On October 10, 2023, the Securities and Exchange Commission (the “SEC”) adopted amendments to the rules governing beneficial ownership reporting under Sections 13(d) and 13(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These amendments, which were initially proposed by the SEC in a proposing release (the “Proposing Release”) on February 10, 2022, make significant changes to modernize the beneficial ownership reporting regime. A copy of the adopting release (the “Adopting Release”), which also provides interpretive guidance on the beneficial ownership rules, can be found here.

Background

Under Sections 13(d) and 13(g) of the Exchange Act, along with Regulation 13D-G, an investor who beneficially owns more than five percent (5%) of a covered class of equity securities (the “5% threshold”) must publicly file either a Schedule 13D or Schedule 13G with the SEC. The filing requirements depend on the regulated status of the investor, the percentage of the class acquired and the purpose of the acquisition.

An investor with control intent, meaning a person who acquires for the purpose or effect of influencing or changing the control of the issuer, must currently file a Schedule 13D within 10 days after crossing the 5% threshold.

The shorter Schedule 13G is available to “Exempt Investors”^[1] and certain qualified institutional investors, such as broker/dealers and investment companies (“QIIs”), that acquire the securities in the ordinary course of business and without control intent. Currently, an Exempt Investor must file a Schedule 13G within 45 days after the end of the calendar year, assuming its beneficial ownership exceeds 5% as of year-end.  QIIs must file a Schedule 13G within 45 days after the end of the calendar year in which the QII crosses the 5% threshold, assuming it exceeds 5% as of year-end, or 10 days after the end of the month in which its beneficial ownership exceeds 10%. Certain investors who beneficially own less than 20% of the securities and have no control intent (“passive investors”) may elect to file a Schedule 13G in lieu of a Schedule 13D, which is due within 10 days after crossing the 5% threshold (the same deadline as a Schedule 13D filer).

Accelerated Filing Deadlines

The amendments shorten the deadlines for both initial Schedule 13D and Schedule 13G filings and amendments to those schedules, as follows:

Schedule 13D

• The filing deadline for the initial Schedule 13D is shortened to five business days after the date on which a person exceeds the 5% threshold.
• The filing deadline for the initial Schedule 13D for individuals who are no longer eligible to report on Schedule 13G is shortened to five business days after the event that causes ineligibility.
• The new filing deadline for amendments to Schedule 13D is two business days (rather than the current “promptly”) after the date on which a material change in the facts set forth in the Schedule 13D occurs.

Schedule 13G

• The new filing deadline for the initial Schedule 13G for QIIs and Exempt Investors is 45 calendar days after the end of the calendar quarter (no longer calendar year-end) in which beneficial ownership crosses the 5% threshold.
• The new filing deadline for passive investors to file an initial Schedule 13G is five business days after the date on which beneficial ownership crosses the 5% threshold (the same as a Schedule 13D filer).
• The new filing deadline for amendments to Schedule 13G for all Schedule 13G filers is 45 calendar days after the end of the calendar quarter in which a material change (no longer “any change”) in the information previously reported occurs.
• A QII will need to amend its Schedule 13G within five business days after the end of the month in which its beneficial ownership first exceeds 10% of a covered class and thereafter upon any deviation in ownership by more than 5% of the covered class.
• A passive investor will need to amend its Schedule 13G within two business days after its beneficial ownership first exceeds 10% of a covered class and thereafter upon any deviation in ownership by more than 5% of the covered class.

Although Schedule 13D filers will need to be aware of their accelerated deadlines, Schedule 13G filers will need to adjust to a new filing mind-set. Schedule 13G filers have typically amended their filings once a year by the 45^th day after calendar year-end (February 14, unless the 14^th fell on a weekend) to report “any change” in the Schedule 13G information. Going forward, Schedule 13G filers will need to assess on a quarterly basis whether there has been any “material change” in the information previously reported. The SEC opted for calendar days instead of business days, as well as the quarterly reporting periods, for certain Schedule 13G filings to mirror the due date for the Form 13F, which is due 45 calendar days after quarter end and filed by various institutional investment managers who may also have Schedule 13G filing obligations.

Rule 13d-2(a) of the Exchange Act provides that an acquisition or disposition of beneficial ownership of one percent or more of a class of securities would be deemed “material,” and acquisitions or dispositions of less than that may be material, depending on the circumstances. Although Rule 13d-2(a) applies to material changes for Schedule 13D amendment purposes, the Adopting Release indicates that the same standard would apply to Schedule 13G filers. Rule 13d-2(b) of the Exchange Act, which applies to Schedule 13G amendments, clarifies that no amendment would be needed with respect to a change in the percent of the class outstanding if the change results solely from a change in the aggregate number of shares outstanding.

Filing Logistics

The amendments require Schedules 13D and 13G to be filed using a structured, machine-readable data language (XML-based language). This requirement includes all information disclosed on Schedules 13D and 13G, other than the exhibits. In addition, the amendments extend the filing “cut-off” time from 5:30 p.m. to 10:00 p.m. Eastern time, which mirrors the extended cut-off time to file Forms 3, 4 and 5 as well as Form 144.

Regulation of Certain Derivative Securities

The amendments added language to Item 6 of Schedule 13D (Contracts, Arrangements, Understandings or Relationships With Respect to Securities of the Issuer) to clarify that disclosure is required with respect to all derivative securities, including cash-settled derivative securities, that use the issuer’s equity security as a reference security. The Adopting Release noted that Item 6 narrative disclosure was required even if the referenced equity security was not used in the calculation of beneficial ownership for the filer.

The Adopting Release also addressed whether the holder of cash-settled derivative securities (other than security-based swaps (SBSs)) would be deemed the beneficial owner of the referenced equity security. According to the Adopting Release, the underlying theory for attribution of beneficial ownership of a cash-settled security was “the ability of investors in cash-settled derivative securities to influence or control an issuer by, for example, pressuring a counterparty to the derivative transaction to make certain decisions regarding the voting and disposition of substantial blocks of securities of the reference issuer.”  In the Proposing Release, the SEC proposed to add paragraph (e) to Rule 13d-3 of the Exchange Act to provide that certain holders of cash-settled derivative securities, other than SBSs, would be the beneficial owners of the reference security if they held the derivative security with the purpose or effect of changing or influencing the control of the issuer.

In the Adopting Release, the SEC decided not to amend Rule 13d-3 but to provide SEC guidance on the applicability of beneficial ownership rules to cash-settled derivative securities (other than SBSs). In the facts and circumstances analysis, which is comparable to the 2011 guidance provided by the SEC with respect to SBSs, the SEC would look at the extent to which the cash-settled derivative security (1) confers voting or investment power through contractual arrangements or otherwise, (2) is used for the purpose or effect of divesting the holder of beneficial ownership as part of a plan or scheme to avoid reporting obligations, or (3) grants the holder a right to acquire equity securities within 60 days or with the purpose or effect of changing or influencing the control of the issuer.

Group Formation

The Adopting Release also provides guidance as to the legal standard with respect to the formation of a group. The SEC notes that the appropriate legal standard for determining whether a group exists does not depend solely on the presence of an express agreement of the persons to be a group. Rather, depending on the circumstances, a group may be deemed to exist if two or more persons take concerted actions for the purpose of acquiring, holding, or disposing of securities of an issuer. The Adopting Release also provides guidance on whether or not various shareholder engagement activities would constitute the formation of a “group.”

Compliance Dates

The amendments will become effective 90 days after publication in the Federal Register. Compliance with the revised Schedule 13G deadlines (initial filings and amendments) will be required beginning September 30, 2024. Beneficial owners filing under Schedule 13G will be required to comply with the current Schedule 13G filing deadlines until September 29, 2024. Thus, a Schedule 13G filer will need to file an amendment to Schedule 13G within 45 days after September 30, 2024 if, as of that date, there were any material changes in the information previously reported on Schedule 13G. Compliance with the structured data requirement for Schedules 13D and 13G will be required beginning December 18, 2024.

For additional information related to the matters discussed here, please contact one of the authors listed above, or any member of our Securities Law Practice Group.

[1] “Exempt Investors” are persons holding beneficial ownership of more than 5% of the covered class, but who have not made an acquisition of beneficial ownership subject to Section 13(d) of the Exchange Act (such as founders who acquired the securities before the class of equity was registered under the Exchange Act) and persons who acquire not more than 2% of a covered class within a 12-month period.