[ by Howard Haykin ]

SEC Determines What Other Regulatory Tools Needed to Enforce JOBS Act.

The SEC completed its analysis, and issued a report, on whether it's fully prepared to enforce compliance with Rule 12g5–1 as it pertains to crowd funding activities under the JOBS Act.  The project, mandated under Dodd-Frank, provides the Agency with the opportunity to ask Congress for additional regulatory tools it may need to enforce the anti-evasion provision contained in subsection (b)(3) of Rule 12g5-1.

And what conclusion did the SEC reach?  What, if any, new fangled enforcement tools has the SEC devised for broker-dealers, issuers and other unsuspecting market participants?  NONE.  We'll skip to the end of the Report and go directly to the Conclusion:

"The current enforcement tools available to the Commission are adequate to enforce the anti-evasion provision of Rule 12g5-1.

While difficult to detect at the outset, once the staff is alerted to a potential circumvention of Section 12(g), the current authority to investigate potential violations of the securities laws provides the staff with a wide variety of tools to gather facts.  The increase in the Section 12(g) threshold from 500 holders of record to 2000 included in the JOBS Act may reduce the motivation of issuers and others to engage in circumvention efforts, although it is possible that the requirement to register if the number of non-accredited holders of record exceeds 500 may mitigate that effect.

Since those changes were just recently enacted, time will need to pass before the impact, including the impact on possible circumvention efforts, can be assessed. We therefore have no particular legislative recommendations regarding enforcement tools relating to Rule 12g5-1(b)(3) at this time.

REPORT ON AUTHORITY TO ENFORCE EXCHANGE ACT RULE 12g5-1 AND SUBSECTION (B)(3)

As discussed in the Report, Section 12(g) of the Exchange Act requires an issuer of a certain size to register under the Exchange Act and file periodic and current reports.  Under Section 12(g), as amended by the JOBS Act, if a company has fewer than 2,000 holders of record of its equity securities and fewer than 500 holders of record who are not accredited investors, the company would not trigger the registration and reporting requirements of Section 12(g) of the Exchange Act.

One concern of particular note is the possibility that special purpose vehicles might be formed or created to facilitate evasion of the registration and reporting requirements of Section 12(g), possibly resulting in investors not having access to appropriate disclosure.   Such might be the case where special purpose vehicles are established to pool investor funds and purchase shares (typically from former employees and early investors) of companies that have not yet undertaken a public offering of their shares. 

Obviously, the SEC's existing regulatory tools are sufficient to deal with potential manipulation of investor numbers, along with a host of other concerns.  Accordingly, we'll take a shortcut with this post and recommend that you click on the hyperlink below. 

To access the full text of the Report, go to:   [SEC Report on Authority to Enforce Exchange Act Rule 12g5-1 and Subsection (B)(3), 10/15/12].