United States

Share-based awards: SEC amends Rule 701 and seeks comment

FINANCIAL REPORTING INSIGHTS  | 

SEC Rule 701 provides an exemption from the registration requirements of the Securities Act of 1933 for securities issued by a private company under a written compensatory benefit plan (e.g., ESOP or 401(k)), or written compensation contract, to employees, directors, officers, consultants, advisers and their family members. To qualify for the exemption under this Rule, the aggregate sales price or amount of securities sold and options granted during any consecutive 12-month period must not exceed the greatest of:

  • $1 million (measured in accordance with the provisions of Rule 701);
  • 15% of the total assets of the issuer, measured at the issuer’s most recent balance sheet date (if no older than its last fiscal year end); or
  • 15% of the outstanding amount of the class of securities being offered and sold under Rule 701, measured at the issuer’s most recent balance sheet date (if no older than its last fiscal year end).

Recently the SEC issued Release No. 33-10520, which increased form $5 million to $10 million the aggregate sales price or amount of securities sold during any consecutive 12-month period in excess of which the issuer is required to deliver additional disclosures to investors under Rule 701(e). As such, under Rule 701, if the aggregate sales price or amount of securities sold or issued during any consecutive 12-month period exceeds $10 million, the issuer must furnish financial statements as required by Part F/S of Form 1-A (Regulation A Offering Statement) under Regulation A. The issuer must deliver the financial statements and other required disclosures (i.e., a summary of the compensation plan and information about investment risks) to investors within a reasonable period of time before the date of sale (or grant), or in the case of stock options, before the date of the stock option exercise or conversion.

The SEC also recently issued a Concept Release on Compensatory Securities Offerings and Sales to solicit comment on possible ways to update the requirements of Rule 701 and Form S-8, the registration statement for compensatory offerings by reporting companies. The Concept Release solicits comment on:

  • “Gig economy” relationships, in light of issuers using internet platforms to provide workers the opportunity to sell goods and services, to better understand how they work and determine what attributes of these relationships potentially may provide a basis for extending eligibility for the Rule 701 exemption  
  • Whether the SEC should further revise the disclosure content and timing requirements of Rule 701(e)
  • Whether the use of Form S-8 to register the offering of securities pursuant to employee benefit plans should be further streamlined