Private companies and the 300/500 shareholder limits 2740
I’m referring to a never-public company, not one delisting.
I’ve seen several different thresholds claimed before Sarbanes-Oxley compliance is required:
a) More than USD10 million in assets plus 500 or more holders of any class of equity
b) 300 or more holders of all classes of equity
c) 300 or more holders of all classes of securities (including debt)
- What’s the right number?
- Do only equity holders count?
- Any class or all classes of equity?
- Should I really read (a) to mean that you could slice and dice your capital structure to get far more than 500 shareholders and still be exempt from compliance? It’s tough to raise much money in a private offering without a high investment floor, which impedes acceptance of the offering. Bifurcating your offering into different classes of shares (preferreds with differing dividends for example) to get more investors at a lower minimum investment would be very attractive.
I would advise you to search previous questions and answers in these forums. I think I have already answered this question in these forums.
The Sarbanes-Oxley Act does not have a general applicability definition that would apply to all the different sections in the SOA. Most individual sections of the SOA contain their own applicability definition and some refer to the definition of an issuer in one of the sections of the SOA. In addition, the rules of the Securities Exchange Commission (SEC) that implement the SOA may provide certain exemption, so you always need to consider the SEC’s rules in addition to the SOA.
Most of the sections of the SOA are securities law. Those sections usually apply to issuers of securities that use the public capital market of the USA in one of the three following ways:
- listing of a security (debt or equity) on a national securities exchange (e.g. NYSE, NASDAQ, AMEX, etc.) in the USA (the number of securityholders is irrelevant in this case). This triggers a registration of the security with the SEC. If you delist from the exchange no. 2 or no. 3 may still apply.
- over-the-counter trading of EQUITY securities in the USA if the issuer’s total assets in its consolidated balance sheet exceed USD 10 million and if a class of equity securities is held by five hundred or more persons. Foreign private issuers are exempted if there are less than 300 holders in the US or if their primary trading market is on a foreign securities exchange and publish certain information in English. The applicability stops if the number of holders of the security drops to less than 300 persons.
- public offering of a security (debt or equity) in the USA. The applicability stops if the number of holders of the security drops to less than 300 persons.
So the answer to your questions is:
- the number of security holders depends on the way in which the public capital market of the USA was entered and whether the issuer enters the registration requirement or is already registered and wants to to deregister or to terminate/suspend the resulting periodic reporting requirements
- in the case of a listing on a national securities exchange in the USA or of a public offerting of the securities in the USA the type of securities (debt or equity) does not matter. In the case of over-the-counter trading in the USA, only OTC trading of equity securities triggers the applicability of US securities laws including the Sarbanes-Oxley Act, but OTC trading of debt securities does not.
- see the answer to question nr. 2. The definition of equity security is included in US securities law. It also includes the right to acquire equity securites (e.g. options) or debt securities that are convertible into equity securities
- if you do not have a listing on a national securities exchange in the USA, and if you do not publicly offer the securities in the USA (i.e. no public advertising, only private placements) and if you have a primary listing on a foreign securities exchange and follow certain minimum disclosure requirements in English you do not have to register your securities with the SEC and the SOA does not apply.
Sections of the SOA that deal with criminal law are often not restricted to issuers of securities that use the public capital markets of the USA but have other triggers.
I did search. Found nothing relating to number of shareholders in an offering where the securities are unregistered and there is no public trading i.e. a private placement.
You note several times the 300 persons threshold for delisting a previously publicly traded security. Important to know, but I don’t see its applicability to a security that is not and never will be publicly traded. Remember the issue for a private placement is moving up, not moving down.
A whole lot of other people seem to think that it doesn’t matter whether your securities are registered or traded, merely having ‘too many’ holders (some say 300, some say 500) triggers SOX. For example, I’ve seen the argument that even if you aren’t required to make a 12(g) filing because you have fewer than 500 shareholders, the mere fact that you have more than 300 securities holders (including debt issues) means you can’t qualify for a registration exemption, triggering a 15(d) filing and SOX (by virtue of the 15(d) filing). This would seem to be redundant with the 10 mil/500 shareholders rule, but since when is consistency required?
- Are you saying that holders of debt that doesn’t confer on the holder a warrant, option, or right to convert do not by virtue of numbers trigger any sort of registration requirement or SOX compliance? 1000 creditors? No problem.
- Are you saying that, in fact, you can have an unlimited number of holders of equity securities so long as the securities are not registered? I thought having more than 500 (not sure if it’s ‘500 total’ or ‘500 in a single class’) was itself sufficient to trigger a 12(g) registration. That registration triggers SOX.
Forget the previous post. Let me simplify it even more. Here is what I’ve been led to understand:
Even if your company has not registered a securities offering, it must file an Exchange Act registration statement if:
A) It has more than USD10 million total assets and a class of equity securities, like common stock, with 500 or more shareholders; or
B) It lists its securities on an exchange. This includes debt issues as well as equity.
Shareholders means ‘name on the stock ledger’. There is no look through to beneficial owners.
- You can have more than 500 shareholders without being required to register, so long as
1a) they are divided among different classes of equity, or
1b) the company has less than USD10,000,000 in total assets
- There is no limit to holders of debt, so long as the debt gives the holder no equity-like features (warrants, options, conversion).
- You, your wholly-owned company, your IRA, and your 401k constitute four shareholders, even though you control them all.
- Don’t get too close to 500; heirs and gifts will soon push you over.
Being forced to register triggers SOX, even though the company is not public and would not otherwise be subject to SOX (other than the anti-fraud provisions, of course).
Is my understanding correct?
- You can have more than 500 shareholders without being required to register, so long as
US securities law does not contain a definition of a ‘public company’ and what triggers a company to be public.
It merely contains provisions for the three ways of using the PUBLIC capital market of the USA that require a registration of the concerned security with the US SEC, which in turn triggers a requirement to provide certain reports to the SEC. So the registration of the security and/or the resulting requirement to file reports with the SEC also trigger the Sarbanes-Oxley Act of 2002 (which is a US securities law that complements the Securities Act of 1933 and the Securities Exchange Act of 1934). However, most people use the colloquial term ‘public company’ for purposes of US securities law for companies that have securities registered with the SEC.
If I understood you correcly, you do not want to PUBLICY offer debt or equity securities to persons in the USA (i.e. no public advertising in the US and no public advertising abroad that does not specifically state that the offer does not apply to US persons).
There are certain exemptions for foreign private issuers (i.e. non-US companies) whose equity securities are traded over-the-counter in the US (i.e. your point A, see my explanations in 1c and 1d).
Holders of securities of record does not mean the persons (which may be banks on behalf of their customers who have a securities deposit with the bank) in the security ledger that is maintained by the issuer (otherwise there would be a lot of banks on the list). A look through to beneficial owners is required (see ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr-and-sid=710a63b4f6e784f5ba1ebb0e3c2feb73-and-rgn=div8-and-view=text-and-node=17:18.104.22.168.22.214.171.124-and-idno=17 no www required at the beginning or see 17 CFR 240.12g5-1).
I would add 1c) that a foreign private issuer with more than 10 million total assets can have 500 or more holders of a class of equity securities provided the class has less than 300 holders in the USA (with a look through to beneficial owners as mentioned above).
I would also add 1d) that a foreign private issuer that maintains a listing of the subject class of securities on one or more exchanges in a foreign jurisdiction that, either singly or together with the trading of the same class of the issuer’s securities in another foreign jurisdiction, constitutes the primary trading market for those securities; and that publishes certain information in English is exempt from the registration requirement even if he has more than 10 million of total assets and a class of equity securities with 500 or more holders of record (see 17 CFR 12g3-2 ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr-and-sid=710a63b4f6e784f5ba1ebb0e3c2feb73-and-rgn=div8-and-view=text-and-node=17:126.96.36.199.188.8.131.52-and-idno=17)
- yes, provided that the debt has not been publicly offered in the USA (i.e. private placements only within the private placement exemption of US securities law) or is not listed on a national securities exchange in the USA (both would otherwise require a registration of the debt security with the SEC).
The definition of an equity security is included in 17 CFR 240.3a11-1 ‘The term equity security is hereby defined to include any stock or similar security, certificate of interest or participation in any profit sharing agreement, preorganization certificate or subscription, transferable share, voting trust certificate or certificate of deposit for an equity security, limited partnership interest, interest in a joint venture, or certificate of interest in a business trust; any security future on any such security; or any security convertible, with or without consideration into such a security, or carrying any warrant or right to subscribe to or purchase such a security; or any such warrant or right; or any put, call, straddle, or other option or privilege of buying such a security from or selling such a security to another without being bound to do so.’
- I don’t know, but I think so.
- Sounds like good advice.
‘Being forced to register triggers SOX, even though the company is not public and would not otherwise be subject to SOX (other than the anti-fraud provisions, of course).’ Yes.
If you need more info, specifically on private placements, consult a book on securities regulation such as Hazen and consult the Securities Act and the regulations thereunder on the SEC website or in the US code (USC) and the code of federal regulations (CFR). I do not want to overload this forum with an extensive lecture on US securities law and its effect on foreign companies.
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Sorry. Yes, it does. Thanks for your valuable insight.