“It is, of course, an indispensable part of a scrivener’s business to verify the accuracy of his copy, word by word.“
The Securities and Exchange Commission publishes a number of “frequently asked questions” on its website. Following the enactment of the Jumpstart Our Business Startups Act (aka the “JOBS Act”), the SEC published the following description of the new Section 12(g) registration threshold for issuers that are not banks or bank holding companies:
Title V and Title VI of the JOBS Act amend Section 12(g) and Section 15(d) of the Exchange Act as follows:
- The holders of record threshold for triggering Section 12(g) registration for issuers (other than banks and bank holding companies) has been raised from 500 or more persons to either (1) 2,000 or more persons or (2) 500 or more persons who are not accredited investors.
My guess is that many will assume that this is a faithful restatement of the amendment of Section 12(g) of the Exchange Act effected by the JOBS Act. It is not. In fact, Section 501 of the JOBS Act amended Section 12(g)(1)(A) to read as follows:
(A) within 120 days after the last day of its first fiscal year ended on which the issuer has total assets exceeding $10,000,000 and a class of equity security (other than an exempted security) held of record by either—
(i) 2,000 persons, or
‘(ii) 500 persons who are not accredited investors (as such term is defined by the Commission), and
The subtle difference between the SEC’s FAQ and the actual amendment is that the SEC has inserted the words “or more” after “2,000” and “500”. I doubt that anyone believes that Congress intended to require only issuers with exactly 2,000 holders of record or 500 non-accredited investors to register under the Exchange Act, but this is what the amended statute literally provides. Therefore don’t read this post as legal advice to that effect. If you have questions about whether registration under the Exchange Act is required, hire a securities lawyer and make certain that she is properly feed.
Can Congress Really Blame it on Bartleby?
The omission of “or more” is puzzling. First, the threshold for registration in Section 12(g)(1) before the JOBS Act was “500 or more” persons. Second, Section 601 of the JOBS Act amended Section 12(g)(1)(B) (establishing the Exchange Act registration for banks and bank holding companies) to read: “held of record by 2,000 or more persons”. Thus, at the very same time that Congress was deleting “or more” from subparagraph (A) it included “or more” the very next subparagraph. Third, in establishing the $10 million threshold, Congress made it clear that total assets had to exceed the threshold.
Perhaps the SEC would “prefer not to”
Although the amendment of Section 12(g)(1)(A) was effective upon amendment and required no SEC action, the SEC in 2014 proposed rule changes to reflect the new, higher thresholds for registration, termination of registration and suspension of reporting that were set forth in the JOBS Act. The proposing release insouciantly asserts that the SEC “proposing to amend these rules to reflect the new thresholds set forth in the JOBS Act” without acknowledging that it is proposing to add “or more” to Section 12(g)(1)(A). Thus, there is no discussion of whether the SEC has the authority to expand the class of issuers subject to Section 12(g). Section 12(h) of the Exchange Act expressly empowers the SEC to exempt any issuer or class of issuer from Section 12(g) but makes no reference to widening the class of issuers subject to Section 12(g).
Perhaps the SEC would “prefer not to” tackle this recondite problem and hope that it disappears for want of attention. The omission of “or more” does engender more than a few philosophical questions, including:
- Should are we governed by Congress’ (supposed) intent or by the unambiguous words of Section 12(g)(1)(A)?
- If Congress enacted one thing, but most likely intended another, should the SEC or the courts “fix” the problem?
- What authority, if any, does the SEC have to expand the class of issuers subject to Section 12(g)?
- What about an issuer who is so benighted as to take Section 12(g)(1)(A) at face value?
- Does it make a difference that the omission of “or more” from Section 12(g)(1)(A) doesn’t make the statute unintelligible or incapable of application?