SEC Pursues Rule Changes Impacting Private Firms
The Securities and Exchange Commission (SEC), led by Chair Gary Gensler, has revealed its agenda for several rule changes. One of the key changes being pursued is the revision to the Definition of Securities Held of Record. This rule aims to address the “12(g) rule” of the Exchange Act, which determines when a private firm must become a reporting company based on specific thresholds.
The proposal states that the Division is considering recommending amendments to the “held of record” definition for section 12(g) of the Exchange Act. The Gensler Commission has been focusing on imposing stricter regulations on private firms and is now looking to demand more disclosures, which may make it harder for investors to participate in exempt offerings, particularly under Regulation D.
The 12(g) rules primarily focus on the number of investors holding shares in a private firm and the assets held. However, it seems that the Commission is placing emphasis on the determination of “held of record.” In cases where a company surpasses a certain threshold of shareholders, it may be required to register with the SEC or become a public firm. This could present challenges for companies that raise capital under crowdfunding exemptions.
According to Carta, Section 12(g) triggers the transition of private companies into a public reporting regime. The reporting obligations, including filing quarterly reports, an annual report, and periodic updates on Form 8-K for significant events, become similar to those in public markets. As companies approach the 12(g) threshold, the more demanding reporting regime often leads them to go public prematurely.
We spoke with Sara Hanks, founder and CEO of CrowdCheck and a respected figure in the securities crowdfunding industry, to gain insight into the potential impact of changes to 12(g). Hanks, who has extensive experience as a lawyer on Capitol Hill and at the SEC, expressed that any alteration to the definition of “held of record” would likely result in private companies being deemed to have more shareholders. This would increase the likelihood of triggering the thresholds for mandatory registration under the Exchange Act, thereby imposing additional disclosure requirements.
Although the specific details of the proposal have yet to be unveiled, there are speculations that the Commission will soon make the proposal permanent. Crowdfunding platforms should closely monitor any upcoming updates to this rule.
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