A public company with a class of securities registered under Section 12 or which is subject to Section 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”) must file reports with the SEC (“Reporting Requirements”). The underlying basis of the Reporting Requirements is to keep shareholders and the markets informed on a regular basis in a transparent manner. Reports filed with the SEC can be viewed by the public on the SEC EDGAR website. The required reports include an annual Form 10-K, quarterly Form 10Q’s and current periodic Form 8-K as well as proxy reports and certain shareholder and affiliate reporting requirements.
This blog discusses the “certain shareholder” filing requirements under Sections 13d and 13g of the Exchange Act, Regulation 13D-G beneficial ownership reporting and related Schedules 13D and 13G. This blog is a summary of the large body of rules and interpretations related to Sections 13d and 13g, including the SEC’s Compliance and Disclosure Interpretations (C&DI’s) publication on the rules and filing requirements. Shareholders that may become subject to these rules and filing requirements should seek the advice of securities counsel to ensure compliance.
A company becomes subject to the Reporting Requirements by filing an Exchange Act Section 12 registration statement on either Form 10 or Form 8-A. A Section 12 registration statement may be filed voluntarily or per statutory requirement if the issuer’s securities are held by either (i) 2,000 persons or (ii) 500 persons who are not accredited investors and where the issuer’s total assets exceed $10 million. Although companies that file a Form S-1 registration statement under the Securities Act of 1933, as amended (“Securities Act”) become subject to Reporting Requirements under Section 15(d) of the Exchange Act, only the shareholders of companies that have a class of securities registered under Section 12 of the Exchange Act are subject to the 13d and 13g filing requirements.
Section 13 of the Exchange Act requires any person acquiring more than five percent of a voting class of a company’s Section 12 registered equity securities directly or by tender offer to file a Schedule 13D or 13G. Depending upon the facts and circumstances, the person or group of persons may be eligible to file the more abbreviated Schedule 13G in lieu of Schedule 13D. Generally, the obligation to file an initial beneficial ownership statement on Schedule 13D or 13G is triggered by the person directly or indirectly acquiring or possessing beneficial ownership of more than 5% of a class of equity securities.
The obligations to file Scheduled 13D and 13G are in addition to and separate from any other filing requirements, including Forms 3, 4 and 5 under Section 16 of the Exchange Act. That is, a person that becomes an officer, director or 10% shareholder, who is also a 5% shareholder, would be required to file both a Form 3 and Schedule 13D initially and Forms 4 and amended Schedule 13D’s upon changes in the information contained in the initial filings. Schedules 13D and 13G may be filed by groups of shareholders who through shared control, such as a shareholders agreement or common ownership in an entity, own in excess of 5% of the public company’s stock.
Generally officers and directors have the ability to directly or indirectly influence the management and policies of an issuer and therefore are considered control persons who would not qualify to file a Schedule 13G as opposed to a Schedule 13D.
Schedule 13D
A Schedule 13D is lengthier than a Schedule 13G and is often referred to as a long-form beneficial ownership disclosure statement. Following a company’s IPO or initial going public transaction, any shareholder that acquires 5% or more of the company’s stock may be required to file a Form 13D. The requirement to file a Schedule 13D is triggered by an acquisition. The full contents and instructions of a Schedule 13D can be found HERE.
A Schedule 13D must be filed within 10 days of the triggering event requiring the filing. The filing discloses ownership on the date of such filing. Accordingly, if a person acquires 5% of the company’s securities, the filing requirement is triggered. If that person then makes additional acquisitions or dispositions during that 10-day period, the filing would report the ownership as of the date of filing. Schedule 13D requires disclosure of all transactions in the company’s stock that were effected during the past sixty days or since the most recent filing of Schedule 13D, whichever is less, and accordingly would include a description of the acquisitions and dispositions during the 10-day period between the event that triggered the filing requirement and the filing itself.
Although changes in the number of outstanding securities that result in an increase of ownership to over 5% are not acquisitions resulting in an initial Schedule 13D filing, they would result in the requirement to file an amended Schedule 13D to report the “material increase or decrease” in the percentage of the beneficial ownership.
As discussed below, a shareholder that already owns 5% of the company’s stock at the time of an IPO or going public transaction must file a Schedule 13G within 45 days of the IPO or going public transaction. These shareholders are referred to as “exempt shareholders” and are only required to file a Schedule 13D if they acquire more than 2% of the company’s stock in a 12-month period following the IPO or going public transaction.
Subject to certain exclusions, including the ability to file a Schedule 13G rather than a Schedule 13D, any event that results in an acquisition resulting in a beneficial ownership of more than 5% triggers the 13D filing requirement. Accordingly, the formation of a group and the transfer to a trustee could result in a Schedule 13D filing requirement, in addition to straightforward purchases of stock.
Under the authority of Section 13d of the Exchange Act, the SEC has enacted certain exemptions to the Schedule 13D filing requirement. Generally, these exemptions only allow the filing of the shorter 13G and not a relief from any filing. Executors or administrators of a decedent’s estate generally will be presumed not to have acquired beneficial ownership of the securities in the decedent’s estate until such time as such executors or administrators are qualified under local law to perform their duties.
Schedule 13D filers are required to file amendments to report any change (increase or decrease) in beneficial ownership of 1% or more. For purposes of Section 13 of the Exchange Act, beneficial ownership includes the right to acquire securities within 60 days of the reporting date. Accordingly, a shareholder that owns convertible notes, warrant or option that entitle that shareholder to acquire securities under the convertible instrument must include the securities which the shareholders could acquire in the calculation of beneficial ownership. Moreover, if the number of shares that a convertible note holder owns changes by 1% or more due to fluctuations in a conversion price that is tied to market price, each such 1% change requires the filing of an amended Schedule 13D.
The 60-day beneficial ownership period is calculated based on securities that the shareholder has a right to acquire within the 60 days. If the right to acquire securities is pre-conditioned on an event (such as a transaction closing) that has not occurred, or contractually limited (such as a provision limiting the acquisition right to no more than 4.9% of outstanding securities), the right to acquire such securities is likewise limited as is the concurrent ownership reporting obligation.
Any material changes in a previously filed Schedule 13D require an amendment to such filing, even if that material change is not in beneficial ownership. For instance, a Schedule 13D requires reporting of plans to acquire additional securities and material contracts related to the securities. Therefore, if a shareholder acquired warrants to purchase more than 1% of the outstanding securities, not exercisable for six months, its beneficial ownership would not have changed but its plan to acquire additional securities and contracts related to such securities would have materially changed, triggering the requirement to file an amended Schedule 13D.
The requirement to file amendments to a previously filed Schedule 13D continues until such filer has reported ownership below 5%. Accordingly, if a change of beneficial ownership results in ownership below 5%, but such change is not a 1% change that would otherwise trigger the requirement to file an amendment, that shareholder can voluntarily file such an amendment to relieve themselves of the Schedule 13D filing requirement going forward (or at least until a new triggering event required such filing in the future).
Schedule 13G
A Schedule 13G is a shorter and simpler form than a Schedule 13D. Schedule 13G eligible filers include (i) qualified institutional investors; (ii) passive investors; and (iii) exempt investors. The full contents and instructions of a Schedule 13G can be found HERE.
Qualified Institutional Investors
Rule 13d-1 allows qualified institutional investors to file on Schedule 13G instead of 13D. A qualified institutional investor is an investor that acquired the securities in the ordinary course of business and not with the purpose nor with the effect of changing or influencing the control of the issuer and is also one of the following:
- A registered broker-dealer;
- A registered investment adviser;
- A registered investment company;
- A church plan excluded from the definition of an investment company;
- A bank;
- A savings association under the FDIC;
- An insurance company;
- A parent holding company holding less than 1% of the outstanding stock;
- An employee benefit plan subject to the Employee Retirement Income Security Act;
- A non-U.S. institution that is the functional equivalent of any of the above institutions, provided it is subject to a comparable regulatory scheme; and
- A group provided that all members of the group qualify as any of the above institutions.
Qualified institutional investors must file a Schedule 13G within 10 days of the end of the month of the triggering event requiring the filing and must amend the Schedule 13G each year within 45 days of the end of the calendar year to report changes in beneficial ownership. However, if a 13G filing shareholder acquires in excess of 10% of the company’s stock, an amended 13G must be within 10 days of the acquisition. Moreover, an amendment must also be filed within 10 days to report increases or decreases of beneficial ownership of more than 5%.
Passive Investors
Shareholders who are passive investors can file or continue to file reports on Schedule 13G, avoiding the more burdensome Schedule 13D. Passive investors must file their Schedule 13G within 10 days of the triggering event requiring the filing. Rule 13d-1(c) defines a passive investor as a person that: (i) has not acquired the securities with any purpose, or with the effect of, changing or influencing the control of the issuer, or in connection with or as a participant in any transaction having that purpose or effect, other than a qualified institutional investor; and (ii) is not directly or indirectly the beneficial owner of 20% or more of the class.
A change in the number of outstanding securities that results in a passive investor owning more than 5% of the outstanding class of securities will trigger a Schedule 13G filing requirement. A shareholder that receives a dividend in a subsidiary spin-off, in excess of 5% of the outstanding securities of the spun-off subsidiary, would be considered a passive investor and eligible to file Schedule 13G, as long as such shareholder was not in fact an officer, director or otherwise a control person of the spun-off subsidiary.
Such passive investor loses Schedule 13G eligibility and must file a Schedule 13D within 10 days of acquiring 20% or more of the company’s stock. A person in a control position, such as a director or executive officer, will not qualify as a passive investor.
Exempt Investors
Exempt investors include every person or entity that beneficially owned more than 5% of the company’s stock at the time of the IPO or going public transaction. The filing requirement for Schedule 13D is triggered by an acquisition of 5% or more of securities of a company with securities registered under Section 12 of the Exchange Act. Accordingly, these initial 5% shareholders are referred to as exempt shareholders because their shares were acquired prior to the company’s IPO or going public transaction – i.e., prior to the company having a class of securities registered under Section 12 of the Exchange Act.
Exempt investors must file a Schedule 13G within 45 days following the end of the calendar year in which a company completes its IPO or other going public transaction.
Generally, a shareholder must amend a Schedule 13G each year within 45 days of the end of the calendar year to report changes in beneficial ownership. However, if a 13G filing shareholder acquires in excess of 10% of the company’s stock, an amended 13G must be within 10 days of the acquisition. Moreover, an amendment must also be filed within 10 days to report increases or decreases of beneficial ownership of more than 5%.
Moving from Schedule 13G to Schedule 13D
If an exempt investor who previously reported on Schedule 13G later becomes subject to Rule 13d-1(a) due to a nonexempt acquisition, then a Schedule 13D must be filed within 10 days of the acquisition. Nonexempt transactions that require the filing of a Schedule 13D include any acquisition with a view towards changing or influencing the control of the issuer. In addition, any acquisition of the beneficial ownership of a security which, together with all other acquisitions by the same person (or group of persons) of securities of the same class during the preceding twelve months, that results in ownership in excess of 2% of that class eliminates the ability to rely on Schedule 13G and requires the filing of a Schedule 13D.
Accordingly, if a group of exempt investors reporting on Schedule 13G adds a new member who owns more than 2 percent of the same class of equity securities, then each member of the group loses their exempt investor status as a result of acquiring the equity securities owned by the new group member, and a Schedule 13D must be filed within 10 days of the acquisition. A passive investor or qualified institutional investor loses that status upon acquiring or holding a class of equity securities with a purpose or effect of changing or influencing control of the issuer. Similarly, a passive investor also loses that status upon acquiring 20% or more of a class of equity securities.
Only security holders who were once eligible to file on Schedule 13G and were required to switch to a Schedule 13D may switch back to a Schedule 13G filing. Security holders who were initially required to report on Schedule 13D must continue to report on Schedule 13D thereafter.
The Author
Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys
LAnthony@LegalAndCompliance.com
Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the OTC Market’s top source for industry news, and the producer and host of LawCast.com, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
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