The 2012 JOBS Act rewrote the registration requirements under the Securities Exchange Act of ’34.  Registration now is required for companies with record shareholders of either 2,000 persons or 500 persons who are not accredited investors.  Prior to the JOBS Act, companies with total assets over $10 Million had to register if they had over 500 record shareholders.  Practice under these new ground rules was a subject of discussion at Practicing Law’s Annual Institute on Securities Regulation concluding today in New York. 

The JOBS Act permits a company to exclude from its count of shareholders both (i) investors under new crowd-funding procedures (not yet available; SEC proposals issued October 23 allowing crowd-funding are still subject to a 90 day comment period),  and (ii) employees receiving shares under employee plans. 

How does an issuer keep count, over time, of its number of gross shareholders and of its non-accredited shareholders? 

The SEC’s crowd-funding release suggests one solution for the two thousand total shareholder cap: shares originally sold in a crowd-funding transaction, if transferred to a subsequent shareholder, exempt that subsequent shareholder from being counted. 

But you separately have to make sure you do not go over the five hundred non-accredited limit.  How do you control that?  With appropriate disclosure to investors (because limitations on transfer will negatively affect the liquidity of the securities involved), perhaps you can instruct the transfer agent to prohibit, or provide by charter a prohibition against, transfer to any purchaser who is not accredited; or, bar transfer to anyone who is not accredited wherein such transfer would cause a company to exceed the five hundred non-accredited cap; or, provide that offending proposed transfers would be subject to a right of first refusal on the part of the company to itself purchase, or direct the purchase of, any shares proposed to be transferred to  a non-accredited investor.