On February 10, 2022, the Securities and Exchange Commission (the “SEC”) proposed 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”). The proposed amendments, if adopted, would make significant changes to the beneficial ownership reporting regime.

Background

Under Sections 13(d) and 13(g) of the Exchange Act, an investor who acquires beneficial ownership of more than 5% of a covered class of equity securities (the “5%-threshold”) must 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. Persons who acquire for the purpose or effect of influencing or changing control of the issuer (“control intent”) must file a Schedule 13D within 10 days of 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 must be filed within 10 days of crossing the 5%-threshold.

The filing deadlines for amendments to Schedules 13D and 13G vary based upon the form and the status of the investor.

Accelerated Filing Deadlines

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

For Schedule 13D:

• Shorten the initial filing deadline from 10 days to five days, and require that all amendments triggered by a material change be filed within one business day.
• Shorten the initial filing deadline for certain persons who forfeit their eligibility to report on Schedule 13G in lieu of Schedule 13D to five days after the event that caused ineligibility.

For Schedule 13G:

• Shorten the deadline for the initial Schedule 13G filing for QIIs and Exempt Investors from 45 days after the calendar year end to five business days after the last day of the month in which beneficial ownership first exceeds 5% of a covered class.
• Shorten the deadline for passive investors eligible to file an initial Schedule 13G in lieu of a Schedule 13D from 10 days to five days after crossing the 5%-threshold.
• Change the filing deadline required for amendments to Schedule 13G to five business days after the end of the month in which a reportable change occurs. The amendment obligation would only apply in the event of a “material change” in the facts previously reported, rather than “any change” regardless of the materiality of such change, as required under the current rule.
• Shorten the filing deadline for Schedule 13G amendments filed by QIIs to five days after the date on which beneficial ownership first exceeds 10% of a class, and thereafter upon any deviation by more than 5% of the covered class, with these requirements applying if the thresholds were crossed at any time during a month.
• Change the filing deadline for Schedule 13G amendments filed by passive investors when they cross the 10% threshold, and thereafter upon any deviation by more than 5% of the covered class, from a “promptly” standard to one business day after the date on which an amendment obligation arises.

The proposed amendments would require Schedules 13D and 13G to be filed using XML-based language.  To ease the filer’s administrative burdens, the proposed amendments would also extend the EDGAR filing “cutoff” for these filings to 10:00 p.m. eastern time (from the current 5:30 p.m. eastern).

Regulation of Certain Derivative Securities

Currently, a holder of a derivative security with conversion rights, such as an option, warrant or convertible note or stock, that can be settled in cash does not have beneficial ownership of the underlying security. The proposed amendments would provide that holders of certain cash-settled derivative securities (other than security-based swaps) would be “deemed” beneficial owners of the reference securities if the derivative securities are held for the purpose or effect of changing or influencing the control of the issuer of the reference securities or in connection with or as a participant in any transaction having such purpose or effect. Only long positions in derivative securities would be counted in determining beneficial ownership, and short positions would not be netted against long positions. The calculation of the number of reference securities that are beneficially owned is based on a formula set out in the proposed amendments. Additionally, Item 6 of Schedule 13D would be revised to clarify that a person is required to disclose interests in all derivatives securities (including cash-settled derivative securities) that use the issuer’s equity security as a reference security.

Group Formation

The proposed amendments would clarify circumstances under which two or more persons have formed a “group” under Regulation 13D-G and the Exchange Act, removing  any requirement for an express agreement by two parties as long as the persons “act as” a group for purpose of acquiring, holding or disposing of an issuer’s securities.  Under the proposed amendments, a “tipper-tippee” relationship, where a tipper shares non-public information about an upcoming Schedule 13D filing with a tippee, who subsequently purchases the subject securities based on that information, would be deemed a “group.”  Rule 13d-5 would be amended to expressly impute to the group acquisitions made by a group member after the date of group formation. These amendments are consistent with current interpretations by the SEC staff.

To counter concerns that the proposed amendments might chill communications or impede shareholder engagement, the proposed amendments provide exemptions to allow investors to communicate and consult with each other, jointly engage with issuers, and execute certain transactions without being subject to regulation as a group. These exemptions would address circumstances in which (i) investors communicate with one another or the issuer without the purpose or effect of changing or influencing control of the issuer, and (ii) investors and financial institutions enter into agreements governing the terms of derivative securities.

Comment Period

The full text of the proposed amendments can be found here. Comments on the proposed amendments are due 30 days after publication in the Federal Register or April 11, 2022, whichever is later.

[1] “Exempt Investors” are persons holding beneficial ownership of more than 5% of the covered class at the end of a calendar year, 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.