Rethinking the 12(g) threshold for tokenised private issuances

Section 12(g) of the US Securities Exchange Act requires issuers to register with the SEC once they exceed 2,000 holders of record (or 500 non-accredited holders). The threshold was designed for a paper era in which counting holders was expensive and identities were approximate. Tokenised private issuances — where every holder is identified by a cryptographic key bound to a KYC attestation — make the count trivially exact, and the threshold becomes a binding constraint on liquidity that it was never designed to be. This brief argues for a tokenisation-aware reform of the 12(g) threshold.

1. A rule from a paper era

Section 12(g) was enacted in 1964, amended several times, and currently requires an issuer of a class of equity securities to register with the SEC if that class is held by more than 2,000 persons (or 500 non-accredited persons) at the end of a fiscal year, provided assets exceed $10 million.

The threshold was designed around a particular technological assumption: counting holders was expensive and approximate, so the threshold functioned as a rough proxy for "widely distributed enough to warrant public-issuer disclosure." The assumption was reasonable in 1964 and remained defensible through the 2000s.

2. What tokenisation changes

In a tokenised private issuance, every holder is identified by a cryptographic key bound to a KYC attestation. Counting holders is not expensive; it is arithmetic. The threshold, applied literally, becomes a binding operational constraint on secondary liquidity.

Issuers responding to this constraint have adopted several workarounds. Some impose explicit holder caps in the token's transfer-restriction logic. Some force-redeem long-tail holders to keep the count manageable. Some route all secondary trades through a single intermediary counted as the sole record holder, recreating the very intermediation that tokenisation was supposed to reduce.

Each workaround preserves literal compliance at the cost of the economic properties — liquidity, distribution, pricing — that made tokenisation attractive in the first place.

3. A proportionate reform

The policy intent of 12(g) is to ensure public-issuer disclosure obligations attach once a security has become "widely distributed." Counting holders is a proxy for wide distribution. A better proxy — in a world where exact counts are cheap — is aggregate holder value, adjusted for holder sophistication.

We propose a tiered regime: under $50 million in aggregate holder value, no registration required; $50 million to $500 million, simplified annual disclosure; above $500 million, full Exchange Act registration. Accredited-holder filtering is preserved where relevant but no longer serves as the primary threshold.

This preserves the investor-protection intent while removing the artificial liquidity ceiling. The draft amendment to Rule 12g5-1 in the appendix sets out the mechanics.