[author: Steve Quinlivan]

The SEC Staff as submitted to Congress a report on its authority to enforce Rule 12g5–1 to determine if new enforcement tools are needed to enforce the anti-evasion provision contained in subsection (b)(3) of the rule.  Rule 12g5-1(b)(3) states that “[i]f the issuer knows or has reason to know that the form of holding securities of record is used primarily to circumvent the provisions of Section 12(g) or 15(d) of the Act, the beneficial owners of such securities shall be deemed to be the record owners thereof.”  According to the SEC, the rule has been described by commentators as “a catch-all provision that is aimed at deterring the organization of holding companies, subsidiaries or trusts for the primary purposes of avoiding registration.”

The SEC staff noted  that Rule 12g5-1(b)(3) has two primary legal elements.

• First, there must be a form of holding that exists primarily to circumvent the provisions of Section 12(g) or 15(d) of the Exchange Act.
• Second, an issuer must know or have reason to know that a form of holding was being used primarily to circumvent the provisions of 12(g) or 15(d). Both elements must be present for the Commission to pursue a violation.

The SEC staff also observed that Rule 12g5-1(b)(3) has been invoked by the SEC or in private litigation sparingly and little precedent interpreting the rule is available.

The staff concluded by noting that current enforcement tools available to the SEC 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, according to the staff,  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.

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