Richard W. Jones

Mr. Jones is an attorney with the Atlanta,Georgia law firm of Jones & Haley,P.C. Mr. Jones concentrates his practice on securities law matters,such as public offerings,IPO's,private placements,SEC compliance,broker/dealer and investment adviser regulation and hedge funds. For further information go to www.corplaw.net

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The New JOBS Act —Raising the Mandatory Registration Requirements

In April 2012,Congress passed the Jumpstart Our Business Startups Act (the “JOBS Act” or “Act”).  The purpose of the JOBS Act was to reduce the regulatory burdens on businesses in order to allow them to create more jobs.  Most of the provisions of the JOBS Act went into effect immediately when the President signed the Act into law. 

            One part of the securities laws affected by the Act is the requirement that certain companies must register their shares with the SEC and must file reports with the SEC.  Since 1964,the SEC has required companies of a specified size to register under the Securities and Exchange Act of 1934 (“Exchange Act”).  Once they are so registered,they must begin filing the reports that are required under the Exchange Act,such as 10-Ks and 10-Qs.  In effect,these laws reflect the SEC’s recognition that companies which reach a certain size should be required to provide their shareholders and the public with information about their business and operations.  Historically,under Rule 12(g),the SEC set the minimum threshold for this mandatory filing to include companies which had more than $10,000,000 in assets and more than 500 shareholders of record.

            In reviewing the Rule 12(g) requirements,Congress decided that this threshold placed undue pressure on the financial markets,because it restricted the number of shareholders and the amount of assets that smaller companies could have,while remaining private.  This,in turn,limited the growth stage for companies,which needed more time and flexibility to develop before being burdened with the expenses and time consuming requirements of being a public company.  Congress felt that without relief from these regulatory hardships,small businesses would not grow or they would be acquired by larger firms.  In any event,both alternatives would likely lead to fewer jobs and less innovation.  This dynamic can be seen in companies like Facebook,which ultimately went public in part because it was approaching the 500 shareholder threshold.  In order to continue to grow,Facebook needed to sell more of its shares,which would likely trigger Exchange Act filing obligations.  As a result,Facebook chose to go public,perhaps before it was ready to do so.

            In order to address these problems,the JOBS Act increased the Rule 12(g) threshold.  Under the new rules,a company is not required to file with the SEC until it has $10,000,000 in assets and it has 2,000 shareholders,or in the alternative,it has 500 shareholders who are not accredited investors.  An accredited investor for purposes of the rule is someone with a net worth of one million dollars,without consideration of the equity in their house,or someone with annual income of $200,000. 

            One of the most significant changes in the new law is that employees of a company are excluded from the count of shareholders in determining whether the corporation meets the minimum shareholder threshold.  This is a truly useful change and it allows companies to keep and incentivize good employees without fear of exceeding the minimum shareholder limitations.  This will be a boon for fast-growing companies that compensate their employees with stock options and stock awards,and it will give those companies more time to develop,before being forced to file as a public company.

            The new rules have brought clarification to companies with $10,000,000 in assets and 2,000 or more shareholders,because it is clear that they are required to file with the SEC.  Also it has brought clarity to corporations with less than $10,000,000 in assets and/or less than 500 shareholders.  Those corporations do not have to file with the SEC.  Things are not so clear for corporations that have more than $10,000,000 in assets and have between 501 and 1,999 shareholders.  Corporations that fall into this category–I will refer to them as “Middle Tier Companies”–must file with the SEC unless they can prove that less than 500 of their shareholders are not accredited.  For example,if a corporation had 600 shareholders,it would have to establish that at least 101 of its shareholders are accredited in order to avoid the registration requirements.  To establish that shareholders are accredited–according to the legislative history–each accredited investor/shareholder would be required to fill out a form asserting that they meet the accredited investor definition and that they want to be outside of some of the protections of the securities laws.  This places substantial burdens on these Middle Tier Companies,and as a practical matter,it will be virtually impossible for them to prove how many of their shareholders are accredited.

            While Congress’ intent to provide greater flexibility to corporations is laudable,I fear that the new changes will lead to greater confusion and uncertainty.  In practice,it will be extremely difficult for Middle Tier Companies to police the number of shareholders that are accredited and unaccredited.  As a result,I would expect that most securities attorneys,in an abundance of caution,will advise all their clients with more than $10,000,000 in assets and 500 shareholders to file with the SEC under Rule 12(g).  Otherwise,the corporation runs the very real risk of violating the requirements of the Exchange Act.  If this is true,the new rule will not have the beneficial impact that was intended.  In light of these problems,perhaps Congress will revisit the rule and make it clearer and more practical in order to provide the relief to businesses that they were seeking.

            Richard W. Jones is an Atlanta business lawyer and an Atlanta securities lawyer with the Atlanta,Georgia law firm of Jones &Haley,P.C.  He has over 30 years experience representing clients in securities and corporate matters.  Please see our website at http://www.corplaw.net/.

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