• Neil R. E. Carr

SEC Adopts Amendment to Rule 701 Exemption for Offerings Pursuant to Compensatory Arrangements




August 1, 2018


On July 18, 2018, the Securities and Exchange Commission (“SEC”) adopted an amendment to Rule 701 under the Securities Act of 1933, as amended (“Securities Act”), which provides an exemption from registration for securities issued by non-reporting companies under their compensatory arrangements, such as their stock option, restricted stock, and other compensation plans and agreements. The amendment raises the threshold amount that will trigger a requirement on the part of an issuer to deliver additional disclosure to investors, including certain financial statement disclosures.

The amendment became effective July 23, 2018, and implements Section 507 of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018.


Background

Rule 701 provides an exemption from the Securities Act registration requirements for offers and sales of securities under certain compensatory benefit plans or written agreements related to compensation (such as employment agreements).

The rule provides an exemption for securities offered or sold under a plan or agreement between a non-reporting company and certain eligible persons, including its employees, officers, directors, partners, trustees, consultants and advisors who, at the time of the issuance of the stock-based compensation.


In order to rely on the exemption, the aggregate sales price or amount of securities sold under Rule 701 during any consecutive 12-month period must not exceed the greatest of the following:


  • $1,000,000

  • 15 percent of the total assets of the issuer, measured as of the date of the issuer's most recent balance sheet; or

  • 15 percent of the outstanding amount of the class of securities being offered and sold in reliance on Rule 701, measured as of the date of the issuer’s most recent balance sheet


The rule is not available to companies that are reporting companies under Section 13 or Section 15(d) under the Securities Exchange Act of 1934, as amended, or investment companies registered or required to be registered under the Investment Company Act of 1940, as amended.


Prior to the amendment, the rule provided that only limited disclosure is required to be delivered by an issuer for offers and sales of securities in the aggregate amount of up to $5 million during any consecutive 12-month period. In excess of that amount, an issuer was required to deliver additional disclosure to investors, including a summary of the compensatory plan or arrangement, financial statements dated not more than 180 days before the sale, and a list of risk factors associated with the securities.

Non-reporting foreign private issuers (FPIs) are required to provide the same disclosure as non-reporting domestic issuers if sales under Rule 701 exceed $5 million within any 12-month period.


Summary of Amendment; New Concept Release

Under the recent amendment to Rule 701, the aggregate sales price or amount of securities that may be sold during any consecutive 12-month period by a non-reporting company before additional disclosure is required to be delivered to investors has been increased from $5 million to $10 million. Accordingly, the additional disclosures required by Rule 701(e) will not be required for sales of up to $10 million.


The rule amendment is expected to expand the ability of private companies (including FPIs) to issue stock, options, and other equity-based awards as compensation in lieu of or in addition to cash compensation and should help reduce the costs associated with providing the expanded disclosures required under the rule.


In addition, the SEC issued a concept release seeking comment on ways in which compensatory securities offerings can be modernized, including ways in which to update the requirements of Rule 701 and Securities Act registration statement Form S-8.


For more information, please contact:

Neil R.E. Carr

Direct Dial: +1 202 459 4651

neil.carr@somertons.com

Kathleen L. Cerveny

Direct Dial: +1 202 779 9507

kathleen.cerveny@somertons.com



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