We will address over the next four installments one of the deep mysteries of the securities universe: how to exit the SEC reporting system and “go dark.”

Normally, in order to understand what is required to go to the dark side, you will first have to travel to a distant planet and endure rigorous training with a small green creature with the disconcerting habit of putting the end of his sentences first.¹ We will spare you most of that, but you will have to put up with some unavoidable complexities here – this area of the law is pretty technical. After all, Obi Wan never said it was going to be easy to be a Jedi.

Background

A company’s SEC reporting obligation typically flows not from the Force, but from some combination of four provisions under the Exchange Act:

• Section 12(b) – requires registration of any class of securities listed on a national exchange (e.g., NYSE or, since 2006, Nasdaq).
• Section 12(g) – requires registration of any class of equity securities held by more than 2,000 record holders or more than 500 record holders who are not accredited investors, where the issuer has assets of $10 million as of the end of its fiscal year;² for foreign private issuers, at least 300 of the record holders must be resident in the United States.
• Section 13(a) – requires every issuer with a class of securities registered under Section 12 to file reports with the SEC.
• Section 15(d) – imposes a reporting obligation on an issuer that has sold securities pursuant to an effective registration statement under the Securities Act. This frequently arises in connection with registration of securities for employee benefit plans on a Form S-8 or in the context of an A/B exchange offer.

There are a few points to bear in mind here.

First, understanding how to count record holders – complicated that is, as Yoda might put it. Securities in the United States are typically held in “street name.” This usually means they are held by a broker-dealer (as a “participant” in DTC) for the accounts of the broker-dealer’s customers. In the case of street name securities, the holder of record is typically considered to be the broker-dealer and not the underlying customers (and also not DTC itself).³ For foreign private issuers, counting record holders is done a bit differently – for more information on that topic, see the Latham FPI Guide.

Second, an issuer can simultaneously have several different Exchange Act registration and reporting obligations. For example, it can be listed on NYSE and so be registered under Section 12(b); at the same time, it could have more than 2,000 record holders of its stock, and so have a Section 12(g) registration obligation; and it could have gone public via a Form S-1, and so have a Section 15(d) reporting obligation. Or, perhaps it listed on Nasdaq and registered under Section 12(g) back in the day when Nasdaq was not a national securities exchange, but it is now deemed registered under Section 12(b). In the normal course of things, you do not worry about these overlapping obligations, because there are various provisions of the securities laws that reconcile things (e.g., Section 12(g)(2)(A), which provides that Section 12(g) registration does not apply to any security listed on a national securities exchange; or Section 15(d), which provides that the duty to file Section 15(d) reports is automatically suspended if the issuer has a class of securities registered under Section 12). But these dormant obligations spring back into life under various scenarios, so it is important to get rid of all reporting obligations in order for a company to stop making filings under the Exchange Act.

Third, what about companies that voluntarily file under the Exchange Act? They are just that, voluntary filers, so they do not have to jump through any hoops to suspend their filing obligations (although they of course may have contractual obligations to meet under the terms of their indentures).

How does a company terminate its registration under Section 12(b)?OK, enough background already. How do you get out of Section 12(b)? The answer lies in Form 25 and Rule 12d2-2. Like Yoda himself, Form 25 is short (one page) but powerful.

Form 25 applies in several different situations spelled out in Rule 12d2-2. The basic question is whether the exchange or the issuer will file the form.

• Exchange files the form – There are certain circumstances in which an exchange must file a Form 25 (e.g., typical M&A scenarios as well as redemption or maturity of a security – see Rule 12d2-2(a)). Otherwise, an exchange may file a Form 25 (under Rule 12d2-2(b)) in accordance with its own Rules (see, e.g., Rule 804 of the NYSE Listed Company Manual; Rule 5800 Series of Nasdaq Listing Rules; see also Nasdaq FAQ on continued listing).
• Company files the form – By making certain representations largely revolving around its intention to delist (spelled out in Rule 12d2-2(c)), a company may file its own Form 25 directly with the SEC.

The Form 25 takes effect 10 days after filing.

Why is this important? Because, young Jedi, until the Form 25 first takes effect, file your SEC reports you must. In other words, not even a Jedi Master such as Yoda can get you off the hook if your filing falls due while you are in the 10-day period and still waiting for the effectiveness of your Form 25. See Rule 12d2-2(d)(5). And don’t get any bright ideas about using Form 12b-25 to delay the date of your report until after the effective date of the Form 25, as C&DI 144.03 makes clear.

So, filing the Form 25 ends the company’s SEC reporting obligations for good, right?

You might think so – but the answer is likely “no.” Remember that your issuer may have a dormant Section 12(g) registration and a dormant Section 15(d) reporting obligation. These now come back to life, like Anakin Skywalker reappearing in his new guise of Darth Vader. See Rules 12d2-2(d)(6) (dealing with Section 12(g)) and 12d2-2(d)(7) (dealing with Section 15(d)). At the risk of leaving you in suspense, we will tackle Sections 12(g) and 15(d) in the next installment. And remember, you must confront those Rules – then, only then, a Jedi will you be.

____________________

¹   Surely our favorite denizen of the Dagobah System needs no further introduction or hyperlink (although a hyperspace link would be a nice thing – come to think of it, we could use a lightsaber from time to time as well).
²   The threshold in Section 12(g) is actually $1 million, but Rule 12g-1 raises the bar to $10 million.

³   See C&DI 152.01 (securities held in street name by a broker-dealer are held of record only by the broker-dealer). But note that under paragraph (b)(3) of Rule 12g5-1, if the company knows or has reason to know that the form in which securities are being held is being used primarily to circumvent Section 12(g) or 15(d) then the ultimate beneficial owners of the securities will be deemed to be the record holders.