The Securities and Exchange Commission (“SEC”) requires large holders of certain securities to file a Schedule 13D. Specifically, people or groups that beneficially own more than 5% of a voting class of any equity security registered under Section 12 of the Securities Exchange Act of 1934 (the “Act”) must file a Schedule 13D with the SEC. In some situations, these people may be eligible to make an abbreviated filing, Schedule 13G instead of Schedule 13D. 

 

 

Section 13(d) of the Securities Exchange Act of 1934 (the “Act”) imposes reporting obligations on those who own or manage more than 5% of any voting class of the following types of equity securities:

·         Any security registered under Section 12 of the Act;

·         Any security of an insurance company that would have been required to be so registered except for the exemption in section 12(g)(2)(G) of the Act; and

·         Any security issued by a closed-end investment company registered under the Investment Company Act of 1940. 

 

Holding non-voting securities does not trigger any obligation to file a Schedule 13D or 13G. Securities are generally deemed voting if the holders of the class are “presently entitled to vote for election of directors.” Securities that are non-voting but provide the holder with voting rights under certain circumstances remain non-voting until these circumstances occur and the shares actually become voting. 

 

 

These rules apply to anyone who “beneficially owns” Section 12 securities as defined in the Act. This generally includes persons who directly or indirectly have sole or share voting or investment power with respect to the security. Specifically, you may be deemed to “beneficially own” a security for purposes of Section 13(d) if you have, either directly or indirectly:

·         The power to vote or direct the voting of a security;

·         The power to dispose or direct the disposition of a security; or

·         The right to acquire “beneficial ownership” of such security within 60 days through the exercise of an option or warrant or the exercise of a conversion right in a convertible security.

 

An indirect beneficial owner is one who is able to control the decisions of the direct beneficial owner. Several persons may share beneficial ownership if they jointly make the voting or investment decisions with respect to the subject securities. 

 

A parent company will be deemed to have indirect or shared beneficial ownership of any shares beneficially owned by its subsidiaries. In situations where subsidiaries exercise voting and investment power over the securities independently from the parent, parent aggregation may not be required.  

 

Under certain circumstances, persons who agree to act together on acquiring, holding, voting or disposing of an issuer’s securities (e.g., pursuant to a shareholders’ agreement) may be deemed members of a group, and each group members is deemed to beneficially own the securities held by the other members of the group.  For instance, a group may be deemed formed for these reporting purposes if it retains a common advisor in an attempt to influence a management decision. 

 

Investment advisors are deemed to beneficially own the securities held in any account over which they have discretion. Advisors are also deemed to beneficially own securities held in nondiscretionary accounts to the extent that the advisors have or share de facto authority to direct the voting or disposition of the securities held in the nondiscretionary accounts. 

 

You are generally deemed to beneficially own any securities over which you have the right to acquire beneficial ownership within sixty days. An option or right convertible into an equity security within sixty days will not be deemed to confer beneficial ownership to the holder if the conversion is subject to material contingencies outside of the holder’s control.  Any person acquiring a security with the purpose or effect of changing or influencing control of the issuer is deemed to be the beneficial owner of such securities immediately upon their acquisition, without taking into consideration the sixty-day timeframe. Also, you may need to disclose options or rights that are not convertible into an equity security within sixty days or that otherwise do not confer beneficial ownership if there are plans to acquire additional equity securities (Item 4 of Schedule 13D) or contracts concerning the subject securities (Item 6 of Schedule 13D). 

 

 

“Beneficial owners” must file an initial Schedule 13D within ten days of the trade date of the first acquisition causing their holdings to exceed the 5% threshold.  Disclosures in Schedule 13D must be current through the date of filing. 

 

To determine whether you “beneficially own” more than 5% of a class of an equity security, you need to measure the amount you are deemed to “beneficially own” against the total amount of outstanding securities of that class. For information on the total amount of the class currently outstanding, a beneficial owner may rely upon the issuer’s most recent quarterly or annual report (10-Q or 10-K) filed with the SEC and any current report (Form 8-K) filed later. You must include any equity securities you may obtain within 60 days through the conversion or exercise of options, warrants or outstanding shares in this calculation. But you do not need to include similar non-exercised or converted shares held by anyone else.  For instance, if an issuer had 100 shares of common stock outstanding and you beneficially own a note convertible within sixty days into ten shares of the issuer’s common stock, then you are deemed to beneficially own 10/110 or 9.09% of the common stock of that issuer. 

 

Schedule 13D seeks general information relating to the beneficial owner, the number of shares beneficially owned, and fairly detailed information on the nature and purpose of ownership of the subject securities. This includes the source and amount of funds or other consideration used for the acquisition (in Item 3), any significant plants or proposals with respect to the issuer (in Item 4), and any other contracts, arrangements or understandings between the beneficial owner and other parties regarding the issuer’s securities (in Item 6). Copies of certain documents must be filed as exhibits to Schedule 13D, in Item 7. 

 

 

Schedule 13D filings must be promptly amended to reflect any material changes in the information. “Promptly” is generally understood to mean within two business days. The duty to amend Schedule 13D continues until the filer ceases to beneficially own more than 5% of the subject securities. If you fall below the 5% threshold, you must make one (final) amendment notifying the SEC of this.  

 

Material changes may include acquiring or disposing of a material percentage of the class of securities beneficially owned (i.e., 1% or more) or changes in intent to gain control of the issuer. For instance, if you manage more than 5% in the shares of an issuer and the percentage you manage increases or decreases by more than 1% (whether through a transaction or other event), you must amend Schedule 13D.  Also, if you reserve the right to engage in certain transactions in the future in the initial filing and then subsequently decide to engage in one of those transactions, you must amend Schedule 13D because you have developed a specific intention as to a disclosable matter in the meantime. 

 

There may be other circumstances that qualify as a material change requiring an amendment. For instance, if you acquire warrants that are not exercisable within 60 days, you may still need to amend Schedule 13D to revise the discussion of plans concerning the acquisition of additional securities and related contracts, even if the amount of voting shares you manage has not yet changed. 

 

 

Some “beneficial owners” may be able to file an abbreviated filing—called a Schedule 13G—instead of Schedule 13D. 

 

Three categories of beneficial owners may report ownership on the short-form Schedule 13G. The time for filing the initial Schedule 13G and subsequent amendments depends upon which of the following three categories the filer falls into:

 

1.      Qualified institutional investors include most U.S. regulated financial institutions, investment advisors registered with the SEC or a state, other institutional investors, and comparable non-U.S. financial institutions (certifying that they are subject to a regulatory scheme similar to that applicable to their U.S. counterparts) if they acquire the securities:

a.       In the ordinary course of business; and

b.      Not with the purpose or effect of changing or influencing the control of the issuer nor in connection with or as a participant in any transaction that has such purpose or effect;

 

2.      Passive investors owning less than 20% of the security who have not acquired, and do not hold, the securities with the purpose or effect of changing or influencing the control of the issuer; and

 

3.      Exempt investors include investors owning more than 5% of the equity security before the issuer registering the class under the Act who acquire not more than 2% of these securities within a twelve-month period.

a.       It is irrelevant whether exempt investors purchase or hold the securities with the purpose or effect of changing or influencing the control of the issuer. 

 

Unlike Schedule 13D, Schedule 13G requires disclosure of only basic information regarding the beneficial owner and the amount of securities beneficially owned, and does not seek information on legal proceedings or other contracts or understandings relating to the issuer’s securities. 

 

Different filing thresholds and deadlines apply to initial and amended Schedule 13G filings depending on the type of beneficial owner the filer is.

 

For more information on Schedules 13D and 13D, please review these resources on the SEC’s website:

·         Overview: http://www.sec.gov/answers/sched13.htm; and