, as well as holders of securities issued in transactions otherwise exempted from, or not subject to, the registration requirements of the Securities Act that satisfy the conditions of Rule 701(c), even if all the other conditions of Rule 701, such as issuer eligibility in Rule 701(b)(1), the volume limitations in Rule 701(d) or the disclosure delivery provisions in Rule 701(e), are not met. Thus, the safe harbor is available for holders of securities received in other employee compensation plan transactions exempted from, or not subject to, the registration requirements of Section 5 of the Securities Act, such as securities issued in reliance on Securities Act Section 4(a)(2), Regulation A, Regulation D, or Regulation S under the Securities Act, that also meet the conditions of Rule 701(c). b. Securities Issued in Exempt Transactions In response to comments, we are adding a provision to the safe harbor relating to the determination that the securities were issued in a transaction exempt from, or not subject to, the registration requirements of Section 5 of the Securities Act. The addition to the safe harbor provides that, solely for purposes of Section 12(g) of the Exchange Act, an issuer may deem securities to have been exempt from, or not subject to, the registration requirements of Section 5 of the Securities Act if the issuer had a reasonable belief at the time of issuance 104 See Rule 701—Exempt Offerings Pursuant to Compensatory Arrangements, Release No. 33–7511 (Feb. 27, 1998) [63 FR 10785 (Mar. 5, 1998)] at Section III.E.4. Including family member transferees in the safe harbor is consistent with the approach in Rule 701(c), which provides an exemption to family member transferees in connection with stock options because of their common economic interest and the non-capital raising nature of the transactions. PO 00000 Frm 00009 Fmt 4700 Sfmt 4700 28697 that the securities were issued in a transaction that was exempt from, or not subject to, the registration requirements of Section 5. While one commenter recommended that the safe harbor should deem the securities qualified for the Securities Act exemption if the conditions of Securities Act Rule 701(c) were met as of the end of the fiscal year,105 we believe that such a safe harbor would go too far and negate the requirement that the securities have been issued in a transaction exempt from, or not subject to, the registration requirements of Section 5 of the Securities Act at the time of issuance. Instead, the safe harbor provides issuers with relief from the burden of establishing that earlier issuances of securities satisfied an appropriate exemption on an annual basis provided it had a reasonable belief that it had complied with the appropriate registration requirements or the conditions of an applicable exemption at the time of issuance. c. Interpretative Guidance Relating to Acquisitions by Family Members One commenter recommended that the Commission provide guidance regarding the application of Rule 701 to certain equity securities initially issued pursuant to a compensatory benefit plan acquired from an employee (or former employee) by gift or domestic relations order, or upon an employee’s (or former employee’s) death or disability.106 In light of the nature of such transactions, family members (as defined in Rule 701(c)) who receive the equity securities as a result of the employee’s (or former employee’s) gift, domestic relations order, or death are also considered as persons who received ‘‘the securities pursuant to an employee compensation plan’’ for purposes of Rule 12g5– 1(a)(8).107 D. Foreign Private Issuers 1. Proposed Rule Amendments While ‘‘foreign private issuers’’ 108 would be able to rely on Exchange Act 105 See letter from ABA. letter from ABA. 107 In general we understand that guardians or members of a committee for incompetent former employees, or similar persons duly authorized by law to administer the assets of former employees would administer the assets for the benefit of the former employee and title would not have transferred to these agents. In such circumstances, the securities would meet the conditions of Rule 701(c) for purposes of determining the holders of record. 108 See Exchange Act Rule 3b–4(c) [17 CFR 240.3b–4(c)]. A foreign private issuer is any foreign issuer other than a foreign government, except for an issuer that (1) has more than 50% of its 106 See E:\FR\FM\10MYR1.SGM Continued 10MYR1 28698 Federal Register / Vol. 81, No. 90 / Tuesday, May 10, 2016 / Rules and Regulations Rule 12g5–1(a)(8) when making their determination of the number of U.S. resident holders under Exchange Act Rule 12g3–2(a), we proposed to amend Exchange Act Rule 3b–4 to clarify that securities held by employees must continue to be counted for the purpose of determining the percentage of the issuer’s outstanding securities held by U.S. residents, and thus for determining whether an issuer qualifies as a foreign private issuer. We also proposed to amend the definition of ‘‘foreign private issuer’’ under Securities Act Rule 405 to reinsert an omitted instruction but with a proposed revision, identical to that proposed under Exchange Act Rule 3b– 4, clarifying that securities held by employees must continue to be counted for the purposes of determining the percentage of the issuer’s outstanding securities held by U.S. residents and foreign private issuer status under the Securities Act.109 2. Comments on Proposed Rule Amendments We received comments on the proposed amendments from one commenter, who supported the proposed amendments relating to foreign private issuers.110 ehiers on DSK5VPTVN1PROD with RULES 3. Final Rule Amendments After considering the comments, we are adopting the amendments substantially as proposed. Under the rules we are adopting, foreign private issuers may rely on Rule 12g5–1(a)(8) when making their determination of the number of U.S. resident holders under Exchange Act Rule 12g3–2(a).111 Under Rule 12g3–2(a), foreign private issuers that meet the asset and shareholder threshold for registration under Section 12(g) are exempt from registering any class of securities under that section if the class of securities is held by fewer than 300 holders resident in the United States.112 For purposes of determining whether this threshold is met, Rule 12g3–2(a)(1) specifies that the method shall be as provided in Exchange Act Rule 12g5–1, except that securities held of record by brokers, dealers, banks and nominees for the accounts of customers resident in the United States shall be outstanding voting securities held of record by U.S. residents and (2) any of the following: (i) A majority of its officers and directors are citizens or residents of the United States; (ii) more than 50% of its assets are located in the United States; or (iii) its business is principally administered in the United States. 109 17 CFR 230.405. The definition of ‘‘foreign private issuer’’ under the Securities Act is intended to be the same as the definition under Exchange Act Rule 3b–4. 110 See letter from ABA. 111 17 CFR 240.12g3–2(a). 112 Id. VerDate Sep<11>2014 15:17 May 09, 2016 Jkt 238001 counted as held by the number of separate accounts for which the securities are held.113 Because the rule directs issuers to the definition of ‘‘held of record’’ in Rule 12g5–1, the statutory changes to Section 12(g)(5) as well as the amendment to Rule 12g5–1 adopted today also apply to the determination of a foreign private issuer’s U.S. resident holders for the purposes of the Rule 12g3–2(a) analysis.114 IV. Economic Analysis Title V and Title VI of the JOBS Act increased the registration thresholds for issuers, amended the definition of ‘‘held of record’’ to exclude securities issued pursuant to employee compensation plans and increased the thresholds for termination of registration and suspension of reporting under the Exchange Act for banks and bank holding companies. The FAST Act similarly increased the thresholds for registration, termination of registration and suspension of reporting under the Exchange Act for savings and loan holding companies. The Commission is adopting amendments to implement Title V and Title VI of the JOBS Act and Title LXXXV of the FAST Act. In adopting rules or amendments, we are mindful of the costs imposed by and the benefits obtained from our rules. The discussion below attempts to address the economic effects of the amendments, including the likely costs and benefits of the amendments as well as the effect of the amendments on efficiency, competition and capital 113 The amendment to Rule 12g5–1 is limited to determinations under Section 12(g). The definition of ‘‘foreign private issuer’’ in Exchange Act Rule 3b–4 contains a cross-reference to Rule 12g3–2(a) for purposes of calculating record ownership in determining whether more than 50% of an issuer’s outstanding voting securities are directly or indirectly held by residents of the United States. In contrast to the approach in Rule 12g3–2(a), Rule 3b–4 clarifies that securities held by employees must continue to be counted for the purpose of determining the percentage of the issuer’s outstanding securities held by U.S. residents, and thus for determining whether an issuer qualifies as a foreign private issuer. See Instruction to paragraph (c)(1) of Rule 3b–4. We are revising the Instruction to paragraph (c)(1)A.2. from the proposal to clarify that all of Rule 12g5–1(a)(8) does not apply for purposes of making a determination under Rule 405 as to foreign private issuer status. 114 The definition of ‘‘foreign private issuer’’ under the Securities Act, which is found in Securities Act Rule 405, is the same as the definition under Exchange Act Rule 3b–4. We are similarly amending the foreign private issuer definition under Rule 405 to reinsert an omitted instruction with an identical revision to that in Rule 3b–4, clarifying that securities held by employees must continue to be counted for the purposes of determining the percentage of the issuer’s outstanding securities held by U.S. residents and foreign private issuer status under the Securities Act. PO 00000 Frm 00010 Fmt 4700 Sfmt 4700 formation.115 Some of the costs and benefits stem from the statutory mandates of Title V and Title VI of the JOBS Act and Title LXXXV of the FAST Act, while others are affected by the discretion we exercise in revising our rules to reflect this mandate. For purposes of this economic analysis, we address the benefits and costs resulting from the mandatory statutory provisions and our exercise of discretion together because the two types of costs and benefits are not readily separable. We also analyze the benefits and costs of significant alternatives to the amendments that were suggested by commenters and that we considered on our own accord. A. Baseline The baseline for our economic analysis of the amendments, including the baseline for our consideration of the effects on efficiency, competition and capital formation, is the state of the market as well as market practices prior to enactment of the JOBS Act and the FAST Act. Prior to the JOBS Act, issuers were required to register a class of their equity securities with the Commission upon reaching 500 holders of record and total assets of $10 million 116 and were allowed to terminate registration or suspend the duty to file periodic and current reports with the Commission when the number of holders of record had fallen below 300, or below 500 and total assets had not exceeded $10 million on the last day of each of the issuer’s three most recent fiscal years. In addition, Exchange Act Rules 12h–1(f) and 12h–1(g) permitted issuers to exclude stock options issued under written compensatory benefit plans under certain conditions from the registration requirements of Section 12(g). The JOBS Act raised the thresholds at which an issuer is required to register a class of equity securities with the Commission pursuant to Section 12(g) and provided that persons holding certain employee compensation plan 115 Section 23(a)(2) of the Exchange Act [17 U.S.C. 78w(a)(2)] requires the Commission, when making rules under the Exchange Act, to consider the impact that the rules would have on competition, and prohibits the Commission from adopting any rule that would impose a burden on competition not necessary or appropriate in furtherance of the Exchange Act. 15 U.S.C. 78w(a). Further, Section 2(b) of the Securities Act [15 U.S.C. 77b(b)] and Section 3(f) of the Exchange Act [17 U.S.C. 78c(f)] require the Commission, when engaging in rulemaking where it is required to consider or determine whether an action is necessary or appropriate in the public interest, to consider, in addition to the protection of investors, whether the action will promote efficiency, competition and capital formation. 116 See supra note 31. E:\FR\FM\10MYR1.SGM 10MYR1 Federal Register / Vol. 81, No. 90 / Tuesday, May 10, 2016 / Rules and Regulations ehiers on DSK5VPTVN1PROD with RULES securities need not be counted when determining whether an issuer is required to register. The JOBS Act also raised the thresholds at which an issuer that is either a bank or a bank holding company is permitted to terminate registration or suspend reporting obligations with the Commission. These statutory changes were effective immediately upon signing of the JOBS Act. As a result, some banks and bank holding companies were newly eligible to terminate registration or suspend reporting. As of December 31, 2015, we estimate that approximately 103 such institutions have elected to do so.117 We estimate that there are approximately 486 banks and bank holding companies that currently report to the Commission,118 of which some may be eligible to terminate registration under the JOBS Act but have elected to continue reporting. Subsequent to the JOBS Act, the FAST Act raised the thresholds at which savings and loan holding companies are required to register and permitted to terminate registration or suspend reporting obligations to the same thresholds as apply to banks and bank holding companies. These statutory changes were effective immediately upon signing of the FAST Act. We estimate that, as of December 31, 2015, there are approximately 64 savings and loan holding companies that currently report to the Commission, approximately 28 of which are eligible to terminate registration or suspend reporting under the amendments.119 We are amending specified Exchange Act rules to reflect the new, higher threshold for banks, savings and loan holding companies and bank holding companies under Section 12(g)(4) and Section 15(d)(1). For those banks, savings and loan holding companies and bank holding companies that are eligible to terminate registration under Section 12(g), the amendments will provide the same procedural accommodations available to other issuers under current rules by permitting these institutions to suspend their reporting obligations immediately upon the filing of a certification on Form 15 with the Commission. In addition, the amendments apply the definition of ‘‘accredited investor’’ in Securities Act Rule 501(a) in making determinations under Exchange Act Section 12(g)(1), revise the definition of ‘‘held of record’’ in Rule 12g5–1, and establish a non-exclusive safe harbor for issuers to rely on when determining whether securities were received pursuant to an employee compensation plan in transactions exempt from, or not subject to, the registration requirements of Section 5 of the Securities Act. The non-exclusive safe harbor, as adopted, permits an issuer to rely on the definition of ‘‘compensatory benefit plan’’ in Securities Act Rule 701 and the conditions in Securities Act Rule 701(c) in determining whether a person has received securities pursuant to an employee compensation plan. It also permits an issuer to rely on a reasonable belief at the time of issuance that the securities were issued in a transaction exempt from, or not subject to, the registration requirements of Section 5. We considered alternative definitions of ‘‘employee compensation plan.’’ We also considered whether to provide additional guidance with respect to the determination of accredited investor status when establishing the number of holders of record. These decisions may affect how a non-reporting issuer counts its holders of record for the purpose of the registration thresholds under the Exchange Act; hence, they could affect whether an issuer becomes subject to Exchange Act reporting. However, due to limited availability of shareholder information on these non-reporting issuers, we are unable to quantify the number of non-reporting issuers that might be affected by these decisions. 117 The Commission staff derived this estimate of the number of banks and bank holding companies that have elected to terminate registration or suspend reporting by analyzing Form 15 filings on EDGAR. 118 The Commission staff derived this estimate by analyzing annual filings submitted to the Commission as of December 31, 2015 for the most recently completed fiscal year. 119 Id. We note, however, that 25 of these 28 savings and loan holding companies are listed on a national securities exchange and required to report under Section 12(b) of the Exchange Act. In order to cease reporting, these issuers would be required to delist from the exchange. 1. Increased Regulatory Thresholds for Banks, Savings and Loan Holding Companies and Bank Holding Companies As discussed above, the JOBS Act and the FAST Act amended Sections 12(g) and 15(d) of the Exchange Act to raise the thresholds at which banks, savings and loan holding companies and bank holding companies may terminate registration or suspend their obligations to file reports with the Commission VerDate Sep<11>2014 15:17 May 09, 2016 Jkt 238001 B. Analysis of the Amendments The amendments will affect reporting issuers generally, and banks, bank holding companies and savings and loan holding companies specifically, as well as non-reporting issuers, employees and other investors. We analyze the costs and benefits associated with the amendments below. PO 00000 Frm 00011 Fmt 4700 Sfmt 4700 28699 from 300 to 1,200 holders of record.120 However, without the amendments being adopted today, banks, savings and loan holding companies and bank holding companies that want to use the higher thresholds must wait 90 days after filing a certification with the Commission that the number of holders of record is less than 1,200 persons to terminate their Section 12(g) registration and cease filing reports required by Section 13(a) and must wait until the first day of the fiscal year to suspend any Section 15(d) reporting obligations. For other issuers, our existing rules afford procedural accommodations that allow them to suspend their reporting obligations immediately upon the filing of a certification on Form 15. To make these procedural accommodations applicable to banks, savings and loan holding companies and bank holding companies, as proposed, the amendments revise Exchange Act Rules 12g–2, 12g–3, 12g– 4 and 12h–3 to reflect the 1,200 holders of record threshold for banks, savings and loan holding companies and bank holding companies. This will permit banks, savings and loan holding companies and bank holding companies to rely on these rules to cease reporting during a fiscal year, rather than wait the 90 days or until the end of the reporting year prescribed under the Exchange Act. This will reduce issuer compliance and reporting costs during the fiscal year the issuer ceases reporting 121 and may lessen potential confusion that could arise from the differences in the thresholds contained in the statute and our existing rules. At the same time, extending these procedural accommodations could accelerate the loss of investor access to current information about the issuer. We note, however that this effect is likely mitigated by the non-SEC regulatory disclosure requirements that will continue to apply to regulated banks, savings and loan holding companies and bank holding companies after adoption of today’s amendments. We believe that the amendments adopted under this rule will not have a significant impact on competition. To the extent that savings pursuant to lower compliance and reporting costs could possibly be used to increase institutions’ lending activities, the amendments may lead to higher levels 120 For other issuers, the threshold in Section 12(g)(4) for termination of registration and in Section 15(d)(1) for suspension of reporting remains at 300 holders of record. 121 See letter from ABA indicating that these costs could be especially onerous for financially distressed firms and from ICBA. E:\FR\FM\10MYR1.SGM 10MYR1 28700 Federal Register / Vol. 81, No. 90 / Tuesday, May 10, 2016 / Rules and Regulations ehiers on DSK5VPTVN1PROD with RULES of investment and capital formation in the economy. As stated above, we estimate that there are approximately 550 banks, savings and loan holding companies and bank holding companies that currently report with the Commission. Many of these reporting issuers have more than 1,200 holders of record and are not eligible to cease reporting under the new higher thresholds. However, approximately 192 of these reporting banks, savings and loan holding companies and bank holding companies have between 300 and 1,199 holders of record and may be eligible to cease reporting. Many of these banks and bank holding companies have likely been eligible to deregister or suspend reporting since the adoption of the JOBS Act, but have chosen to continue as reporting issuers. One explanation for why many of these issuers have chosen not to deregister is that most (143) are also listed on national securities exchanges and if they chose to deregister or suspend reporting under the Exchange Act, they would have to give up their national exchange listing.122 While a higher percentage of savings and loan holding companies have become eligible to terminate their registration or suspend reporting under the FAST Act, approximately 50 of 64 reporting savings and loan holding companies are registered pursuant to Section 12(b). Based on staff research, most of the newly eligible savings and loan holding companies (approximately 25 of the 28) would have to delist from a national securities exchange to cease reporting under the Exchange Act. We believe that the likelihood of large numbers of eligible banks, savings and loan holding companies and bank holding companies terminating registration or suspending reporting based on the new higher thresholds in future years is low. While a relatively larger number of banks and bank holding companies (69) relied on the new thresholds to exit Exchange Act reporting immediately after the adoption of the JOBS Act in 2012, the numbers of such issuers relying on the new thresholds to exit substantially decreased over the subsequent three years (18 in 2013, 7 in 2014 and 6 in 2015).123 As banks and bank holding companies remain subject to other 122 Listing on a national securities exchange triggers current and periodic Exchange Act reporting requirements under Section 12(b). 123 The Commission staff derived this estimate by analyzing Form 15 filings submitted to the Commission. These numbers indicate that approximately 4%, 1% and 1% of the reporting bank and bank holding companies deregistered during 2013, 2014 and 2015, respectively. VerDate Sep<11>2014 15:17 May 09, 2016 Jkt 238001 regulatory reporting requirements,124 many have chosen to continue reporting, and bear ongoing reporting costs, even though they are eligible to cease reporting under Section 12(g) of the Exchange Act. We expect to see a similar trend with respect to the deregistrations of savings and loan holding companies. In deciding whether to terminate registration or suspend their reporting obligations, we anticipate that banks, savings and loan holding companies and bank holding companies will weigh the benefits of being a public company against the burden of additional disclosure costs. Commonly cited benefits of being a public company include the ability to obtain a lower cost of capital for investment and growth, increased liquidity through a broader shareholder base, and greater ability to finance acquisitions and offer equitybased incentive contracts.125 Commonly cited costs of being a public company include the need to comply with increased regulations and regulatory supervision, including requirements for independent audits,126 disclosure of information to competitors, loss of control and ownership dilution.127 124 The Board of Governors of the Federal Reserve System is responsible for the consolidated supervision of bank holding companies and savings and loan holding companies and requires those entities to provide data relating to capitalization, liquidity, and risk management as well as periodic financial reports in order for the Board of Governors to analyze the overall financial condition of those entities to ensure safe and sound operations. 125 See J. Brau, Why Do Firms Go Public?, Oxford Handbook of Entrepreneurial Finance (2010) (providing a general discussion of the different rationales for firms to go public); U. Celikyurt, M. Sevilir, and A. Shivdasani, Going Public to Acquire? The Acquisition Motive in IPOs, J. FIN. ECON. (2010) (arguing that firms go public so as to facilitate acquisitions); M. Pagano, F. Panetta, and L. Zingales, Why Do Companies Go Public? An Empirical Analysis, J. FIN. (1998) (showing that initial public offerings are generally followed by lower cost of credit and increased turnover in control); T. Chemmanur and P. Fulghieri, A Theory of the Going Public Decision, REV. FIN.STUD. (1999) (arguing that going public broadens the ownership base of the firm); R. Rosen, S. Smart and C. Zutter, Why Do Firms Go Public? Evidence From the Banking Industry, Working Paper (2005) (finding that banks that go public are more likely to grow faster, earn higher profits, employ more leverage and become acquirers when compared to their non-reporting counterparts), available at https://papers.ssrn.com/sol3/ papers.cfm?abstract_id=686473. 126 See letter from IPA. IPA cited an estimate of ongoing reporting costs under the Exchange Act of $650,000 annually. This commenter additionally noted that becoming an Exchange Act reporting company may be contrary to an issuer’s business plan and against investors’ economic interests. See also letter from ABA positing that once the initial cost of implementing reporting procedures are undertaken, the ongoing costs of reporting are not a significant burden on capital formation and job creation. 127 See J. Brau and S. Fawcett, Initial Public Offerings: An Analysis of Theory and Practice, J. PO 00000 Frm 00012 Fmt 4700 Sfmt 4700 2. Use of the Term ‘‘Accredited Investor’’ in Exchange Act Section 12(g) Section 501 of the JOBS Act raises the number of holders of record at which an issuer is required to register a class of equity securities under the Exchange Act from 500 persons to 2,000 persons or 500 persons who are not accredited investors. In order for an issuer to rely on the new, higher threshold established by the JOBS Act, the issuer must make accredited investor determinations if it has more than 500 holders of record. We are amending Exchange Act Rule 12g–1 to clarify that the definition of ‘‘accredited investor’’ in Securities Act Rule 501(a) applies when making determinations under Exchange Act Section 12(g)(1) and that such determination must be made as of the last day of the fiscal year rather than at the time of sale of the securities. Under Rule 501(a), an accredited investor is any person who comes within one or more of the categories of investors specified therein, or who the issuer reasonably believes comes within any such category. Many issuers and investors are familiar with the Rule 501(a) definition as it is a central component for private offerings conducted under Securities Act Rule 506 of Regulation D.128 Consequently, the amendment should facilitate compliance.129 Developing an alternative definition for purposes of Section 12(g)(1) could impose costs on issuers and investors by requiring them to familiarize themselves with, and apply, a new and different standard.130 Due to limitations in available data, we are unable to estimate how many issuers will be impacted by using the Rule 501(a) definition of ‘‘accredited investor.’’ Requiring issuers to make the accredited investor determination at the end of the fiscal year rather than at the time of sale of securities will ensure that the information is timely and consistent FIN. (2006) (reporting based on a survey of CFOs that ‘‘desire to maintain decision-making control,’’ ‘‘disclosing information to competitors,’’ ‘‘SEC reporting requirements’’ and ‘‘to avoid ownership dilution’’ are among the top five reasons why firms choose to stay private); J. Farre-Mensa, Why Are Most Firms Privately Held?, Working paper, Harvard University (2011) (documenting that firms in industries with high disclosure costs (i.e., where it is easier for competitors to appropriate a firm’s intellectual property) tend to remain private), available at https://www.cemfi.es/ftp/pdf/papers/ wshop/Farre-Mensa_JobMarketPaper.pdf. 128 The Rule 501(a) definition is also used in connection with other unregistered offerings, for example for offerings conducted pursuant to amended Regulation A or the recently adopted Regulation Crowdfunding. 129 See letter from ABA. 130 Id. E:\FR\FM\10MYR1.SGM 10MYR1 ehiers on DSK5VPTVN1PROD with RULES Federal Register / Vol. 81, No. 90 / Tuesday, May 10, 2016 / Rules and Regulations with issuers’ facts and circumstances at the end of each year. Permitting an issuer to rely on an ongoing basis on information previously obtained relating to accredited investors status, such as allowing reliance on information obtained by the issuer at the time the securities were initially issued to the investor or at the time the securities were most recently issued to the investor, would likely be less costly than requiring the issuer to establish a reasonable belief that the investor is an accredited investor. This, however, could also lead to reliance on outdated information, potentially causing issuers with more than 500 non-accredited investors to fail to register, thereby leaving investors in those issuers with less information and protection under the federal securities laws. Not providing specific guidance or rules on how to establish a reasonable belief of a security holder’s status as an accredited investor for purposes of determining holders of record could result in some uncertainty and possibly higher costs for issuers. We believe, however, that the ‘‘reasonable belief’’ standard under Rule 501(a) provides issuers with appropriate flexibility to use the method that works best, given their individual circumstances, to determine the accredited investor status of their shareholders. We also believe that this standard may help to mitigate some of the concerns relating to higher costs under the adopted provision by allowing issuers to rely on previous/ other determinations if they have a reasonable belief that the security holder continues to be or is an accredited investor. We also note that many issuers are familiar with and routinely use the ‘‘reasonable belief’’ standard without such guidance when making private offerings in reliance on Regulation D. Some commenters recommended that the Commission address potential compliance issues related to the accredited investor threshold by providing a safe harbor for determining accredited investor status.131 A safe harbor could increase efficiency by providing issuers with a prescribed process to determine and update the accredited investor status of their investors. For example, a safe harbor that permits an issuer to rely on an annual affirmation of accredited investor status by the investor, other information obtained by the issuer or on a combination of a certification and other information may be less costly than requiring an issuer to establish a 131 See letters from ABA, Foley and NYCBA. See also letters from ADISA, CFM, Cleary and IPA. VerDate Sep<11>2014 15:17 May 09, 2016 Jkt 238001 reasonable basis for its determination through other means. Similarly, a safe harbor with specified time limits on the permitted use of the information 132 or conditioned upon the issuer not having information that the previously obtained information was incorrect, unreliable or had changed could address some of the concerns related to higher costs or outdated information. Another alternative would be a safe harbor that permits an issuer to rely on a third-party certification for determining the accredited investor status of investors.133 Despite the benefits described above, providing a specific method (or methods) under a safe harbor could become a de facto minimum standard which we believe would reduce the flexibility available to issuers for determining accredited investor status.134 Moreover, at-least for some issuers, a prescribed method may be less accurate and more burdensome than alternate non-prescribed methods in establishing the accredited status of investors. For example, a safe harbor providing for annual certification could be costly and have adverse impacts on small issuers and their investors,135 discouraging accredited investors from investing in their securities, and leading to lower levels of investment.136 3. Definition of ‘‘Held of Record’’ and Safe Harbor for Employee Compensation Plan Securities Section 12(g)(5), as amended by Section 502 of the JOBS Act, excludes from the definition of ‘‘held of record’’ securities held by persons who received them pursuant to an employee compensation plan in transactions exempted from the registration requirements of Section 5 of the Securities Act for purposes of determining whether an issuer is 132 See letter from Cleary suggesting a safe harbor permitting accredited investor status determinations made in offerings during the three months prior to fiscal year-end or on selfcertifications by investors if the offering occurred more than three months but less than twelve months prior to fiscal year-end. 133 See letter from IPA suggesting that relying upon third parties might allow issuers to reduce the cost of compliance for accredited investor determinations. We do not have adequate information about third-party certification providers and the characteristics of this industry to assess this alternative in terms of reliability and cost of the provided certification services. To the extent that reputational concerns would incentivize third-party certification providers to perform reliable and updated due diligence, third-party certification could potentially provide accurate information at a cost that economies of scale may lessen. 134 See letter from ABA. 135 See letter from IPA. 136 See letter from CFM. PO 00000 Frm 00013 Fmt 4700 Sfmt 4700 28701 required to register a class of security pursuant to Section 12(g)(1).137 Section 503 of the JOBS Act directs the Commission to adopt a safe harbor that issuers can use when making their holder of record determinations. We believe that, by making it easier for non-reporting companies that issue securities to their employees to remain below the registration and reporting thresholds in the Exchange Act, the statutory changes will benefit issuers by allowing them to better control how and when they become subject to reporting requirements, while continuing to use securities to compensate employees.138 These changes could be particularly beneficial for smaller or cashconstrained issuers that could more easily issue securities to their employees as a form of compensation without being subject to Exchange Act reporting requirements and the associated compliance costs. However, investors in these issuers, including employees, may be adversely affected by a delay in the potential registration of a class of securities and the associated reporting because they otherwise might benefit from the information provided through such reporting. As a result, the amendments to the definition of ‘‘held of record’’ and the non-exclusive safe harbor being adopted today could have an impact on the potential costs and benefits of Exchange Act registration for affected issuers and their investors by affecting areas such as the ease of relying upon the statutory exemption under Section 12(g), the number of non-reporting companies able to forestall registration, and the amount of information available to investors in those issuers’ securities, with effects, for example, on price efficiency and liquidity. We further discuss the economic impact of specific aspects of these amendments below. Instead of establishing a new definition for the term ‘‘employee compensation plan,’’ we are amending the definition of ‘‘held of record’’ to permit an issuer to exclude securities held by persons who received them pursuant to an employee compensation plan in transactions exempted from, or not subject to, the registration requirements of Section 5 of the Securities Act and adopting a safe harbor providing that this condition will be satisfied if the securities were received pursuant to a compensatory benefit plan in transactions that meet 137 Prior to the JOBS Act, employees who obtained securities under an issuer’s employee compensation plan were not excluded from the shareholders of record calculation. 138 See letter from ABA. E:\FR\FM\10MYR1.SGM 10MYR1 ehiers on DSK5VPTVN1PROD with RULES 28702 Federal Register / Vol. 81, No. 90 / Tuesday, May 10, 2016 / Rules and Regulations the conditions of Rule 701(c). By not creating a new definition and relying on familiar concepts, the amendments should facilitate compliance and simplify recordkeeping by issuers.139 In a change from the proposal, we are revising the amendments to the definition of ‘‘held of record’’ to make clear that, in addition to securities issued to employees in transactions exempted from the registration requirements of Securities Act Section 5 (such as securities issued in a Rule 506 offering) or those issued to employees in transactions that did not involve a sale of securities within the meaning of Securities Act Section 2(a)(3), the amended definition also will permit issuers to exclude exempt securities issued to employees pursuant to Securities Act Section 3 (such as securities issued in a Regulation A or Rule 504 offering). The amendment will provide consistency in treatment of securities received pursuant to employee compensation plans in primary transactions that are exempt from Section 5 registration requirements or not subject to Section 5 registration requirements.140 This could lower issuer costs and facilitate compliance. At the same time, such an expanded definition of ‘‘held of record’’ could reduce the number of holders of record of an issuer and potentially allow the issuers to delay or avoid Exchange Act reporting. The amendments will permit issuers to exclude securities held by former employees who received the securities in a transaction exempt from, or not subject to, the registration requirements of Securities Act Section 5 in substitution or exchange for securities excludable under the proposed definition of held of record, as long as the former employees were eligible, at the time of issuance, to receive the original excludable securities. Relative to the proposal, the amended definition will also include such securities held by former employees who were employed by or providing services to a predecessor or an acquired company. By providing uniform treatment for all securities issued in exempt transactions, such provisions could lower issuer costs and facilitate compliance. Permitting exclusion of securities received by former employees and covered persons and securities exchanged or substituted for such original excludable securities also is likely to remove disincentives for issuers to engage in value-enhancing business combinations or other similar 139 See letter from ABA. 140 Id. VerDate Sep<11>2014 15:17 May 09, 2016 Jkt 238001 transactions,141 which will benefit issuers and their investors. In this way, the amendments may also lead to a more efficient allocation of resources amongst firms that could improve growth prospects over the longer run. As proposed, the amendments establish a non-exclusive safe harbor that issuers can rely on when determining whether holders of securities received pursuant to an employee compensation plan may be excluded. Consistent with the proposal, the safe harbor being adopted relies on the conditions in existing Rule 701(c). Relying on an existing standard that is already understood by market participants will make it easier for issuers to avail themselves of this safe harbor than if we proposed a new alternative standard. While generally broad in application, the conditions in Rule 701(c) impose certain limitations, such as requiring that securities be sold under a compensatory benefit plan, that the plan be written, that the plan be established by the issuer or certain specified related entities and that participation be limited to employees and certain other specified persons. Although we are unable to quantify the impact of adopting this safe harbor, as we cannot reliably predict the number of issuers that would rely on it, we can qualitatively assess its impact. A safe harbor that applies the familiar concepts of existing Rule 701(c) should create efficiencies in its application and avoid conflicts with existing rules, which could reduce costs, especially for smaller issuers.142 In a change from the proposal, the safe harbor also includes a reasonable belief standard. The inclusion of such a standard will obviate the need for issuers to re-establish that earlier issuances satisfied an appropriate exemption at the time of issuance. This should provide greater regulatory certainty, leading to lower compliance burdens for issuers.143 Similarly, the interpretative guidance set forth in this release regarding transfers to family members of such exempt securities through the employee’s death, disability or domestic relations order provides greater regulatory certainty with respect to specific circumstances that are unexpected or out of control of the issuer, which will benefit issuers intending to use equity compensation.144 141 Id. 142 See letter from ABA which states that Rule 701 is the primary exemption relied upon by smaller and other non-reporting issuers for such transactions. 143 Id. 144 Id. PO 00000 Frm 00014 Fmt 4700 Sfmt 4700 Finally, as proposed, the amendments also provide that foreign private issuers will be able to rely on the adopted safe harbor when making their determination of the number of U.S. resident holders under Exchange Act Rule 12g3–2(a). While we are unable to quantify the number of foreign private issuers that will be impacted due to limitations in the available data, the amendments may allow some foreign private issuers to delay registering with and reporting to the Commission. The cost and benefit tradeoffs of Exchange Act registration for foreign private issuers will be analogous to the ones discussed above for domestic issuers. Additionally, the flexibility accorded by the amendments will benefit the U.S.based employees of foreign private issuers by putting them on equal footing with employees in domestic private companies.145 V. Paperwork Reduction Act Certain provisions of our disclosure rules and forms applicable to issuers contain ‘‘collection of information’’ requirements within the meaning of the Paperwork Reduction Act of 1995 (‘‘PRA’’).146 The hours and costs associated with preparing and filing forms and retaining records constitute reporting and cost burdens imposed by the collection of information requirements. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information requirement unless it displays a currently valid Office of Management and Budget (‘‘OMB’’) control number. Compliance with the information collections is mandatory. Responses to the information collections are not kept confidential and there is no mandatory retention period for the collections of information. The amendments adopted today do not alter the disclosure requirements set forth in our rules and forms; however, the JOBS Act and FAST Act amendments to Exchange Act Sections 12(g) and 15(d) and the amendments to our rules to reflect those statutory amendments are expected to insubstantially decrease the number of filings made pursuant to these rules and forms. Exchange Act Rules 12g–1, 12g– 2, 12g–3, 12g–4 and 12h-3 set forth when an issuer’s securities are required to be registered and the procedures for a registrant to terminate its registration or suspend its duty to file reports. The amendments provide thresholds that issuers may rely on when determining their registration and reporting 145 Id. 146 44 E:\FR\FM\10MYR1.SGM U.S.C. 3501 et seq. 10MYR1 Federal Register / Vol. 81, No. 90 / Tuesday, May 10, 2016 / Rules and Regulations ehiers on DSK5VPTVN1PROD with RULES obligations.147 Exchange Act Section 12(g)(5) and the amendment to Exchange Act Rule 12g5–1 also exclude securities received pursuant to certain employee compensation plans from the determination of when an issuer is required to initially register with the Commission. These changes will reduce the number of registrants required to initially register a class of securities with the Commission as well as accelerate the ability of some registrants to cease filing after they have crossed below the statutory thresholds. For purposes of the PRA, as discussed below, we estimate that the amendments will not substantially reduce the number of filings received, nor will they affect the incremental burden or cost per filing. The titles for the affected collections of information are: (1) ‘‘Form 10’’ (OMB Control No. 3235–0064); 148 (2) ‘‘Form 20–F’’ (OMB Control No. 3235–0288); 149 (3) ‘‘Form 40–F’’ (OMB Control No. 3235–0381); 150 (4) ‘‘Form 10–K’’ (OMB Control No. 3235–0063); 151 (5) ‘‘Form 10–Q’’ (OMB Control No. 3235–0070); 152 (6) ‘‘Form 8–K’’ (OMB Control No. 3235–0060); 153 (7) ‘‘Schedule 14A’’ (OMB Control No. 3235–0059); 154 (8) ‘‘Schedule 14C’’ (OMB Control No. 3235–0057); 155 and (9) ‘‘Form 15’’ (OMB Control No. 3235–0167). The forms were adopted under the Exchange Act and the Securities Act and set forth the disclosure requirements for periodic, current and other reports required to be filed by issuers registered with the Commission. We estimate that there are approximately 579 Exchange Act registrants that are bank holding companies or savings and loan holding companies. We estimate that approximately 100 bank holding companies have filed Forms 15 to terminate or suspend their reporting obligations under the Exchange Act based on the statutory changes in the JOBS Act.156 To put these numbers in 147 We also are amending Rule 12g–1 to reflect the new higher thresholds in Section 12(g)(1). 148 17 CFR 249.10. 149 17 CFR 249.220f. 150 17 CFR 249.240f. 151 17 CFR 249.310. 152 17 CFR 249.308a. 153 17 CFR 249.308. 154 17 CFR 240.14a–101. 155 17 CFR 240.14c–101. 156 After the JOBS Act became effective, there was an increase in the number of termination and VerDate Sep<11>2014 15:17 May 09, 2016 Jkt 238001 context, the current PRA estimate for the number of annual reports on Form 10–K filed annually is 8,137. Moreover, for certain changes, such as the amendments to the definition of ‘‘held of record’’ in Rule 12g5–1, we do not have access to data to support a reliable estimate of the number of issuers that will not be required to file reports based on the JOBS Act amendments and our implementation of those amendments. As explained in the Proposing Release, because the rule amendments are not expected to substantially impact the overall burden estimates associated with our rules and forms and in light of the limitations on available data, we have not submitted revised burden estimates for these collections of information to OMB for review in accordance with the PRA and its implementing regulations.157 However, as we periodically update our PRA estimates in accordance with applicable regulations, we will make any necessary adjustments to reflect the actual number of filings received, including adjustments to reflect any reduction in filings arising from today’s amendments. VI. Final Regulatory Flexibility Act Analysis This Final Regulatory Flexibility Act Analysis has been prepared in accordance with 5 U.S.C. 604. This analysis relates to the amendments to Securities Act Rule 405 and Exchange Act Rules 3b–4, 12g–1, 12g–2, 12g–3, 12g–4, 12g5–1, and 12h–3. A. Need for, and Objectives of, the Action The primary reason for, and objective of, the proposed amendments is to implement Title V and Title VI of the JOBS Act and Title LXXXV of the FAST Act. The JOBS Act directs the Commission to issue rules to implement the statutory changes and specifically charges the Commission with amending the definition of ‘‘held of record’’ and establishing a safe harbor for the determination relating to ‘‘employee compensation plan’’ securities. The amendments adopted today revise suspension of registrations by bank holding companies. We do not anticipate a similar rate of deregistration for bank holding companies after revising our rules to reflect the new, higher deregistration threshold. As the FAST Act was only recently enacted, we do not have data on the number of savings and loan holding companies seeking to deregister. However, we do not expect the rate of deregistration for savings and loan holding companies to be as high as for bank holding companies, as many of the newly eligible savings and loan holding companies (20 of 26) would have to give up an exchange listing in order to terminate registration and suspend reporting. 157 44 U.S.C. 3507(d); 5 CFR 1320.11. PO 00000 Frm 00015 Fmt 4700 Sfmt 4700 28703 existing rules to reflect the new, higher Exchange Act registration, termination of registration and suspension of reporting thresholds for banks, savings and loan holding companies and bank holding companies, apply the definition of ‘‘accredited investor’’ in Securities Act Rule 501(a) in making determinations under Exchange Act Section 12(g)(1), revise the definition of ‘‘held of record’’ to exclude certain securities held by persons who received them pursuant to employee compensation plans, and establish a non-exclusive safe harbor for issuers to follow when determining whether those securities are ‘‘held of record.’’ Additionally, revising the definition and providing a non-exclusive safe harbor to issuers relating to the determination of securities ‘‘held of record’’ will assist issuers in determining which holders of record they are required to count under the registration requirements of Exchange Act Section 12(g). B. Significant Issues Raised by Public Comment In the Proposing Release, we requested comment on all aspects of the Initial Regulatory Flexibility Act (‘‘IRFA’’), including the number of small entities that would be affected by the proposed amendments, the nature of the impact, how to quantify the number of small entities that would be affected and how to quantify the impact of the proposed amendments. We did not receive comments specifically addressing the IRFA. We did, however, receive comments from members of the public on matters that could potentially impact small entities. Several commenters recommended a safe harbor for the establishment of a reasonable belief of accredited investor status.158 In contrast, one commenter opposed such a safe harbor out of concern that it would become a de facto minimum standard.159 Commenters also sought additional guidance or revisions to the proposed amendment to Rule 12g5–1 and Securities Act Rule 701.160 C. Small Entities Subject to the Rule Amendments Exchange Act Rule 0–10(a) 161 defines an entity, other than an investment company, to be a ‘‘small business’’ or ‘‘small organization’’ if it had total assets of $5 million or less on the last day of its most recent fiscal year. For 158 See letters from ADISA, CFM, Cleary, IPA. One commenter recommended a safe harbor for the determination specifically for private investment funds. 159 See letter from ABA. 160 See letters from ABA and ADISA. 161 17 CFR 240.0–10(a). E:\FR\FM\10MYR1.SGM 10MYR1 ehiers on DSK5VPTVN1PROD with RULES 28704 Federal Register / Vol. 81, No. 90 / Tuesday, May 10, 2016 / Rules and Regulations purposes of the Regulatory Flexibility Act, an investment company is a small entity if it, together with other investment companies in the same group of related investment companies, has net assets of $50 million or less as of the end of its most recent fiscal year.162 We estimate that there are approximately 841 issuers that file with the Commission, other than investment companies, that may be considered small entities.163 The rule amendments establishing the use of the Securities Act Rule 501(a) definition of ‘‘accredited investor’’ under Exchange Act Section 12(g)(1) and revising the definition of ‘‘held of record’’ to exclude certain securities and establish a non-exclusive safe harbor may affect small issuers relying on the revised rules and safe harbor to determine the number of holders of record. While an issuer is not required to register a class of equity securities pursuant to Section 12(g) of the Exchange Act until the issuer’s total assets exceed $10 million, a small business or small organization may rely on the rules when determining to whom to issue securities and whether to compensate employees with securities. By providing guidance on the meaning of the term ‘‘accredited investor’’ in the Exchange Act context, the rule amendments may facilitate private offerings and the ability of an issuer to determine their registration and reporting obligations. By excluding certain employee compensation securities from the definition of ‘‘held of record,’’ the rule amendments may facilitate the use of equity compensation by small issuers, thereby helping them to preserve cash and giving them greater ability to determine when the Exchange Act Section 12(g) registration obligation would be triggered. We cannot reliably estimate the number of small entities affected by these rule amendments. By definition, such entities are not yet subject to Section 12(g) registration and reporting requirements, which are triggered by the issuer having total assets exceeding $10 million as of the last day of its fiscal year. We do not otherwise have information about the number of shareholders at small entities, including those who have received securities as a result of employee compensation plans. 162 17 CFR 270.0–10(a). staff estimate is based on a review of Form 10–K, 20–F, 40–F filings (from EDGAR XBRL) with fiscal periods ending between January 31, 2015– January 31, 2016. 163 The VerDate Sep<11>2014 15:17 May 09, 2016 Jkt 238001 D. Reporting, Recordkeeping and Other Compliance Requirements The amendments’ use of the Securities Act Rule 501(a) definition of ‘‘accredited investor’’ and the definition of ‘‘held of record’’ will assist an issuer in determining the number of holders of record. In order for an issuer to rely on the safe harbor, the securities must be issued in a transaction exempt from, or not subject to, the registration requirements of Securities Act Section 5 and satisfy the requirements of Securities Act Rule 701(c), which includes the requirement that the securities be offered or sold under a written compensatory benefit plan or written compensation contract. In addition, issuers seeking to rely upon the safe harbor may need to maintain records to help establish their compliance with the conditions of the safe harbor. The rule amendments affecting banks, bank holding companies and savings and loan holding companies do not create any new reporting, recordkeeping or other compliance requirements for those entities. The rule amendments raise the thresholds relating to registration for those entities and therefore reduce their compliance burdens. E. Agency Action To Minimize Effect on Small Entities The Regulatory Flexibility Act directs us to consider significant alternatives that would accomplish the stated objective of our proposals, while minimizing any significant adverse impact on small entities. In connection with the rule amendments, we considered the following alternatives: (1) The establishment of differing compliance or reporting requirements or timetables that take into account the resources available to small entities; (2) the clarification, consolidation or simplification of compliance and reporting requirements under the rule for small entities; (3) the use of performance rather than design standards; and (4) an exemption from coverage of the rules, or any part of the rules, for small entities. We are applying the current definition of ‘‘accredited investor’’ in Securities Act Rule 501(a) in making determinations under Exchange Act Rule 12g–1(b)(1). Alternatively, we could have developed a new definition of ‘‘accredited investor’’ for purposes of Section 12(g)(1); however, given the prevalence of the use of Regulation D for exempt offerings, many issuers are familiar with and rely upon the definition in Rule 501(a). The increased PO 00000 Frm 00016 Fmt 4700 Sfmt 4700 registration threshold established by the JOBS Act is intended to permit issuers, including small entities, to defer Exchange Act registration until issuers have a larger shareholder base. Because proposed Rule 12g–1(b)(1) is intended to facilitate an issuer’s ability to make the determination of when it is required to register, we believe use of the familiar performance standard in Rule 501(a) definition of ‘‘accredited investor’’ will further this regulatory objective for all issuers, including small entities. We determined not to propose or adopt a safe harbor for the determination of accredited investor status. Requiring issuers to consider their particular facts and circumstances to establish a reasonable basis for their determination will provide issuers with flexibility in making the determination and diminish concerns that the information relied upon could be unreliable. Additionally, some standards that might be included in a safe harbor could, as one commenter noted, result in establishing a de facto minimum standard for the determination.164 This could shift the standard from a performance standard to a design standard which would provide issuers with less flexibility when making the determination. The revised definition of ‘‘held of record’’ and related safe harbor apply to all issuers, including small entities, that choose to exclude securities held by persons who received them pursuant to employee compensation plans in transactions exempt from, or not subject to, the registration requirements of Securities Act Section 5. The amendment and safe harbor help define the contours of an exemption from registration for issuers that might otherwise cross the Section 12(g) registration thresholds. The amendments are intended to permit issuers, including small entities, to exclude certain securities from the ‘‘held of record’’ determination and to assist issuers in making that determination by clarifying and simplifying requirements for all entities. Establishing different compliance or reporting requirements relating to employee compensation plan securities or accredited investor determinations for small entities could complicate the rules and make them more difficult to apply as those issuers grow, cease to be small entities, and are required to determine whether they must register with the Commission. With respect to the use of performance standards rather than design standards, we note that the holder of record threshold is a 164 See E:\FR\FM\10MYR1.SGM letter from ABA. 10MYR1 Federal Register / Vol. 81, No. 90 / Tuesday, May 10, 2016 / Rules and Regulations statutorily created design standard, requiring issuers to register if their holders of record coupled with their total assets cross certain thresholds. As we are modifying the definition of ‘‘held of record’’ and clarifying the determination of ‘‘accredited investor’’ under this statutory design standard, we did not evaluate whether a performance standard would be more useful. VII. Statutory Authority and Text of Rule Amendments The amendments contained in this release are being adopted under the authority set forth in Section 19 of the Securities Act, as amended, Sections 3(b), 12(g), 12(h), 15(d) and 23(a) of the Exchange Act, as amended, and Section 503 and Section 602 of the JOBS Act. List of Subjects in 17 CFR Parts 230 and 240 Reporting and recordkeeping requirements, Securities. Text of the Amendments For the reasons set out above, the Commission amends Title 17, chapter II of the Code of Federal Regulations as follows: PART 230—GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933 (iii) The jurisdiction that is the primary trading market for the issuer’s voting securities, if different than the issuer’s jurisdiction of incorporation; and (2) Notwithstanding § 240.12g5– 1(a)(8) of this chapter, the issuer shall not exclude securities held by persons who received the securities pursuant to an employee compensation plan. B. If, after reasonable inquiry, the issuer is unable to obtain information about the amount of shares represented by accounts of customers resident in the United States, the issuer may assume, for purposes of this definition, that the customers are residents of the jurisdiction in which the nominee has its principal place of business. C. Count shares of voting securities beneficially owned by residents of the United States as reported on reports of beneficial ownership provided to the issuer or filed publicly and based on information otherwise provided to the issuer. * * * * * PART 240—GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934 3. The general authority citation for part 240 is revised to read as follows: ■ * Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c–3, 78c–5, 78d, 78e, 78f, 78g, 78i, 78j, 78j–1, 78k, 78k–1, 78l, 78m, 78n, 78n–1, 78o, 78o–4, 78o–10, 78p, 78q, 78q–1, 78s, 78u–5, 78w, 78x, 78ll, 78mm, 80a–20, 80a–23, 80a–29, 80a-37, 80b–3, 80b– 4, 80b–11, 7201 et seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; Pub. L. 111–203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112–106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted. ■ * 1. The authority citation for part 230 continues to read, in part, as follows: ■ Authority: 15 U.S.C. 77b, 77b note, 77c, 77d, 77d note, 77f, 77g, 77h, 77j, 77r, 77s, 77z–3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o–7 note, 78t, 78w, 78ll(d), 78mm, 80a–8, 80a–24, 80a–28, 80a–29, 80a–30, and 80a–37, and Pub. L. 112–106, sec. 201(a), sec. 401, 126 Stat. 313 (2012), unless otherwise noted. * * * * 2. Amend § 230.405 by adding a Note to paragraph (1) of the definition of ‘‘Foreign private issuer’’ to read as follows: ehiers on DSK5VPTVN1PROD with RULES § 230.405 Definitions of terms. * * * * * Foreign private issuer. (1) * * * Note to paragraph (1) of the definition of Foreign private issuer: To determine the percentage of outstanding voting securities held by U.S. residents: A. Use the method of calculating record ownership in § 240.12g3–2(a) of this chapter, except that: (1) The inquiry as to the amount of shares represented by accounts of customers resident in the United States may be limited to brokers, dealers, banks and other nominees located in: (i) The United States, (ii) The issuer’s jurisdiction of incorporation, and VerDate Sep<11>2014 15:17 May 09, 2016 Jkt 238001 * * * * 4. Amend § 240.3b–4 by redesignating the Instruction to paragraph (c)(1) as Note to paragraph (c)(1), and revising newly redesignated Note to paragraph (c)(1) to read as follows: ■ § 240.3b–4 Definition of ‘‘foreign government,’’ ‘‘foreign issuer’’ and ‘‘foreign private issuer’’. * * * * * (c) * * * Note to paragraph (c)(1): To determine the percentage of outstanding voting securities held by U.S. residents: A. Use the method of calculating record ownership in § 240.12g3–2(a), except that: (1) Your inquiry as to the amount of shares represented by accounts of customers resident in the United States may be limited to brokers, dealers, banks and other nominees located in: PO 00000 Frm 00017 Fmt 4700 Sfmt 4700 28705 (i) The United States, (ii) Your jurisdiction of incorporation, and (iii) The jurisdiction that is the primary trading market for your voting securities, if different than your jurisdiction of incorporation; and (2) Notwithstanding § 240.12g5– 1(a)(8) of this chapter, you shall not exclude securities held by persons who received the securities pursuant to an employee compensation plan. B. If, after reasonable inquiry, you are unable to obtain information about the amount of shares represented by accounts of customers resident in the United States, you may assume, for purposes of this definition, that the customers are residents of the jurisdiction in which the nominee has its principal place of business. C. Count shares of voting securities beneficially owned by residents of the United States as reported on reports of beneficial ownership provided to you or filed publicly and based on information otherwise provided to you. * * * * * ■ 5. Revise § 240.12g–1 to read as follows: § 240.12g–1 Registration of securities; exemption from section 12(g). An issuer is not required to register a class of equity securities pursuant to section 12(g)(1) of the Act (15 U.S.C. 78l(g)(1)) if on the last day of its most recent fiscal year: (a) The issuer had total assets not exceeding $10 million; or (b) (1) The class of equity securities was held of record by fewer than 2,000 persons or 500 persons who are not accredited investors (as such term is defined in § 230.501(a) of this chapter, determined as of such day rather than at the time of the sale of the securities); or (2) The class of equity securities was held of record by fewer than 2,000 persons in the case of a bank; a savings and loan holding company, as such term is defined in section 10 of the Home Owners’ Loan Act (12 U.S.C. 1461); or a bank holding company, as such term is defined in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C. 1841). ■ 6. Revise § 240.12g–2 to read as follows: § 240.12g–2 Securities deemed to be registered pursuant to section 12(g)(1) upon termination of exemption pursuant to section 12(g)(2)(A) or (B). Any class of securities that would have been required to be registered pursuant to section 12(g)(1) of the Act (15 U.S.C. 78l(g)(1)) except for the fact E:\FR\FM\10MYR1.SGM 10MYR1 28706 Federal Register / Vol. 81, No. 90 / Tuesday, May 10, 2016 / Rules and Regulations that it was exempt from such registration by section 12(g)(2)(A) of the Act (15 U.S.C. 78l(g)(2)(A)) because it was listed and registered on a national securities exchange, or by section 12(g)(2)(B) of the Act (15 U.S.C. 78l(g)(2)(B)) because it was issued by an investment company registered pursuant to section 8 of the Investment Company Act of 1940 (15 U.S.C. 80a–8), shall upon the termination of the listing and registration of such class or the termination of the registration of such company and without the filing of an additional registration statement be deemed to be registered pursuant to section 12(g)(1) of the Act if at the time of such termination: (a) The issuer of such class of securities has elected to be regulated as a business development company pursuant to sections 55 through 65 of the Investment Company Act of 1940 (15 U.S.C. 80a–54 through 64) and such election has not been withdrawn; or (b) Securities of the class are not exempt from such registration pursuant to section 12 of the Act (15 U.S.C. 78l) or rules thereunder and all securities of such class are held of record by 300 or more persons, or 1,200 or more persons in the case of a bank; a savings and loan holding company, as such term is defined in section 10 of the Home Owners’ Loan Act (12 U.S.C. 1461); or a bank holding company, as such term is defined in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C. 1841). ■ 7. Amend § 240.12g–3 by revising paragraphs (a)(2), (b)(2), and (c)(2) to read as follows: ehiers on DSK5VPTVN1PROD with RULES § 240.12g–3 Registration of securities of successor issuers under section 12(b) or 12(g). (a) * * * (2) All securities of such class are held of record by fewer than 300 persons, or 1,200 persons in the case of a bank; a savings and loan holding company, as such term is defined in section 10 of the Home Owners’ Loan Act (12 U.S.C. 1461); or a bank holding company, as such term is defined in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C. 1841). * * * * * (b) * * * (2) All securities of such class are held of record by fewer than 300 persons, or 1,200 persons in the case of a bank; a savings and loan holding company, as such term is defined in section 10 of the Home Owners’ Loan Act (12 U.S.C. 1461); or a bank holding company, as such term is defined in VerDate Sep<11>2014 15:17 May 09, 2016 Jkt 238001 section 2 of the Bank Holding Company Act of 1956 (12 U.S.C. 1841). * * * * * (c) * * * (2) All securities of such class are held of record by fewer than 300 persons, or 1,200 persons in the case of a bank; a savings and loan holding company, as such term is defined in section 10 of the Home Owners’ Loan Act (12 U.S.C. 1461); or a bank holding company, as such term is defined in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C. 1841). * * * * * ■ 8. Amend § 240.12g–4 by revising paragraph (a) to read as follows: § 240.12g–4 Certifications of termination of registration under section 12(g). (a) Termination of registration of a class of securities under section 12(g) of the Act (15 U.S.C. 78l(g)) shall take effect 90 days, or such shorter period as the Commission may determine, after the issuer certifies to the Commission on Form 15 (§ 249.323 of this chapter) that the class of securities is held of record by: (1) Fewer than 300 persons, or in the case of a bank; a savings and loan holding company, as such term is defined in section 10 of the Home Owners’ Loan Act (12 U.S.C. 1461); or a bank holding company, as such term is defined in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C. 1841), 1,200 persons; or (2) Fewer than 500 persons, where the total assets of the issuer have not exceeded $10 million on the last day of each of the issuer’s most recent three fiscal years. * * * * * ■ 9. Amend § 240.12g5–1 by adding paragraph (a)(8) to read as follows: § 240.12g5–1 of record’’. Definition of securities ‘‘held (a) * * * (8)(i) For purposes of determining whether an issuer is required to register a class of equity securities with the Commission pursuant to section 12(g)(1) of the Act (15 U.S.C. 78l(g)(1)), an issuer may exclude securities: (A) Held by persons who received the securities pursuant to an employee compensation plan in transactions exempt from, or not subject to, the registration requirements of section 5 of the Securities Act of 1933 (15 U.S.C. 77e); and (B) Held by persons who received the securities in a transaction exempt from, or not subject to, the registration requirements of section 5 of the Securities Act (15 U.S.C. 77e) from the issuer, a predecessor of the issuer or an PO 00000 Frm 00018 Fmt 4700 Sfmt 9990 acquired company in substitution or exchange for excludable securities under paragraph (a)(8)(i)(A) of this section, as long as the persons were eligible to receive securities pursuant to § 230.701(c) of this chapter at the time the excludable securities were originally issued to them. (ii) As a non-exclusive safe harbor under this paragraph (a)(8): (A) An issuer may deem a person to have received the securities pursuant to an employee compensation plan if such plan and the person who received the securities pursuant to the plan met the plan and participant conditions of § 230.701(c) of this chapter; and (B) An issuer may, solely for the purposes of Section 12(g) of the Act (15 U.S.C. 78l(g)(1)), deem the securities to have been issued in a transaction exempt from, or not subject to, the registration requirements of Section 5 of the Securities Act (15 U.S.C. 77e) if the issuer had a reasonable belief at the time of the issuance that the securities were issued in such a transaction. * * * * * ■ 10. Amend § 240.12h–3 by revising paragraph (b)(1) to read as follows: § 240.12h–3 Suspension of duty to file reports under section 15(d). * * * * * (b) * * * (1) Any class of securities, other than any class of asset-backed securities, held of record by: (i) Fewer than 300 persons, or in the case of a bank; a savings and loan holding company, as such term is defined in section 10 of the Home Owners’ Loan Act (12 U.S.C. 1461); or a bank holding company, as such term is defined in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C. 1841), 1,200 persons; or (ii) Fewer than 500 persons, where the total assets of the issuer have not exceeded $10 million on the last day of each of the issuer’s three most recent fiscal years; and * * * * * By the Commission. May 3, 2016. Brent J. Fields, Secretary. [FR Doc. 2016–10746 Filed 5–9–16; 8:45 am] BILLING CODE 8011–01–P E:\FR\FM\10MYR1.SGM 10MYR1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 81, Number 90 (Tuesday, May 10, 2016)]
[Rules and Regulations]
[Pages 28689-28706]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-10746]

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Rules and Regulations
Federal Register
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This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by the Superintendent of Documents.
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Federal Register / Vol. 81, No. 90 / Tuesday, May 10, 2016 / Rules
and Regulations

[[Page 28689]]

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230 and 240

[Release No. 33-10075; 34-77757; File No. S7-12-14]
RIN 3235-AL40

Changes to Exchange Act Registration Requirements To Implement
Title V and Title VI of the JOBS Act

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: We are amending our rules in light of the statutory changes
made by Title V and Title VI of the Jumpstart Our Business Startups Act
(the ``JOBS Act'') and Title LXXXV of the Fixing America's Surface
Transportation Act (the ``FAST Act''). The amendments revise our rules
to reflect the new, higher thresholds for registration, termination of
registration and suspension of reporting that were set forth in the
JOBS Act and the FAST Act. In addition, the amendments revise the
definition of ``held of record'' in Rule 12g5-1 under the Securities
Exchange Act of 1934 (the ``Exchange Act''), in accordance with the
JOBS Act, to exclude certain securities held by persons who received
them pursuant to employee compensation plans and establish a non-
exclusive safe harbor for determining whether securities are ``held of
record'' for purposes of registration under Exchange Act Section 12(g).

DATES: Effective June 9, 2016.

FOR FURTHER INFORMATION CONTACT: Steven G. Hearne, Senior Special
Counsel, at (202) 551-3430, or Anne Krauskopf, Senior Special Counsel,
at (202) 551-3500, Division of Corporation Finance, Securities and
Exchange Commission, 100 F Street NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION: We are adopting amendments to Rules 3b-4,\1\
12g-1,\2\ 12g-2,\3\ 12g-3,\4\ 12g-4,\5\ 12g5-1,\6\ and 12h-3 \7\ under
the Exchange Act \8\ and amendments to Rule 405 \9\ under the
Securities Act of 1933 (the ``Securities Act'').\10\
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\1\ 17 CFR 240.3b-4.
\2\ 17 CFR 240.12g-1.
\3\ 17 CFR 240.12g-2.
\4\ 17 CFR 240.12g-3.
\5\ 17 CFR 240.12g-4.
\6\ 17 CFR 240.12g5-1.
\7\ 17 CFR 240.12h-3.
\8\ 15 U.S.C. 78a et seq.
\9\ 17 CFR 230.405.
\10\ 15 U.S.C. 77a et seq.
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Table of Contents

I. Introduction
II. Amendments Relating To Exchange Act Reporting Thresholds
A. Application of the Increased Thresholds for Registration and
Reporting Obligations
B. Application of the Increased Threshold for Accredited
Investors
III. Amendments to Exchange Act Rule 12g5-1
A. Statutory Requirement and Definition of ``Employee
Compensation Plan''
B. Definition of ``Held of Record''
C. Non-exclusive Safe Harbor for Determining Holders of Record
D. Foreign Private Issuers
IV. Economic Analysis
A. Baseline
B. Analysis of the Rules
V. Paperwork Reduction Act
VI. Final Regulatory Flexibility Act Analysis
A. Need for, and Objectives of, the Action
B. Significant Issues Raised by Public Comment
C. Small Entities Subject to the Rule Amendments
D. Reporting, Recordkeeping and Other Compliance Requirements
E. Agency Action To Minimize Effect on Small Entities
VII. Statutory Authority and Text of Rule Amendments

I. Introduction

On December 17, 2014, we proposed amendments \11\ to implement
Title V and Title VI of the JOBS Act.\12\ The JOBS Act amended Sections
12(g) \13\ and 15(d) \14\ of the Exchange Act to adjust the thresholds
for registration, termination of registration and suspension of
reporting.\15\ Specifically, Section 501 of the JOBS Act \16\ amended
Section 12(g)(1) of the Exchange Act \17\ to require an issuer to
register a class of equity securities (other than exempted securities)
within 120 days after its fiscal year-end if, on the last day of its
fiscal year, the issuer has total assets of more than $10 million and
the class of equity securities is ``held of record'' by either (i)
2,000 persons, or (ii) 500 persons who are not accredited investors.
Section 601 of the JOBS Act \18\ further amended Exchange Act Section
12(g)(1) to require an issuer that is a bank or a bank holding company,
as defined in Section 2 of the Bank Holding Company Act of 1956,\19\ to
register a class of equity securities (other than exempted securities)
within 120 days after the last day of its first fiscal year ended after
the effective date of the JOBS Act, on which the issuer has total
assets of more than $10 million and the class of equity securities is
``held of record'' by 2,000 or more persons. Section 601 of the JOBS
Act also amended Exchange Act Section 12(g)(4) \20\ and Exchange Act
Section 15(d)(1) \21\ to enable an issuer that is a bank or a bank
holding company to terminate the registration of a class of securities
under Section 12(g) or suspend reporting under Section 15(d)(1) if that
class is held of record by less than 1,200 persons.\22\ For other
issuers, the threshold in Section 12(g)(4) for termination of
registration and in Section 15(d)(1) for suspension of reporting
remained at 300.\23\ In addition, Section 502 of the JOBS Act \24\
amended Exchange Act Section 12(g)(5) \25\ to exclude from the
definition of ``held of record,'' for the purposes of determining
whether an issuer is required to register a class of equity securities,
securities that are held by persons who received

[[Page 28690]]

them pursuant to an ``employee compensation plan'' in transactions
exempted from the registration requirements of Section 5 of the
Securities Act.\26\ Section 503 of the JOBS Act \27\ directed the
Commission to revise the definition of ``held of record'' pursuant to
Exchange Act Section 12(g)(5) to implement the amendment made by
Section 502 of the JOBS Act, and to create a safe harbor for issuers
when determining whether holders received their securities pursuant to
an ``employee compensation plan'' in a transaction exempted from the
registration requirements of Section 5 of the Securities Act.
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\11\ Changes to Exchange Act Registration Requirements to
Implement Title V and Title VI of the JOBS Act, Release No. 33-9693
(Dec. 17, 2014) [79 FR 78343 (Dec. 30, 2014)] (the ``Proposing
Release'').
\12\ Public Law 112-106, 126 Stat. 306 (Apr. 5, 2012).
\13\ 15 U.S.C. 78l(g).
\14\ 15 U.S.C. 78o(d).
\15\ The changes to Exchange Act Sections 12(g)(1), 12(g)(4) and
15(d)(1) were effective upon enactment of the JOBS Act and do not
require any Commission action.
\16\ Sec. 501, 126 Stat. at 325.
\17\ 15 U.S.C. 78l(g)(1).
\18\ Sec. 601, 126 Stat. at 326.
\19\ 12 U.S.C. 1841.
\20\ 15 U.S.C. 78l(g)(4).
\21\ 15 U.S.C. 78o(d)(1).
\22\ See supra note 18.
\23\ See 15 U.S.C. 78l(g)(4) and 15 U.S.C. 78o(d)(1).
\24\ Sec. 502, 126 Stat. at 326.
\25\ 15 U.S.C. 78l(g)(5).
\26\ 15 U.S.C. 77e.
\27\ Sec. 503, 126 Stat. at 326.
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Subsequent to our proposal, Section 85001 of the FAST Act \28\
adjusted the Exchange Act thresholds for registration, termination of
registration and suspension of reporting for savings and loan holding
companies, as defined in Section 10 of the Home Owners' Loan Act,\29\
so that they would be the same as the thresholds for banks and bank
holding companies. This change also was effective upon enactment.
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\28\ Public Law 114-94 (Dec. 4, 2015).
\29\ 12 U.S.C. 1461.
---------------------------------------------------------------------------

In connection with the amendments made by Title V and Title VI of
the JOBS Act and Title LXXXV of the FAST Act, we are amending our rules
to reflect the new, higher registration, termination of registration
and suspension of reporting thresholds under amended Exchange Act
Sections 12(g)(1), 12(g)(4) and 15(d)(1). We are also amending Exchange
Act Rule 12g5-1 to reflect the amendment to Exchange Act Section
12(g)(5) and to establish a non-exclusive safe harbor that issuers may
follow when determining if securities held by persons who received them
pursuant to an employee compensation plan in transactions exempted from
the registration requirements of Section 5 of the Securities Act may be
excluded when determining whether they are required to register under
Exchange Act Section 12(g)(1).
The comment period for the proposed amendments closed on March 2,
2015. We received 11 comment letters on the Proposing Release, which
generally supported the proposals.\30\ We have reviewed and considered
all of these comments. We are adopting the amendments substantially as
proposed, and discuss these amendments and any modifications or
clarifications in detail below.
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\30\ We also considered pre-proposal comment letters when
formulating the proposed amendments. Pre-proposal comment letters
received on Title V of the JOBS Act are available at https://www.sec.gov/comments/jobs-title-v/jobs-title-v.shtml and on Title VI
of the JOBS Act at https://www.sec.gov/comments/jobs-title-vi/jobs-title-vi.shtml.
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II. Amendments Relating to Exchange Act Reporting Thresholds

A. Application of the Increased Thresholds for Registration and
Reporting Obligations

Sections 501 and 601 of the JOBS Act amended the Exchange Act to
raise the total assets and held of record thresholds under which
issuers are required to register or permitted to terminate registration
or suspend reporting pursuant to Section 12(g) and 15(d) of the
Exchange Act. Section 85001 of the FAST Act further amended these
provisions to apply the new statutory thresholds for banks and bank
holding companies to savings and loan holding companies.
1. Proposed Rule Amendments
To harmonize our rules with the statutory changes made to Exchange
Act Sections 12(g)(1), 12(g)(4) and 15(d), we proposed amendments to
Exchange Act Rules 12g-1, 12g-2, 12g-3, 12g-4 and 12h-3, the rules that
govern the mechanics relating to registration, termination of
registration under Section 12(g) and suspension of reporting
obligations under Section 15(d). These rules generally reflected the
holder of record statutory thresholds in Sections 12(g) and 15(d) prior
to the enactment of the JOBS Act.\31\
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\31\ Prior to adoption of the JOBS Act, the Commission used its
general exemptive authority to provide for a $10 million asset
threshold by rule. JOBS Act Section 501 amended Exchange Act Section
12(g)(1) to raise the statutory threshold from $1 million to $10
million to match the threshold previously provided in Exchange Act
Rule 12g-1.
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We proposed to revise Rule 12g-1 to reflect the asset and holder of
record thresholds established by Titles V and VI of the JOBS Act
relating to the requirement to register a class of equity securities
under the Exchange Act.\32\ Similarly, we proposed to revise Exchange
Act Rules 12g-2 \33\ and 12g-3 \34\ to reflect the holders of record
thresholds in the Exchange Act, as amended by the JOBS Act, for
terminating registration and suspending reporting for banks and bank
holding companies. In addition, we proposed to amend Exchange Act Rules
12g-4 and 12h-3, the rules which permit issuers to immediately suspend
their duty to file periodic and current reports, to reflect the new
thresholds in Sections 12(g) and 15(d) enacted by the JOBS Act for
banks and bank holding companies.
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\32\ We also proposed to remove the reference to an automated
inter-dealer quotation system since the NASDAQ Stock Market is now
registered as a securities exchange with the Commission. See In the
Matter of the Application of the Nasdaq Stock Market LLC for
Registration as a National Securities Exchange; Findings, Opinion
and Order of the Commission, Release No. 34-53128 (Jan. 13, 2006)
[71 FR 3550 (Jan. 23, 2006)].
\33\ Rule 12g-2 addresses securities deemed to be registered
pursuant to Section 12(g)(1) upon termination of certain exemptions.
\34\ Rule 12g-3 addresses the threshold for the registration of
securities of successor issuers under Section 12(b) or Section
12(g).
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In light of the fact that savings and loan holding companies
provide similar services to banks and bank holding companies and are
generally subject to similar bank regulatory and supervision
requirements, we also proposed to use our general exemptive authority
to apply the same registration thresholds applicable to banks and bank
holding companies to savings and loan holding companies and to revise
our rules accordingly. As noted above, subsequent to this proposal, the
FAST Act amended the Exchange Act to apply the new statutory thresholds
for banks and bank holding companies to savings and loan holding
companies.\35\
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\35\ Because of the FAST Act amendment to the Exchange Act, the
Commission no longer needs to adopt changes relating to those
thresholds using its general exemptive authority.
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Because the new statutory threshold for banks, savings and loan
holding companies and bank holding companies is not reflected in our
existing rules, such institutions seeking to rely on the new 1,200
holder of record threshold to terminate registration and suspend
reporting are not able to rely on the existing procedural
accommodations in our rules to do so immediately. Without the proposed
amendments, a bank, savings and loan holding company or bank holding
company is required to wait 90 days after filing a certification with
the Commission that the number of its holders of record is less than
1,200 persons to terminate its Section 12(g) registration and cease
filing reports required by Exchange Act Section 13(a),\36\ rather than
being able to suspend its Section 13(a) reporting obligations
immediately upon the filing of a Form 15 \37\ in reliance on the rule.
Similarly, without the proposed amendments, banks, savings and loan
holding companies or bank holding companies may not rely on Rule 12h-3
to immediately suspend their Section 15(d) reporting obligations using
the new higher statutory threshold during a fiscal year. Rather,
Section 15(d)(1) provides for suspending a Section 15(d) obligation
only at the beginning of a fiscal year.
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\36\ 15 U.S.C. 78m(a).
\37\ 17 CFR 249.323.

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[[Page 28691]]

2. Comments on Proposed Rule Amendments
We received comments on the proposed amendments from two
commenters.\38\ These commenters supported the amendments as proposed.
One commenter further agreed with our determination not to propose
amendments to our rules relating to Exchange Act registration that
extend substantially beyond the changes contemplated by the JOBS
Act.\39\ Several commenters also expressed support for our proposal to
treat savings and loan holding companies similar to banks and bank
holding companies for purposes of Exchange Act registration.\40\
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\38\ See letters from American Bankers Association (Feb. 27,
2015) (``American Bankers'') and American Bar Association (Apr. 10,
2015) (``ABA'').
\39\ See letter from ABA.
\40\ See letters from American Bankers, ABA and Independent
Community Bankers Association (Feb. 27, 2015) (``ICBA'').
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3. Final Rule Amendments
After considering the comments, we are adopting the proposed
amendments to Exchange Act Rules 12g-1, 12g-2, 12g-3, 12g-4 and 12h-3
to reflect the statutory changes made by the JOBS Act and the FAST Act.
As amended, Rule 12g-1 provides that an issuer is not required to
register a class of equity securities pursuant to Section 12(g)(1) if
on the last day of its most recent fiscal year:
The issuer had total assets not exceeding $10 million; or
The class of equity securities was held of record by fewer
than 2,000 persons or 500 persons who are not accredited investors (as
such term is defined in Securities Act Rule 501(a)),\41\ determined as
of such day rather than at the time of the sale of the securities; or
---------------------------------------------------------------------------

\41\ 17 CFR 230.501(a).
---------------------------------------------------------------------------

in the case of a bank; a savings and loan holding company,
as such term is defined in section 10 of the Home Owners' Loan Act; or
a bank holding company, as such term is defined in Section 2 of the
Bank Holding Company Act of 1956, the class of equity securities was
held of record by fewer than 2,000 persons.\42\
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\42\ As observed by one commenter, Section 501 of the JOBS Act
amended Section 12(g)(1) of the Exchange Act to require an issuer to
register a class of equity securities (other than exempted
securities) if, on the last day of its fiscal year, the issuer has
total assets of more than $10 million and the class of equity
securities is ``held of record by either 2,000 persons, or 500
persons who are not accredited investors.'' See letter from Keith P.
Bishop (Mar. 1, 2016). We read this language to provide that an
issuer is not required to register under Section 12(g) if the issuer
has fewer than 2,000 persons, or 500 persons who are not accredited
investors that hold of record. An issuer with more than 2,000
persons, or 500 persons who are not accredited investors, that hold
of record has necessarily met the threshold and would be required to
register pursuant to Section 12(g)(1)(A).
---------------------------------------------------------------------------

As revised, Rule 12g-2, which addresses securities deemed to be
registered pursuant to Section 12(g)(1) upon termination of the
exemption pursuant to Section 12(g)(2)(A) or (B) \43\ and establishes a
300-person threshold for such a class of securities to be registered
under Section 12(g), provides a 1,200-person registration threshold for
a bank, a savings and loan holding company, as such term is defined in
section 10 of the Home Owners' Loan Act, or bank holding company, as
defined in Section 2 of the Bank Holding Company Act of 1956.
---------------------------------------------------------------------------

\43\ Section 12(g)(2)(A) [15 U.S.C. 78l(g)(2)(A)] provides an
exemption from Section 12(g) registration while the class of
securities is listed and registered on a national securities
exchange under Exchange Act Section 12(b) [15 U.S.C. 78l(b)].
Section 12(g)(2)(B) [15 U.S.C. 78l(g)(2)(B)] provides an exemption
for securities issued by registered investment companies.
---------------------------------------------------------------------------

Revised Rule 12g-3, which addresses the 300-person threshold for
the registration of securities of successor issuers under Section 12(b)
or Section 12(g), similarly provides a 1,200-person registration
threshold for a bank, a savings and loan holding company, as such term
is defined in Section 10 of the Home Owners' Loan Act, or bank holding
company, as defined in Section 2 of the Bank Holding Company Act of
1956.
Revised Rule 12g-4(a) provides that termination of registration
under Section 12(g) shall take effect in 90 days, or such shorter
period as the Commission determines, after the issuer certifies on Form
15 that the class of securities is held of record by fewer than 300
persons, 1,200 persons in the case of a bank, a savings and loan
holding company, as such term is defined in section 10 of the Home
Owners' Loan Act, or a bank holding company, as defined in Section 2 of
the Bank Holding Company Act of 1956, or 500 persons where the total
assets of the issuer have not exceeded $10 million on the last day of
each of the preceding three years. As a result of the changes to Rule
12g-4(a), banks, savings and loan holding companies and bank holding
companies will be able to terminate registration of a class of
securities and suspend immediately their duty to file current and
periodic reports upon filing a certification on Form 15 at the 1,200
person threshold.
Finally, revised Rule 12h-3 provides that the duty to file current
and periodic reports under Section 13(a) pursuant to Section 15(d) for
that class of securities is suspended immediately upon the filing of a
certification on Form 15, provided that the issuer has fewer than 300
holders of record, 500 holders of record where the issuer's total
assets have not exceeded $10 million on the last day of each of the
preceding three years, or in the case of a bank, a savings and loan
holding company, as such term is defined in Section 10 of the Home
Owners' Loan Act, or bank holding company, as defined in Section 2 of
the Bank Holding Company Act of 1956, 1,200 holders of record; the
issuer has filed its Section 13(a) reports for the most recent three
completed fiscal years, and for the portion of the year immediately
preceding the date of filing the Form 15 or the period since the issuer
became subject to the reporting obligation; and a registration
statement has not become effective or was required to be updated
pursuant to Exchange Act Section 10(a)(3) \44\ during the fiscal
year.\45\
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\44\ 15 U.S.C. 78j(a)(3).
\45\ The automatic statutory suspension of an issuer's Section
15(d) reporting obligation also is not available as to any fiscal
year in which the issuer's Securities Act registration statement
becomes effective or is required to be updated pursuant to Section
10(a)(3) of the Securities Act.
---------------------------------------------------------------------------

B. Application of the Increased Threshold for Accredited Investors

Section 501 of the JOBS Act amended Exchange Act Section 12(g)(1)
to increase the threshold that triggers registration by an issuer other
than a bank or bank holding company to total assets exceeding $10
million and a class of equity securities (other than an exempted
security) held of record by either 2,000 persons or 500 persons who are
not accredited investors (as such term is defined by the
Commission).\46\ To rely on the new, higher threshold established by
the JOBS Act, an issuer will need to be able to determine which of its
record holders are accredited investors. A number of pre-proposal
commenters pointed to potential compliance concerns with respect to
identifying accredited investors and recommended ways to facilitate
issuers' use of the increased threshold for holders of record that are
accredited investors.\47\
---------------------------------------------------------------------------

\46\ The statutory amendment was effective upon enactment of the
JOBS Act and does not require any Commission action. While this
change primarily affects issuers that have never had a reporting
obligation under the Exchange Act, issuers that have terminated
registration will need to monitor the accredited investor status of
their holders of record as of the last day of each fiscal year.
\47\ See, e.g., letters from New York City Bar Association (June
6, 2012) (``NYCBA''), the Business Law Section of the American Bar
Association (June 26, 2013) (``ABA Pre-Proposal'') and Foley &
Lardner (May 24, 2012) (``Foley'').

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[[Page 28692]]

1. Proposed Rule Amendment
We proposed to amend Rule 12g-1 to make clear that the definition
of ``accredited investor'' in Securities Act Rule 501(a) applies in
making determinations under Exchange Act Section 12(g)(1) and that the
``accredited investor'' determination must be made as of the last day
of the fiscal year rather than at the time of the sale of the
securities.\48\ In proposing to use the Rule 501(a) definition, we
stated our belief that applying the familiar concepts of the accredited
investor definition in Rule 501(a) to the registration threshold in
Section 12(g)(1) would facilitate compliance for issuers.\49\ We also
noted our concern that reliance on information previously provided by
security holders in connection with the purchase or transfer of
securities for an indefinite period into the future could result in the
use of outdated information that may no longer be reliable.\50\
---------------------------------------------------------------------------

\48\ Securities Act Rule 501(a) otherwise defines ``accredited
investor'' as being determined at the time of the sale of the
securities.
\49\ See Proposing Release at Section II.C.
\50\ Id.
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2. Comments on Proposed Rule Amendment
We received comments on the proposed approach from five
commenters.\51\ Four commenters supported the use of the Securities Act
Rule 501(a) definition.\52\ Two of these commenters requested that the
Commission provide guidance on how to establish a reasonable belief of
accredited investor status.\53\ A number of commenters supported
establishing a safe harbor for the accredited investor determination
that permits an issuer to rely on previously obtained information
relating to accredited investor status.\54\ These commenters
recommended various safe harbors that permit issuers to rely on:
information obtained at the time securities were initially or most
recently sold to that person; \55\ an annual self-certification or
affirmation; \56\ and determinations made by certain third parties.\57\
Another commenter provided a more limited recommendation that the
Commission permit reliance on accredited investor status determinations
made in offerings during the three months prior to fiscal year-end or
on self-certification by investors if the offering occurred more than
three months but less than twelve months prior to fiscal year-end.\58\
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\51\ See letters from ABA, Alternative & Direct Investment
Securities Association (Mar. 2, 2015) (``ADISA''), Investment
Program Association (Mar. 2, 2015) (``IPA''), Securities Arbitration
Clinic, Cardozo Law School (Mar. 2, 2015) (``Cardozo'') and Managed
Funds Association (Mar. 2, 2015) (``MFA'').
\52\ See letters from ABA, ADISA, Cardozo and MFA.
\53\ See letters from ABA and ADISA. ABA recommended that the
Commission provide guidance by rule or in the text of the release.
\54\ See letters from ADISA, Milken Institute Center for
Financial Markets (Mar. 2, 2015) (``CFM''), Cleary, Gottlieb, Steen
& Hamilton LLP (Feb. 27, 2015) (``Cleary'') and IPA. CFM suggested
that a safe harbor would create certainty and predictability for
issuers and investors. IPA recommended a safe harbor as an
alternative to determination at time of the last sale and proposed
that securities sold prior to the effective date of any rule should
not be subject to reaffirmation of accredited investor status.
\55\ See letters from ADISA and CFM.
\56\ See letters from ADISA and IPA. CFM further recommended
allowing an issuer to assume that an investor's status has not
changed and to query investors ``as needed'' via a written
communication.
\57\ See letters from ADISA, Cleary and IPA. These commenters
recommended permitting reliance on information from registered
broker-dealers, registered investment advisers, licensed attorneys,
or certified public accountants.
\58\ See letter from Cleary.
---------------------------------------------------------------------------

One commenter opposed a formal safe harbor out of concern it would
become a de facto minimum standard and recommended instead that the
Commission provide additional guidance.\59\ Specifically, this
commenter recommended that:
---------------------------------------------------------------------------

\59\ See letter from ABA.
---------------------------------------------------------------------------

an issuer should be able to rely on information previously
provided by investors as indicative of their current accredited
investor status, when there is a reasonable basis for doing so;
an annual confirmation should only be necessary if there
was reason to believe that an investor's status had changed;
an issuer should be able to rely on certification from
certain third parties; and
an issuer should not be subject to enforcement if the
basis was reasonable at the time the conclusion was reached.\60\
---------------------------------------------------------------------------

\60\ See letter from ABA. See also letter from IPA advocating
against annual recertification, which noted that any future
adjustments to the definition of accredited investor could affect an
issuer's number of accredited investors. This could cause issuers to
be required to register despite an issuer's efforts to sell only to
an appropriately limited number of accredited and non-accredited
investors at the time of the offer and sale. ABA recommended a
presumption that a person continues to be an accredited investor
under the revised definition to address concerns relating to future
adjustments to the definition of accredited investor.
---------------------------------------------------------------------------

One commenter recommended that the Commission issue a separate rule
or safe harbor with respect to private investment funds.\61\ The
commenter noted that private investment funds that rely on the
exemption in Investment Company Act Section 3(c)(7) \62\ (``3(c)(7)
Funds'') may have an unlimited number of investors that are ``qualified
purchasers,'' a significantly higher standard than ``accredited
investors.'' The commenter recommended a rule that permits 3(c)(7)
Funds to continue to rely on their initial determination of a record
holder's qualified purchaser and accredited investor status on a going
forward basis without requiring additional annual diligence. In the
alternative, the commenter recommended that the Commission provide a
non-exclusive safe harbor that permits 3(c)(7) Funds to send an annual
negative consent letter to record holders asking them to inform the
issuer if their accredited investor status has changed and permits
treatment of a non-response as confirmation of status.
---------------------------------------------------------------------------

\61\ See letter from MFA.
\62\ 15 U.S.C. 80a-3(c)(7).
---------------------------------------------------------------------------

Two commenters expressed concern about the timing of the
determination and opposed requiring determination as of the last day of
the fiscal year.\63\ One of these commenters claimed that annual
reconfirmation will be costly, will provide little investor protection
and may cause issuers to sell to fewer investors.\64\ This commenter
recommended only requiring yearly recertification if there is a ready
market for the securities and the securities are freely tradable.\65\
---------------------------------------------------------------------------

\63\ See letters from ADISA and IPA. ADISA recommended
permitting issuers to rely on information available at the time they
made a judgment, rather than requiring issuers to update information
as of the end of the fiscal year. IPA recommended that accredited
investor status be determined at the time of last sale, not
annually, and expressed concern regarding the administrative and
reporting costs of determinations required as of the last day of the
fiscal year.
\64\ See letter from IPA. IPA cited an estimate of ongoing
reporting costs under the Exchange Act of $650,000 annually. This
commenter additionally noted that becoming an Exchange Act reporting
company may be contrary to an issuer's business plan and against
investors' economic interests.
\65\ See letter from IPA. IPA suggested that most affected
investors will not hold freely tradable securities, muting the
benefits of public company reporting for those investors.
---------------------------------------------------------------------------

3. Final Rule Amendment
After considering the comments, we are adopting an amendment to
Rule 12g-1 as proposed, providing that the term ``accredited investor''
for purposes of Section 12(g)(1) is as defined in Securities Act Rule
501(a).\66\ Consistent with the proposal, the ``accredited investor''
determination for these

[[Page 28693]]

purposes must be made as of the last day of the issuer's most recent
fiscal year rather than at the time of the sale of the securities.
Commenters supported use of the Securities Act Rule 501(a)
definition.\67\ Rule 501(a) provides that an accredited investor is any
person who comes within one or more of the categories of investors
specified therein, or whom the issuer reasonably believes comes within
any such category. Whether the issuer has a reasonable belief depends
on the particular facts and circumstances surrounding the
determination. Under amended Rule 12g-1, an issuer will need to
determine, based on facts and circumstances, whether prior information
provides a basis for a reasonable belief that the security holder
continues to be an accredited investor as of the last day of the fiscal
year.\68\
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\66\ Consideration of the use of the ``accredited investor''
definition in this context is distinct from other efforts to
consider the definition. In December 2015, the staff issued a report
addressing the ``accredited investor'' definition and providing
certain recommendations for our consideration. See Report on the
Review of the Definition of Accredited Investor (Dec. 18, 2015),
available at https://www.sec.gov/corpfin/reportspubs/special-studies/review-definition-of-accredited-investor-12-18-2015.pdf.
\67\ See letters from ABA, ADISA, Cardozo and MFA.
\68\ If after the issuer has made its determination as of the
end of the fiscal year, it is subsequently determined that an
investor did not, in fact, come within one of the accredited
investor categories, the issuer may rely on that determination for
that fiscal year if it had a reasonable belief at the time the
determination was made.
---------------------------------------------------------------------------

Although some commenters requested that the Commission provide
guidance on making the accredited investor determination in the Section
12(g) context or establish a safe harbor relating to the
determination,\69\ we have decided against doing so. Our rules do not
currently provide a safe harbor for the reasonable belief determination
made under Rule 501(a) for exempt offerings and we do not believe that
the determinations required for Section 12(g) present a more compelling
case for having such a safe harbor. Additionally, as one commenter
noted, a safe harbor could become a de facto minimum standard.\70\ We
believe that requiring issuers to consider their particular facts and
circumstances in establishing a reasonable basis for their
determination provides issuers with appropriate flexibility for making
the determination.\71\
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\69\ See letters from ABA, ADISA, CFM, Cleary and MFA.
\70\ See letter from ABA.
\71\ One commenter requested that the Commission establish a
separate safe harbor or rule with respect to private investment
funds. See letter from MFA. We are declining to provide specific
relief to private investment funds for reasons similar to those
discussed for issuers generally. We believe that a standard where
issuers, including private investment funds, consider their
particular facts and circumstances in establishing a reasonable
basis for believing that a security holder is an accredited investor
is the most appropriate standard to apply at this time.
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As adopted, the accredited investor determination under Rule 12g-1
must be made as of the last day of the issuer's most recent fiscal year
rather than at the time of the sale of the securities. Several
commenters recommended that the Commission adopt rules providing that
the determination need not be made at year-end.\72\ We believe that a
fiscal year-end determination date is appropriate because the Section
12(g)(1) requirement to register is triggered if the issuer meets the
specified asset and held of record thresholds at the end of its fiscal
year.
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\72\ See letters from ADISA and IPA.
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Other commenters recommended permitting an issuer to rely on
previously obtained information relating to accredited investor
status.\73\ We continue to be concerned that permitting issuers to rely
solely on previously obtained information, which in some cases could be
years or decades old, could result in the use of outdated and
unreliable information when making the determination. One commenter
suggested that we permit issuers to rely on accredited investor
determinations made in offerings during the three months prior to
fiscal year-end or on self-certification by investors if the offering
occurred more than three months but less than twelve months prior to
fiscal year-end.\74\ While such information could provide a reasonable
basis for making a determination about accredited investor status as of
the end of the fiscal year, for the reasons set forth above, we believe
that issuers should consider their particular facts and circumstances
before reaching such a conclusion and that the ``reasonable belief''
standard under Rule 501(a) provides issuers with a familiar context and
appropriate flexibility in making such a determination.
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\73\ See letters from ABA, CFM, Cleary and MFA.
\74\ See letter from Cleary.
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III. Amendments to Exchange Act Rule 12g5-1

A. Statutory Requirement and Definition of ``Employee Compensation
Plan''

Exchange Act Section 12(g)(5), as amended by Section 502 of the
JOBS Act, provides that the definition of ``held of record'' shall not
include securities held by persons who received them pursuant to an
``employee compensation plan'' in transactions exempted from the
registration requirements of Section 5 of the Securities Act. By its
express terms, this new statutory exclusion applies solely for purposes
of determining whether an issuer is required to register a class of
equity securities under the Exchange Act and does not apply to a
determination of whether such registration may be terminated or
suspended.\75\ The provision, which is substantially broader than the
Commission's existing rules exempting compensatory employee stock
options from Section 12(g) registration,\76\ does not define the term
``employee compensation plan.''
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\75\ The statutory exclusion in Section 12(g)(5) specifically
refers to Exchange Act Section 12(g)(1), which relates to when an
issuer must register its securities with the Commission.
\76\ Exchange Act Rule 12h-1(f) [17 CFR 240.12h-1(f)] provides
non-reporting issuers with an exemption from Section 12(g)
registration for stock options issued under written compensatory
stock option plans under certain conditions. Exchange Act Rule 12h-
1(g) [17 CFR 240.12h-1(g)] provides reporting issuers a similar
exemption for such stock options. The exemptions provide specific
eligibility requirements and are limited to options issued pursuant
to a written compensatory stock option plan. See Exemption of
Compensatory Stock Options from Registration Under Section 12(g) of
the Securities Exchange Act of 1934, Release No. 34-56887 (Dec. 3,
2007) [72 FR 69554 (Dec. 7, 2007)].
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Section 503 of the JOBS Act instructs the Commission to amend the
definition of ``held of record'' to implement the amendment in Section
502 and to adopt a safe harbor that issuers can use when determining
whether holders of their securities received them pursuant to an
employee compensation plan in transactions exempted from the
registration requirements of Section 5 of the Securities Act.
1. Proposed Rule Amendment
We did not propose to define the term ``employee compensation
plan.'' Instead, we proposed to revise the definition of ``held of
record'' and to additionally establish a non-exclusive safe harbor that
relies on the current definition of ``compensatory benefit plan'' in
Rule 701 and the conditions in Rule 701(c).
2. Comments on Proposed Rule Amendment
We received comments from two commenters generally supportive of
the proposed amendment.\77\ One of those commenters specifically
supported our determination not to create a new definition of the term
``employee compensation plan.'' \78\ This commenter suggested that
application in a Section 12(g) context of the familiar concepts applied
by an issuer in connection with its exempt issuances of compensatory
equity securities under Securities Act Rule 701 would facilitate
compliance by streamlining the issuer's learning curve and simplifying
recordkeeping.
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\77\ See letters from ABA and ADISA.
\78\ See letter from ABA.

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[[Page 28694]]

3. Final Rule Amendment
After considering the comments, we are adopting an amendment to
Rule 12g5-1 to revise the definition of ``held of record,'' and
establish a non-exclusive safe harbor. By not defining the term
``employee compensation plan,'' and providing for a non-exclusive safe
harbor, we believe issuers will have appropriate flexibility to make a
principles-based determination about securities received as employee
compensation when determining their holders of record under Section
12(g)(5), as well as the added certainty of a safe harbor. We further
believe that developing a new definition for ``employee compensation
plan'' could result in needless complexity and create potential
conflicts with the current definitions of ``compensatory benefit plan''
and ``employee benefit plan.'' \79\ Finally, we note that by
conditioning the new exclusion from ``held of record'' upon the
securities being received pursuant to an employee compensation plan in
transactions exempted from the registration requirements of Section 5
of the Securities Act, Section 502 of the JOBS Act uses Securities Act
concepts to identify persons that an issuer may exclude from its
determination of the number of holders of record under Section 12(g)(1)
of the Exchange Act. Because this provision of the JOBS Act includes
concepts from both the Securities Act and Exchange Act,\80\ we believe
that it will facilitate compliance if the terminology used in the new
safe harbor in Exchange Act Rule 12g5-1(a)(8)(ii) is consistent with
the terminology used in our Securities Act rules.
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\79\ See Rule 701--Exempt Offerings Pursuant to Compensatory
Arrangements, Release No. 33-7645 (Feb. 25, 1999) [64 FR 11095 (Mar.
8, 1999)] (the ``1999 Rule 701 Release''), and Registration of
Securities on Form S-8, Release No. 33-7646 (Feb. 25, 1999) [64 FR
11103 (Mar. 8, 1999)] (the ``1999 Form S-8 Release'').
\80\ This provision of the JOBS Act relies on concepts from both
the Securities Act and the Exchange Act by establishing that certain
securities received pursuant to an employee compensation plan in
transactions exempted from the registration requirements of Section
5 of the Securities Act may be excluded when determining whether an
issuer is required to register under Section 12(g) of the Exchange
Act.
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B. Definition of ``Held of Record''

Section 503 of the JOBS Act directed the Commission to revise the
definition of ``held of record'' pursuant to Section 12(g)(5) to
provide that securities held by persons who received them pursuant to
an employee compensation plan in transactions exempted from the
registration requirements of Section 5 of the Securities Act may be
excluded when calculating the number of holders of record of a class of
equity securities for purposes of determining the issuer's registration
obligation under Section 12(g)(1). We received pre-proposal comments
addressing issues about the scope of the definition. One commenter
recommended that securities issued in a subsequent transaction
(including a business combination) that is exempt from, or otherwise is
not subject to, the registration requirements of Section 5 to eligible
employees, former employees and other covered persons in exchange for
securities covered by the Section 12(g)(5) compensatory plan securities
carve-out also should be excluded.\81\ The same commenter further
recommended that securities issued in unregistered transactions based
on the ``no sale'' theory \82\ should be included within the definition
of ``transactions exempt from Section 5.''
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\81\ See letter from ABA Pre-Proposal.
\82\ The ``no sale'' theory relates to the issuance of
compensatory grants made by employers to broad groups of employees
pursuant to broad-based stock bonus plans without Securities Act
registration under the theory that the awards are not an offer or
sale of securities under Section 2(a)(3) of the Securities Act [15
U.S.C. 77b(a)(3)]. See Employee Benefit Plans; Interpretations of
Statute, Release No. 33-6188 (Feb. 1, 1980) [45 FR 8960 (Feb. 11,
1980)] at Section II.A.5.d; Employee Benefit Plans, Release No. 33-
6281 (Jan. 15, 1981) [46 FR 8446 (Jan. 27, 1981)] at Section III.
Many issuers rely on the ``no sale'' theory when making such awards
to employees where no consideration--and hence no ``value''--is
received by the issuer in return. The staff has not objected to
these issuances in a series of no-action letters. See, e.g., no-
action letter to Verint Systems Inc. (May 24, 2007).
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1. Proposed Rule Amendment
We proposed to amend the definition of ``held of record'' to
provide that when determining whether an issuer is required to register
a class of equity securities with the Commission pursuant to Exchange
Act Section 12(g)(1) an issuer may exclude securities that are either:
held by persons who received the securities pursuant to an
employee compensation plan in transactions exempt from the registration
requirements of Section 5 of the Securities Act;
held by persons who received the securities pursuant to an
employee compensation plan in transactions that did not involve a sale
within the meaning of Section 2(a)(3) of the Securities Act; or
held by persons eligible to receive securities from the
issuer pursuant to Securities Act Rule 701(c) who received the
securities in a transaction exempt from the registration requirements
of Section 5 of the Securities Act in exchange for securities
excludable under proposed Rule 12g5-1(a)(7).
Section 502 of the JOBS Act refers specifically to ``transactions
exempted'' from the Securities Act Section 5 registration requirements.
A number of issuers, however, issue securities to employees without
Securities Act registration on the basis that the issuance is not a
sale under Section 2(a)(3) of the Securities Act and therefore does not
trigger the registration requirement of Securities Act Section 5, which
applies only to the offer and sale of securities.\83\ While securities
issued to employees in transactions that do not involve a sale under
Section 2(a)(3) are not technically ``transactions exempted from the
registration requirements of section 5,'' they are similar to other
compensatory issuances to employees in exempt transactions in that the
issuer provides the awards to employees for a compensatory purpose. We
therefore proposed to exclude such ``no sale'' issuances from the
definition of ``held of record'' in Rule 12g5-1 for purposes of
determining an issuer's obligation to register a class of securities
under the Exchange Act.
---------------------------------------------------------------------------

\83\ See id.
---------------------------------------------------------------------------

Additionally, we proposed to permit an issuer to exclude securities
of holders who are persons eligible to receive securities from the
issuer pursuant to Rule 701(c) and who acquired the securities in
exchange for securities excludable under the proposed definition. The
proposed exclusion was intended to facilitate the ability of an issuer
to conduct restructurings, business combinations and similar
transactions that are exempt from Securities Act registration so that
if the securities being surrendered in such a transaction would not
have been counted under the proposed definition of ``held of record,''
the securities issued in the exchange also would not be counted under
this definition.\84\ The securities issued in the exchange would be
deemed to have a compensatory purpose because they would replace other
securities previously issued pursuant to an employee compensation plan.
We believed such an approach would be consistent with the intent of
Section 502 of the JOBS Act and would provide issuers with appropriate
flexibility to conduct certain business combinations and similar
transactions.
---------------------------------------------------------------------------

\84\ As proposed and consistent with Rule 701(c), securities
held of record by former employees would be excluded when
determining the securities held of record only if the employees were
employed by or providing services to the surviving issuer at the
time the exchange securities were offered.

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[[Page 28695]]

2. Comments on Proposed Rule Amendment
We received comments on the proposed amendment from two commenters,
both generally supporting the amendment.\85\ One commenter supported
the proposed amendment to the definition of ``held of record'' to
implement JOBS Act Section 503, but recommended that the Commission
clarify and extend the scope of the proposed exclusion for securities
received in exchange for excludable securities.\86\ The commenter
recommended that the Commission revise the exclusion for employee
compensation plan securities acquired through a business combination to
encompass securities that are ``exempt from, or not subject to, the
registration requirements of Section 5 of the Securities Act.'' The
commenter noted that the proposed language, if construed literally, may
not apply to exempt securities under Section 3 of the Securities Act,
such as securities issued under Section 3(a)(9) (in connection with
exchange offers), Regulation A or Rule 504 or 505 of Regulation D,
because those exemptions are securities-based rather than transaction-
based. Finally, the commenter noted that business combinations do not
always involve an exchange and suggested additional clarification that
the rule would apply to securities received ``in exchange for, in
substitution for or upon conversion or exercise of'' the original
securities.
---------------------------------------------------------------------------

\85\ See letters from ABA and ADISA.
\86\ See letter from ABA.
---------------------------------------------------------------------------

This commenter additionally recommended that the Commission expand
the exclusion for securities issued in business combinations and
similar transactions that replace securities previously issued pursuant
to an employee compensation plan to include former employees,
directors, general partners, trustees, officers, or consultants and
advisors who were employed by, or providing services to, a predecessor
of the issuer or a company acquired in a business combination. The
commenter expressed concern that denying the exclusion to former
employees could inhibit issuers from entering into business combination
transactions.
3. Final Rule Amendment
After considering the comments, we are adopting Exchange Act Rule
12g5-1(a)(8)(i) with the clarifications and changes detailed below.\87\
We are amending the definition of ``held of record'' to provide that
when determining whether an issuer is required to register a class of
equity securities with the Commission pursuant to Exchange Act Section
12(g)(1) an issuer may exclude securities that are:
---------------------------------------------------------------------------

\87\ As part of the amendments to Regulation A, we adopted a new
Exchange Act Rule 12g5-1(a)(7) providing a conditional exemption to
the definition of ``held of record'' for securities issued in Tier 2
Regulation A offerings. Amendments to Regulation A, Rel. No. 33-9741
(Mar. 25, 2015) [80 FR 21805 (Apr. 20, 2015)]. We proposed to use
Rule 12g5-1(a)(7) for the exemption and safe harbor under the
definition of ``held of record'' for certain employee compensation
plan securities in the Proposing Release. Because Rule 12g5-1(a)(7)
has been adopted in relation to Regulation A, we are adopting the
proposed exemption and safe harbor as Exchange Act Rule 12g5-
1(a)(8).
---------------------------------------------------------------------------

Held by persons who received the securities pursuant to an
employee compensation plan in transactions exempt from, or not subject
to, the registration requirements of Section 5 of the Securities Act;
or
held by persons who received the securities in a
transaction exempt from, or not subject to, the registration
requirements of Section 5 of the Securities Act from this issuer, a
predecessor of the issuer or an acquired company in substitution or
exchange for excludable securities under Exchange Act Rule 12g5-
1(a)(8)(i)(A), as long as the persons were eligible to receive
securities pursuant to Rule 701(c) at the time the excludable
securities were originally issued to them.
Consistent with one commenter's suggestion,\88\ we are revising the
language in new Exchange Act Rule 12g5-1(a)(8)(i)(A) to encompass
securities received in transactions exempt from, or not subject to, the
registration requirements of Section 5. Such transactions include
transactions that did not involve a sale of securities within the
meaning of Section 2(a)(3) of the Securities Act, as well as
transactions involving exempt securities, such as sales of securities
made pursuant to Section 3 of the Securities Act. As we indicated in
the Proposing Release, while securities issued to employees in
transactions that do not involve a sale under Section 2(a)(3) are not
technically ``transactions exempted from the registration requirements
of Section 5,'' they are similar to other compensatory issuances to
employees in exempt transactions in that the issuer provides the awards
to employees for a compensatory purpose. We believe it is consistent
with the statutory relief to also exclude from the definition of ``held
of record'' in Rule 12g5-1 exempt securities issued to employees
pursuant to an employee compensation plan. These exempt securities are
similarly issued to employees for compensatory purposes and their
issuance does not require registration under the Securities Act.
---------------------------------------------------------------------------

\88\ See letter from ABA.
---------------------------------------------------------------------------

We are adopting new Exchange Act Rule 12g5-1(a)(8)(i)(B) to provide
relief in the context of business combinations. We are clarifying and
expanding the proposed relief to encompass securities held by former
employees of the issuer or its predecessors. In response to a
commenter's concern that the term ``in exchange for'' is not broad
enough to capture all of the ways in which a person may receive new
securities in place of existing securities held prior to a business
combination, we have revised the language by using the phrase ``in
substitution or exchange for'' to cover various methods of how those
securities may be received in place of the existing securities, such as
upon conversion or exercise of such securities. In response to a
commenter's concerns,\89\ we are revising proposed Rule 12g5-
1(a)(8)(i)(B) to also permit securities to be excluded if they were
received by former employees in an exempt transaction in substitution
or exchange for excludable securities, where the former employees were
eligible under Rule 701(c) to receive the original securities at the
time of issuance. Under the exemption as proposed, securities received
in such an exchange by former employees of an issuer and employees of
an acquired issuer or the target company in a business combination
would not have been excludable. Requiring issuers to count those
securities for Exchange Act registration purposes could, as the
commenter noted, inhibit issuers from entering into economically
beneficial business combinations. Such former employees of the issuer,
and employees of a predecessor of the issuer or an acquired company,
will have received the original securities pursuant to an employee
compensation plan in a transaction exempt from, or not subject to, the
registration requirements of Section 5 of the Securities Act. We
therefore believe it is appropriate to exclude the securities received
by these former employees \90\ in such an exchange when determining
whether an issuer is required to register under Section 12(g)(1).
---------------------------------------------------------------------------

\89\ Id.
\90\ Rule 701(c) provides appropriate limitations on who may
qualify as an employee, former employee, or permitted family member
transferee. See discussion in Section III.C.3.a.
---------------------------------------------------------------------------

C. Non-Exclusive Safe Harbor for Determining Holders of Record

Section 503 of the JOBS Act directed the Commission to establish a
safe

[[Page 28696]]

harbor in Rule 12g5-1 that issuers can rely on when determining if
securities held by persons who received them pursuant to an employee
compensation plan in transactions exempted from the registration
requirements of Section 5 of the Securities Act may be excluded when
calculating the number of holders of record of a class of equity
securities for purposes of determining the issuer's registration
obligation under Section 12(g)(1). One pre-proposal commenter
recommended that the Commission expressly provide a non-exclusive safe
harbor akin to the Securities Act Rule 506 safe harbor under Securities
Act Section 4(a)(2).\91\ This commenter recommended that the safe
harbor provide that an issuer may treat an issuance of securities as
exempt from Securities Act registration for purposes of Section
12(g)(5) if that issuer had a reasonable belief that the exemption was
available at the time the securities were issued.\92\
---------------------------------------------------------------------------

\91\ See letter from ABA Pre-Proposal recommending that the
Commission provide ``that the safe harbor(s) is not the exclusive
means by which an issuer may comply with the `compensatory plan
carve-out' provisions of Section 12(g)(5).'' This commenter
suggested that ``failure to satisfy all conditions to reliance on
the safe harbor(s) should not preclude reliance on the statutory
carve-out itself.''
\92\ See letter from ABA Pre-Proposal.
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1. Proposed Rule Amendment
We proposed a non-exclusive safe harbor that would provide that a
person will be deemed to have received the securities pursuant to an
employee compensation plan if such person received them pursuant to a
compensatory benefit plan in transactions that met the conditions of
Securities Act Rule 701(c).
2. Comments on Proposed Rule Amendment
We received comments on the proposed amendment from two commenters,
both generally supporting the amendment.\93\ One commenter, while
generally supportive of the rule and safe harbor, expressed concern
that an issuer's ability to rely on the safe harbor was conditioned on
the issuer's ability to demonstrate compliance with all of the express
requirements of an exemption, placing undue emphasis on technical
aspects of the exemption that should not serve as the basis for
determining whether an issuer should be required to register under
Section 12(g).\94\ This commenter suggested that Section 503 of the
JOBS Act should be read to mandate that the safe harbor provide
certainty with respect to the exempt offering condition of JOBS Act
Section 502 and that if the safe harbor requires an issuer to establish
annually that each issuance of exempt equity securities satisfied an
available Securities Act exemption, then the safe harbor would impose a
significant ongoing burden on the issuer. The commenter recommended
revising the safe harbor so that, solely for purposes of Exchange Act
Section 12(g), the original issuance would be deemed to have satisfied
the Securities Act exemption condition if the conditions of Securities
Act Rule 701(c) are satisfied at the end of the fiscal year.\95\
---------------------------------------------------------------------------

\93\ See letters from ABA and ADISA.
\94\ See letter from ABA.
\95\ Id.
---------------------------------------------------------------------------

Two commenters made recommendations that the Commission provide
more guidance on the application of Securities Act Rule 701(c), or
modify the application of Rule 701(c) in the Section 12(g) context.\96\
One commenter recommended that there be no limit on the categories of
persons who may receive securities pursuant to an employee compensation
plan for purposes of the safe harbor.\97\ Another commenter recommended
expanding the provisions of Securities Act Rule 701(c) to exempt any
consultants and advisors, instead of maintaining the limitation in Rule
701(c) to consultants and advisors who are natural persons.\98\ This
commenter also recommended that the Commission explicitly provide that
Rule 701(c) extends to family members who acquire equity securities
initially issued pursuant to a compensatory benefit plan from an
employee (or former employee) by gift or domestic relations order, or
upon an employee's death or disability, as well as to the executor or
guardian of the employee, former employee, or family member who
acquires the securities upon such person's death or disability.
---------------------------------------------------------------------------

\96\ See letters from ABA and ADISA.
\97\ See letter from ADISA.
\98\ See letter from ABA.
---------------------------------------------------------------------------

3. Final Rule Amendment and Interpretation
After considering the comments, we are adopting the proposed
amendment to Exchange Act Rule 12g5-1(a)(8) with the additions and
clarifications detailed below. We are adopting a non-exclusive safe
harbor.\99\ The safe harbor provides that:
---------------------------------------------------------------------------

\99\ Failure to satisfy all of the conditions of the non-
exclusive safe harbor would not preclude reliance on Section
12(g)(5) or other provisions of the rule.
---------------------------------------------------------------------------

an issuer may deem a person to have received the
securities pursuant to an employee compensation plan if such plan and
the person who received the securities pursuant to the plan met the
plan and participant conditions of Securities Act Rule 701(c); and
an issuer may, solely for the purposes of Section 12(g),
deem the securities to have been issued in a transaction exempt from,
or not subject to, the registration requirements of Section 5 of the
Securities Act if the issuer had a reasonable belief at the time of the
issuance that the securities were issued in such a transaction.
a. Employee Compensation Plan
We believe that using the conditions of Rule 701(c) to structure
the employee compensation plan safe harbor for the determination that a
person received the securities pursuant to an employee compensation
plan allows issuers to apply well understood principles of an existing
Securities Act exemption to the new Exchange Act registration
determination created by the JOBS Act. We believe application in a
Section 12(g) context of the familiar concepts applied in connection
with the issuance of compensatory equity securities under Securities
Act Rule 701 will facilitate compliance and simplify recordkeeping.
Rule 701 exempts from Securities Act registration offers and sales
of securities pursuant to certain compensatory benefit plans and
contracts relating to compensation. Rule 701(c) limits this exemption
to offers and sales of securities under a written compensatory benefit
plan established by the issuer, its parents, its majority-owned
subsidiaries or majority-owned subsidiaries of the issuer's parent, for
the participation of their employees, directors, general partners,
trustees, officers, or consultants and advisors.\100\

[[Page 28697]]

Rule 701(c)(1) sets forth special requirements for consultants and
advisors \101\ and Rule 701(c)(3) defines eligible family members.\102\
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\100\ Securities Act Rule 701(c) exempts offers and sales of
securities (including plan interests and guarantees pursuant to Rule
701(d)(2)(ii)) under a written compensatory benefit plan (or written
compensation contract) established by the issuer, its parents, its
majority-owned subsidiaries or majority-owned subsidiaries of the
issuer's parent, for the participation of their employees,
directors, general partners, trustees (where the issuer is a
business trust), officers, or consultants and advisors, and their
family members who acquire such securities from such persons through
gifts or domestic relations orders. This section exempts offers and
sales to former employees, directors, general partners, trustees,
officers, consultants and advisors only if such persons were
employed by or providing services to the issuer at the time the
securities were offered. In addition, the term ``employee'' includes
insurance agents who are exclusive agents of the issuer, its
subsidiaries or parents, or who derive more than 50% of their annual
income from those entities. As explained in the 1999 Rule 701
Release at Section II.D, Rule 701 is also available to persons with
a de facto employment relationship with the issuer. Such a
relationship would exist where a person not employed by the issuer
provides the issuer services that traditionally are performed by an
employee and the compensation paid for those services is the primary
source of the person's earned income.
\101\ The Commission adopted amendments to Form S-8 and the Rule
405 definition of ``employee benefit plan'' that made Form S-8
available for the issuance of securities to consultants or advisors
only if: They are natural persons; they provide bona fide services
to the registrant; and the services are not in connection with the
offer or sale of securities in a capital-raising transaction, and do
not directly or indirectly promote or maintain a market for the
registrant's securities. See 1999 Form S-8 Release and 1999 Rule 701
Release. Rule 701(c)(1) applies the same limitations regarding
consultants and advisors as those provided in Form S-8 and the Rule
405 definition of ``employee benefit plan.''
\102\ Rule 701 is available for the exercise of employee benefit
plan options by an employee's family member who has acquired the
options from the employee through a gift or a domestic relations
order. As defined in Exchange Act Rule 701(c)(3) [17 CFR
230.701(c)(3)], for this purpose, ``family member'' includes any
child, stepchild, grandchild, parent, stepparent, grandparent,
spouse, former spouse, sibling, niece, nephew, mother-in-law,
father-in-law, son-in-law, daughter-in-law, brother-in-law, or
sister-in-law, including adoptive relationships, any person sharing
the employee's household (other than a tenant or employee), a trust
in which these persons have more than 50% of the beneficial
interest, a foundation in which these persons (or the employee)
control the management of assets, and any other entity in which
these persons (or the employee) own more than 50% of the voting
interests.
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The safe harbor we are adopting today is available for the plan
participants enumerated in Rule 701(c), including employees, directors,
general partners, trustees, officers and certain consultants and
advisors.\103\ The safe harbor also is available for permitted family
member transferees with respect to securities issued pursuant to a plan
that are acquired by gift or domestic relations order from plan
participants, or such securities acquired by permitted family member
transferees in connection with options transferred to them by the plan
participant through gifts or domestic relations orders.\104\ Because
the safe harbor is limited to holders who are persons specified in Rule
701(c), once these persons subsequently transfer the securities to
holders not specified in Rule 701(c), whether or not for value, the
securities must be counted as held of record by the transferee for
purposes of determining whether the issuer is subject to the
registration and reporting requirements of Exchange Act Section
12(g)(1).
---------------------------------------------------------------------------

\103\ Unlike traditional employees, consultants and advisors
typically provide their services to multiple clients rather than to
the same issuer on a dedicated basis. This distinction may cause
them to be less likely to hold the securities they receive as
compensation and more likely to sell them. As a result the
Commission limited the consultants and advisors eligible to rely on
the exemption. See 1999 Rule 701 Release at Section II.D. We believe
that in light of the Rule 701 restrictions applicable to consultants
and advisors, the compensatory nature of the transactions justifies
treating consultants and advisors who are eligible to receive
securities in compensatory transactions that satisfy the conditions
of Rule 701(c) as persons who receive securities pursuant to an
employee compensation plan for purposes of the Rule 12g5-1 safe
harbor. Furthermore, since the securities would no longer be
eligible for the exclusion under the safe harbor following their
transfer, we believe the potential for abuse would be limited.
However, in spite of one commenter's recommendation (see letter from
ABA), we see no reason to expand the scope of eligible consultants
and advisors under Section 12(g) or Rule 701, which the Commission
narrowed in 1999 in order to address abuses in the use of Form S-8
and Rule 701. See Registration of Securities on Form S-8, Release
No. 33-7646 (Feb. 25, 1999) [64 FR 11103 (Mar. 8, 1999)]; Rule 701--
Exempt Offerings Pursuant to Compensatory Arrangements, Release No.
33-7645 (Feb 25, 1999) [64 FR 11095 (Mar. 8, 1999)].
\104\ See Rule 701--Exempt Offerings Pursuant to Compensatory
Arrangements, Release No. 33-7511 (Feb. 27, 1998) [63 FR 10785 (Mar.
5, 1998)] at Section III.E.4. Including family member transferees in
the safe harbor is consistent with the approach in Rule 701(c),
which provides an exemption to family member transferees in
connection with stock options because of their common economic
interest and the non-capital raising nature of the transactions.
---------------------------------------------------------------------------

An issuer may rely on the safe harbor when determining the holders
of securities issued in reliance on Securities Act Rule 701, as well as
holders of securities issued in transactions otherwise exempted from,
or not subject to, the registration requirements of the Securities Act
that satisfy the conditions of Rule 701(c), even if all the other
conditions of Rule 701, such as issuer eligibility in Rule 701(b)(1),
the volume limitations in Rule 701(d) or the disclosure delivery
provisions in Rule 701(e), are not met. Thus, the safe harbor is
available for holders of securities received in other employee
compensation plan transactions exempted from, or not subject to, the
registration requirements of Section 5 of the Securities Act, such as
securities issued in reliance on Securities Act Section 4(a)(2),
Regulation A, Regulation D, or Regulation S under the Securities Act,
that also meet the conditions of Rule 701(c).
b. Securities Issued in Exempt Transactions
In response to comments, we are adding a provision to the safe
harbor relating to the determination that the securities were issued in
a transaction exempt from, or not subject to, the registration
requirements of Section 5 of the Securities Act. The addition to the
safe harbor provides that, solely for purposes of Section 12(g) of the
Exchange Act, an issuer may deem securities to have been exempt from,
or not subject to, the registration requirements of Section 5 of the
Securities Act if the issuer had a reasonable belief at the time of
issuance that the securities were issued in a transaction that was
exempt from, or not subject to, the registration requirements of
Section 5.
While one commenter recommended that the safe harbor should deem
the securities qualified for the Securities Act exemption if the
conditions of Securities Act Rule 701(c) were met as of the end of the
fiscal year,\105\ we believe that such a safe harbor would go too far
and negate the requirement that the securities have been issued in a
transaction exempt from, or not subject to, the registration
requirements of Section 5 of the Securities Act at the time of
issuance. Instead, the safe harbor provides issuers with relief from
the burden of establishing that earlier issuances of securities
satisfied an appropriate exemption on an annual basis provided it had a
reasonable belief that it had complied with the appropriate
registration requirements or the conditions of an applicable exemption
at the time of issuance.
---------------------------------------------------------------------------

\105\ See letter from ABA.
---------------------------------------------------------------------------

c. Interpretative Guidance Relating to Acquisitions by Family Members
One commenter recommended that the Commission provide guidance
regarding the application of Rule 701 to certain equity securities
initially issued pursuant to a compensatory benefit plan acquired from
an employee (or former employee) by gift or domestic relations order,
or upon an employee's (or former employee's) death or disability.\106\
In light of the nature of such transactions, family members (as defined
in Rule 701(c)) who receive the equity securities as a result of the
employee's (or former employee's) gift, domestic relations order, or
death are also considered as persons who received ``the securities
pursuant to an employee compensation plan'' for purposes of Rule 12g5-
1(a)(8).\107\
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\106\ See letter from ABA.
\107\ In general we understand that guardians or members of a
committee for incompetent former employees, or similar persons duly
authorized by law to administer the assets of former employees would
administer the assets for the benefit of the former employee and
title would not have transferred to these agents. In such
circumstances, the securities would meet the conditions of Rule
701(c) for purposes of determining the holders of record.
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D. Foreign Private Issuers

1. Proposed Rule Amendments
While ``foreign private issuers'' \108\ would be able to rely on
Exchange Act

[[Page 28698]]

Rule 12g5-1(a)(8) when making their determination of the number of U.S.
resident holders under Exchange Act Rule 12g3-2(a), we proposed to
amend Exchange Act Rule 3b-4 to clarify that securities held by
employees must continue to be counted for the purpose of determining
the percentage of the issuer's outstanding securities held by U.S.
residents, and thus for determining whether an issuer qualifies as a
foreign private issuer. We also proposed to amend the definition of
``foreign private issuer'' under Securities Act Rule 405 to reinsert an
omitted instruction but with a proposed revision, identical to that
proposed under Exchange Act Rule 3b-4, clarifying that securities held
by employees must continue to be counted for the purposes of
determining the percentage of the issuer's outstanding securities held
by U.S. residents and foreign private issuer status under the
Securities Act.\109\
---------------------------------------------------------------------------

\108\ See Exchange Act Rule 3b-4(c) [17 CFR 240.3b-4(c)]. A
foreign private issuer is any foreign issuer other than a foreign
government, except for an issuer that (1) has more than 50% of its
outstanding voting securities held of record by U.S. residents and
(2) any of the following: (i) A majority of its officers and
directors are citizens or residents of the United States; (ii) more
than 50% of its assets are located in the United States; or (iii)
its business is principally administered in the United States.
\109\ 17 CFR 230.405. The definition of ``foreign private
issuer'' under the Securities Act is intended to be the same as the
definition under Exchange Act Rule 3b-4.
---------------------------------------------------------------------------

2. Comments on Proposed Rule Amendments
We received comments on the proposed amendments from one commenter,
who supported the proposed amendments relating to foreign private
issuers.\110\
---------------------------------------------------------------------------

\110\ See letter from ABA.
---------------------------------------------------------------------------

3. Final Rule Amendments
After considering the comments, we are adopting the amendments
substantially as proposed. Under the rules we are adopting, foreign
private issuers may rely on Rule 12g5-1(a)(8) when making their
determination of the number of U.S. resident holders under Exchange Act
Rule 12g3-2(a).\111\ Under Rule 12g3-2(a), foreign private issuers that
meet the asset and shareholder threshold for registration under Section
12(g) are exempt from registering any class of securities under that
section if the class of securities is held by fewer than 300 holders
resident in the United States.\112\ For purposes of determining whether
this threshold is met, Rule 12g3-2(a)(1) specifies that the method
shall be as provided in Exchange Act Rule 12g5-1, except that
securities held of record by brokers, dealers, banks and nominees for
the accounts of customers resident in the United States shall be
counted as held by the number of separate accounts for which the
securities are held.\113\ Because the rule directs issuers to the
definition of ``held of record'' in Rule 12g5-1, the statutory changes
to Section 12(g)(5) as well as the amendment to Rule 12g5-1 adopted
today also apply to the determination of a foreign private issuer's
U.S. resident holders for the purposes of the Rule 12g3-2(a)
analysis.\114\
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\111\ 17 CFR 240.12g3-2(a).
\112\ Id.
\113\ The amendment to Rule 12g5-1 is limited to determinations
under Section 12(g). The definition of ``foreign private issuer'' in
Exchange Act Rule 3b-4 contains a cross-reference to Rule 12g3-2(a)
for purposes of calculating record ownership in determining whether
more than 50% of an issuer's outstanding voting securities are
directly or indirectly held by residents of the United States. In
contrast to the approach in Rule 12g3-2(a), Rule 3b-4 clarifies that
securities held by employees must continue to be counted for the
purpose of determining the percentage of the issuer's outstanding
securities held by U.S. residents, and thus for determining whether
an issuer qualifies as a foreign private issuer. See Instruction to
paragraph (c)(1) of Rule 3b-4. We are revising the Instruction to
paragraph (c)(1)A.2. from the proposal to clarify that all of Rule
12g5-1(a)(8) does not apply for purposes of making a determination
under Rule 405 as to foreign private issuer status.
\114\ The definition of ``foreign private issuer'' under the
Securities Act, which is found in Securities Act Rule 405, is the
same as the definition under Exchange Act Rule 3b-4. We are
similarly amending the foreign private issuer definition under Rule
405 to reinsert an omitted instruction with an identical revision to
that in Rule 3b-4, clarifying that securities held by employees must
continue to be counted for the purposes of determining the
percentage of the issuer's outstanding securities held by U.S.
residents and foreign private issuer status under the Securities
Act.
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IV. Economic Analysis

Title V and Title VI of the JOBS Act increased the registration
thresholds for issuers, amended the definition of ``held of record'' to
exclude securities issued pursuant to employee compensation plans and
increased the thresholds for termination of registration and suspension
of reporting under the Exchange Act for banks and bank holding
companies. The FAST Act similarly increased the thresholds for
registration, termination of registration and suspension of reporting
under the Exchange Act for savings and loan holding companies. The
Commission is adopting amendments to implement Title V and Title VI of
the JOBS Act and Title LXXXV of the FAST Act.
In adopting rules or amendments, we are mindful of the costs
imposed by and the benefits obtained from our rules. The discussion
below attempts to address the economic effects of the amendments,
including the likely costs and benefits of the amendments as well as
the effect of the amendments on efficiency, competition and capital
formation.\115\ Some of the costs and benefits stem from the statutory
mandates of Title V and Title VI of the JOBS Act and Title LXXXV of the
FAST Act, while others are affected by the discretion we exercise in
revising our rules to reflect this mandate. For purposes of this
economic analysis, we address the benefits and costs resulting from the
mandatory statutory provisions and our exercise of discretion together
because the two types of costs and benefits are not readily separable.
We also analyze the benefits and costs of significant alternatives to
the amendments that were suggested by commenters and that we considered
on our own accord.
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\115\ Section 23(a)(2) of the Exchange Act [17 U.S.C. 78w(a)(2)]
requires the Commission, when making rules under the Exchange Act,
to consider the impact that the rules would have on competition, and
prohibits the Commission from adopting any rule that would impose a
burden on competition not necessary or appropriate in furtherance of
the Exchange Act. 15 U.S.C. 78w(a). Further, Section 2(b) of the
Securities Act [15 U.S.C. 77b(b)] and Section 3(f) of the Exchange
Act [17 U.S.C. 78c(f)] require the Commission, when engaging in
rulemaking where it is required to consider or determine whether an
action is necessary or appropriate in the public interest, to
consider, in addition to the protection of investors, whether the
action will promote efficiency, competition and capital formation.
---------------------------------------------------------------------------

A. Baseline

The baseline for our economic analysis of the amendments, including
the baseline for our consideration of the effects on efficiency,
competition and capital formation, is the state of the market as well
as market practices prior to enactment of the JOBS Act and the FAST
Act. Prior to the JOBS Act, issuers were required to register a class
of their equity securities with the Commission upon reaching 500
holders of record and total assets of $10 million \116\ and were
allowed to terminate registration or suspend the duty to file periodic
and current reports with the Commission when the number of holders of
record had fallen below 300, or below 500 and total assets had not
exceeded $10 million on the last day of each of the issuer's three most
recent fiscal years. In addition, Exchange Act Rules 12h-1(f) and 12h-
1(g) permitted issuers to exclude stock options issued under written
compensatory benefit plans under certain conditions from the
registration requirements of Section 12(g).
---------------------------------------------------------------------------

\116\ See supra note 31.
---------------------------------------------------------------------------

The JOBS Act raised the thresholds at which an issuer is required
to register a class of equity securities with the Commission pursuant
to Section 12(g) and provided that persons holding certain employee
compensation plan

[[Page 28699]]

securities need not be counted when determining whether an issuer is
required to register. The JOBS Act also raised the thresholds at which
an issuer that is either a bank or a bank holding company is permitted
to terminate registration or suspend reporting obligations with the
Commission. These statutory changes were effective immediately upon
signing of the JOBS Act. As a result, some banks and bank holding
companies were newly eligible to terminate registration or suspend
reporting. As of December 31, 2015, we estimate that approximately 103
such institutions have elected to do so.\117\ We estimate that there
are approximately 486 banks and bank holding companies that currently
report to the Commission,\118\ of which some may be eligible to
terminate registration under the JOBS Act but have elected to continue
reporting.
---------------------------------------------------------------------------

\117\ The Commission staff derived this estimate of the number
of banks and bank holding companies that have elected to terminate
registration or suspend reporting by analyzing Form 15 filings on
EDGAR.
\118\ The Commission staff derived this estimate by analyzing
annual filings submitted to the Commission as of December 31, 2015
for the most recently completed fiscal year.
---------------------------------------------------------------------------

Subsequent to the JOBS Act, the FAST Act raised the thresholds at
which savings and loan holding companies are required to register and
permitted to terminate registration or suspend reporting obligations to
the same thresholds as apply to banks and bank holding companies. These
statutory changes were effective immediately upon signing of the FAST
Act. We estimate that, as of December 31, 2015, there are approximately
64 savings and loan holding companies that currently report to the
Commission, approximately 28 of which are eligible to terminate
registration or suspend reporting under the amendments.\119\
---------------------------------------------------------------------------

\119\ Id. We note, however, that 25 of these 28 savings and loan
holding companies are listed on a national securities exchange and
required to report under Section 12(b) of the Exchange Act. In order
to cease reporting, these issuers would be required to delist from
the exchange.
---------------------------------------------------------------------------

We are amending specified Exchange Act rules to reflect the new,
higher threshold for banks, savings and loan holding companies and bank
holding companies under Section 12(g)(4) and Section 15(d)(1). For
those banks, savings and loan holding companies and bank holding
companies that are eligible to terminate registration under Section
12(g), the amendments will provide the same procedural accommodations
available to other issuers under current rules by permitting these
institutions to suspend their reporting obligations immediately upon
the filing of a certification on Form 15 with the Commission.
In addition, the amendments apply the definition of ``accredited
investor'' in Securities Act Rule 501(a) in making determinations under
Exchange Act Section 12(g)(1), revise the definition of ``held of
record'' in Rule 12g5-1, and establish a non-exclusive safe harbor for
issuers to rely on when determining whether securities were received
pursuant to an employee compensation plan in transactions exempt from,
or not subject to, the registration requirements of Section 5 of the
Securities Act. The non-exclusive safe harbor, as adopted, permits an
issuer to rely on the definition of ``compensatory benefit plan'' in
Securities Act Rule 701 and the conditions in Securities Act Rule
701(c) in determining whether a person has received securities pursuant
to an employee compensation plan. It also permits an issuer to rely on
a reasonable belief at the time of issuance that the securities were
issued in a transaction exempt from, or not subject to, the
registration requirements of Section 5.
We considered alternative definitions of ``employee compensation
plan.'' We also considered whether to provide additional guidance with
respect to the determination of accredited investor status when
establishing the number of holders of record. These decisions may
affect how a non-reporting issuer counts its holders of record for the
purpose of the registration thresholds under the Exchange Act; hence,
they could affect whether an issuer becomes subject to Exchange Act
reporting. However, due to limited availability of shareholder
information on these non-reporting issuers, we are unable to quantify
the number of non-reporting issuers that might be affected by these
decisions.

B. Analysis of the Amendments

The amendments will affect reporting issuers generally, and banks,
bank holding companies and savings and loan holding companies
specifically, as well as non-reporting issuers, employees and other
investors. We analyze the costs and benefits associated with the
amendments below.
1. Increased Regulatory Thresholds for Banks, Savings and Loan Holding
Companies and Bank Holding Companies
As discussed above, the JOBS Act and the FAST Act amended Sections
12(g) and 15(d) of the Exchange Act to raise the thresholds at which
banks, savings and loan holding companies and bank holding companies
may terminate registration or suspend their obligations to file reports
with the Commission from 300 to 1,200 holders of record.\120\ However,
without the amendments being adopted today, banks, savings and loan
holding companies and bank holding companies that want to use the
higher thresholds must wait 90 days after filing a certification with
the Commission that the number of holders of record is less than 1,200
persons to terminate their Section 12(g) registration and cease filing
reports required by Section 13(a) and must wait until the first day of
the fiscal year to suspend any Section 15(d) reporting obligations. For
other issuers, our existing rules afford procedural accommodations that
allow them to suspend their reporting obligations immediately upon the
filing of a certification on Form 15.
---------------------------------------------------------------------------

\120\ For other issuers, the threshold in Section 12(g)(4) for
termination of registration and in Section 15(d)(1) for suspension
of reporting remains at 300 holders of record.
---------------------------------------------------------------------------

To make these procedural accommodations applicable to banks,
savings and loan holding companies and bank holding companies, as
proposed, the amendments revise Exchange Act Rules 12g-2, 12g-3, 12g-4
and 12h-3 to reflect the 1,200 holders of record threshold for banks,
savings and loan holding companies and bank holding companies. This
will permit banks, savings and loan holding companies and bank holding
companies to rely on these rules to cease reporting during a fiscal
year, rather than wait the 90 days or until the end of the reporting
year prescribed under the Exchange Act. This will reduce issuer
compliance and reporting costs during the fiscal year the issuer ceases
reporting \121\ and may lessen potential confusion that could arise
from the differences in the thresholds contained in the statute and our
existing rules. At the same time, extending these procedural
accommodations could accelerate the loss of investor access to current
information about the issuer. We note, however that this effect is
likely mitigated by the non-SEC regulatory disclosure requirements that
will continue to apply to regulated banks, savings and loan holding
companies and bank holding companies after adoption of today's
amendments.
---------------------------------------------------------------------------

\121\ See letter from ABA indicating that these costs could be
especially onerous for financially distressed firms and from ICBA.
---------------------------------------------------------------------------

We believe that the amendments adopted under this rule will not
have a significant impact on competition. To the extent that savings
pursuant to lower compliance and reporting costs could possibly be used
to increase institutions' lending activities, the amendments may lead
to higher levels

[[Page 28700]]

of investment and capital formation in the economy.
As stated above, we estimate that there are approximately 550
banks, savings and loan holding companies and bank holding companies
that currently report with the Commission. Many of these reporting
issuers have more than 1,200 holders of record and are not eligible to
cease reporting under the new higher thresholds. However, approximately
192 of these reporting banks, savings and loan holding companies and
bank holding companies have between 300 and 1,199 holders of record and
may be eligible to cease reporting. Many of these banks and bank
holding companies have likely been eligible to deregister or suspend
reporting since the adoption of the JOBS Act, but have chosen to
continue as reporting issuers. One explanation for why many of these
issuers have chosen not to deregister is that most (143) are also
listed on national securities exchanges and if they chose to deregister
or suspend reporting under the Exchange Act, they would have to give up
their national exchange listing.\122\ While a higher percentage of
savings and loan holding companies have become eligible to terminate
their registration or suspend reporting under the FAST Act,
approximately 50 of 64 reporting savings and loan holding companies are
registered pursuant to Section 12(b). Based on staff research, most of
the newly eligible savings and loan holding companies (approximately 25
of the 28) would have to delist from a national securities exchange to
cease reporting under the Exchange Act.
---------------------------------------------------------------------------

\122\ Listing on a national securities exchange triggers current
and periodic Exchange Act reporting requirements under Section
12(b).
---------------------------------------------------------------------------

We believe that the likelihood of large numbers of eligible banks,
savings and loan holding companies and bank holding companies
terminating registration or suspending reporting based on the new
higher thresholds in future years is low. While a relatively larger
number of banks and bank holding companies (69) relied on the new
thresholds to exit Exchange Act reporting immediately after the
adoption of the JOBS Act in 2012, the numbers of such issuers relying
on the new thresholds to exit substantially decreased over the
subsequent three years (18 in 2013, 7 in 2014 and 6 in 2015).\123\ As
banks and bank holding companies remain subject to other regulatory
reporting requirements,\124\ many have chosen to continue reporting,
and bear ongoing reporting costs, even though they are eligible to
cease reporting under Section 12(g) of the Exchange Act. We expect to
see a similar trend with respect to the deregistrations of savings and
loan holding companies.
---------------------------------------------------------------------------

\123\ The Commission staff derived this estimate by analyzing
Form 15 filings submitted to the Commission. These numbers indicate
that approximately 4%, 1% and 1% of the reporting bank and bank
holding companies deregistered during 2013, 2014 and 2015,
respectively.
\124\ The Board of Governors of the Federal Reserve System is
responsible for the consolidated supervision of bank holding
companies and savings and loan holding companies and requires those
entities to provide data relating to capitalization, liquidity, and
risk management as well as periodic financial reports in order for
the Board of Governors to analyze the overall financial condition of
those entities to ensure safe and sound operations.
---------------------------------------------------------------------------

In deciding whether to terminate registration or suspend their
reporting obligations, we anticipate that banks, savings and loan
holding companies and bank holding companies will weigh the benefits of
being a public company against the burden of additional disclosure
costs. Commonly cited benefits of being a public company include the
ability to obtain a lower cost of capital for investment and growth,
increased liquidity through a broader shareholder base, and greater
ability to finance acquisitions and offer equity-based incentive
contracts.\125\ Commonly cited costs of being a public company include
the need to comply with increased regulations and regulatory
supervision, including requirements for independent audits,\126\
disclosure of information to competitors, loss of control and ownership
dilution.\127\
---------------------------------------------------------------------------

\125\ See J. Brau, Why Do Firms Go Public?, Oxford Handbook of
Entrepreneurial Finance (2010) (providing a general discussion of
the different rationales for firms to go public); U. Celikyurt, M.
Sevilir, and A. Shivdasani, Going Public to Acquire? The Acquisition
Motive in IPOs, J. FIN. ECON. (2010) (arguing that firms go public
so as to facilitate acquisitions); M. Pagano, F. Panetta, and L.
Zingales, Why Do Companies Go Public? An Empirical Analysis, J. FIN.
(1998) (showing that initial public offerings are generally followed
by lower cost of credit and increased turnover in control); T.
Chemmanur and P. Fulghieri, A Theory of the Going Public Decision,
REV. FIN.STUD. (1999) (arguing that going public broadens the
ownership base of the firm); R. Rosen, S. Smart and C. Zutter, Why
Do Firms Go Public? Evidence From the Banking Industry, Working
Paper (2005) (finding that banks that go public are more likely to
grow faster, earn higher profits, employ more leverage and become
acquirers when compared to their non-reporting counterparts),
available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=686473.
\126\ See letter from IPA. IPA cited an estimate of ongoing
reporting costs under the Exchange Act of $650,000 annually. This
commenter additionally noted that becoming an Exchange Act reporting
company may be contrary to an issuer's business plan and against
investors' economic interests. See also letter from ABA positing
that once the initial cost of implementing reporting procedures are
undertaken, the ongoing costs of reporting are not a significant
burden on capital formation and job creation.
\127\ See J. Brau and S. Fawcett, Initial Public Offerings: An
Analysis of Theory and Practice, J. FIN. (2006) (reporting based on
a survey of CFOs that ``desire to maintain decision-making
control,'' ``disclosing information to competitors,'' ``SEC
reporting requirements'' and ``to avoid ownership dilution'' are
among the top five reasons why firms choose to stay private); J.
Farre-Mensa, Why Are Most Firms Privately Held?, Working paper,
Harvard University (2011) (documenting that firms in industries with
high disclosure costs (i.e., where it is easier for competitors to
appropriate a firm's intellectual property) tend to remain private),
available at https://www.cemfi.es/ftp/pdf/papers/wshop/Farre-Mensa_JobMarketPaper.pdf.
---------------------------------------------------------------------------

2. Use of the Term ``Accredited Investor'' in Exchange Act Section
12(g)
Section 501 of the JOBS Act raises the number of holders of record
at which an issuer is required to register a class of equity securities
under the Exchange Act from 500 persons to 2,000 persons or 500 persons
who are not accredited investors. In order for an issuer to rely on the
new, higher threshold established by the JOBS Act, the issuer must make
accredited investor determinations if it has more than 500 holders of
record.
We are amending Exchange Act Rule 12g-1 to clarify that the
definition of ``accredited investor'' in Securities Act Rule 501(a)
applies when making determinations under Exchange Act Section 12(g)(1)
and that such determination must be made as of the last day of the
fiscal year rather than at the time of sale of the securities. Under
Rule 501(a), an accredited investor is any person who comes within one
or more of the categories of investors specified therein, or who the
issuer reasonably believes comes within any such category. Many issuers
and investors are familiar with the Rule 501(a) definition as it is a
central component for private offerings conducted under Securities Act
Rule 506 of Regulation D.\128\ Consequently, the amendment should
facilitate compliance.\129\ Developing an alternative definition for
purposes of Section 12(g)(1) could impose costs on issuers and
investors by requiring them to familiarize themselves with, and apply,
a new and different standard.\130\ Due to limitations in available
data, we are unable to estimate how many issuers will be impacted by
using the Rule 501(a) definition of ``accredited investor.''
---------------------------------------------------------------------------

\128\ The Rule 501(a) definition is also used in connection with
other unregistered offerings, for example for offerings conducted
pursuant to amended Regulation A or the recently adopted Regulation
Crowdfunding.
\129\ See letter from ABA.
\130\ Id.
---------------------------------------------------------------------------

Requiring issuers to make the accredited investor determination at
the end of the fiscal year rather than at the time of sale of
securities will ensure that the information is timely and consistent

[[Page 28701]]

with issuers' facts and circumstances at the end of each year.
Permitting an issuer to rely on an ongoing basis on information
previously obtained relating to accredited investors status, such as
allowing reliance on information obtained by the issuer at the time the
securities were initially issued to the investor or at the time the
securities were most recently issued to the investor, would likely be
less costly than requiring the issuer to establish a reasonable belief
that the investor is an accredited investor. This, however, could also
lead to reliance on outdated information, potentially causing issuers
with more than 500 non-accredited investors to fail to register,
thereby leaving investors in those issuers with less information and
protection under the federal securities laws.
Not providing specific guidance or rules on how to establish a
reasonable belief of a security holder's status as an accredited
investor for purposes of determining holders of record could result in
some uncertainty and possibly higher costs for issuers. We believe,
however, that the ``reasonable belief'' standard under Rule 501(a)
provides issuers with appropriate flexibility to use the method that
works best, given their individual circumstances, to determine the
accredited investor status of their shareholders. We also believe that
this standard may help to mitigate some of the concerns relating to
higher costs under the adopted provision by allowing issuers to rely on
previous/other determinations if they have a reasonable belief that the
security holder continues to be or is an accredited investor. We also
note that many issuers are familiar with and routinely use the
``reasonable belief'' standard without such guidance when making
private offerings in reliance on Regulation D.
Some commenters recommended that the Commission address potential
compliance issues related to the accredited investor threshold by
providing a safe harbor for determining accredited investor
status.\131\ A safe harbor could increase efficiency by providing
issuers with a prescribed process to determine and update the
accredited investor status of their investors. For example, a safe
harbor that permits an issuer to rely on an annual affirmation of
accredited investor status by the investor, other information obtained
by the issuer or on a combination of a certification and other
information may be less costly than requiring an issuer to establish a
reasonable basis for its determination through other means. Similarly,
a safe harbor with specified time limits on the permitted use of the
information \132\ or conditioned upon the issuer not having information
that the previously obtained information was incorrect, unreliable or
had changed could address some of the concerns related to higher costs
or outdated information. Another alternative would be a safe harbor
that permits an issuer to rely on a third-party certification for
determining the accredited investor status of investors.\133\
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\131\ See letters from ABA, Foley and NYCBA. See also letters
from ADISA, CFM, Cleary and IPA.
\132\ See letter from Cleary suggesting a safe harbor permitting
accredited investor status determinations made in offerings during
the three months prior to fiscal year-end or on self-certifications
by investors if the offering occurred more than three months but
less than twelve months prior to fiscal year-end.
\133\ See letter from IPA suggesting that relying upon third
parties might allow issuers to reduce the cost of compliance for
accredited investor determinations. We do not have adequate
information about third-party certification providers and the
characteristics of this industry to assess this alternative in terms
of reliability and cost of the provided certification services. To
the extent that reputational concerns would incentivize third-party
certification providers to perform reliable and updated due
diligence, third-party certification could potentially provide
accurate information at a cost that economies of scale may lessen.
---------------------------------------------------------------------------

Despite the benefits described above, providing a specific method
(or methods) under a safe harbor could become a de facto minimum
standard which we believe would reduce the flexibility available to
issuers for determining accredited investor status.\134\ Moreover, at-
least for some issuers, a prescribed method may be less accurate and
more burdensome than alternate non-prescribed methods in establishing
the accredited status of investors. For example, a safe harbor
providing for annual certification could be costly and have adverse
impacts on small issuers and their investors,\135\ discouraging
accredited investors from investing in their securities, and leading to
lower levels of investment.\136\
---------------------------------------------------------------------------

\134\ See letter from ABA.
\135\ See letter from IPA.
\136\ See letter from CFM.
---------------------------------------------------------------------------

3. Definition of ``Held of Record'' and Safe Harbor for Employee
Compensation Plan Securities
Section 12(g)(5), as amended by Section 502 of the JOBS Act,
excludes from the definition of ``held of record'' securities held by
persons who received them pursuant to an employee compensation plan in
transactions exempted from the registration requirements of Section 5
of the Securities Act for purposes of determining whether an issuer is
required to register a class of security pursuant to Section
12(g)(1).\137\ Section 503 of the JOBS Act directs the Commission to
adopt a safe harbor that issuers can use when making their holder of
record determinations.
---------------------------------------------------------------------------

\137\ Prior to the JOBS Act, employees who obtained securities
under an issuer's employee compensation plan were not excluded from
the shareholders of record calculation.
---------------------------------------------------------------------------

We believe that, by making it easier for non-reporting companies
that issue securities to their employees to remain below the
registration and reporting thresholds in the Exchange Act, the
statutory changes will benefit issuers by allowing them to better
control how and when they become subject to reporting requirements,
while continuing to use securities to compensate employees.\138\ These
changes could be particularly beneficial for smaller or cash-
constrained issuers that could more easily issue securities to their
employees as a form of compensation without being subject to Exchange
Act reporting requirements and the associated compliance costs.
---------------------------------------------------------------------------

\138\ See letter from ABA.
---------------------------------------------------------------------------

However, investors in these issuers, including employees, may be
adversely affected by a delay in the potential registration of a class
of securities and the associated reporting because they otherwise might
benefit from the information provided through such reporting. As a
result, the amendments to the definition of ``held of record'' and the
non-exclusive safe harbor being adopted today could have an impact on
the potential costs and benefits of Exchange Act registration for
affected issuers and their investors by affecting areas such as the
ease of relying upon the statutory exemption under Section 12(g), the
number of non-reporting companies able to forestall registration, and
the amount of information available to investors in those issuers'
securities, with effects, for example, on price efficiency and
liquidity. We further discuss the economic impact of specific aspects
of these amendments below.
Instead of establishing a new definition for the term ``employee
compensation plan,'' we are amending the definition of ``held of
record'' to permit an issuer to exclude securities held by persons who
received them pursuant to an employee compensation plan in transactions
exempted from, or not subject to, the registration requirements of
Section 5 of the Securities Act and adopting a safe harbor providing
that this condition will be satisfied if the securities were received
pursuant to a compensatory benefit plan in transactions that meet

[[Page 28702]]

the conditions of Rule 701(c). By not creating a new definition and
relying on familiar concepts, the amendments should facilitate
compliance and simplify recordkeeping by issuers.\139\
---------------------------------------------------------------------------

\139\ See letter from ABA.
---------------------------------------------------------------------------

In a change from the proposal, we are revising the amendments to
the definition of ``held of record'' to make clear that, in addition to
securities issued to employees in transactions exempted from the
registration requirements of Securities Act Section 5 (such as
securities issued in a Rule 506 offering) or those issued to employees
in transactions that did not involve a sale of securities within the
meaning of Securities Act Section 2(a)(3), the amended definition also
will permit issuers to exclude exempt securities issued to employees
pursuant to Securities Act Section 3 (such as securities issued in a
Regulation A or Rule 504 offering). The amendment will provide
consistency in treatment of securities received pursuant to employee
compensation plans in primary transactions that are exempt from Section
5 registration requirements or not subject to Section 5 registration
requirements.\140\ This could lower issuer costs and facilitate
compliance. At the same time, such an expanded definition of ``held of
record'' could reduce the number of holders of record of an issuer and
potentially allow the issuers to delay or avoid Exchange Act reporting.
---------------------------------------------------------------------------

\140\ Id.
---------------------------------------------------------------------------

The amendments will permit issuers to exclude securities held by
former employees who received the securities in a transaction exempt
from, or not subject to, the registration requirements of Securities
Act Section 5 in substitution or exchange for securities excludable
under the proposed definition of held of record, as long as the former
employees were eligible, at the time of issuance, to receive the
original excludable securities. Relative to the proposal, the amended
definition will also include such securities held by former employees
who were employed by or providing services to a predecessor or an
acquired company. By providing uniform treatment for all securities
issued in exempt transactions, such provisions could lower issuer costs
and facilitate compliance. Permitting exclusion of securities received
by former employees and covered persons and securities exchanged or
substituted for such original excludable securities also is likely to
remove disincentives for issuers to engage in value-enhancing business
combinations or other similar transactions,\141\ which will benefit
issuers and their investors. In this way, the amendments may also lead
to a more efficient allocation of resources amongst firms that could
improve growth prospects over the longer run.
---------------------------------------------------------------------------

\141\ Id.
---------------------------------------------------------------------------

As proposed, the amendments establish a non-exclusive safe harbor
that issuers can rely on when determining whether holders of securities
received pursuant to an employee compensation plan may be excluded.
Consistent with the proposal, the safe harbor being adopted relies on
the conditions in existing Rule 701(c). Relying on an existing standard
that is already understood by market participants will make it easier
for issuers to avail themselves of this safe harbor than if we proposed
a new alternative standard. While generally broad in application, the
conditions in Rule 701(c) impose certain limitations, such as requiring
that securities be sold under a compensatory benefit plan, that the
plan be written, that the plan be established by the issuer or certain
specified related entities and that participation be limited to
employees and certain other specified persons. Although we are unable
to quantify the impact of adopting this safe harbor, as we cannot
reliably predict the number of issuers that would rely on it, we can
qualitatively assess its impact. A safe harbor that applies the
familiar concepts of existing Rule 701(c) should create efficiencies in
its application and avoid conflicts with existing rules, which could
reduce costs, especially for smaller issuers.\142\
---------------------------------------------------------------------------

\142\ See letter from ABA which states that Rule 701 is the
primary exemption relied upon by smaller and other non-reporting
issuers for such transactions.
---------------------------------------------------------------------------

In a change from the proposal, the safe harbor also includes a
reasonable belief standard. The inclusion of such a standard will
obviate the need for issuers to re-establish that earlier issuances
satisfied an appropriate exemption at the time of issuance. This should
provide greater regulatory certainty, leading to lower compliance
burdens for issuers.\143\ Similarly, the interpretative guidance set
forth in this release regarding transfers to family members of such
exempt securities through the employee's death, disability or domestic
relations order provides greater regulatory certainty with respect to
specific circumstances that are unexpected or out of control of the
issuer, which will benefit issuers intending to use equity
compensation.\144\
---------------------------------------------------------------------------

\143\ Id.
\144\ Id.
---------------------------------------------------------------------------

Finally, as proposed, the amendments also provide that foreign
private issuers will be able to rely on the adopted safe harbor when
making their determination of the number of U.S. resident holders under
Exchange Act Rule 12g3-2(a). While we are unable to quantify the number
of foreign private issuers that will be impacted due to limitations in
the available data, the amendments may allow some foreign private
issuers to delay registering with and reporting to the Commission. The
cost and benefit tradeoffs of Exchange Act registration for foreign
private issuers will be analogous to the ones discussed above for
domestic issuers. Additionally, the flexibility accorded by the
amendments will benefit the U.S.-based employees of foreign private
issuers by putting them on equal footing with employees in domestic
private companies.\145\
---------------------------------------------------------------------------

\145\ Id.
---------------------------------------------------------------------------

V. Paperwork Reduction Act

Certain provisions of our disclosure rules and forms applicable to
issuers contain ``collection of information'' requirements within the
meaning of the Paperwork Reduction Act of 1995 (``PRA'').\146\ The
hours and costs associated with preparing and filing forms and
retaining records constitute reporting and cost burdens imposed by the
collection of information requirements. An agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information requirement unless it displays a currently valid Office of
Management and Budget (``OMB'') control number. Compliance with the
information collections is mandatory. Responses to the information
collections are not kept confidential and there is no mandatory
retention period for the collections of information.
---------------------------------------------------------------------------

\146\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

The amendments adopted today do not alter the disclosure
requirements set forth in our rules and forms; however, the JOBS Act
and FAST Act amendments to Exchange Act Sections 12(g) and 15(d) and
the amendments to our rules to reflect those statutory amendments are
expected to insubstantially decrease the number of filings made
pursuant to these rules and forms. Exchange Act Rules 12g-1, 12g-2,
12g-3, 12g-4 and 12h-3 set forth when an issuer's securities are
required to be registered and the procedures for a registrant to
terminate its registration or suspend its duty to file reports. The
amendments provide thresholds that issuers may rely on when determining
their registration and reporting

[[Page 28703]]

obligations.\147\ Exchange Act Section 12(g)(5) and the amendment to
Exchange Act Rule 12g5-1 also exclude securities received pursuant to
certain employee compensation plans from the determination of when an
issuer is required to initially register with the Commission. These
changes will reduce the number of registrants required to initially
register a class of securities with the Commission as well as
accelerate the ability of some registrants to cease filing after they
have crossed below the statutory thresholds. For purposes of the PRA,
as discussed below, we estimate that the amendments will not
substantially reduce the number of filings received, nor will they
affect the incremental burden or cost per filing.
---------------------------------------------------------------------------

\147\ We also are amending Rule 12g-1 to reflect the new higher
thresholds in Section 12(g)(1).
---------------------------------------------------------------------------

The titles for the affected collections of information are:
(1) ``Form 10'' (OMB Control No. 3235-0064); \148\
---------------------------------------------------------------------------

\148\ 17 CFR 249.10.
---------------------------------------------------------------------------

(2) ``Form 20-F'' (OMB Control No. 3235-0288); \149\
---------------------------------------------------------------------------

\149\ 17 CFR 249.220f.
---------------------------------------------------------------------------

(3) ``Form 40-F'' (OMB Control No. 3235-0381); \150\
---------------------------------------------------------------------------

\150\ 17 CFR 249.240f.
---------------------------------------------------------------------------

(4) ``Form 10-K'' (OMB Control No. 3235-0063); \151\
---------------------------------------------------------------------------

\151\ 17 CFR 249.310.
---------------------------------------------------------------------------

(5) ``Form 10-Q'' (OMB Control No. 3235-0070); \152\
---------------------------------------------------------------------------

\152\ 17 CFR 249.308a.
---------------------------------------------------------------------------

(6) ``Form 8-K'' (OMB Control No. 3235-0060); \153\
---------------------------------------------------------------------------

\153\ 17 CFR 249.308.
---------------------------------------------------------------------------

(7) ``Schedule 14A'' (OMB Control No. 3235-0059); \154\
---------------------------------------------------------------------------

\154\ 17 CFR 240.14a-101.
---------------------------------------------------------------------------

(8) ``Schedule 14C'' (OMB Control No. 3235-0057); \155\ and
---------------------------------------------------------------------------

\155\ 17 CFR 240.14c-101.
---------------------------------------------------------------------------

(9) ``Form 15'' (OMB Control No. 3235-0167).

The forms were adopted under the Exchange Act and the Securities Act
and set forth the disclosure requirements for periodic, current and
other reports required to be filed by issuers registered with the
Commission.
We estimate that there are approximately 579 Exchange Act
registrants that are bank holding companies or savings and loan holding
companies. We estimate that approximately 100 bank holding companies
have filed Forms 15 to terminate or suspend their reporting obligations
under the Exchange Act based on the statutory changes in the JOBS
Act.\156\ To put these numbers in context, the current PRA estimate for
the number of annual reports on Form 10-K filed annually is 8,137.
Moreover, for certain changes, such as the amendments to the definition
of ``held of record'' in Rule 12g5-1, we do not have access to data to
support a reliable estimate of the number of issuers that will not be
required to file reports based on the JOBS Act amendments and our
implementation of those amendments.
---------------------------------------------------------------------------

\156\ After the JOBS Act became effective, there was an increase
in the number of termination and suspension of registrations by bank
holding companies. We do not anticipate a similar rate of
deregistration for bank holding companies after revising our rules
to reflect the new, higher deregistration threshold. As the FAST Act
was only recently enacted, we do not have data on the number of
savings and loan holding companies seeking to deregister. However,
we do not expect the rate of deregistration for savings and loan
holding companies to be as high as for bank holding companies, as
many of the newly eligible savings and loan holding companies (20 of
26) would have to give up an exchange listing in order to terminate
registration and suspend reporting.
---------------------------------------------------------------------------

As explained in the Proposing Release, because the rule amendments
are not expected to substantially impact the overall burden estimates
associated with our rules and forms and in light of the limitations on
available data, we have not submitted revised burden estimates for
these collections of information to OMB for review in accordance with
the PRA and its implementing regulations.\157\ However, as we
periodically update our PRA estimates in accordance with applicable
regulations, we will make any necessary adjustments to reflect the
actual number of filings received, including adjustments to reflect any
reduction in filings arising from today's amendments.
---------------------------------------------------------------------------

\157\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
---------------------------------------------------------------------------

VI. Final Regulatory Flexibility Act Analysis

This Final Regulatory Flexibility Act Analysis has been prepared in
accordance with 5 U.S.C. 604. This analysis relates to the amendments
to Securities Act Rule 405 and Exchange Act Rules 3b-4, 12g-1, 12g-2,
12g-3, 12g-4, 12g5-1, and 12h-3.

A. Need for, and Objectives of, the Action

The primary reason for, and objective of, the proposed amendments
is to implement Title V and Title VI of the JOBS Act and Title LXXXV of
the FAST Act. The JOBS Act directs the Commission to issue rules to
implement the statutory changes and specifically charges the Commission
with amending the definition of ``held of record'' and establishing a
safe harbor for the determination relating to ``employee compensation
plan'' securities. The amendments adopted today revise existing rules
to reflect the new, higher Exchange Act registration, termination of
registration and suspension of reporting thresholds for banks, savings
and loan holding companies and bank holding companies, apply the
definition of ``accredited investor'' in Securities Act Rule 501(a) in
making determinations under Exchange Act Section 12(g)(1), revise the
definition of ``held of record'' to exclude certain securities held by
persons who received them pursuant to employee compensation plans, and
establish a non-exclusive safe harbor for issuers to follow when
determining whether those securities are ``held of record.''
Additionally, revising the definition and providing a non-exclusive
safe harbor to issuers relating to the determination of securities
``held of record'' will assist issuers in determining which holders of
record they are required to count under the registration requirements
of Exchange Act Section 12(g).

B. Significant Issues Raised by Public Comment

In the Proposing Release, we requested comment on all aspects of
the Initial Regulatory Flexibility Act (``IRFA''), including the number
of small entities that would be affected by the proposed amendments,
the nature of the impact, how to quantify the number of small entities
that would be affected and how to quantify the impact of the proposed
amendments. We did not receive comments specifically addressing the
IRFA. We did, however, receive comments from members of the public on
matters that could potentially impact small entities. Several
commenters recommended a safe harbor for the establishment of a
reasonable belief of accredited investor status.\158\ In contrast, one
commenter opposed such a safe harbor out of concern that it would
become a de facto minimum standard.\159\ Commenters also sought
additional guidance or revisions to the proposed amendment to Rule
12g5-1 and Securities Act Rule 701.\160\
---------------------------------------------------------------------------

\158\ See letters from ADISA, CFM, Cleary, IPA. One commenter
recommended a safe harbor for the determination specifically for
private investment funds.
\159\ See letter from ABA.
\160\ See letters from ABA and ADISA.
---------------------------------------------------------------------------

C. Small Entities Subject to the Rule Amendments

Exchange Act Rule 0-10(a) \161\ defines an entity, other than an
investment company, to be a ``small business'' or ``small
organization'' if it had total assets of $5 million or less on the last
day of its most recent fiscal year. For

[[Page 28704]]

purposes of the Regulatory Flexibility Act, an investment company is a
small entity if it, together with other investment companies in the
same group of related investment companies, has net assets of $50
million or less as of the end of its most recent fiscal year.\162\ We
estimate that there are approximately 841 issuers that file with the
Commission, other than investment companies, that may be considered
small entities.\163\
---------------------------------------------------------------------------

\161\ 17 CFR 240.0-10(a).
\162\ 17 CFR 270.0-10(a).
\163\ The staff estimate is based on a review of Form 10-K, 20-
F, 40-F filings (from EDGAR XBRL) with fiscal periods ending between
January 31, 2015-January 31, 2016.
---------------------------------------------------------------------------

The rule amendments establishing the use of the Securities Act Rule
501(a) definition of ``accredited investor'' under Exchange Act Section
12(g)(1) and revising the definition of ``held of record'' to exclude
certain securities and establish a non-exclusive safe harbor may affect
small issuers relying on the revised rules and safe harbor to determine
the number of holders of record. While an issuer is not required to
register a class of equity securities pursuant to Section 12(g) of the
Exchange Act until the issuer's total assets exceed $10 million, a
small business or small organization may rely on the rules when
determining to whom to issue securities and whether to compensate
employees with securities. By providing guidance on the meaning of the
term ``accredited investor'' in the Exchange Act context, the rule
amendments may facilitate private offerings and the ability of an
issuer to determine their registration and reporting obligations. By
excluding certain employee compensation securities from the definition
of ``held of record,'' the rule amendments may facilitate the use of
equity compensation by small issuers, thereby helping them to preserve
cash and giving them greater ability to determine when the Exchange Act
Section 12(g) registration obligation would be triggered.
We cannot reliably estimate the number of small entities affected
by these rule amendments. By definition, such entities are not yet
subject to Section 12(g) registration and reporting requirements, which
are triggered by the issuer having total assets exceeding $10 million
as of the last day of its fiscal year. We do not otherwise have
information about the number of shareholders at small entities,
including those who have received securities as a result of employee
compensation plans.

D. Reporting, Recordkeeping and Other Compliance Requirements

The amendments' use of the Securities Act Rule 501(a) definition of
``accredited investor'' and the definition of ``held of record'' will
assist an issuer in determining the number of holders of record. In
order for an issuer to rely on the safe harbor, the securities must be
issued in a transaction exempt from, or not subject to, the
registration requirements of Securities Act Section 5 and satisfy the
requirements of Securities Act Rule 701(c), which includes the
requirement that the securities be offered or sold under a written
compensatory benefit plan or written compensation contract. In
addition, issuers seeking to rely upon the safe harbor may need to
maintain records to help establish their compliance with the conditions
of the safe harbor.
The rule amendments affecting banks, bank holding companies and
savings and loan holding companies do not create any new reporting,
recordkeeping or other compliance requirements for those entities. The
rule amendments raise the thresholds relating to registration for those
entities and therefore reduce their compliance burdens.

E. Agency Action To Minimize Effect on Small Entities

The Regulatory Flexibility Act directs us to consider significant
alternatives that would accomplish the stated objective of our
proposals, while minimizing any significant adverse impact on small
entities. In connection with the rule amendments, we considered the
following alternatives: (1) The establishment of differing compliance
or reporting requirements or timetables that take into account the
resources available to small entities; (2) the clarification,
consolidation or simplification of compliance and reporting
requirements under the rule for small entities; (3) the use of
performance rather than design standards; and (4) an exemption from
coverage of the rules, or any part of the rules, for small entities.
We are applying the current definition of ``accredited investor''
in Securities Act Rule 501(a) in making determinations under Exchange
Act Rule 12g-1(b)(1). Alternatively, we could have developed a new
definition of ``accredited investor'' for purposes of Section 12(g)(1);
however, given the prevalence of the use of Regulation D for exempt
offerings, many issuers are familiar with and rely upon the definition
in Rule 501(a). The increased registration threshold established by the
JOBS Act is intended to permit issuers, including small entities, to
defer Exchange Act registration until issuers have a larger shareholder
base. Because proposed Rule 12g-1(b)(1) is intended to facilitate an
issuer's ability to make the determination of when it is required to
register, we believe use of the familiar performance standard in Rule
501(a) definition of ``accredited investor'' will further this
regulatory objective for all issuers, including small entities.
We determined not to propose or adopt a safe harbor for the
determination of accredited investor status. Requiring issuers to
consider their particular facts and circumstances to establish a
reasonable basis for their determination will provide issuers with
flexibility in making the determination and diminish concerns that the
information relied upon could be unreliable. Additionally, some
standards that might be included in a safe harbor could, as one
commenter noted, result in establishing a de facto minimum standard for
the determination.\164\ This could shift the standard from a
performance standard to a design standard which would provide issuers
with less flexibility when making the determination.
---------------------------------------------------------------------------

\164\ See letter from ABA.
---------------------------------------------------------------------------

The revised definition of ``held of record'' and related safe
harbor apply to all issuers, including small entities, that choose to
exclude securities held by persons who received them pursuant to
employee compensation plans in transactions exempt from, or not subject
to, the registration requirements of Securities Act Section 5. The
amendment and safe harbor help define the contours of an exemption from
registration for issuers that might otherwise cross the Section 12(g)
registration thresholds.
The amendments are intended to permit issuers, including small
entities, to exclude certain securities from the ``held of record''
determination and to assist issuers in making that determination by
clarifying and simplifying requirements for all entities. Establishing
different compliance or reporting requirements relating to employee
compensation plan securities or accredited investor determinations for
small entities could complicate the rules and make them more difficult
to apply as those issuers grow, cease to be small entities, and are
required to determine whether they must register with the Commission.
With respect to the use of performance standards rather than design
standards, we note that the holder of record threshold is a

[[Page 28705]]

statutorily created design standard, requiring issuers to register if
their holders of record coupled with their total assets cross certain
thresholds. As we are modifying the definition of ``held of record''
and clarifying the determination of ``accredited investor'' under this
statutory design standard, we did not evaluate whether a performance
standard would be more useful.

VII. Statutory Authority and Text of Rule Amendments

The amendments contained in this release are being adopted under
the authority set forth in Section 19 of the Securities Act, as
amended, Sections 3(b), 12(g), 12(h), 15(d) and 23(a) of the Exchange
Act, as amended, and Section 503 and Section 602 of the JOBS Act.

List of Subjects in 17 CFR Parts 230 and 240

Reporting and recordkeeping requirements, Securities.

Text of the Amendments

For the reasons set out above, the Commission amends Title 17,
chapter II of the Code of Federal Regulations as follows:

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

0
1. The authority citation for part 230 continues to read, in part, as
follows:

Authority: 15 U.S.C. 77b, 77b note, 77c, 77d, 77d note, 77f,
77g, 77h, 77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n,
78o, 78o-7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28,
80a-29, 80a-30, and 80a-37, and Pub. L. 112-106, sec. 201(a), sec.
401, 126 Stat. 313 (2012), unless otherwise noted.
* * * * *

0
2. Amend Sec. 230.405 by adding a Note to paragraph (1) of the
definition of ``Foreign private issuer'' to read as follows:

Sec. 230.405 Definitions of terms.

* * * * *

Foreign private issuer. (1) * * *
Note to paragraph (1) of the definition of Foreign private issuer:
To determine the percentage of outstanding voting securities held by
U.S. residents:
A. Use the method of calculating record ownership in Sec.
240.12g3-2(a) of this chapter, except that:
(1) The inquiry as to the amount of shares represented by accounts
of customers resident in the United States may be limited to brokers,
dealers, banks and other nominees located in:
(i) The United States,
(ii) The issuer's jurisdiction of incorporation, and
(iii) The jurisdiction that is the primary trading market for the
issuer's voting securities, if different than the issuer's jurisdiction
of incorporation; and
(2) Notwithstanding Sec. 240.12g5-1(a)(8) of this chapter, the
issuer shall not exclude securities held by persons who received the
securities pursuant to an employee compensation plan.
B. If, after reasonable inquiry, the issuer is unable to obtain
information about the amount of shares represented by accounts of
customers resident in the United States, the issuer may assume, for
purposes of this definition, that the customers are residents of the
jurisdiction in which the nominee has its principal place of business.
C. Count shares of voting securities beneficially owned by
residents of the United States as reported on reports of beneficial
ownership provided to the issuer or filed publicly and based on
information otherwise provided to the issuer.
* * * * *

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934

0
3. The general authority citation for part 240 is revised to read as
follows:

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4,
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20,
80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq., and
8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350;
Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-106,
sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.

* * * * *

0
4. Amend Sec. 240.3b-4 by redesignating the Instruction to paragraph
(c)(1) as Note to paragraph (c)(1), and revising newly redesignated
Note to paragraph (c)(1) to read as follows:

Sec. 240.3b-4 Definition of ``foreign government,'' ``foreign
issuer'' and ``foreign private issuer''.

* * * * *
(c) * * *
Note to paragraph (c)(1): To determine the percentage of
outstanding voting securities held by U.S. residents:
A. Use the method of calculating record ownership in Sec.
240.12g3-2(a), except that:
(1) Your inquiry as to the amount of shares represented by accounts
of customers resident in the United States may be limited to brokers,
dealers, banks and other nominees located in:
(i) The United States,
(ii) Your jurisdiction of incorporation, and
(iii) The jurisdiction that is the primary trading market for your
voting securities, if different than your jurisdiction of
incorporation; and
(2) Notwithstanding Sec. 240.12g5-1(a)(8) of this chapter, you
shall not exclude securities held by persons who received the
securities pursuant to an employee compensation plan.
B. If, after reasonable inquiry, you are unable to obtain
information about the amount of shares represented by accounts of
customers resident in the United States, you may assume, for purposes
of this definition, that the customers are residents of the
jurisdiction in which the nominee has its principal place of business.
C. Count shares of voting securities beneficially owned by
residents of the United States as reported on reports of beneficial
ownership provided to you or filed publicly and based on information
otherwise provided to you.
* * * * *

0
5. Revise Sec. 240.12g-1 to read as follows:

Sec. 240.12g-1 Registration of securities; exemption from section
12(g).

An issuer is not required to register a class of equity securities
pursuant to section 12(g)(1) of the Act (15 U.S.C. 78l(g)(1)) if on the
last day of its most recent fiscal year:
(a) The issuer had total assets not exceeding $10 million; or
(b) (1) The class of equity securities was held of record by fewer
than 2,000 persons or 500 persons who are not accredited investors (as
such term is defined in Sec. 230.501(a) of this chapter, determined as
of such day rather than at the time of the sale of the securities); or
(2) The class of equity securities was held of record by fewer than
2,000 persons in the case of a bank; a savings and loan holding
company, as such term is defined in section 10 of the Home Owners' Loan
Act (12 U.S.C. 1461); or a bank holding company, as such term is
defined in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C.
1841).

0
6. Revise Sec. 240.12g-2 to read as follows:

Sec. 240.12g-2 Securities deemed to be registered pursuant to section
12(g)(1) upon termination of exemption pursuant to section 12(g)(2)(A)
or (B).

Any class of securities that would have been required to be
registered pursuant to section 12(g)(1) of the Act (15 U.S.C.
78l(g)(1)) except for the fact

[[Page 28706]]

that it was exempt from such registration by section 12(g)(2)(A) of the
Act (15 U.S.C. 78l(g)(2)(A)) because it was listed and registered on a
national securities exchange, or by section 12(g)(2)(B) of the Act (15
U.S.C. 78l(g)(2)(B)) because it was issued by an investment company
registered pursuant to section 8 of the Investment Company Act of 1940
(15 U.S.C. 80a-8), shall upon the termination of the listing and
registration of such class or the termination of the registration of
such company and without the filing of an additional registration
statement be deemed to be registered pursuant to section 12(g)(1) of
the Act if at the time of such termination:
(a) The issuer of such class of securities has elected to be
regulated as a business development company pursuant to sections 55
through 65 of the Investment Company Act of 1940 (15 U.S.C. 80a-54
through 64) and such election has not been withdrawn; or
(b) Securities of the class are not exempt from such registration
pursuant to section 12 of the Act (15 U.S.C. 78l) or rules thereunder
and all securities of such class are held of record by 300 or more
persons, or 1,200 or more persons in the case of a bank; a savings and
loan holding company, as such term is defined in section 10 of the Home
Owners' Loan Act (12 U.S.C. 1461); or a bank holding company, as such
term is defined in section 2 of the Bank Holding Company Act of 1956
(12 U.S.C. 1841).
0
7. Amend Sec. 240.12g-3 by revising paragraphs (a)(2), (b)(2), and
(c)(2) to read as follows:

Sec. 240.12g-3 Registration of securities of successor issuers under
section 12(b) or 12(g).

(a) * * *
(2) All securities of such class are held of record by fewer than
300 persons, or 1,200 persons in the case of a bank; a savings and loan
holding company, as such term is defined in section 10 of the Home
Owners' Loan Act (12 U.S.C. 1461); or a bank holding company, as such
term is defined in section 2 of the Bank Holding Company Act of 1956
(12 U.S.C. 1841).
* * * * *
(b) * * *
(2) All securities of such class are held of record by fewer than
300 persons, or 1,200 persons in the case of a bank; a savings and loan
holding company, as such term is defined in section 10 of the Home
Owners' Loan Act (12 U.S.C. 1461); or a bank holding company, as such
term is defined in section 2 of the Bank Holding Company Act of 1956
(12 U.S.C. 1841).
* * * * *
(c) * * *
(2) All securities of such class are held of record by fewer than
300 persons, or 1,200 persons in the case of a bank; a savings and loan
holding company, as such term is defined in section 10 of the Home
Owners' Loan Act (12 U.S.C. 1461); or a bank holding company, as such
term is defined in section 2 of the Bank Holding Company Act of 1956
(12 U.S.C. 1841).
* * * * *
0
8. Amend Sec. 240.12g-4 by revising paragraph (a) to read as follows:

Sec. 240.12g-4 Certifications of termination of registration under
section 12(g).

(a) Termination of registration of a class of securities under
section 12(g) of the Act (15 U.S.C. 78l(g)) shall take effect 90 days,
or such shorter period as the Commission may determine, after the
issuer certifies to the Commission on Form 15 (Sec. 249.323 of this
chapter) that the class of securities is held of record by:
(1) Fewer than 300 persons, or in the case of a bank; a savings and
loan holding company, as such term is defined in section 10 of the Home
Owners' Loan Act (12 U.S.C. 1461); or a bank holding company, as such
term is defined in section 2 of the Bank Holding Company Act of 1956
(12 U.S.C. 1841), 1,200 persons; or
(2) Fewer than 500 persons, where the total assets of the issuer
have not exceeded $10 million on the last day of each of the issuer's
most recent three fiscal years.
* * * * *
0
9. Amend Sec. 240.12g5-1 by adding paragraph (a)(8) to read as
follows:

Sec. 240.12g5-1 Definition of securities ``held of record''.

(a) * * *
(8)(i) For purposes of determining whether an issuer is required to
register a class of equity securities with the Commission pursuant to
section 12(g)(1) of the Act (15 U.S.C. 78l(g)(1)), an issuer may
exclude securities:
(A) Held by persons who received the securities pursuant to an
employee compensation plan in transactions exempt from, or not subject
to, the registration requirements of section 5 of the Securities Act of
1933 (15 U.S.C. 77e); and
(B) Held by persons who received the securities in a transaction
exempt from, or not subject to, the registration requirements of
section 5 of the Securities Act (15 U.S.C. 77e) from the issuer, a
predecessor of the issuer or an acquired company in substitution or
exchange for excludable securities under paragraph (a)(8)(i)(A) of this
section, as long as the persons were eligible to receive securities
pursuant to Sec. 230.701(c) of this chapter at the time the excludable
securities were originally issued to them.
(ii) As a non-exclusive safe harbor under this paragraph (a)(8):
(A) An issuer may deem a person to have received the securities
pursuant to an employee compensation plan if such plan and the person
who received the securities pursuant to the plan met the plan and
participant conditions of Sec. 230.701(c) of this chapter; and
(B) An issuer may, solely for the purposes of Section 12(g) of the
Act (15 U.S.C. 78l(g)(1)), deem the securities to have been issued in a
transaction exempt from, or not subject to, the registration
requirements of Section 5 of the Securities Act (15 U.S.C. 77e) if the
issuer had a reasonable belief at the time of the issuance that the
securities were issued in such a transaction.
* * * * *
0
10. Amend Sec. 240.12h-3 by revising paragraph (b)(1) to read as
follows:

Sec. 240.12h-3 Suspension of duty to file reports under section
15(d).

* * * * *
(b) * * *
(1) Any class of securities, other than any class of asset-backed
securities, held of record by:
(i) Fewer than 300 persons, or in the case of a bank; a savings and
loan holding company, as such term is defined in section 10 of the Home
Owners' Loan Act (12 U.S.C. 1461); or a bank holding company, as such
term is defined in section 2 of the Bank Holding Company Act of 1956
(12 U.S.C. 1841), 1,200 persons; or
(ii) Fewer than 500 persons, where the total assets of the issuer
have not exceeded $10 million on the last day of each of the issuer's
three most recent fiscal years; and
* * * * *

By the Commission.

May 3, 2016.
Brent J. Fields,
Secretary.
[FR Doc. 2016-10746 Filed 5-9-16; 8:45 am]
BILLING CODE 8011-01-P

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