When is a shareholder not a shareholder? SmartDisk, a Fort Myers, Fla.-based manufacturer of digital storage products, filed to deregister from Nasdaq in May. No more need to file costly financialreports, proxy statements and the like, even though its stock will still trade on the Pink Sheets. The company can get away with that because it had only 278 shareholders of record–under the 300-shareholder threshold for public disclosure of financial data. That 300-count rule was written in 1965, before the practice of holding stock through a broker (in “street name”) became almostuniversal. In its annual report, filed in March, the company admitted there are 6,000 beneficial owners of its common stock.

Ah, a battle of semantics. A group of investors is claiming that it’s way too easy for companies like SmartDisk to deregister, thanks to that outdated law. Merrill Lynch could have thousands of clients all holding shares in a company, yet they would collectively be counted as one shareholder of record. In its 2002 annual report Microsoft states it has 117,730 shareholders of record. But Microsoft’s beneficial holders number 4.2 million.

“Many of these companies are deregistering because they just don’t want to deal with their shareholders anymore,” contends Stephen J. Nelson, a White Plains, N.Y. attorney. He is petitioning the Securities & Exchange Commission, on behalf of a group of irate hedge fund managers, to change the rule to count beneficial holders, not the street nominees.

Nelson says that since January at least 24 companies with more than 300 beneficial stockowners have deregistered. Thomson Financial counts 82 companies that have either bought out shareholders or deregistered since July 2002, a 24% hike over the same period a year earlier. The culprit usually is the Sarbanes-Oxley Act, which ratcheted up the legal and accounting costs of compliance.

Michael S. Battaglia, SmartDisk’s chief executive, makes no apology for his switch. “If the law is truly obsolete, then it should be changed,” says Battaglia, who plans to issue annual reports and proxies to his shareholders directly but “not much else.” If history is any guide, though, he and his shareholders can expect wild price swings in the Pink Sheets.