Small Business Advisory Committee Recommendations on 1934 Act Registration Requirements and Obligations

This week we’ll continue to look at the Advisory Committee on Small and Emerging Business’ Recommendations Regarding Registration Requirements and Reporting Obligations under the Securities Exchange Act of 1934.

Thank you to all of you who found last week’s blog setting forth a summary of the 1934 Act Reporting requriements helpful.

In this blog we’ll look at the Committee’s analysis of these laws, rules and regulations and their recommended changes.

Here are the Committee’s concerns about current law:

(a)    Under the current thresholds that trigger Exchange Act registration and reporting, some private companies may be required to register and begin reporting sooner than desired and at a time in their development that is not the most advantageous to the company or its shareholders, or, to avoid registration, companies may be driven to manage their capital raising or employee compensation activities in ways that may not be in their or their security holders’ best interests;

(b)   Public companies have been able to cease reporting under. the Exchange Act ­ referred to as “going dark” – while their securities continue to be actively and widely traded and held by many more than 500 shareholders, leaving such shareholders and possible investors with little or no information, because ownership through securities intermediaries has resulted in fewer than 300 holders of record of the class of securities, even though the number of beneficial owners may be far greater;

(c)    Small and emerging companies may be discouraged from compensating their employees with stock, which may make it more difficult for such companies to attract and retain employees, because securities held by company employees, even if such employees cannot trade the securities, are counted for purposes of  determining whether the company is required to register the class of securities under Section 12(g) of the Exchange Act and become subject to a reporting obligation; and

(d)   Banks and bank holding companies (“banking institutions”), which, the Committee notes, are subject to extensive regulation by, and financial reporting to, federal and state government agencies, are subject to the same triggers and thresholds for registration and reporting under the Exchange Act as other types of companies, but due to the nature of their shareholders may be disproportionately affected by the current regulatory thresholds.

Based upon these concerns, the Committee made the following recommendations:

1.  The Commission take action immediately to amend its registration and reporting rules under the Exchange Act to adopt an interim rule, to be effective while the related study is pending, under which

  • a company’s obligation to register and begin public reporting would not be triggered until it had a class of securities held by 1,000 or more holders of record, except that a banking institution’s obligation to register and begin public reporting would not be triggered until it had a class of securities held by 2,000 or more holders of record;
  • a company that is currently obligated to file reports with the Commission could cease public reporting if the number of holders of record of the class of securities that subjects the company to reporting is less than 600, except that a banking institution could cease public reporting if the number of holders of record of the class of securities that subjects the banking institution to reporting is less than 1,200; and
  • holders of record who are employees of the company or banking institution and who are appropriately restricted from trading their securities would not be counted in determining whether the company or banking institution has met these thresholds.

The Committee indicated that the Commission staff’s study of the registration and reporting requirements under the Exchange Act should include an assessment of the effects of the above-referenced interim rule changes, as well as consideration of possible transition periods for companies impacted by interim rule changes that previously initiated or ceased public reporting in reliance on the current regulations; and

After completion of the staff study and an analysis of findings thereunder, the staff of the Commission would be required to evaluate the registration and reporting rules under the Exchange Act and to recommend to the Commission permanent modifications of such rules based on the findings of such staff study.

As the Committee noted, the SEC staff is currently studying these issues.  As the 1934 Act reporting obligations do increase the cost burdens on smaller companies, an SEC analysis of the triggers for reporting and ceasing to have to report taking into account what the Committee considered and recommended, could produce cost savings for smaller businesses, a good thing.

As always, if you want more information about this or any other securities law issue, you can e-mail Michael at and Todd Feinstein at   And check out our website at  Or just Contact Us.



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