Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, October 16, 2012

SEC Issues Report on Enforcement of Rule 12g5-1(b)(3)

In the JOBS Act Congress required the SEC to prepare a report on the Authority to Enforce Exchange Act Rule 12g5-1 and Subsection (b)(3), to determine "if new enforcement tools are needed to enforce the anti-evasion provision contained in subsection (b)(3) of the Rule."  That report is now posted on the SEC's website. (Download Authority-to-enforce-rule-12g5-1[1])

As background, under Section 12(g) of the Exchange Act, as amended by the JOBS Act, the reporting requirements are not triggered if the issuer has less than 2,000 holders of record of its equity securities and less than 500 holders of record who are not accredited investors.  Rule 12g5-1(b)(3), intended to prevent circumvention of Section 12(g), states that if the issuer knows or has reason to know that the form of holding securities of record is used primarily to circumvent the provisions of Section 12(g) or 15(d) of the Act, the beneficial owners of such securities shall be deemed to be the record owners thereof.  In particular, concerns were raised about the impact on the reporting requirements of the creation of special purpose vehicles used to pool investor funds and purchase securities and as to whether such SPVs could be used to facilitate evasion of the registration and reporting requirements.

In the study the staff concluded:

The current enforcement tools available to the Commission are adequate to enforce the anti-evasion provision of Rule 12g5-1. While difficult to detect at the outset, once the staff is alerted to a potential circumvention of Section 12(g), the current authority to investigate potential violations of the securities laws provides the staff with a wide variety of tools to gather facts. The increase in the Section 12(g) threshold from 500 holders of record to 2000 included in the JOBS Act may reduce the motivation of issuers and others to engage in circumvention efforts, although it is possible that the requirement to register if the number of non-accredited holders of record exceeds 500 may mitigate that effect. Since those changes were just recently enacted, time will need to pass before the impact, including the impact on possible circumvention efforts, can be assessed. We therefore have no particular legislative recommendations regarding enforcement tools relating to Rule 12g5-1(b)(3) at this time.

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