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May 3, 2024

Navigating the New Crowdfunding Frontier: Rule 3a-9 and Regulation Crowdfunding SPVs

Part 4 of a 5 Part Series

Section 12(g) Holders of Record

In the labyrinth of securities regulations, Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) stands out as another point of complexity by setting shareholder thresholds for securities registration. For entrepreneurs navigating the crowdfunding frontier, it is crucial to consider the implications of Section 12(g) of the Exchange Act together with Rule 3a-9 of the Investment Company Act of 1940, as amended.

Section 12(g) outlines shareholder thresholds for when securities must be registered with the Securities & Exchange Commission (the “SEC”). Under Section 12(g), an issuer must register its securities if, within 120 days after its first fiscal year ended, it “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)[.]”

Notwithstanding, for securities issued under Regulation Crowdfunding, there exists a conditional exemption from Section 12(g) registration. Under Section 12(g)-6, the securities of a crowdfunding issuer will be exempted from the record holder count of Section 12(g) if the crowdfunding issuer (1) is current in filing its ongoing annual reports, (2) has engaged a registered transfer agent with respect to its securities, and (3) has total assets as of the end of its fiscal year of $25 million or less. If a crowdfunding issuer does not fulfill the three previously stated requirements and exceeds the holders of record limit, it must register its securities under Section 12(g) and has a two-year transition period before mandatory registration kicks in.

Each person or entity listed as a shareholder at the end of the fiscal year is included in the “holders of record” count. This brings us to a potential conundrum when dealing with both Regulation Crowdfunding (“Reg. CF”) and non-Reg. CF investors, as the number of shareholders can climb rapidly, potentially exceeding the threshold.

Enter once more Rule 3a-9 with a solution to this regulatory risk. Utilization of a crowdfunding vehicle significantly reduces the risk of crossing the Section 12(g) threshold, because securities held in the name of this entity are treated as a single holder, regardless of the number of beneficial holders within that entity. This means that potentially hundreds or thousands of Reg. CF investors can now be consolidated as just one holder, the crowdfunding vehicle, making it far less likely that a startup or, perhaps a better illustration being a real estate syndication vehicle, would inadvertently stumble into reporting company status.

Caution is warranted, however. The SEC, through Section 12g5-1(a)(9)(ii), includes securities held by non-natural persons in the holders of record count. Under this Section, both the crowdfunding issuer and the crowdfunding vehicle must include in their holders of record count securities issued by a crowdfunding vehicle that are held by non-natural persons, when the crowdfunding issuer and the crowdfunding vehicle are co-issuers in a Reg. CF offering. Therefore, entrepreneurs must be careful to ensure they do not run afoul of the 12(g) registration requirements in the event their crowdfunding campaign brings in investments from numerous entities instead of natural persons.

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