The Securities and Exchange Commission (SEC) has published a long list of rule changes it intends to pursue. The complete agenda established by the Commission, under the leadership of SEC Chair Gary Gensler, is available here.
One of the rule changes near the top is defined as Revisions to the Definition of Securities Held of Record. This has to do with the “12(g) rule” of the Exchange Act, which determines when a private firm must become a reporting company, as there are certain thresholds that trigger a change. The abstract for the proposal states:
“The Division is considering recommending that the Commission propose amendments to the “held of record” definition for purposes of section 12(g) of the Exchange Act.”
The Gensler Commission has pursued greater restrictions for private firms and is currently looking to demand more disclosures, making it more difficult for investors to participate in exempt offerings, specifically under Reg D. 12(g) rules have to do with the number of investors that hold shares in a private firm and the assets held, but it appears the Commission is focusing on the “held of record” determination. If a company surpasses a certain threshold of shareholders, the company in question may be compelled to register with the SEC or become a public firm. This could be problematic for companies that raise capital under the different crowdfunding exemptions.
To quote Carta on the regulation:
“Section 12(g) is the trigger that pushes private companies into a public reporting regime. The reporting obligations that come with 12(g) registration are similar to those in public markets: filing quarterly reports, an annual report, and periodic updates on Form 8-K when certain material events occur. As companies approach the 12(g) threshold, the more onerous reporting regime pushes many to go public—often before they’re ready.”
CI touched base with Sara Hanks, founder and CEO of CrowdCheck and an OG in the securities crowdfunding industry, to ask her what changes in 12(g) may mean. Hanks, a lawyer who worked on Capitol Hill as well as at the SEC, had this to say:
“Any change to the definition of “held of record” is likely to result in private companies being deemed to have more shareholders and thus more likely to trigger the thresholds for compulsory registration under the Exchange Act, with all the additional disclosure requirements that entails.”
While the exact proposal has yet to be disclosed, chatter is the Commission may move soon on making the proposal permanent. Crowdfunding platforms will need to pay attention to any forthcoming updates to the rule.