The SEC’s Report Under JOBS Act Section 504: A Shot Across the Bow at Public Company Governance Discourse?

The October 15, 2012 report by the SEC pursuant to Section 504 of the JOBS Act examines the question whether the Commission has sufficient enforcement authority to address evasions of Rule 12b5-1. The new report has some provocative nuggets in it:

1. Strikingly, it reports that about 87% of companies currently in the ’34 Act reporting system by virtue of Section 12(g) (having had more than 500 stockholders of record) would not become subject to those reporting requirements under the increased threshold adopted in the JOBS Act.

2. Lest anyone rush to the conclusion that this statistic is alarming, the report (in footnote 70) cites recent empirical studies that suggest that the likely contraction of the application of reporting requirements is a good thing: according to those studies, companies not subject to public reporting obligations obviously avoid “disclosure costs related to revealing information to competitors.” Less obviously, but more interestingly, “there is also evidence that private companies have less myopic investment strategies compared to their public peers, and are more sensitive in responding to new investment opportunities.”

3. The 500 nonaccredited investor limit added by the JOBS Act creates additional detection problems, where special purpose vehicles might be used to aggregate the holdings of multiple such investors.

The report ultimately concludes that there isn’t enough information at the moment to request additional enforcement authority. It’s important to note what the new report (understandably, given the Congressional mandate) does not ask: whether tying Exchange Act registration to numbers of record stockholders makes sense any more in an age where, as the report explains, “the vast majority of investors own their securities as a beneficial owner through a securities intermediary,” unlike the system in place when the number of record holders was chosen to determine applicability of the registration requirement.

The suggestion that private companies have “less myopic investment strategies compared to their public peers” is yet more evidence that conscientious investors and managers in public companies could stand to rethink and reshape the quality of discourse about corporate performance.

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