Final Rules
We are adopting today final rules that exempt securities issued in a Tier 2 offering from the provisions of Section 12(g) for so long as the issuer remains subject to, and is current in (as of its fiscal year end),197 its Regulation A periodic reporting obligations.198 Additionally, in order for the conditional exemption to apply, issuers are required to engage the services of a transfer agent registered with the Commission pursuant to Section 17A of the Exchange Act. The final rules also provide that the exemption from Section 12(g) is only available to companies that meet requirements similar to those in the “smaller reporting company” definition under Securities Act and Exchange Act
193 ABA BLS Letter (a 24 month phase-in period that could expire earlier if the company triggered Exchange Act reporting in some other manner); MoFo Letter.
194 Heritage Letter.
195 KVCF Letter; SBIA Letter.
196 MoFo Letter.
197 The determination as to “current” reporting status is determined at the time of fiscal year end in reference to the filing of all periodic reports, including special financial reports, required to be filed during such fiscal year. For these purposes, a newly qualified issuer that at fiscal year end has not yet been obligated to file a periodic report, including, if applicable, a special financial report, would be considered “current” for these purposes.
198 Rule 12g5-1(a)(7).
rules.199 As such, the conditional exemption in the final rules is limited to issuers that have a public float of less than $75 million, determined as of the last business day of its most recently completed semiannual period,200 or, in the absence of a public float, annual revenues of less than $50 million, as of the most recently completed fiscal year.201 An
issuer that exceeds either of the thresholds, in addition to exceeding the threshold in Section 12(g) of the Exchange Act, would be granted a two-year transition period before it would be required to register its class of securities pursuant to Section 12(g), provided it timely files all ongoing reports due pursuant to Rule 257 during such
period.202 Section 12(g) registration will only be required if, on the last day of the fiscal
year in which the company exceeded the public float or annual revenue threshold, the company has total assets of more than $10 million and the class of equity securities is
199 “Smaller reporting company” is defined in Securities Act Rule 405, 17 CFR 230.405, Exchange Act Rule 12b-2, 17 CFR 240.12b-2, and Item 10(f)(1) of Regulation S-K, 17 CFR 229.10(f)(1). The provision of the smaller reporting company definition relating to initial registration statements under the Securities Act is not applicable to exempt offering pursuant to Regulation A. See Item 10(f)(1)(a)(ii) of Regulation S-K, 17 CFR 229.10(f)(a)(ii). The final rules do not therefore incorporate this concept for purposes of Rule 12g5-1(a)(7). See Rule 12g5-1(a)(7).
200 Consistent with the smaller reporting company definition, an issuer will calculate “public float” by multiplying the aggregate worldwide number of shares of its common equity securities held by non-affiliates by the price at which such securities were last sold (or the average bid and asked prices of such securities) in the principal market for such securities. Rule 12g5-1(a)(7). See also, e.g., Item 10(f)(1)(i) of Regulation S-K.
201 Rule 12g5-1(a)(7). The Commission adopted the smaller reporting company regime in 2007. See SEC Rel. No. 33-8876 (Dec. 19, 2007) [73 FR 934]. Some commentators, such as the Commission’s Advisory Committee on Small and Emerging Companies, have suggested that the Commission revisit the smaller reporting company regime, including the definitional thresholds. Recommendations Regarding Disclosure and Other Requirements for Smaller Public Companies, Securities and Exchange Commission, Advisory Committee on Small and Emerging Companies (February 1, 2013), at 2-3, available at: http://www.sec.gov/info/smallbus/acsec/acsec- recommendation-032113-smaller-public-co-ltr.pdf. Although the Commission has not yet responded to this recommendation, in considering any potential changes to the smaller reporting company regime, we would expect to consider whether corresponding changes to the thresholds included in Rule 12g5-1(a)(7) should also be made, taking into account how the Regulation A regime is working.
202 Id.
held by more than 2,000 persons or 500 persons who are not accredited investors.203 In such circumstances, an issuer that exceeds the thresholds in Section 12(g) and
Rule 12g5-1(a)(7) would be required to begin reporting under the Exchange Act the fiscal year immediately following the end of the two-year transition period.204 An issuer entering Exchange Act reporting will be considered an “emerging growth company” to the extent the issuer otherwise qualifies for such status.205
In determining to provide a conditional exemption from the provisions of Section 12(g), we have considered a number of factors. First, we believe the conditional exemption we are adopting today is consistent with the intent behind the original
enactment of Section 12(g) to the extent it ensures that relevant information about issuers will be made routinely available to investors and the marketplace.206 Second, we believe the additional requirement that Regulation A issuers use a registered transfer agent will provide an important investor protection in this context. The use of a transfer agent registered under the Exchange Act, which, in the absence of a conditional exemption from the provisions of Section 12(g), would be required of issuers when they register under the Exchange Act, will provide added comfort that securityholder records and secondary trades will be handled accurately. Third, we believe that phasing out the
203 15 U.S.C. 78l(g).
204 Id. See Section II.E.4.b(2). below for a discussion on suspension or termination of the duty to file ongoing reports pursuant to Rule 257.
205 See fn. 726 below and accompanying text.
206 Section 12(g) was originally enacted by Congress as a way to ensure that investors in over-the- counter securities about which there was little or no information, but which had a significant shareholder base, were provided with ongoing information about their investment. See, generally, Report of the Special Study of Securities Markets of the Securities and Exchange Commission, House Document No. 95, House Committee on Interstate and Foreign Commerce, 88th Cong., 1st Sess. (1963), at 60-62
exemption once companies grow and expand their shareholder base is consistent with the intent behind Title IV of the JOBS Act, which was enacted to facilitate smaller company capital formation.207 Finally, we are concerned that, as commenters suggested, the lack of an exemption from mandatory registration under the Exchange Act may undermine the utility of amended Regulation A either by discouraging use of the exemption altogether or by dissuading issuers from making sales to non-accredited investors in Regulation A offerings in an effort to avoid the application of Section 12(g).
While we believe, as we noted in the Proposing Release, that the Section 12(g) record holder threshold continues to provide an important baseline above which issuers should generally be subject to the disclosure obligations of the Exchange Act, we are persuaded that this need not be the case where an issuer is a smaller company that is subject to, and current in, its periodic reporting obligations under Tier 2 of Regulation A and engages the services of a transfer agent that is registered with the Commission under the Exchange Act. Regulation A, as amended in the final rules, requires issuers that
conduct Tier 2 offerings to provide periodic disclosure to their investors and updates for certain important corporate events.208 While such reports provide less information than is required of an Exchange Act reporting company, we believe a conditional exemption from registration under Section 12(g) is warranted for smaller Tier 2 issuers since such companies are required to provide investors with ongoing information about themselves and the securities offered, and the ongoing reporting regime we are adopting today is
207 See, e.g., H.R. Rep. No. 112-206 (2011), at 4 (“Small companies are critical to economic growth in the United States. Amending Regulation A to make it viable for small companies to access capital will permit greater investment in these companies, resulting in economic growth and jobs.”).
208 See Rule 257.
more appropriately tailored for such companies. Additionally, in order to address situations where an issuer that conducts a Tier 2 offering could remain subject to its ongoing reporting requirements indefinitely and thereby avoid having to comply with Exchange Act reporting requirements regardless of the size of its shareholder base, we note that the exemption from Section 12(g) is conditional and that an issuer that does not meet its conditions, including the limitation on public float and annual revenues, will be required to register under the Exchange Act.