The 2,000 Investor Limit is a stipulation required by the Securities & Exchange Commission (SEC) that mandates a company that exceeds 2,000 individual investors, and with more than $10 million in combined assets, must file its financials with the commission. According to SEC rules, a company that meets these criteria has 120 days to file following its fiscal year’s end.
Key Takeaways
The 2,000 investor limit or rule is a key threshold for private businesses that do not wish to disclose financial information for public consumption.
A business with more than 2,000 distinct shareholders, totaling $10 million or more in capital, must file with the SEC even if it is a privately-held company.
Congress raised the limit from 500 individual investors to 2,000 investors in 2016 as part of the JOBS and FAST Acts.
The increased investor limit has opened greater possibility for equity crowdfunding.
Understanding the 2000 Investor Limit
The 2,000 investor limit or rule is a key threshold for private businesses that do not wish to disclose financial information for public consumption. Congress raised the limit from 500 individual investors in 2016 as part of the Jumpstart Our Business Startups (JOBS) Act and Title LXXXV of the Fixing America’s Surface Transportation (FAST) Act. The revised rules also specify a limit of 500 persons who are not accredited investors before public filing is required.
The prior threshold had been 500 holders of record without regard to accredited investor status. Congress began debating an increase in the limit in the wake of the 2008 recession and an explosion in online businesses (some of which complained that they were growing so fast that the disclosure rules had become a burden at too early a stage of their lifecycle).
The JOBS Act also set up a separate registration threshold for banks and bank holding companies, allowing them to terminate the registration of securities or suspend reporting if that class of shares is held by less than 1,200 people.
Investor Thresholds and Equity Crowdfunding
The JOBS Act revisions to SEC rules helped facilitate the growth of crowdfunding platforms. These platforms are able to raise money from individual investors online without providing detailed financial data. The rules established limits on how much individuals can invest in SEC-approved crowdfunding platforms as a percent of the lesser of their annual income or net worth.
The individual limits for crowdfunding, through an investment portal approved by the SEC, as of May 2017:
If eitheryour annual income or your net worth is under $107,000, during any 12-month period, you can invest up to the greater of either $2,200 or 5 percent of the lesser of your annual income or net worth.
If both your annual income and net worth are $107,000 or more during any 12-month period, you can invest up to 10 percent of your annual income or net worth, whichever is less, not to exceed $107,000.
These calculations don’t include the value of your home.
Example
For example, suppose that your annual income is $150,000 and your net worth is $80,000. JOBS Act crowdfunding rules allow you to invest the greater of $2,200—or 5% of $80,000 ($4,000)—during a 12-month period. So in this case, you can invest $4,000 over a 12-month period.
Economists and real estate investors use the term 18-hour city to describe a mid-size city with attractive amenities, higher-than-average population growth, and a lower cost of living and cost of doing business than the biggest urban areas. The 18-hour city generally has a population of under one million, making it a second-tier city.
Eighteen-hour cities in the U.S. are increasingly seen as viable alternatives for investment and living to the Big Six markets of Boston, Chicago, Los Angeles, New York, San Francisco and Washington, D.C that make up America’s first-tier or 24-hour cities.
Understanding the 18-Hour City
While loosely defined, the term 18-hour city most often refers to a city that has public services, amenities and job opportunities that are comparable in quality to those in the big six markets.
Key Takeaways
Eighteen-hour cities are vibrant smaller metro areas that are proving attractive to new residents, entrepreneurs and investors.
They boast lower living costs along with solid infrastructure and appealing amenities.
Many have emerged as alternatives to big cities for starting or relocating a business or investing in real estate.
Unlike the biggest cities, most of their services and amenities don’t operate on a 24-hour basis. However, they boast comparable advantages, including solid public transportation systems, modern infrastructure and strong economies. Housing prices are moderate in comparison.
The 18-Hour City Advantage
Eighteen-hour cities have emerged as an attractive alternative to big cities for starting a new business, relocating an existing one, or investing in real estate. They typically feature lower capitalization rate compression, meaning property values tend to remain stable rather than spiking up or down significantly.
Like first-tier cities, 18-hour cities often boast low real estate vacancy rates along with favorable supply concentrations, rental growth and absorption trends—all indicators of long-term real estate investment potential.
Aside from the numbers, Forbes.com cites a distinctive and lovable culture as a key factor in creating and maintaining a vibrant 18-hour city: “Austin is the live music capital of the world. Denver and the Research Triangle are outdoor meccas. Portland is just plain weird (and residents would like to keep it that way.”
One perceived downside is the increased risk inherent in cities that do not have the established track record of primary market cities.
Examples of 18-Hour Cities in the U.S.
CrowdStreet, a site for crowd-sourced real estate investments, cites Austin, Denver, and Nashville as recent stars among 18-hour cities. In 2020, it identified Charleston, South Carolina, as the next big success story in the category.
The stars among 18-hour cities are a draw for millennials turned off by big-city obstacles.
Realtor.com identified its top metropolitan areas for 2020 and beyond, with all of its top five picks squarely in the 18-hour city category. They include Boise, Idaho; Mc-Allen-Edinburg-Mission, Texas; Tucson, Arizona; Chattanooga, Tennessee, and Columbia, South Carolina.
The National Real Estate Investor website chose Charleston, Kansas City, and Columbus, Ohio, based on their stellar growth in jobs.
Follow the Millennials
These and other frequently-cited 18-hour city stars have become targets for millennials whose goal is launching or advancing their careers. They are characterized by the availability of recreation and entertainment opportunities that extend well beyond what the typical second-tier affords.
Employers are drawn to 18-hour cities because doing business is less expensive in these markets and this, in turn, attracts large numbers of job seekers and entrepreneurs.
An activist investor, typically a specialized hedge fund, buys a significant minority stake in a publicly traded company in order to change how it is run.
The activist investor’s goals may be as modest as advising company management or as ambitious as forcing the sale of the company, divestitures or restructuring, or replacing the board of directors.
Unlike private equity firms that buy and restructure companies in order to profit when they are resold, activist investors seldom acquire full or majority stakes. Instead, they use public communications and private discussions to win over other shareholders and company insiders. When such efforts fail, an activist investor may pursue a proxy contest to elect new directors in order to force the company to meet their demands.
Key Takeaways
Activist investors buy minority stakes in public companies to change how they are run.
If they fail to persuade company managers, they may wage a proxy fight for board seats.
Some hedge funds specialize in activist investing while institutional investors may engage in it from time to time.
Investor activism may focus on maximizing shareholder value or on the company’s social responsibilities.
The SEC has proposed tougher disclosure rules for activist investors that critics contend may make activism unprofitable.
Understanding Activist Investors
Activist investors are sometimes called shareholder activists, a term also used to describe those lobbying companies to improve working conditions for the overseas employees of their contractors, or backers of a dissident board slate elected to fight climate change.
However, many activist investor campaigns seek only to maximize shareholder value, and most of those are the work of hedge funds specializing in the unique mix of public pressure, behind-the-scenes lobbying, and business expertise required.
Unlike the public pension funds and mutual funds that also engage in activism at times, activist hedge funds may hold highly concentrated stakes and supplement them with additional leverage from derivatives like stock options to offset the considerable cost of such campaigns. In contrast with institutional investors that sometimes turn to activism after owning a disappointing investment for years, activist hedge funds typically buy a stake in an underperforming company shortly before calling for change, and hope to profit from the resulting turnaround and price appreciation.
In contrast to institutional investors, activist hedge funds are also more willing to use confrontational tactics, from poison-pen letters to management and unflattering public reports to proxy fights seeking to oust incumbent directors.
The rise of activist investors has been described as an effective market response to the agency problem, which arises when agents (in this case company managements) have the opportunity and the means to enrich themselves at the expense of clients (in this case shareholders—a diffuse group with limited powers to safeguard its ownership interests.)
How Activist Investors Make Their Case
Investor activists often announce their campaigns by filing a Schedule 13D form with the U.S. Securities and Exchange Commission (SEC), which must be filed within 10 calendar days of acquiring 5% or more of a company’s voting class shares.
Qualified institutional investors and passive investors, meaning those not trying to acquire or influence control of the company, may instead file a simplified Schedule 13G with less stringent disclosure requirements and thresholds. Schedule 13D filers must disclose, among other facts, their reasons for acquiring the stake and any plans they may have for the company in terms of mergers and acquisitions, asset disposals, capitalization or dividends, or other policies.
The initial 13D filing gives the activist investor a golden opportunity to publicize their case for change at the targeted company. At the same time, the filing curtails the activist’s ability to alter their stake in, and plans for, the company out of the public eye. Any changes to the facts disclosed on a Schedule 13D must be reported in an amended filing “promptly,” under current SEC rules.
Activist investors may use amended Schedule 13D filings to comment on a company’s response to their proposals. For example, when Netflix, Inc. (NFLX) adopted a poison pill after funds affiliated with Carl Icahn reported a stake of nearly 10% in the video streaming company, the funds filed an amended disclosure calling the poison pill “an example of poor corporate governance.” Activist investors may also write sharply worded letters to incumbent managers, issue press releases arguing their case to other shareholders, or privately lobby institutional investors to side with them.
Whichever tactics activist investors use must be persuasive, since the only way to overcome opposition from entrenched company management short of a hostile takeover is to persuade a sufficient number of other shareholders to replace the board in a proxy fight, or at least to be able to credibly threaten to do so.
The Future of Shareholder Activism
There has been a claim that “activism is dying,” lamented Carl Icahn in May 2022, contrasting the legendary investor’s few-holds-barred approach seen in the past. Some have feared the changes proposed to the Schedule 13D disclosure requirements in 2022 constitute a pressing threat, with Elliott Investment Management stating publicly that the proposed rules “will virtually shut down activism.”
In February 2022 the SEC had proposed shortening the initial Schedule 13 filing deadline from 10 calendar days to 5, with amendments due within a day of a material change rather than “promptly” as currently. The proposal, if passed, would effectively force 13D filers to specify holdings of derivatives (such as options) that confer an economic interest in the company without the shareholder rights associated with an outright stock position. Perhaps more controversially, the proposed rules would no longer require investors to agree to act in concert and be designated a single group by the SEC for Schedule 13D reporting purposes. Rules have also been proposed to make it harder for activist shareholders to squash a company’s environmental or other pro-ESG initiatives.
SEC Chair Gary Gensler argued the stepped up requirements proposed would address “an information asymmetry” between activist investors and other shareholders. Critics countered the proposed rules would make activism unprofitable by making it more difficult and costly for activist investors to accumulate significant stakes, while inhibiting communication among shareholders.
Despite these proposed rule changes, shareholder activism does not seem to be slowing down (at least, not yet). For example, activist investor Nelson Peltz reportedly made a profit of more than $150 million by acquiring shares of Disney (DIS) in November 2022, in a move that prompted a proxy fight against the returning CEO, Bob Iger; however, this brief fight was called off after Iger announced a restructuring plan that is expected to save the media giant $5.5 billion in costs and cut 7,000 employees. Peltz has expressed satisfaction with the company’s direction and decision to make changes, praising Iger and his management team. In early 2023, ValueAct Capital Management, a San Francisco-based activist hedge fund, took a stake in streaming media company Spotify Technology SA (SPOT), with the goal of cutting costs and streamlining management. ValueAct has also disclosed a major position and board seat in SalesForce (CRM), which now has no less than five large activist investor shareholders on board with long positions, resulting in early 2023 cost cutting measures that include layoffs of 10% of the company’s employees. In all three of the these examples, markets have reacted positively to the inclusion of activist shareholders, seeing their share prices afterwards outperform.
Do Activist Investors Ever Settle With Companies?
Yes, because activist investing is not a zero-sum game. Since activist investors and incumbent managers share an interest in the company’s success, they may sometimes agree to a mutually acceptable compromise. Such agreements typically grant the activist investor representation on the company board in exchange for a pledge to support management and the company’s director nominees for a specified time. The agreements may also specify steps management will take at activist investors’ behest, while including standstill provisions preventing the activist from increasing their stake in the company or requiring them to maintain a specified minimum stake.
Is Shareholder Activism Dying?
While some fear recently proposed SEC rule changes may put a damper on activist investing, it has not yet seemed to slow down. After taking a dip in 2020 and 2021 due to COVID19 restrictions, activist investors were seen back above 2019 levels. In fact, shareholder activism activity hit a record high in 2022. Some predict this upward trend will continue through 2023 and beyond despite regulatory roadblocks that may be put in the way, although only time will tell.
Do Activist Investors Create Value?
Activist investors have been effective at times in addressing the agency problem faced by shareholders whose interests don’t always coincide with those of entrenched management teams. They’ve certainly created value for themselves and other shareholders. Activist investing can’t easily be pigeonholed as good or bad, however. Activist investors look out for themselves and realize the lion’s share of the value they unlock. Their relatively short-term focus on strategies likely to lift the share price, such as return of capital to shareholders in the form of dividends or share buybacks, can prevent companies from making needed long-term investments.
Which Activist Investor Generates the Largest Share-Price Gains at the Outset?
It is difficult to know for sure which activist investors have been the more successful dollar-for-dollar and what other factors may cause particular stocks to rise in addition to an activist taking on a stake, but we can look to SEC disclosures and public statements made by these investors. Elliott Investment Management, for one, claims that its investments receive an average rise of 8% in the shares of the target company on the day the firm made its stake public. According to Elliot, its activist engagements have increased the market values of the targeted companies by an aggregate of more $30 billion.
Who Are the Biggest Activist Investors?
The largest activist shareholders by assets under management (AUM) as of Q1 2023 are listed in the table below, led by New York City-based Third Point Partners:
Largest Activist Investment Firms by AUM (Q1 2023)
Rank
Profile
Managed AUM
Region
1.
Third Point Partners
$18,1 billion
North America
2.
Pershing Square Capital Management
$16,8 billion
North America
3.
ValueAct Capital
$13,2 billion
North America
4.
Eminence Capital
$10,5 billion
North America
5.
Pentwater Capital Management
$9,9 billion
North America
6.
Starboard Value LP
$9,2 billion
North America
7.
Trian Fund Management
$7.6 billion
North America
8.
Effissimo Capital Management
$6,8 billion
Asia
9.
Sachem Head Capital Management
$6,2 billion
North America
10.
Scopia Capital Management
$2,7 billion
North America
Source: Sovereign Wealth Fund Institute (SWFI)
The Bottom Line
When activist investors use their significant but still relatively small minority stakes to push for change at publicly listed companies, they must often exercise their rights as shareholders to the fullest to get the attention of incumbent management and persuade other shareholders. Activists often call for extreme cost cutting measures, including layoffs, more streamlined management, and disposing of unprofitable units. The discipline they impose promotes shareholder-friendly policies at other companies as well. But they are not always right, and any public benefit they provide may be incidental to their pursuit of profits for themselves and their clients.
China A-shares are the stock shares of mainland China-based companies that trade on the two Chinese stock exchanges, the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE). Historically, China A-shares were only available for purchase by mainland citizens due to China’s restrictions on foreign investment.
However, since 2003, select foreign institutions have been able to purchase these shares through the Qualified Foreign Institutional Investor (QFII) system. Established in 2002, the QFII program allows specified licensed international investors to buy and sell on mainland China’s stock exchanges.
A-shares are also known as domestic shares because they use the Chinese renminbi (RMB) for valuation.
Key Takeaways
China A-shares are the stock shares of mainland China-based companies that trade on the two Chinese stock exchanges, the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE).
Historically, China A-shares were only available for purchase by mainland citizens due to China’s restrictions on foreign investment.
China A-shares are different from B-shares; A-shares are only quoted in RMB, while B-shares are quoted in foreign currencies, such as the U.S. dollar, and are more widely available to foreign investors.
China A-Shares vs. B-Shares
China A-shares are different from B-shares. A-shares are only quoted in RMB, while B-shares are quoted in foreign currencies, such as the U.S. dollar, and are more widely available to foreign investors. Foreign investors may have difficulty accessing A-shares because of Chinese government regulations, and Chinese investors may have difficulty accessing B shares most notably for currency-exchange reasons. Some companies opt to have their stock listed on both the A-shares and B-shares market.
Due to the limited access of Chinese investors to B-shares, the stock of the same company often trades at much higher valuations on the A-shares market than on the B-shares market. Although foreign investors may now invest in A-shares, there is a monthly 20% limit on repatriation of funds to foreign countries.
The Shanghai Stock Exchange (SSE) publishes the key performance index for A-shares, known as the SSE 180 Index. In composing the index, the exchange selects 180 stocks listed on the SSE. The selection is diversified between sector, size, and liquidity to ensure adequate representation. Thus, the index’s performance benchmark reflects the overall situation and operation of the Shanghai securities market.
History of China A-Shares
Since its inception in 1990, including a major reform in 2002, the index has seen great fluctuations. However, it has grown along with the Chinese economy. The years 2015 to 2016 were a particularly difficult period, with a 52-week performance of -21.55% as of July 20, 2016.
As China grows from an emerging market to an advanced economy, there is substantial demand for Chinese equity. Stock exchange regulators continue efforts to make A-shares more broadly available to foreign investors and have them recognized by the global investing community.
In June 2017, the MSCI Emerging Markets Index announced a two-phase plan in which it would gradually add 222 China A large-cap stocks. In May 2018, the index began to partially include China large-cap A shares, which make up 5% of the index. Full inclusion would make up 40% of the index.
It is important for countries such as China to open their markets to global investors to stay competitive and thrive economically. China A-shares provide an alternative investment for those interested in trading in Chinese securities.
