500-Shareholder Threshold: What It Was and How It Worked The 500-shareholder threshold was an SEC rule that required companies with 500 or more distinct shareholders to register under the Securities Exchange Act of 1934 and begin public disclosure of financial and other material information. The requirement came from Section 12(g) and obligated affected issuers to file periodic reports (typically beginning within 120 days after the fiscal year-end). Why it existed
* Introduced in 1964 to address fraud and lack of transparency in the over‑the‑counter (OTC) market.
* Aimed to protect investors by forcing companies with a substantial number of owners to make financial information publicly available.
* Without the threshold, small companies could remain privately held while still attracting many investors—potentially leaving outside buyers with inadequate information.
How it affected private companies
* Reaching the threshold meant a privately held company had to undertake the time, cost, and disclosure obligations associated with public reporting, although it could remain legally private.
* Many private companies sought to limit the number of shareholders to avoid mandatory reporting, preserving confidentiality and avoiding regulatory burden.
Change to the threshold (JOBS Act)
* Rapid growth in private investing—especially in technology startups—made the 500-shareholder cutoff impractical for many companies that wanted to remain private while raising capital.
* The JOBS Act of 2012 raised the threshold, allowing companies to have up to 1,999 holders of record without triggering the Exchange Act registration requirement. This provided growing private companies more flexibility and time before public reporting became mandatory.
Current implications
* The higher threshold reduces the likelihood that fast-growing private companies will be forced into public reporting solely because of investor count.
* Companies still must monitor their shareholder base and applicable rules under Section 12(g) to determine when registration and public disclosure become required.
Key takeaways
* The 500-shareholder threshold required companies with 500+ shareholders to register with the SEC and publicly disclose financial information.
* It was introduced to curb fraud and improve transparency in OTC markets.
* In 2012, the threshold was raised (via the JOBS Act) to allow up to 1,999 holders of record before registration is required, reflecting changes in private capital formation and startup growth.
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