Chapter 17 - § 17.1 • CONSEQUENCES OF BEING PUBLICLY OWNED

• Jurisdiction: Colorado

§ 17.1 • CONSEQUENCES OF BEING PUBLICLY OWNED

Many consequences attach to a company's decision to become publicly owned. Certain requirements are applicable to any company that has sold securities to the public pursuant to a registration statement filed under the 1933 Act. Additional requirements apply only to companies with securities that are registered under the 1934 Act. It is important to note that 1933 Act registration (discussed in Chapter 3) does not equate to 1934 Act registration (required by §§ 12(b) and 12(g) of the 1934 Act). 1933 Act registration is required for a transaction; classes of securities, not transactions, are registered under the 1934 Act.

1934 Act § 12(g)(1) and Rule 12g-l thereunder require registration under the 1934 Act within 120 days after the end of a company's fiscal year in which it had total assets exceeding $10 million¹ and a class of equity securities (other than an exempted security) held of record by more than the threshold number of persons.² Prior to the enactment of the JOBS Act,³ the record-holder threshold was 500 persons. Section 501 of the JOBS Act amended § 12(g) to increase the record-holder threshold for issuers that are neither banks nor bank holding companies to either 2,000 persons or 500 persons who are not accredited investors.⁴ Section 502 of the JOBS Act amended § 12(g)(5) to exclude securities held by those who received securities pursuant to an employee compensation plan in transactions exempted from § 5 of the 1933 Act from the threshold calculation. Additionally, § 12(g)(6) (added by § 303 of the JOBS Act) requires the SEC to adopt a rule excluding securities acquired pursuant to the crowd-funding exemption from counting toward the § 12(g) threshold.⁵

Total assets and the record-holder threshold must be measured on an annual basis. As a result of the provisions added by the JOBS Act, issuers will have to continually distinguish between persons who are accredited investors, who acquired securities in an exempt offering pursuant to an employee compensation plan, and through crowd-funding (when authorized). The difficulties in these JOBS Act requirements can be significant, because a person who is an accredited investor in one quarter may not be an accredited investor in the following quarter. A person who has received compensation-based shares pursuant to a plan may, in a subsequent quarter, sell those shares to a person who would not be exempted from the record-holder threshold.

Rule 12g5-l states that the number of record holders is calculated based on the corporation's records, with some exceptions.⁶ This means that a public corporation that has shareholders who hold their shares through a broker-dealer or otherwise in street name does not need to look behind the street name holder in determining whether the shareholder threshold has been exceeded.⁷ When shares are held in the name of Cede & Co. (Depository Trust Company), the brokers and banks that are DTC participants are considered to be the record holders of shares on deposit; Cede & Co. is not considered to be a single holder.⁸

Section 12(g) provides for the registration of over-the-counter trading and is required for quotation of securities on the OTC Bulletin Board. Section 12(b) registration is required for all companies whose securities are to be listed on an exchange, such as one of the NASDAQ markets,⁹ the Pacific Stock Exchange, the Boston Stock Exchange, the American Stock Exchange, and the New York Stock Exchange, among others.

Whether or not...