DEFINITION of 500 Shareholder Threshold
500 shareholder threshold for investors was a previous rule of the Securities and Exchange Commission (SEC) that triggered public reporting requirements of a company. Section 12(g) of the Securities Exchange Act of 1934 calls for issuers of securities to register with the SEC and begin public dissemination of financial information within 120 days of the end of a fiscal year.
The prior 500 shareholder threshold forced companies that had more than 499 investors to provide adequate disclosure for protection of investors. Although the company could remain private, it had to file documents similar to those of public companies. If the number of investors fell back below 500, then the disclosures would not be required. The threshold was increased to 2,000 in 2012 with the passage of the JOBS Act. Thus, a private company is allowed to have up to 1,999 holders of record without the registration requirement of the Exchange Act.
BREAKING DOWN 500 Shareholder Threshold
The 500 shareholder threshold was originally introduced in 1964 to address complaints of fraudulent activity in the over-the-counter market. Since firms with fewer than the threshold number of investors were not required to disclose their financial information, outside buyers were not able to make fully informed decisions regarding their investments. Private companies generally avoid public reporting as long as possible because it consumes time and money and also places confidential financial data in the hands of competitors.
With the ascendency of firms in the technology sector, the 500 shareholder threshold rule became an issue for swift growing companies like Google and Facebook that desired to remain private. While other factors were supposedly in play in the decision of these well-known giants to go public, the 500 rule was a key consideration, according to market observers. The current 2,000-shareholder threshold gives the new generation of super-growth companies more breathing room before they must file for an initial public offering (IPO).