How many stockholders does it take before a company must begin formally issuing publicly available reports under the federal securities laws? Presently, the rule is that a company must meet reporting obligations once it reaches 500 stockholders “of record.” The rule, first adopted over 50 years ago, is not without its critics.
Many argue that the thresh hold is too low and thus forces many smaller, privately-held companies to begin reporting too early in their development. Others argue that, because the rule is tied to holders “of record,” larger companies are able to game the system (by holding “street securities” and using special investment vehicles) to avoid reporting obligations entirely.
Today, the SEC’s Advisory Committee on Small and Emerging Companies met to discuss this issue, among others. The discussion focused on whether the rule should be changed from holders “of record” to beneficial holders. That change would catch the larger companies that game the system.
The discussion also focused on increasing the triggering number to something significantly greater. That change would bring relief to smaller companies who run up against the 500 stockholder limit.
Many committee members also supported the idea that, whatever the triggering number, employee-shareholders should be excluded from the count. Had such a rule been in place, Facebook reportedly would have stayed private even longer than it has.
In the end, the Advisory Committee determined that a move to a different system (“beneficial owners” instead of “holders of record”) requires study and feedback. But the Advisory Committee also agreed on the need for immediate interim relief.
In the end, the Advisory Committee passed a resolution (with only 2 dissenting votes) recommending to the Commission that it immediately increase the 1960s rule from 500 to 1000 holders “of record.” The Committee also recommended that any Company that becomes a reporting Company should not be able to end reporting until it falls below 600 shareholders of record, a number that is double the current 300.