April 24, 2012
Special Forum: JOBS Act - Teaching Exemptions, Ralston Purina, Google, and Section 12(g)
Posted by joanheminway

I will refrain here (at least for now) from choosing one of Brett's three "stories" and from commenting on Erik's many good points (except to say that the lack of supporting evidence for any policy objective that Congress may have had in mind is frustrating--if not shocking).  Rather, I will focus on one of the changes to Section 12(g) of the Securities Exchange Act of 1934 in the context of teaching the law of business associations and U.S. securities law.

As Bob notes, The main change to Section 12(g) is that the aggregate number of record shareholders triggering registration of a class of securities under Section 12(g) has been increased from 500 to 2000, as long as no more than 500 shareholders are unaccredited investors.  Bob also notes that two classes of security holders are not counted for purposes of determining the 2000-shareholder and 500-shareholder limits under this new rule: crowdfunding investors (which we'll post more about on Thursday) and holders of employee benefit plan securities exempt from registration under the Securities Act of 1933.  Although the intent of the exemption in each case is clear, the drafting in each case refers to exempting securities rather than their holders.  (David, the JOBS Act is full of not-so-very-good drafting.  Thanks for highlighting that point and offering examples.)

Sections 502 and 503 of the JOBS Act contain the exemption for employee benefit plan securities.  The central mechanism for the exemption is a an enhancement to the definition of the "held of record" requirement that Bob describes in his post:

For purposes of determining whether an issuer is required to register a security with the Commission pursuant to paragraph (1), the definition of ‘held of record’ shall not include securities held by persons who received the securities pursuant to an employee compensation plan in transactions exempted from the registration requirements of section 5 of the Securities Act of 1933.

The SEC is required to (1) engage in applicable rulemaking (note here to David about more bad drafting in Section 503, where Congress appears to be directing the SEC to revise a statutory provision already amended in the preceding section) and (2) "adopt safe harbor provisions that issuers can follow when determining whether holders of their securities received the securities pursuant to an employee compensation plan in transactions that were exempt from the registration requirements of section 5 of the Securities Act of 1933."

I have a teaching observation about Sections 502 and 503 of the JOBS Act.  A number of subsidiary points flow from it.  My observation is that, as Bob noted about the "accredited investor" definition, the employee benefit plan exemption from the Section 12(g) shareholder threshold puts more pressure on teaching exemptions appicable to employe benefit plan securities.  So, for those of you who give short shrift to Rule 701 under the Securities Act of 1933 and for those of you who may not discuss the potential use of Section 4(2), the Rule 504 and Rule 505 exemptions, and the Rule 506 safe harbor in the employee benefits context, you may want to rethink things . . . .  Based on my personal practice experience, I always have covered these matters to some extent, but they now take on more importance for all of us.

A nice way to raise and debate the relevant issues in class is to note how Google effectively made the same mistake ten years ago that Ralston Purina made a half-century earlier: issuing unregistered securities to employees without the availability of applicable exemptions for the related offers and sales.  Since all of us who are law professors likely teach the Ralston Purina case in Business Associations or Securities Regulation or both courses, the Google matter is an easy way to engage the class with the relevant statutory, regulatory, and decisional law.  After covering Ralston Purina and Rule 701, I point the students to the more recent facts involving Google's pre-public-offering unregistered issuances of stock options as described in the Cease and Desist Order in In re Google, Inc. and David C. Drummond.  Through lecture or discussion, one can do a lot with this material.  The potential reliance on Rule 701, Rule 506, and Section 4(2) in the issuance of options is discussed in the Cease and Desist Order.  This, in and of itself, is valuable because it allows the students to see the (mis)use of multiple exemptions by an issuer and to consider/debate how exemptions of that kind could be better coordinated.  Also, professional responsibility issues (competence, zealous advocacy, etc.) can be raised from, or working off of, the Google fact pattern.  And now, in a post-JOBS-Act world, this whole mess becomes useful for another reason: shareholders acquiring securities under a valid exemption will not be included in the Section 12(g) calculation of shareholders (and, as noted above, the SEC must promulgate safe harbor provisions for use by issuers in this context).

Admittedly, I do not typically have enough time in class to unpack all of these aspects of the Google matter.  But perhaps I should make time, now that there is one more reason why this material is salient.  There is one big problem, however.  Where do I cut existing course material to fit this and the other aspects of the JOBS Act into my courses?  [Audible groan]  Any and all suggestions are welcomed. . . .

FYI, here is an additional perspective on the Ralston Purina case and the JOBS Act for those who (like me) just love that case.

 

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