What is the 500-Shareholder Threshold?

Monitoring each and everything in the financial Stock markets can be a daunting task for any regulatory authority. Since the stock market is like a big ocean, no one knows what goes behind those gigantic walls of the companies.

You get to witness money loitering, money laundering, and investments hoaxes mostly in shell companies. Although they are legit, these companies are created with a purpose, i.e., to shift and rotate the black money around and to avoid paying enormous taxes. Such companies manipulate the shares prices in the market as well, propelling the investors or traders to splurge their money to buy their stocks.

To put an end to these illegitimate aspects in the financial space, the Securities And Exchange Commission (SEC), came up with the 500- shareholders Threshold concept.

What Does 500-Shareholder Threshold Mean in Share Market?

The 500-Shareholder Threshold is like a thumb rule for all the companies in the world. The theory behind this regulation or rule is to keep the companies transparent. This rule suggests that companies should publicize their financial reports to all the interested parties after reaching a 500-Shareholder Threshold limit.

This alleviates the humdrum and perplexity about a particular company before investing. Now, trading stocks can be done in two ways, one, buy (OTCC) over the counter, and two, obtain through the stock exchanges. While some companies like Reliance, Infosys, and a few others are listed on the stock exchanges, others are traded via OTC. These are the stocks of small companies and are traded on the NASDAQ exchange.

The OTC traded stocks are informal and used as a tool by some companies to gain an extra advantage in the market. No one can know the real potential and the veracity behind the OTC traded stocks. To eliminate the whiff of haze for investing struggles, the SEC has put in place the 500-Shareholder Threshold rule.

Here, the company should manifest their true records to the investors after attaining a 500 distinct shareholders count for going public. This directive goes for every company. On the contrary, companies falling below the 500-Shareholder Threshold mark don’t need to reveal anything. The 500-Shareholder Threshold rule was in the market from 1964 to 2012 to curtail the misinformation problem. Post-that, the Securities And Exchange Commission (SEC) announced a new rule called the 2000-Shareholder Threshold.

Example of 500-Shareholder Threshold

The story dates back to the 1920s, Charles Ponzi, an Italian swindler and con artist, ran a scheme that led to investment fraud. He accumulated the funds from the investors and stated that he would repay with 50% returns. He claimed that all the investments were made in international mail coupons. He initiated this scheme with barely 2 dollars in his pockets and woke up filthy rich the next morning.

Through this scheme, he duped $15 million from Bostonians in eight months. The gains he explicitly uttered to offer were all non-existent and a lie. However, this scheme continued until he was taken into custody on August 12, 1920, for investment fraud. Hence, derived the name “Ponzi Scheme”.