The NASPP Blog

Last week, I highlighted areas of JOBS that impact stock plan administrators.   This week, I take a look at another area of JOBS with relevance to equity compensation–the shareholder threshold that triggers registration under the 1934 Act.

Shareholder Threshold for Required Registration
Private companies with $10 million in assets that have shareholders in excess of a specified amount are required to register with the SEC and then become subject to public reporting requirements. JOBS raises this threshold from 500 to 2,000 shareholders, provided that no more than 499 of the shareholders are nonaccredited investors. (For reasons that I cannot fathom, the nonaccredited investor requirement doesn’t apply to banks–10 points to anyone that knows why this is.  Maybe banks just have better lobbyists.)

Interestingly, some commentators have pointed out (e.g., see the Alston + Bird memo included with the NASPP alert on JOBS) that this enables companies to delay going public, which seems contrary to the purpose of JOBS.

Stock Compensation Exempted

JOBS also exempts shareholders that acquired their stock through company benefit plans from this threshold. SEC regulations and a recently issued no-action letter (see “No Action on RSUs“, February 29, 2012) already exempted options and RSUs from the threshold, but now actual shares of stock acquired through these and other compensatory arrangements are also exempted.

Private companies will now be able to allow their employees to purchase stock before they go public without triggering the registration requirement regardless of how many employees they have. This could be a little dangerous in that employees that don’t have much investing experience sometimes don’t understand the potential pitfalls of investing in high-risk, illiquid stocks. I believe that, in most cases although there are certainly some exceptions, it doesn’t make sense for rank-and-file employees to buy or (incur taxable income on) their employer’s stock before that stock is liquid.

In a series of FAQs issued last week, the SEC clarified that this exemption applies regardless of whether the individual holding stock received through a company stock plan is a current or former employee.  It isn’t clear, however, whether the exemption will continue to apply if the individual sells the stock acquired under a company plan (e.g., on one of the secondary markets) to another investor. 

Deregistering

For non-banks, the threshold for deregistering did not change, so companies that have already been forced to register and are now filing public reports will have to continue to do so until they have fewer than 300 shareholders (or less than $10 million in assets).  For banks, the deregistration threshold did increase, to 1,300 shareholders (again, I have no idea why banks get special treatment). 

NASPP “To Do” List
We have so much going on here at the NASPP that it can be hard to keep track of it all, so we keep an ongoing “to do” list for you here in our blog. 

– Barbara