Overview of Issues

 These slides have been prepared by the SEC Staff as 

background for the Advisory Committee. Statements 

do not necessarily reflect the views of the 

Commission.
Triggers for Public Reporting

 Section 12(g) of the Exchange Act requires a 

company to register its securities with the SEC if its 

securities are “held of record” by 500 or more 

persons and the company has “total assets” 

exceeding $10 million.
Triggers for Public Reporting

 Section 12(g) was adopted in 1964 following a 

rigorous special study of the securities markets in the 

early 1960s, commissioned by Congress and 

conducted by the SEC.
Triggers for Public Reporting

 Following adoption of Section 12(g), the Commission 

adopted a rule defining the term “held of record.”

 The definition of “held of record” counts as holders 

of record only persons identified as owners on 

records of security holders maintained by the 

company, or on its behalf, in accordance with 

accepted practice. 
Triggers for Public Reporting

 Securities markets have changed significantly since 

the 1960s.

 Today, most securities of publicly-traded companies 

are held in nominee or “street name” rather than 

directly by the owner. 

 This means that for most publicly-traded 

companies, much of their individual shareholder 

base is not counted under the current definition of 

“held of record.” 
Triggers for Public Reporting

 All shareholders of most private companies, who 

generally hold their shares directly, are counted as 

“holders of record” under the definition. 

 This has required private companies that have more 

than $10 million in total assets and that cross the 

500 record holder threshold – where the number of 

record holders is actually representative of the 

number of shareholders – to register and commence 

reporting. 
Triggers for Public Reporting

 At the same time, it has allowed a number of 

companies, many of whom likely have substantially 

more than 500 shareholders, to stop reporting, or 

“go dark,” because there are fewer than 500 “holders 

of record” due to the fact that the companies’ shares 

are held in street name. 

 In light of these issues, some have called for changes 

to the definition and threshold adopted pursuant to 

Section 12(g). 

 There are four currently pending bills in the House 

and Senate relating to the Section 12(g) thresholds. 
Triggers for Public Reporting

 To facilitate the Commission’s review of the issues 

related to the thresholds for public reporting (and 

those for leaving the reporting system), the 

Chairman has asked the staff to undertake a robust 

study like the one conducted when Section 12(g) was 

enacted. 

 The rapid growth of organized markets for pre-IPO 

company common stock, and the participation in 

those markets of single stock funds as investors, also 

raises interesting policy questions impacting our 

Section 12(g) study and analysis.
Scaling of Regulations

 The SEC first adopted an integrated scaled disclosure 

system for small business in 1992.

 In 2007, the SEC adopted a number of regulatory 

changes intended to simplify and ease the burdens of 

regulations that affect smaller companies.

 This included establishing category of “smaller 

reporting companies” – companies that have less 

than $75 million in public float (or if the company 

cannot calculate public float, less than $50 million in 

revenue) – eligible to provide scaled disclosure.
Scaling of Regulations

 There are other scaled or phased-in requirements in 

SEC rules that apply to newly-public companies, 

such as phase-in of Sarbanes-Oxley 404(a) and 

404(b) requirements.

 For the most part, the general disclosure 

requirements for newly-public companies are the 

same as for all public companies. 
Capital Raising Strategies

 Crowdfunding: 

 Generally, a form of capital raising whereby groups of people 

pool money, typically comprised of very small individual 

contributions, to support an effort by others to accomplish a 

specific goal.

 Interest in crowdfunding as a capital raising strategy 

that could offer investors an ownership interest in a 

developing business is growing. 
Capital Raising Strategies

 Proponents of crowdfunding note that current 

technology could allow small business owners to 

easily access a large number of possible investors as 

a source of funding to help grow and develop their 

businesses or ideas. 

 The proponents are advocating for exemptions from 

the Securities Act registration requirements for 

crowdfunding transactions. 

 However, an exemption from registration -- and the 

investor protections provided by registration -- may 

present opportunities for fraud.
Capital Raising Strategies

 A House bill to permit certain crowdfunding, has 

passed the House Financial Services Committee.
Capital Raising Strategies

 Regulation A: 

 Provides an exemption from registration for transactions by 

non-reporting companies of up to $5 million per year.

 Requires an offering document to be filed with the SEC.

 Allows companies to “test the waters” for interest in their 

offerings. 

 Permits a public offering.

 Securities purchased are not restricted securities. 

 Companies that complete Regulation A offerings do not 

automatically become subject to ongoing reporting under the 

Exchange Act. 

 No state preemption.
Capital Raising Strategies

 Regulation A is not widely used. 

 In Fiscal 2010, there were 25 initial Regulation A filings with 

the SEC and seven Regulation A offerings were qualified. 

 Bills have been introduced in both the Senate and 

the House that would require the Commission to 

create a new exemption, which would be similar to 

Regulation A, but with certain additional conditions 

and a higher offering limit. 
Restrictions on General Solicitation

 One of the most commonly-used exemptions from the 

registration requirements of the Securities Act is Section 

4(2), which exempts transactions by an issuer “not 

involving any public offering.” 

 Rule 506 is a safe harbor under Section 4(2).

 Currently, an issuer seeking to rely on Section 4(2) or 

Rule 506 is generally subject to a restriction on the use of 

general solicitation or advertising to attract investors for 

its offering.

 The restriction was designed to protect those who would 

benefit from the safeguards of registration from being 

solicited in connection with a private offering.
Restrictions on General Solicitation

 Some believe that these restrictions are unnecessary 

because offerees who might be located through a general 

solicitation but who do not purchase the security -- either 

because they do not qualify under the terms of the 

exemption or because they choose not to purchase -- would 

not be harmed by the solicitation.

 Others support the restriction on general solicitation 

because it makes it more difficult for fraudsters to find 

potential victims or for unscrupulous issuers to condition 

the market for their securities.
Restrictions on General Solicitation

 The Chairman asked the staff to review the restrictions 

our rules impose on general solicitation in private 

offerings. 

 A bill has been passed by the House Committee on 

Financial Services that would permit general solicitation 

in offerings under Rule 506 of Regulation D, so long as 

all of the purchasers are accredited investors.