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Updates and commentary by Constance R. (Connie) Barnhart on US business law topics, including corporate, contracts, and commercial law matters, financial and securities laws matters, mergers & acquisitions, and international (cross-border) business transactions.

House Bill would Raise 500 Shareholder Threshold for Public Company Registration to 1,000 & Exclude Accredited Investors from Count

H.R. 2167 - Private Company Flexibility and Growth ActIn June, 2011, a bill was introduced in the House would raise the 500-shareholder threshold for becoming an SEC registered reporting company to 1000 and exclude accredited investors and employees.

The bill, HR 2167, named The Private Company Flexibility and Growth Act, would amend Section 12(g) of the Securities Exchange Act of 1934 (the “Exchange Act”) to trigger public company registration and reporting only at 1000 shareholders of record.

Under the proposed law, the definition of `held of record’ would not include securities held by persons who qualify as accredited investors or securities that are held by persons who received the securities pursuant to an employee compensation plan in transactions exempted from the registration requirements of section 5 of the Securities Act. Likewise, beneficial owners behind the “record owners” would continue not to be counted, just as they are not counted under the current SEC Rule imposing the public company registration and reporting requirement upon companies with 500 shareholders and $10 Million in assets.

The proposed legislation would direct the SEC to revise the definition of “held of record’’ pursuant to section 12(g)(5) of the Exchange Act to implement these changes. It would also require the SEC to adopt safe harbor provisions that issuers can follow when determining whether holders of their securities are accredited investors or that holders of their securities received the securities pursuant to employee compensation plans in exempt transactions, for purposes of this provision.

Enacted in 1964, Section 12(g) of the Exchange Act, as interpreted in rules issued by the SEC, requires companies with more than 500 shareholders of record and more than $10 million in assets to register with the SEC and file annual and other periodic reports which are then available to the public. Under current rules adopted by the SEC under Section 12(g), ultimate beneficial owners of the record holders are not counted in determining whether a company has reached the 500 shareholder threshold.

HR 2167 has been referred to the House Financial Services Committee for review. This means the bill is in the first step in the legislative process. “Introduced bills and resolutions first go to committees that deliberate, investigate, and revise them before they go to general debate. The majority of bills and resolutions never make it out of committee,” according to the legislative tracking service, GovTrack.us.

Meanwhile, as announced by SEC Chairman Mary Schapiro in May, 2011, the SEC is engaged in an ongoing review of current rules relating to public company reporting under Section 12(g) and related regulations relating to private offerings. See our previous report on the SEC’s announcement of its pending review: SEC Reviewing 500 Shareholder Threshold for Requiring Registration as a Public Company.

As we reported, the SEC has formed a committee to review these rules, and we are currently awaiting the SEC’s report.

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Constance R. Barnhart
Attorney At Law, Managing Member
Barnhart Law PLC

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